NOW OR NEVER: MALAYSIA CONFIRMS FAILURE TO OBJECT WAIVES RIGHT TO CHALLENGE

In Sunway Creative Stones Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd and Anor [2020] MLJU 658, the Malaysian High Court refused to set aside an arbitral award because the applicant had not challenged the arbitrator’s jurisdiction and conduct when the issues arose during the arbitral proceedings. The Court emphasised that such lack of protest can be deemed a waiver of a party’s right to set aside an arbitral award on the same grounds at a later date.

This decision serves as a helpful reminder that, notwithstanding regional arbitration trends, parties to Malaysia-seated arbitrations should actively ventilate their dissent as and when they believe the arbitral tribunal is thought to have misconducted itself, even if they understand that the tribunal’s mandate has lapsed.

Background

Yeoh Tiong Lay Sdn Bhd (YTL) was appointed as the main contractor for earthworks, piling works, and main building works for condominiums in Kuala Lumpur. YTL thereafter entered into a sub-contract with Sunway Creative Stones Sdn Bhd (SCS) on an amended PAM 1998 Agreement and Conditions of Building Sub-Contract (Private Edition) for the supply, delivery, and installation of stonework (Sub-Contract).

YTL terminated its engagement as main contractor over alleged non-payment of interim certificates, which, in turn, determined SCS’s employment under the Sub-Contract. SCS commenced an arbitration against YTL under the PAM Arbitration Rules 2003 seeking declaratory and pecuniary reliefs including interest and costs. The dispute was heard before a sole arbitrator (Arbitrator) with the participation of both parties. Following the arbitration hearing, parties exchanged post-hearing submissions, with the last submission being served on 1 June 2015.

Article 21.3 of the PAM Arbitration Rules 2003 – central to YTL’s challenge – required that:

the Arbitrator shall deliver his award as soon as practical but not later than three (3) months from his receipt of the last closing statement from the parties. Such time frame for delivery of the award may be extended by notification to the parties.” [emphasis added]

The Arbitrator neither issued the award by this three-month deadline nor notify both parties of any extensions to this timeline. Instead, the award was delivered on March 2019 – almost 3.5 years late – in which the Arbitrator found in SCS’s favour (Award).

Saliently, SCS’s solicitors reminded the Arbitrator on four occasions between February 2016 and December 2018 on the need to deliver his Award in a timely manner. These reminders were copied to YTL’s solicitors. YTL, however, did not send any such reminders nor raise concerns with the Arbitrator’s non-compliance with the deadline.

Following YTL’s non-payment of sums under the Award, SCS sought recognition and enforcement of the Award against YTL. In response, YTL applied to the Malaysian High Court to set aside the Award under Section 37 of the Arbitration Act 2005 (AA 2005), which largely mirrors Article 34 of the UNCITRAL Model Law.

YTL’s three main grounds for setting aside were:

  1. Procedural Ground: The Arbitrator failed to comply with the agreed arbitral procedure when he delivered the Award beyond three months of his receipt of the last closing submissions. This rendered the Award liable to be set aside under Section 37(1)(a)(vi) AA 2005.
  2. Jurisdiction Ground: The Arbitrator lacked jurisdiction to issue the Award when he did. YTL contended that the Arbitrator’s mandate lapsed on 1 September 2015, upon the expiry of the time limit to deliver the Award. Thus, there was no longer any subsisting arbitration when the Arbitrator delivered the Award on March 2019, which meant that the Award was issued without jurisdiction. It was therefore, void and to be annulled under Section 37(1)(a)(iv) and (v) AA 2005.
  3. Public Policy Ground: The Arbitrator’s delay in delivering the Award was a breach of natural justice, and should be set aside on the grounds of public policy pursuant to Section 37(2) AA 2005.

SCS opposed all three setting aside grounds on the basis of YTL’s failure to raise these complaints in the arbitration. The Court dismissed YTL’s setting aside application on each grounds and upheld the Award.

Procedural and jurisdiction grounds

The Procedural Ground failed as YTL did not protest the Arbitrator’s delay in issuing the Award when it arose. By its silence, YTL was understood to have waived its right to rely on this procedural defect as a ground for challenge. The Court viewed this consistent with the waiver principle under Article 20 of the PAM Arbitration Rules 2003 and Section 7(b) AA 2005, which require a challenging party to promptly raise procedural objections or lose the right to subsequently rely on them.

As regards the Jurisdiction Ground, the Court found that the waiver doctrine extended to jurisdictional challenges and that established Malaysian case law supported this view. Section 18(5) AA 2005, worded similarly to Article 16(2) of the UNCITRAL Model Law, required a party to challenge any excess of jurisdiction as soon as the alleged infraction arises during the arbitral proceedings. Analysing this, the Court held that if a party fails altogether to invoke the right to challenge an arbitrator’s jurisdiction whilst arbitration proceedings are ongoing, that party cannot thereafter apply to set aside the award on jurisdictional grounds under Section 37(1)(a)(iv) and (v) AA 2005.

The Court found further support in the shift in arbitral jurisprudence in Malaysia since the enactment of AA 2005.  It was previously the position under the Arbitration Act 1952 (repealed), as reflected in Bauer (M) Sdn Bhd v Daewoo Corp [1999] 4 MLJ 545, that a failure to raise a jurisdictional objection did not prevent an objecting party from later challenging the award on the same jurisdictional grounds in setting aside or enforcement proceedings. This, however, was inconsistent with the intention of Article 16 of the UNCITRAL Model Law and, in turn, Section 18 AA 2005. The Court sought to give effect to this new legislative intention.

