Appeal Ref: A4/2019/1243 Claim No.

CL-2018-000704

IN THE COURT OF APPEAL (CIVIL DIVISION)

ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND
WALES COMMERCIAL COURT (QBD) B E T W E E N:

MINISTER OF FINANCE (INCORPORATED) 1MALAYSIA

DEVELOPMENT BERHAD

Claimants/Appellants

and

INTERNATIONAL PETROLEUM INVESTMENT COMPANY AABAR

INVESTMENTS PJS

Defendants/Respondents

CASE SUMMARY

Executive Summary
Minister of Finance (Incorporated) of Malaysia (“MoF”) and
1Malaysian Development Berhad

(“1MDB”) successfully appealed the first instance judge’s decision to:

1. (1) stay, on case management grounds, a commercial court claim

(the “commercial court proceedings”) under a section 67 and 68 of the
Arbitration Act 1996 (the “1996 Act”), brought by MoF and 1MDB
against International Petroleum Investment Company (“IPIC”) and
Aabar Investments PJS (“Aabar PJS”); and
2. (2) refuse to injunct, under section 37(1) of the Senior Courts Act
1981, arbitration proceedings that IPIC and Aabar PJS had brought
against MoF and 1MDB.

The Court of Appeal held that:

1. (1) the judge at first instance had exercised his case management
powers to stay the commercial court proceedings on the wrong legal
basis;

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 2. (2) there were no compelling reasons to grant a stay of the
commercial court proceedings, and therefore that the stay imposed
by the judge should be lifted;
3. (3) the judge had exercised his discretion to refuse an injunction
under section 37(1) of the Senior Courts Act 1981 on the wrong legal
basis; and
4. (4) it was just and convenient that the arbitration proceedings
brought by IPIC and Aabar PJS should not proceed until the
commercial court proceedings had been determined, and that those
arbitration proceedings should therefore be injuncted to “bring [IPIC
and Aabar PJS’s] vexatious conduct to an end”.

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Factual Background

This case involves a dispute between (1) MoF and 1MDB (both
investment entities ultimately owned by the Malaysian Government)
(the “Malaysian Parties”), and (2) IPIC and Aabar PJS (both
investment entities ultimately owned by the Government of Abu Dhabi)
(the “Abu Dhabi Parties”) (the Malaysian Parties and the Abu Dhabi
Parties together the “parties”), relating to the well-publicised 1MDB
scandal whereby billions of dollars were misappropriated from the
Malaysian people.

The Malaysian Parties allege that the scandal, which has been
described as the largest kleptocracy case in US history by former
Attorney General Loretta Lynch, arose from a conspiracy involving Mr
Najib Razak, the Prime Minister of Malaysia from 3 April 2009 to 9
May 2018.

The fact of the case are complex, but the key events are summarised
below:
28 May 2015: the parties, under the Najib administration, entered into
an agreement (the

“BTS”) containing a London seated arbitration clause.

13 June 2016: The Abu Dhabi Parties commenced a London seated

arbitration (the “first arbitration”) against the Malaysian Parties for an
alleged breach by the Malaysian Parties of the BTS.

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22 April 2017: the parties entered into settlement deeds, containing
London seated arbitration clauses, which settled the issues raised in
the first arbitration (“settlement deeds”). The settlement deeds also
provided for the issue of a consent award.

9 May 2017: the arbitral tribunal in the first arbitration made the
consent award which, inter alia: (1) terminated the first arbitration, (2)
stated that the BTS was valid and binding on the parties until
terminated by the settlement deeds, (3) provided for the Malaysian
Parties to pay IPIC significant sums, and (4) stated that the Malaysian
Parties would indemnify IPIC in respect of all sums which might be
paid by IPIC under various guarantees.

The Abu Dhabi Parties contend that, for more than 12 months after
May 2017, the Malaysian Parties complied with their obligations under
the settlement deeds and the consent award, including the payment
of significant sums.

9 May 2018: Mr Najib lost the Malaysian general election, and the
new government of Malaysia was, thereafter, able to investigate the
misappropriated sums. Further to those investigations, the Malaysian
Parties contend that the BTS and the settlement deeds were grossly
disadvantageous to them, and that they were, to the Abu Dhabi
Parties’ knowledge, procured by Mr Najib to further his own interests
and to damage their interests.

30 October 2018: the Malaysian Parties issued the commercial court

proceedings, seeking to set aside the consent award on the basis
that:

(a) the arbitral tribunal in the first arbitration did not have substantive
jurisdiction under section 67 of the 1996 Act to make it because, to
the Abu Dhabi Parties’ knowledge,

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Mr Najib was acting in a way which was contrary to the best interests
of the

Malaysian Parties and that he therefore lacked authority to request it;

and
(b) the consent award was procured by fraud or in a way that was

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contrary to public policy under section 68 of the 1996 Act since the
award formed part of an attempt by Mr Najib to cover up the fraud,
and that the Abu Dhabi Parties knew that he was

acting in this way.

