Article

Note: In an attempt to divest holdings, Metrod (Singapore) Pte Ltd (Seller/Applicant) agreed to sell its shares in six companies within the ASTA Group of companies to GEP II Beteiligungs Gmbh (Buyer/ Beneficiary) for EUR 49 million. The parties executed a sale and purchase agreement (Agreement) under which Seller/Applicant agreed to issue a "letter of comfort" dated 6 March 2012 assuring Buyer/ Beneficiary of sufficient funds or credit available up to EUR 5 million in the event Buyer/Beneficiary made claims for payment. The Agreement allowed Buyer/Beneficiary two options to demand this sum: "(i) mutual agreement of the parties in respect of the [Buyer/Beneficiary's] claim under the Agreement; or (ii) binding arbitration decision according to the Agreement."

Instead of taking either option, Seller/Applicant applied for a bank guarantee which was issued by HSBC Bank Malaysia Berhad (Guarantor) in favor of Buyer/Beneficiary on 8 March 2012. The bank guarantee "covered any claim that the [Buyer/ Beneficiary] may have against the [Seller/Applicant] under or in connection with the [Agreement]" and remained valid until 13 March 2015. The opinion does not indicate whether the bank guarantee was subject to practice rules.

On 21 June 2012, Buyer/Beneficiary demanded by letter that Guarantor pay EUR 5 million under the bank guarantee. Five days later on 26 March 2012, Seller/Applicant received notice of the demand from Guarantor, in which Guarantor stated that it must honor the claim before 29 March 2012. Seller/ Applicant then appeared ex parte in the High Court in Kuala Lumpur seeking an emergency injunction with leave to serve Buyer/Beneficiary in Austria, Buyer/Beneficiary's place of business. Seller/ Applicant's originating summons requested: (1) a restraining order preventing Guarantor "from making any payment . . . otherwise than in accordance with . . . the agreement dated [23 December 2011]"; (2) a restraining order preventing Buyer/Beneficiary "from receiving proceeds of any payment under Bank Guarantee . . . otherwise than in accordance with . . . the agreement dated [23 December 2011]"; and (3) "a declaratory order to the effect that the [Buyer/ Beneficiary's] demand on [21 June 2012] upon the bank guarantee is fraudulent and unconscionable, lacking in bona fides and unenforceable." The court heard and granted the applications for emergency injunction and leave to serve papers on 29 June 2012.

Buyer/Beneficiary sought an extension of time to file affidavits in response to the injunction application as well as the substantive allegations contained in Seller/Applicant's originating summons. Buyer/ Beneficiary then filed an application for a stay of proceedings pending arbitration under section 10 of the [Malaysian] Arbitration Act of 2005 (Arbitration Act). Prior to making their submissions, the parties attempted to settle their dispute. Although the negotiations did not result in a complete resolution, the parties did change their positions. In particular, on 21 December 2012, Buyer/Beneficiary attempted to withdraw its demand on the bank guarantee by instructing its solicitors to notify Guarantor by letter, requesting "the original bank guarantee to be sent back to our client immediately." Guarantor notified Seller/Applicant that it was "unable to act on the same since the said letter was not issued by the [Buyer/ Beneficiary]". As a result, Buyer/Beneficiary sent a letter to Guarantor sometime later stating that "[w] e hereby withdraw our original demand for payment and ask for the original bank guarantee to be sent back to us immediately. We reserve the right to make the demand on the said guarantee in accordance with . . . the Notarial Deed of Agreement dated [23 December 2011] with [Seller/Applicant]."

As a result of the changed circumstances and the ongoing arbitration proceedings, the Buyer/ Beneficiary amended its request for a stay pending the outcome of the arbitration proceedings, seeking only a stay of the declaratory judgment proceeding. Seller/Applicant maintained its requests for interim injunctive and declaratory relief. However, "the parties . . . informed the Court that the [Buyer/ Beneficiary] . . . consented to the terms sought in [the] application [for injunction] together with . . . costs." The High Court (Kuala Lumpur), Dato Mary Lim Thiam Suan, J., granted the stay pending the outcome of the arbitration proceedings.