Accordingly, YTL should have raised a plea to the Arbitrator that he lacked jurisdiction to deliver his Award soon after 1 September 2015, ie upon the expiry of the time limit to deliver the Award. Having failed to do so, YTL lost the right to rely on the same jurisdictional defect in setting aside proceedings.

Public policy ground

In the Court’s view, the late Award did not amount to a breach of natural justice satisfying the high threshold for public policy challenges under Section 37(2) AA 2005. The Court emphasised YTL’s failure to avail itself of the opportunity to remedy the Arbitrator’s misconduct before the Award was published, including an application to terminate the Arbitrator’s appointment pursuant to Section 16 AA 2005. Following its failure, YTL could not now argue that a fundamental notion of substantive or procedural justice was violated as a result of the delayed publication of the Award.

In the circumstances, the Arbitrator’s conduct was not “some matter which concerns the public good and public interest“, and did not demonstrate a “strong case has been made out that the arbitral award conflicts with the public policy of Malaysia“. Thus, the Award was not liable to be set aside on the ground of public policy.

Comment

The Malaysian High Court’s decision in Sunway Creative Stones emphasises that parties to Malaysian-seated arbitrations are expected to raise jurisdictional and procedural objections without undue delay. Failure to do so may amount to a waiver of the objecting party’s right to raise such defects at the setting aside stage.

The Malaysian position appears to stand in contrast with the Singaporean approach to jurisdictional objections. In Rakna Arakshaka Lanka Ltd v Avant Garde Maritime Services (Private) Limited [2019] SGCA 33, the Singapore Court of Appeal found that a non-participating respondent was entitled to stand by while the claimant proceeded with the arbitration without losing his right to challenge the jurisdiction of the tribunal in setting aside proceedings before the supervisory court. This was despite that the non-participating respondent declined to participate in arbitral proceedings on the belief that the arbitration had been wrongly started or continued due to a lack of jurisdiction. A salient finding of the Singapore Court of Appeal was that the law does not compel a respondent against whom arbitration proceedings have been started to take part in those proceedings and defend his position. Although it is a risky course of action to pursue, it lies within the respondent’s prerogative to do so where it has a valid objection.

Although it concerns a jurisdiction objection at a different stage of the arbitration, Rakna Arakshaka Lanka Ltd demonstrates the differing levels of judicial tolerance between the Malaysian and Singapore courts towards party delays or refusals to ventilate jurisdictional challenges. Notably, the Rakna Arakshaka Lanka Ltd line of cases was not put before the Malaysian High Court in Sunway Creative Stones. It may be a point of interest for many to see how the Malaysian courts will treat this regional jurisprudential difference in future cases. However, for now, the Sunway Creative Stones decision serves as a reminder that arbitrating parties should not delay in raising jurisdictional and procedural complaints.

An English version of the decision can be accessed here.

 

For further information, please contact Peter Godwin, Lim Tse Wei, 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
Disputes & Managing Partner
+60 3-2777 5104
Tse Wei Lim
Tse Wei Lim
Associate (Malaysia)
+60 3-2777 5135

 

New ruling of the French Cour de cassation in the Tecnimont judicial saga on challenge of an arbitrator

In Avax v Tecnimont (Civ. 1ère, 25 June 2014, pourvoi n° 11-26.529) the French Supreme Court reviewed the Paris Court of Appeal’s decision regarding the effect of the time limits in institutional rules on the judge reviewing the award. 

On 25 June 2014, the French Supreme Court (the Cour de cassation) held that a party that had failed to exercise its right to challenge an arbitrator within the time limit specified by the applicable arbitration rules is deemed to have waived its right to have the award set aside on that ground. In other words, the French Supreme Court held that the arbitration rules that have been chosen by the parties to govern the arbitration have a legal effect on the judge reviewing the award and cannot be disregarded once the arbitral award has been rendered. The decision reversed a controversial decision rendered by the Reims Court of Appeal in 2011.

This is the latest decision in the now long-running judicial saga of the 2007 ICC award in Avax v Tecnimont. The Paris Court of Appeal initially annulled the award in 2009, on the ground that the chairman of the tribunal had failed to disclose his law firm’s representation of companies affiliated to one of the parties during the arbitration proceedings. That decision was then reversed on a procedural ground by the French Supreme Court in November 2010. The case was then referred to the Reims Court of Appeal, which set aside the award again, this time for a failure to disclose conflicts of interests and to take into account the impact of the ICC rules on challenging arbitrators.

In the latest decision, the French Supreme Court ruled on the same case for the second time, but on a different legal issue, reversing the Reims Court of Appeal decision only on the question of the legal authority of the ICC Rules. It did not rule on the second question addressed to it, which concerned the scope of the arbitrator’s duty of disclosure. The French Supreme Court has sent the case back to the Paris Court of Appeal, which will issue another decision on the case (although it will be dealt with by a different chamber of the Paris Court of Appeal).

The decision is a reminder to parties to consider promptly their rights under any agreed institutional arbitration rules and, more importantly, to heed the time limits imposed by those rules.

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