MALAYSIA: HIGH COURT FINDS THAT ARBITRAL TRIBUNAL HAS JURISDICTION TO DETERMINE INSOLVENCY SET-OFF

In UDA Land Sdn Bhd v Puncak Sepakat Sdn Bhd [2020] MLJU 892, the High Court was required to determine whether an award should be set aside because the sole arbitrator (“Arbitrator”) wrongly concluded that it had no jurisdiction to determine a counterclaim and insolvency set-off raised in the arbitration. The High Court set aside the award on the basis that the Arbitrator made an error of law in finding that it had no jurisdiction to hear the counterclaim and set-off.

Continue reading

MALAYSIA: COURT OF APPEAL SUSPENDS RECOGNITION AND ENFORCEMENT OF AN AWARD ON THE BASIS IT IS NOT YET BINDING

In Malaysian Bio-Xcell Sdn Bhd v Lebas Technologies Sdn Bhd and another appeal (Civil Appeal Nos. W-02(IM)(C)-1532-07/2018 and W-02(IM)(C)-1533-07/2018), the Court of Appeal determined, for the first time, an application to suspend the enforcement of an award on the basis that the award has not yet become binding on the parties to the award. Faced with an application to refuse the recognition of the award, the Court of Appeal was asked to consider the circumstances in which an award is deemed to be ‘not yet binding’ under Malaysia’s Arbitration Act 2005 (“Act”).

Background

Malaysian Bio-Xcell Sdn Bhd (“Bio-Xcell” or “appellant”) was the main contractor in a build, lease and transfer agreement dated 1 November 2010 to design, build, equip, test and commission a biotechnology facility for the production of propanediol on a piece of land located in the appellant’s biotechnology park in Johor Bahru. The appellant subcontracted the engineering, procurement, construction and commissioning works to the Lebas Technologies Sdn Bhd (“Lebas” or “respondent”) on 21 June 2011 (the “EPCC Contract”). The EPCC Contract included the procurement of specific salt and water removal equipment from two German manufacturers for the appellant (“Equipment”).

On 15 March 2013, the appellant terminated the EPCC Contract. The respondent subsequently commenced arbitration against the appellant to challenge the validity of the termination and obtain damages for unlawful termination (the “1st Arbitration”).

On 2 February 2015, the tribunal in the 1st Arbitration rendered its final award, which found the appellant’s termination of the EPCC Contract to be unlawful, and ordered the appellant to pay the respondent the sum of MYR6,559,440.37 with interest and costs (“Award”). The sum was made up of the balance sum due under the Final Account and the value of the performance bond which was found to have been wrongly called. This monetary award also included payment for the Equipment that the appellant was to procure under the EPCC Contract.

The appellant became concerned that if it paid out the monies ordered under the Award, there is nothing to ensure that the respondent would deliver the Equipment already purchased. The appellant was also particularly concerned that there would be little assets that would remain in the respondent, given that the latter is a special purpose vehicle incorporated in Malaysia (parent company in France) specifically to carry out the EPCC contract. Its parent company is established in France. If the respondent does not deliver the Equipment after the appellant’s payment, the appellant considered that there would be no realistic recourse against the respondent.

As a result, on 8 August 2017, the appellant commenced civil proceedings against the respondent in the Kuala Lumpur High Court, claiming delivery and transfer of the ownership of the Equipment (“Suit 87”). On 15 November 2017, the respondent successfully applied to stay the court proceedings in Suit 87. The Kuala Lumpur High Court ordered – on terms consented to by the respondent –that (i) the appellant issue its notice of arbitration within one month, (ii) the arbitration proceedings be heard before the same arbitrators in the 1st Arbitration, and (iii) if any arbitrator was indisposed, the procedure for appointing a new arbitrator would be commenced in accordance with the arbitration agreement.

In the interim, on 20 September 2017, the respondent commenced separate proceedings in the Kuala Lumpur High Court pursuant to section 38 of the Act to recognise the Award as a judgment of the court. In response, the appellant applied to stay the application for recognition and suspend the enforcement of the Award pending the hearing and disposal of what was then considered an intended arbitration between the parties.

