Malaysia's Federal Court Sets Aside Default Judgment Obtained In Breach Of An Arbitration Agreement

In Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd (Civil Application No. 03-2-11/2018(B) and Civil Application No. 02(i)-104-11/2018(B)), the Federal Court was asked to decide whether a default judgment from a Malaysian court which was obtained in breach of an arbitration agreement in the underlying contract between the parties should be set aside on the basis of the existence of the arbitration agreement.

Background

The appellant ("Tindak Murni") entered into a building construction contract ("Contract") with the respondent ("Juang Setia"), which contained an arbitration clause. Following a dispute over an alleged failure to make payment by Tindak Murni, Juang Setia commenced civil proceedings against Tindak Murni in the High Court in Shah Alam to claim the alleged outstanding sums.

At the High Court, Tindak Murni did not formally enter its appearance under the rules of the court, nor take immediate steps to stay the court proceedings under the section 10 of the Arbitration Act 2005 (the "Act"). As a result, on 1 March 2017, Juang Setia obtained a default judgment against Tindak Murni to pay the outstanding liquidated sums.

On 10 April 2017, Tindak Murni applied to set aside the default judgment on the basis that it had valid disputes against Juang Setia's claims and that there exists an arbitration agreement between the parties. On 31 July 2012, the Registrar of the High Court set aside the default judgment on the basis that "there was a defence on the merits in that there were disputes and/or triable issues justifying the matter being heard on the merits".

Upon setting aside the default judgment, Tindak Murni did not file a defence in the court proceedings, but instead applied for a stay of the court proceedings pending arbitration. Unsatisfied, Juang Setia appealed to the High Court Judge against the decision of the Registrar, and for a determination of Tindak Murni's application to stay the court proceedings. The High Court Judge held that (1) there was, on its face, a potential defence which could be raised, which substantively justified the setting aside of the default judgment; and (2) a valid arbitration clause to which the parties had agreed to be bound. The court proceedings where therefore stayed pending referral of the dispute to arbitration.

Following the decision of the High Court Judge, Juang Setia then filed two appeals to the Court of Appeal against the (1) decision to set aside the judgment in default ("Default Judgment...