A recent Court of Appeal case in Malaysia had to consider two issues:-

• whether orders for 'extra works' on a project incorporated the arbitration agreement of the original subcontract, and

• if not, did the Arbitrator appointed to hear disputes arising from the original subcontract have jurisdiction to hear disputes arising from the subsequent 'extra works' orders.
  

The project was a large construction site along Jalan Pudu in Kuala Lumpur. The main contractor was Daewoo Corporation and in May 1994, they entered into a subcontract with Bauer (Malaysia) Sdn Bhd for work associated with a diaphragm wall and ground anchors. The subcontract was the Malaysian standard 'PAM' form (identical in all material respects to JCT 1963) and incorporated an arbitration clause. During the course of the works, Daewoo issued further ‘work orders' for additional work on the same project. Disputes arose relating to work in the original 'PAM’ subcontract and there were disputes arising from the subsequent work orders. Arbitration proceedings were commenced by Bauer.

From the outset, Daewoo argued that the arbitration clause in the original PAM subcontract had not been incorporated into the subsequent work orders and so the Arbitrator had no jurisdiction to hear disputes arising from them. The Arbitrator disagreed and this case concerned Bauer's appeal against the High Court judgement which had decided that the Arbitrator did not have jurisdiction to hear the work orders disputes.

The primary issue was whether the subsequent work orders incorporated the provisions of the arbitration agreement in the original subcontract. Emphasis was placed on the wording of the arbitration clause, particularly 'in the event that any disputes or differences should arise ... either during the progress or after the completion or abandonment of the works' and whether the definition of 'the works' included the subsequent work orders. On its construction of the contract, the Court of Appeal said 'the works' did not include the work orders and so the arbitration agreement did not apply.

However, the Court also considered whether the arbitration clause was incorporated into the work orders by the parties’ conduct. Quoting from both Malaysian and English cases, the Court of Appeal upheld the High Court's decision that the original arbitration clause was not incorporated into the subsequent work orders.

Notwithstanding the lack of incorporation of the original arbitration clause into the work orders, the second issue for the Court of Appeal was whether the Arbitrator still had jurisdiction to hear the disputes arising from the subsequent work orders; under the Malaysian Arbitration Act, 1952, the Arbitrator had no jurisdiction if the parties had not made an agreement for their disputes to be so resolved. On this point Bauer's primary argument was that by its past conduct, Daewoo was estopped (precluded) from asserting lack of jurisdiction.

Mustill and Boyd (2nd Edition) at pages 133-34, states 'The most usual case of such an agreement [ie by a party's conduct] is where an arbitration is already in progress under an existing express agreement and a fresh claim is brought before the Arbitrator, which is outside the scope of the original [arbitration] agreement. If no objection is made to the Arbitrator's lack of jurisdiction to deal with the fresh claim, both parties will be bound by an award on the merits of the claim'.

The Court of Appeal found that Daewoo, having strongly registered its disagreement on the Arbitrator's lack of jurisdiction over the disputes arising from the subsequent work orders, then proceeded to participate in the proceedings as if the Arbitrator had jurisdiction. The Court of Appeal said that any reasonable man would have been entitled to assume that Daewoo's actions in taking fresh steps in the arbitration after it had registered its disagreement on the Arbitrator's jurisdiction, indicated that it had in fact withdrawn its original arguments on lack of jurisdiction.
Consequently, having correctly argued that the original arbitration agreement was not incorporated into the subsequent work orders, Daewoo made the error of then participating in the arbitration proceedings concerning the work order disputes. By this conduct, Daewoo acceded to the Arbitrator's jurisdiction to make an award on the merits of the claims being made.

Trett Consulting (Malaysia) Sdn Bhd are Bauer (Malaysia) Sdn Bhd’s claims advisors and are assisting Bauer’s lawyers in the ongoing arbitration. Steve Kennedy, Director, can be contacted on (60) 3 704 5963.

Tan Swee Im of Tan Swee Im & Co acts as counsel for Bauer in the arbitration and with Dato R.R. Sethu on the Court of Appeal, Kuala Lumpur. She can be contacted at (60) 2 283 3918.