21 November 2018: the Abu Dhabi Parties requested the

commencement of further arbitration proceedings against the
Malaysian Parties (the “second arbitrations”), alleging that, inter alia,
the issuing of the commercial court proceedings by the Malaysian
Parties was an event of default under the settlement deeds, entitling
the Abu Dhabi Parties to demand immediate payment of significant
sums of money from the Malaysian Parties.

8 May 2019: the judge at first instance refused: (1) the Abu Dhabi
Parties’ application for a stay of the commercial court proceedings
under section 9 of the Arbitration Act 1996, and (2) the Malaysian
Parties’ application for an injunction to restrain the second arbitrations
under section 37(1) of the Senior Courts Act 1981. Instead, the judge
granted a stay of the commercial court proceedings on case
management grounds whilst the second arbitrations proceeded, since
the Malaysian Parties’ commercial court proceedings would otherwise
elevate the court’s supervisory jurisdiction under sections 67 and 68
above the concurrent jurisdiction of the tribunal in the second
arbitrations. This was the case, the judge found, when the jurisdiction
of both the court, and the tribunal in the second arbitrations, were
derived from party autonomy.1 According to the judge, “the alternative
is duplication in the investigation and decision on whether the
Settlement Deeds (with the arbitration agreements within them) are
void or not binding. That invites delay, cost, disorder, and
uncertainty”2.

29 July 2019: the Malaysian Parties were granted permission to

appeal the judge’s decisions to: (i) stay the commercial court
proceedings on case management grounds, and (ii) refuse to injunct
the second arbitrations.

Court of Appeal’s Reasoning:

1. Judge’s decision to stay the commercial court proceedings on case

management grounds

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The Court of Appeal held that the judge at first instance had exercised
his case management powers to stay the commercial court
proceedings on the wrong legal basis because he had failed to
recognise, inter alia, that:

1. (a) the Malaysian Parties had a right (which the Abu Dhabi Parties
had agreed they should have by the arbitration agreements in the
BTS, and which had effect notwithstanding any agreement to the
contrary) to challenge the consent award under the mandatory
provisions of sections 67 and 68 of the 1996 Act, which the parties
could not contract out of;
2. (b) it is the responsibility of the court to determine challenges under
sections 67 and 68, and to do so as promptly as possible;
3. (c) the parties’ election to arbitrate in the BTS could not dictate the
position in respect of challenges under sections 67 and 68, which
were no longer consensual;

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See paragraph 87 of the judgment of Knowles J dated 8 May 2019.

See paragraph 95 of the judgment of Knowles J dated 8 May 2019.

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(d) courts exercising their supervisory role under the 1996 Act do so
as a branch of the state, not as a mere extension of the consensual
arbitration process; and

(e) the court exercising its supervisory jurisdiction under sections 67

and 68 must do so quickly to avoid uncertainty and injustice in the
enforcement process.

The court then found that there were no compelling reasons to grant a
stay of the commercial court proceedings since, inter alia, the Abu
Dhabi Parties had already submitted to the supervisory jurisdiction of
the English court in relation to the first arbitration when they entered
into the BTS (and before the settlement deeds were themselves
entered into), thereby providing the Malaysian Parties with a statutory
right to bring those proceedings under the mandatory section 67 and
68 provisions of the 1996 Act. Since the parties could not oust those
provisions by contract, the Abu Dhabi Parties could not rely on the

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arbitration agreements in the settlement deeds to take precedence
over the commercial court proceedings.

2. Judge’s decision to refuse to injunct the second arbitrations

The court held that the judge had exercised his discretion to refuse an
injunction under section 37(1) of the Senior Courts Act 1981 on the
mistaken basis that it had been appropriate to grant a case
management stay of the court applications. Accordingly, the court
held that the second arbitrations infringed and threatened the
Malaysian Parties’ undoubted legal right to pursue the court
applications under sections 67 and 68, and were vexatious and
oppressive. The only appropriate exercise of discretion, according to
the court, was for the court to grant an injunction to restrain the pursuit
of the second arbitrations, which would bring the Abu Dhabi Parties’
vexatious conduct to an end.

Case Comment

This decision is significant in confirming the primacy of the court’s

powers contained in the mandatory provisions of the 1996 Act (of
which sections 67 and 68 are two such provisions), which parties are
unable to contract out of. It also clarifies that the court does not have a
continuous supervisory power under the 1996 Act to intervene in
ongoing arbitration proceedings generally.3

The decision results in the commercial court now having to grapple

with the key questions relating to the validity of the BTS and the
settlement deeds in an open and transparent forum. The answers to
those questions are likely to have significant implications in relation to
the overall liability for monies misappropriated as part of the
underlying 1MDB scandal, and accordingly, for the Malaysian people.

Richard Little and Michael Armstrong

Eversheds Sutherland (International) LLP Solicitors for the Appellants

26 November 2019