The Court of Appeal Allowed The Contractor To Rely on An Arbitration Clause In The Sub-Contract To Stay A Court Proceeding Commenced by A Sub-Sub-Contractor
By Datin Chu Ai Li, Partner of Azman Davidson & Co.
In the recent Court of Appeal decision of Apex Communications Sdn Bhd v Sumber Khazanah Sdn Bhd (Dalam likuidasi) and another appeal [2025] MLJU 3914, the Court of Appeal allowed Apex Communications Sdn Bhd (“Apex”) to rely on an arbitration clause in their written sub-contract with Ikatan Engineering Sdn Bhd. (“Ikatan”) to stay the court action commenced by Sumber Khazanah Sdn Bhd, a company who was the sub-contractor to Ikatan and with which Apex does not have any direct contractual relationship.
The contractual relationships were as follows:
(1) Apex was appointed by UEM Construction Sdn Bhd as a nominated sub-contractor for works known as Package S8: Construction and Completion of Elevated Stations and other Associated Works at Saujana Impian, Bandar Kajang and Kajang.
(2) Apex appointed Ikatan as their sub-contractor via a sub-contract agreement dated 16.10.2012 (“Apex-Ikatan Sub-Contract” or “Package S8 Sub-Contract”).
(3) Ikatan then appointed Sumbertech Ventures Sdn Bhd (“SVSB”) as their sub-contractor via a letter of award dated 30.9.2013 (“Ikatan-SVSB LOA”).
Sometime at the end of 2013, a company named Sumber Khazanah Sdn Bhd (“SKSB”) came into the picture. Ikatan sent a letter to Apex referring to their sub-contracting of Package S8 to SKSB and requesting for all payments for Package S8 to be paid directly to SKSB:
“Further to our letter reference … regarding sub-contracting of Package S8 to Sumber Khazanah Sdn Bhd, we wish to request that, all payments including but not limited to all Variation Order and Retention Sum whatsoever pertaining to the works of this Package S8, to be paid directly from Apex Communication Sdn Bhd to our sub-contractor Sumber Khazanah Sdn Bhd.”
Apex subsequently sent a letter dated 5.3.2014 to SKSB, stating as follows:
“We note you and Ikatan Engineering Sdn Bhd have confirmed the agreement for direct assignment pertaining to the works of KVMRT S8: Steel Structural Works, to be paid directly by us to you, in the event that we have no objection.”
The Court of Appeal held, considering these two letters, the proper manner in which the terms of the Ikatan-SVSB LOA must be read was to be “under the clear understanding and effect that SVSB was substituted with SKSB”. It is interesting that the Court of Appeal appears to have come to the conclusion that SVSB was substituted with SKSB by relying solely on the two letters highlighted above, which appear to be focused on direct payment by Apex to SKSB, and which did not specifically mention substitution of SVSB with SKSB.
The Court of Appeal then went on to refer to the provision in the Ikatan-SVSB LOA which referred to the Package S8 Sub-Contract:
“We would like to appoint and award Sumbertech Ventures Sdn Bhd, as our sub-contractor for Package S8: Construction and completion of viaduct guideway and other associated works from Saujana Impian, Bandar Kajang and Kajang (“Package S8”). Ikatan Engineering Sdn Bhd would appoint Sumbertech Ventures Sdn Bhd, under the Nominated Sub-Contract, to execute and complete Package S8 per the contract awarded from APEX COMMUNICATIONS SDN BHD (Co No. 187475-V) to Ikatan Engineering Sdn Bhd dated 8th February 2013 (“Package S8 Sub-Contract Agreement”). All the terms and conditions contained in the Package S8 Sub- Contract Agreement shall be strictly followed and complied by Sumbertech Ventures Sdn Bhd.”
The Court of Appeal held that the operative words “all terms” of the Package S8 Sub-Contract include the arbitration clause.