Pursuant to the High Court’s order dated 15 November 2017, a second arbitration was commenced on 13 December 2017 (before a tribunal which eventually consisted of different arbitrators from the 1st Arbitration) by way of a Notice to Arbitrate, which sought to determine: (i) whether pursuant to the EPCC Contract, Bio-Xcell is entitled to the legal and/or beneficial ownership of the Equipment upon payment of the Arbitration Sum Awarded; (ii) whether Bio-Xcell’s right to the Equipment is incidental and consequential to the decision of the Learned Arbitrators in giving full value to the Equipment based upon the final account; (iii) whether Lebas’s right to payment of the Arbitration Sum Awarded co-exists with a reciprocal obligation on the part of Lebas to deliver and/or transfer of ownership of the Equipment to Bio-Xcell; (iv) whether the Arbitration Award is conditional upon and/or subject to Lebas’s ability to deliver and/or transfer ownership of the Equipment to Bio-Xcell; and (v) whether in the event of Lebas’s inability to deliver and/or transfer of ownership of the Equipment to Bio-Xcell, Lebas is estopped and/or precluded from enforcing the Arbitration Award and is liable to account to Bio-Xcell for monies paid by Bio-Xcell to Lebas in respect of the said Equipment (the “2nd Arbitration”).

Issues

The application to recognise the Award, being a summary procedure, would be granted, in the event the appellant is unsuccessful in staying the recognition of the Award. As such, the main issues are (i) whether court has power to suspend enforcement of Award; and (ii) whether the binding force of the Award rendered in the 1st Arbitration is conditional upon the outcome of 2nd Arbitration?

According to Bio-Xcell, the Award has yet to become binding by reason of the 2nd Arbitration that was ordered on 15 November 2017 upon terms of reference consented by both parties. The appellant argued that, due to external facts and circumstances underscoring the issues addressed in the Award, it has not yet become binding within the meaning of section 39(1)(a)(vii) of the Act; until those facts or circumstances are overcome or spent, the Award remains yet to be binding on the parties. As a result, Lebas is prevented from recognising and enforcing the Award in breach of principles of estoppel and unjust enrichment.

In response, Lebas argued that the court has no jurisdiction to suspend the binding force of the Award, and that the Award was not conditional upon the outcome of the 2nd Arbitration, given that both arbitrations dealt with distinct and unrelated issues.

Decision of the High Court

On 25 June 2018, the appellant’s application to stay the recognition of the Award was dismissed, and the respondent’s application for recognition was allowed. Having failed to stay the application for recognition, the High Court allowed the Award to be recognised as a judgment of the Malaysian courts. At the time of the High Court’s decision, the 2nd Arbitration was already underway.

The High Court considered that there was no power or jurisdiction to grant the orders sought, and that the Malaysian courts cannot call on its inherent jurisdiction to grant the order of stay or suspension. The High Court found that considerations of estoppel and unjust enrichment were not successfully proved, in any event.

Further the High Court held that “it is a fallacy to suppose that merely because the issues in dispute in the second arbitration are somehow connected to those in the first arbitration, and thus the award has not binding on the parties.”. It held that an application to set aside the Award – which the appellant did not make – was significant to any challenge to the binding effect of the Award.

Decision of the Court of Appeal

The Court of Appeal allowed the stay application, and set aside the High Court’s decision to recognise the Award. In doing so, the Court of Appeal adjourned the decision on the recognition pending the disposal of the 2nd Arbitration, and ordered that the sums ordered in the Award be paid as security pending the disposal of the 2nd Arbitration.

The Court of Appeal considered that any application to refuse the recognition of an award under section 39(1)(a)(vii) of the Act must be considered together with section 39(2) which, cumulatively, read as follows:

(1) Recognition or enforcement of an award, irrespective of the State in which it is made, may be refused only at the request of the party against whom it is invoked –

(a) where that party provides to the High Court proof that –

(vii) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

(2) If an application for setting aside or suspension of an award has been made to the High Court on the grounds referred to in subparagraph (1)(a)(vii), the High Court may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.