Injunctive Relief

Buyer/Beneficiary had argued that because it had withdrawn its demand on the bank guarantee, "there was nothing left to consider" and the injunction proceedings had "been rendered academic or redundant". Seller/Applicant had countered by arguing that since Buyer/Beneficiary had reserved the right to make a demand on the bank guarantee, the application was not academic or redundant. Furthermore, Seller/Applicant amended the request for injunctive relief under section 11 (Arbitration Agreement and interim measures by High Court) of the Arbitration Act. Section 11(1)(f) and (h) stated that: "(1) A party may, before or during arbitral proceedings, apply to a High Court for any interim measure and the High Court may make the following orders for: . . . (f) the preservation, interim custody or sale of any property which is the subject matter of the dispute; . . . and (h) an interim injunction or any other interim measure." The Judge had initially agreed with Seller/Applicant that the injunction proceedings were not academic or redundant, but the parties' settlement of this issue rendered any decision moot.

Stay of Declaratory Relief Action Pending Arbitration

As for the stay of proceedings, Buyer/Beneficiary offered four arguments to the court. Buyer/ Beneficiary argued that the court should grant the stay to prevent (1) a breach of the valid arbitration agreement included by the parties as a clause in their Agreement to resolve any disputes arising under that Agreement; (2) a multiplicity of proceedings; (3) the Malaysian courts from encroaching upon the powers which the parties had vested in the arbitral tribunal; and (4) the possibility of inconsistent outcomes between the court and the arbitral tribunal.

Seller/Applicant asserted that under the independence principle the "bank guarantee is separate and independent from the underlying contract between the immediate and disputing parties and the contract between the account party and the bank." Seller/Applicant argued that because of this principle, the dispute related to the demand on the bank guarantee and not on the underlying contract and therefore did "not come within the ambit and understanding of the phrase 'all disputes arising'."

The Judge first looked to whether the Malaysian courts had jurisdiction to grant a stay of proceedings at all. The Judge determined that although the underlying contract and the parties to it were not related to Malaysian jurisdiction, "the substantive matter before the Court is not about the [underlying Agreement] but about the demand by the [Buyer/ Beneficiary] on the [Guarantor], a Malaysian bank located in the capital on a bank guarantee governed by the laws of Malaysia. In view of the position taken by the bank, its role may be said to be nominal. On the other hand, the orders sought and the matters raised in support are not. Therefore, there are sufficient grounds for this Court [to exercise jurisdiction]."

Having determined that the court had sufficient jurisdiction to make a determination on the stay pending arbitration, the Judge adopted the position of the English case Fiona Trust & Holding Corp v. Privalov, [2007] 4 All ER 951, which had looked to similarly broad language of an arbitration clause and determined that "a wide reading of the arbitration clause must subsume a dispute in the related contract for which no express arbitration clause has been provided". Fiona Trust looked to the commercial nature of the agreement with which it dealt and interpreted the arbitration agreement in light of the commercial purpose to which it served.

The Judge considered that Seller/Applicant had, in its Memorandum of Reply to the arbitral tribunal, included background facts about Buyer/ Beneficiary's conduct related to and demand under the bank guarantee so that the tribunal might understand Seller/Applicant's case before the tribunal. The Judge also considered that the court was asked to make a determination on the background facts, namely "whether they tantamount to the allegations made by the [Seller/Applicant]." Because both the court and the arbitral tribunal would be tasked with weighing those facts related to the demand on the bank guarantee, the Judge determined that the "call for the determination of that same course of conduct . . . invariably and undeniably overlaps with the dispute now before the arbitral tribunal." As a result, the Judge deferred to the parties' choice of dispute resolution pursuant to section 10 (Arbitration agreement and substantive claim before court) of the Arbitration Act.

Comment:

Seller/Applicant belatedly relied on the independence principle when it sought to restrain Guarantor from honoring Buyer/Beneficiary's (apparently complying) presentation. However, the underlying Agreement contained the terms on which a demand could be made: either mutual agreement of the parties or binding decision of an arbitral tribunal. Therefore, the real issue was whether Buyer/ Beneficiary had breached the Agreement when it demanded payment under the bank guarantee. Such a dispute clearly arose under the Agreement. While the court performed a measured and thorough examination of its own jurisdiction and the propriety of granting a stay of claim related to an independent bank guarantee, the court need not have looked further than the grounds upon which the Buyer/ Beneficiary could present a demand. Since the claim for fraudulent demand related directly to the terms of the Agreement inasmuch as the claim involved the bank guarantee itself, there is little doubt that the claim fell within the jurisdiction of the arbitration agreement to which the parties agreed.

[MJB/pt]

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