The fund, International Petroleum Investment Co (IPIC), on Tuesday said it had submitted its request to the London Court of International Arbitration.
In April, 1MDB, or 1Malaysia Development Berhad, defaulted on $1.75 billion in company bonds after missing an interest payment of $50 million.
1MDB and Malaysian Prime Minister Najib Razak are battling allegations that billions were looted from the company in complex overseas deals that are being investigated by authorities in several countries.
IPIC has accused 1MDB of failing to pay back a $1 billion loan from the Abu Dhabi fund.
IPIC’s arbitration request accuses 1MDB and Malaysia’s finance ministry — Najib is also finance minister — of failing to stick to its financial agreements with IPIC.
“The failure of 1MDB and (Malaysia’s finance ministry) to perform their obligations, cure their defaults or put forward acceptable proposals has left IPIC in the position where it must pursue its claims in arbitration,” IPIC said in a filing to the London Stock Exchange.
1MDB insists it repaid the loan but IPIC says the money instead went to a company with which it has no relations. IPIC is refusing to guarantee the bonds until the loan is repaid.
Malaysia’s finance ministry took over 1MDB’s assets recently after dissolving the board of advisors.
1MDB said it will “review the request for arbitration once it has been served with a copy”.
Both 1MDB and Najib, who launched the company in 2009, vehemently deny wrongdoing.
In April, a Malaysian parliamentary committee said at least $4.2 billion in questionable overseas money transfers were made by 1MDB.
Najib was plunged into the crisis last year when it was revealed that $681 million in transfers were made to his personal bank accounts in 2013.
In May, Swiss financial regulators approved the dissolution of Switzerland-based BSI Bank over “serious breaches” of money-laundering regulations in its dealings with 1MDB.