Permissive Arbitration Clauses and the Mandatory Stay Under Section 10(1) of the Arbitration Act 2005

A Case Comment on Setia Awan Management Sdn Bhd v SPNB Aspirasi Sdn Bhd [2025] 4 MLJ 181

Introduction

The Court of Appeal’s decision in Setia Awan Management Sdn Bhd v SPNB Aspirasi Sdn Bhd offers a useful reminder of how Courts approach permissive clauses—those that appear to leave parties free to choose between litigation and arbitration. The issue before the Court of Appeal was whether the word “may” renders an arbitration agreement unenforceable, or do the provisions of the Arbitration Act 2005 (“AA 2005”) enable the arbitration agreement to be performed.

The Dispute and Clause 18

The dispute arose out of a development-and-contra transaction agreement (“DACT”) signed in 2018 for a residential project in Sitiawan, Perak. Clause 18 of that contract provided that any dispute “may be referred to any court in Malaysia or to arbitration in accordance with the provisions of the Arbitration Act 2005.”

When disagreements later broke out, SPNB Aspirasi commenced a writ action against Setia Awan in the High Court. Setia Awan, referred to Clause 18, applied to the High Court to stay the proceedings under section 10 of the AA 2005, claiming its right to arbitrate the matter (“Application”).

High Court: No Stay

The High Court dismissed the Application. In its view, Clause 18 failed as an arbitration agreement because it left out what the judge considered to be essential terms: no seat of arbitration, no number of arbitrators and no appointment process. Further, the use of the word “may” suggests that arbitration was optional, not mandatory. Since the plaintiff had chosen to litigate, the court reasoned, arbitration was off the table.

Court of Appeal: A Different Reading

The Court of Appeal saw things differently. It began by pointing to section 9 of the AA 2005, which defines an arbitration agreement. That section is deliberately broad: all that is needed is a written agreement to submit disputes to arbitration. The Act itself supplies default rules for anything the parties have left out—section 12 fixes the number of arbitrators, section 13 sets out appointment procedures, and section 22 deals with the seat. In other words, an arbitration clause does not collapse merely because it is silent on these points.

As for the “may” in Clause 18, the Court of Appeal rejected the idea that permissive wording stripped the clause of binding force. The use of a permissive wording does not mean that parties’ intention to proceed with arbitration is less certain, rendering a stay of proceeding not mandatory.

Instead, it read the provision as offering parties two avenues. If one party chose arbitration, then the agreement crystallised and bound both sides. At that point, section 10(1) of the Act would operate. That section requires a court to grant a stay once a valid arbitration agreement is shown—there is no residual judicial discretion unless the agreement is null, void, inoperative or incapable of performance.

Importantly, the Court of Appeal further stated that the right to arbitrate in such situation is not distinguished due to the mere fact that the Plaintiff elected to resolve disputes in Court.

Broader Issues: Burden of Proof and Kompetenz-Kompetenz principle

The Court of Appeal also addressed how courts should approach stay applications. It held that applicants bear the burden of showing a valid arbitration agreement on a balance of probabilities. Once this is satisfied by the defendant, the evidential burden then shifts to the plaintiff in proving that the arbitration agreement is null and void, inoperative or incapable of being performed.

In deciding whether there is valid and enforceable arbitration agreement, courts may adopt either a prima facie or full-merits approach depending on the circumstances, and if the matter remains contested, the tribunal itself has the competence—under section 18’s kompetenz-kompetenz principle—to rule on its own jurisdiction.

Key Takeaways

• Arbitration clauses do not fail simply because they lack particulars for the conduct of the arbitration as the AA 2005 regulates such conduct.
• Permissive wording does not invalidate an arbitration clause; once a party chooses arbitration, the court must stay its hand if the requirements under Section 10(1) are duly satisfied.
• Courts should adopt a pro-arbitration approach, leaving jurisdictional issues to be determined by the tribunal in the first instance.

Conclusion

For contract drafters, the decision underscores that precision in drafting remains essential.

Ultimately, Setia Awan affirms Malaysia’s pro-arbitration position. Even arbitration clauses framed in permissive terms will not be readily disregarded, provided that the requirements under Section 10(1) are duly satisfied.

By

Jon Wee Hong Xin

Associate, Gan Partnership