The Court of Appeal acknowledged that section 39 of the Act is taken from Article 36 of the UNCITRAL Model Law, and is also the embodiment of Article V of the New York Convention. Section 39 in fact mirrors much of what may be found under the New York Convention and Model Law, save for differences in drafting.

Recognising the lack of Malaysian judicial precedent on this issue, the Court of Appeal made reference to treatises on international arbitration, and decisions of the courts of other New York Convention signatories and jurisdictions adopting the UNCITRAL Model Law, including Canada, England, Spain, and the USA, noting that “[s]uch guidance is highly persuasive and of much assistance given the importance and acknowledged role that arbitration plays in dispute resolution quite aside from the need for consistency and uniformity in how arbitration awards are received in member States”. The Court of Appeal was of the view that there was a “consistent approach” in these jurisdictions to stay or adjourn an application to recognise an award where the resisting party proves that the award is yet to be binding; the court is not restricted to being binary between refusing or granting recognition only under such circumstances. In this respect, the Court of Appeal considered that the grounds for refusing recognition under section 39(1)(a)(vii) are not limited to the existence of an application to set aside or suspend an award, but also to circumstances where the award has not yet become binding on the parties.

The Court of Appeal agreed and adopted the consistent approach taken by these jurisdictions, but did not see a need to lay down any hard and fast rules in determining when an award is yet to be binding; instead, each application under section 39(1)(a)(vii) and (2) of the Act would require the court to carefully scrutinise the factual and legal circumstances surrounding the award before exercising its discretion to stay or adjourn the recognition of the award.

The Court of Appeal disagreed with decision of the High Court which held that the disputes from the 1st Arbitration and 2nd Arbitration stem from the same EPCC Contract, but were discrete and distinct disputes. The subject matter in Suit 87 – which was referred for determination in the 2nd Arbitration – concerns the interplay between the Award and the Equipment, and alleged misrepresentations which led to the findings in the Award. In the 2nd Arbitration, the appellant sought reliefs which, if granted, would effectively vary and even set off against the terms of the Award. It was pertinent that both parties had – in the application to stay Suit 87 –  agreed to the disputes to be referred to the 2nd Arbitration in that manner. For these reasons, the Court of Appeal considered that the Award had not yet become binding.

Comment

Malaysia’s decision to model the Act on the UNCITRAL Model Law demonstrates a fundamental policy choice to support arbitration by ensuring that its legal framework meets the needs of its users, both domestically and internationally. One of the most obvious means by which this objective is achieved is through harmonisation of not only arbitration legislation, but also of the interpretation and application of the legislation. The implications of this objective in terms of the interpretative approach taken by the Malaysian judiciary is clear: a Malaysian judge should strive to look for consensus positions globally, and should take seriously the shift in the hierarchy of sources that this requires.

In what appears to be the first written judgment addressing section 39(a)(vii) and (2) of the Act, the Court of Appeal’s decision to consider not only Commonwealth common law decisions, but also the decisions of other jurisdictions (including civil law jurisdictions) which are signatories to the New York Convention and/or adopters of the UNCITRAL Model Law, is very much welcome. Though not the first decision which draws reasoning from decisions of other New York Convention signatories and UNCITRAL Model Law jurisdictions, the Court of Appeal’s interpretative reasoning here sends a strong signal of its own increasingly frequent approach of interpreting the Act harmoniously with the New York Convention and the UNCITRAL Model Law in a way that achieves the harmonisation objectives of these instruments. The increasingly frequent comparative enquiries taken by Malaysian courts and references to authoritative comparative treatises in search for international consensus on arbitration demonstrates the Malaysian judiciary’s ability to make important contributions to the legal harmonisation project pursued by UNCITRAL.

The judgment of the Court of Appeal is available in English here.

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Daniel Chua, Associate or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Peter Godwin
Peter Godwin
Partner
+60 3-2777 5104

Daniel Chua
Daniel Chua
Associate
+60 3 2777 5101