In the High Court, SKSB had pleaded in their Statement of Claim, among others, that following from the letter of award and direct payment agreement, SKSB had taken over fully the responsibilities, obligations and rights of IESB under the Package S8 Sub-Contract, and that Apex had acted according to the direct payment agreement to assess and certify the progress claims presented by SKSB and made payments to SKSB according to the terms of the S8 Sub-Contract. The Court of Appeal held that SKSB’s pleadings estopped SKSB from negating the fact that the appointment of SKSB went beyond mere scope of works and includes all rights and obligations of IESB in the Package S8 Sub-Contract. SKSB was estopped from denying the applicability and relevance of the arbitration clause to SKSB.
From the grounds of judgment, the Court of Appeal decided that SKSB was bound by the terms of the Package S8 Sub-Contract (including the arbitration clause) entered into by Apex and IESB by virtue of the term in the IESB-Sumbertech LOA that required Sumbertech to strictly follow and comply with all terms of the Package S8 Sub-Contract. The Court of Appeal’s decision appears to have been made notwithstanding the fact that SKSB was not a party to the IESB-Sumbertech LOA and there was no formal novation of the IESB-Sumbertech LOA to SKSB for SKSB to legally take the place of SVSB.
The arbitration clause in the Package S8 Sub-Contract is found in Clause 38 and the provision which gave Ikatan the right to refer a dispute to arbitration used the word “may” (emphasis ours):
“38. ARBITRATION
38.1 If any dispute or difference shall arise between APEX and the Sub-Contractor, either during the progress or after completion of the S8 Works Package – Structural Steel Works, or after the determination of the Sub- Contractor’s employment or breach of this Agreement, as to:
(a) the construction of this Agreement;
(b) any matter or thing of whatsoever nature arising under this Agreement;
(c) the withholding by the P.D. of any certificate to which the Sub-Contractor may claim to be entitled, then such dispute or difference shall be referred to the officer named in Appendix 1 for a decision.
38.2 The decision of the officer named in Appendix 1 which is to be in writing shall subject to sub-clause 38.5 hereof be binding on the parties until after the completion of the S8 Works Package – Structural Steel Works and shall forthwith be given effect by the Sub- Contractor who shall proceed with the S8 Works Package-Structural Steel Works with all due diligence whether or not notice of dissatisfaction is given by him.
38.3 If the officer named in Appendix 1 fails to give a decision for a period of forty-five (45) days after being requested to do so by the Sub-Contractor or if the Sub- Contractor be dissatisfied with any decision of the officer named in Appendix 1, then in any such case the Sub-Contractor may within forty-five (45) days after the expiration of the forty-five (45) days after he had made his request to the officer named in Appendix 1 or forty five (45) days after receiving the decision of the officer named in Appendix 1, as the case may be, require that such dispute or difference be referred to a single Arbitrator agreed for that purpose, or in default of agreement appointed by the Director of the Regional Centre for Arbitration Kuala Lumpur.”
The Court of Appeal held that use of the word “may” in Clause 38. 3 did not mean that arbitration was optional and not mandatory. The word “may” merely qualifies the options made available to SKSB to either (i) accede and accept the decision of the officer, or (ii) if dissatisfied, refer the dispute to arbitration. The Court of Appeal held that the arbitration clause imposes a mandatory reference to arbitration against SKSB and that it was within Apex’s contractual rights to ensure that SKSB does not derail away from the agreement to mandatorily refer the dispute to arbitration.
In summary, the Court of Appeal decision in Apex Communications Sdn Bhd v Sumber Khazanah Sdn Bhd is a clear example of the extent the courts are willing to bend backwards to allow a party to rely on an arbitration clause to stay a court proceeding under Section 10 of the Arbitration Act 2005. In this case, Apex was permitted to rely on the arbitration clause in a contract which SKSB was not party to and in the absence of any written agreement which directly binds SKSB to the terms of the contract containing the arbitration clause.