In a recently surfaced judgment, the Malaysian High Court in Government of Malaysia v Nurhima Kiram Fornan & Ors (Originating Summons No. BKI-24NCvC-190/12-2019 (HC2)) for the first time granted an anti-arbitration injunction to restrain foreign arbitration proceedings on the basis of sovereign immunity.
Tag: Daniel Chua
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”).
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”).
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.
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.
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.
In Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd (Civil Application No. 03-2-11/2018(B) and Civil Application No. 02(i)-104-11/2018(B)), the Federal Court was asked to decide whether a default judgment from a Malaysian court which was obtained in breach of an arbitration agreement in the underlying contract between the parties should be set aside on the basis of the existence of the arbitration agreement.
The appellant (“Tindak Murni”) entered into a building construction contract (“Contract”) with the respondent (“Juang Setia”), which contained an arbitration clause. Following a dispute over an alleged failure to make payment by Tindak Murni, Juang Setia commenced civil proceedings against Tindak Murni in the High Court in Shah Alam to claim the alleged outstanding sums.
At the High Court, Tindak Murni did not formally enter its appearance under the rules of the court, nor take immediate steps to stay the court proceedings under the section 10 of the Arbitration Act 2005 (the “Act”). As a result, on 1 March 2017, Juang Setia obtained a default judgment against Tindak Murni to pay the outstanding liquidated sums.
On 10 April 2017, Tindak Murni applied to set aside the default judgment on the basis that it had valid disputes against Juang Setia’s claims and that there exists an arbitration agreement between the parties. On 31 July 2012, the Registrar of the High Court set aside the default judgment on the basis that “there was a defence on the merits in that there were disputes and/or triable issues justifying the matter being heard on the merits”.
Upon setting aside the default judgment, Tindak Murni did not file a defence in the court proceedings, but instead applied for a stay of the court proceedings pending arbitration. Unsatisfied, Juang Setia appealed to the High Court Judge against the decision of the Registrar, and for a determination of Tindak Murni’s application to stay the court proceedings. The High Court Judge held that (1) there was, on its face, a potential defence which could be raised, which substantively justified the setting aside of the default judgment; and (2) a valid arbitration clause to which the parties had agreed to be bound. The court proceedings where therefore stayed pending referral of the dispute to arbitration.
Following the decision of the High Court Judge, Juang Setia then filed two appeals to the Court of Appeal against the (1) decision to set aside the judgment in default (“Default Judgment Appeal”); (2) the decision granting the stay of court proceedings pending arbitration (“Stay Appeal”).
Decision at the Court of Appeal
Administratively, the Court of Appeal dealt with both appeals separately (as did the High Court), and proceeded to hear and decide the Default Judgment Appeal before the Stay Appeal.
On the Default Judgment Appeal, Juang Setia argued that the relevant clauses of the Contract and applicable Malaysian law relating to interim certification was such that its claim was beyond dispute. In other words, the existence of a debt due and owing to the Contractor was undisputed. As such the contention was that there was simply no dispute that could be arbitrated. The Court of Appeal agreed that the certificates of payment were conclusive in fact, which effectively dismissed any possibility of defects in the work done. It concluded that there could not be any merits to Tindak Murni defending the claim, which meant that the High Court had wrongly set aside the default judgment. The Court of Appeal allowed the contractor’s appeal, restoring the default judgment.
As a result of the decision on the Default Judgment Appeal, the Court of Appeal allowed the Stay Appeal without addressing its merits.
Decision at the Federal Court
The Federal Court held that both appeals should have been heard together (as opposed to the sequential and isolated manner adopted by the Court of Appeal), and thereafter determine which of the two appeals should be decided first in time. It determined that section 10 of Act requires the court to first ascertain whether there is, in fact, an arbitration agreement in respect of the dispute. Section 10 of the Act reads as follows:
“A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative or incapable of being performed.”
The Federal Court observed that the Court of Appeal, having heard and decided the Default Judgment Appeal first, was left with no choice but to allow the Stay Appeal, given that it would be inconsistent with the Court of Appeal’s decision in the Default Judgment Appeal to make a subsequent finding on the merits of the Stay Appeal. In so doing, the Court of Appeal failed to recognise that the subject matter of both appeals were “inextricably intertwined”, and that an application to stay court proceedings pending arbitration is an “essential jurisdictional issue”, which a Malaysian court is bound to consider. As such, the Federal Court proceeded to hear both appeals simultaneously.
Having found a valid arbitration agreement between the parties, the Federal Court considered that the existence of a default judgment is immaterial to the parties’ right to arbitrate the dispute as long as (1) no procedural steps which can be construed as a submission to the court’s substantive jurisdiction have been taken in the court proceedings; and (2) that the arbitration agreement is not null and void, inoperative, or incapable of being performed.
Interestingly, the Federal Court starkly disapproved of Juang Setia’s attempt to circumvent the arbitration agreement by procuring a judgment of a Malaysian court and thereafter argue that the default judgment should take precedence over the breached arbitration agreement, thereby eliminating any consequence for the breach of the arbitration agreement. In doing so, Juang Setia argued that the effect of allowing the arbitration agreement to take precedence is to render the judgment of the court as a ‘subordinate’ to an arbitration agreement, which cannot be done without specific statutory legislation. The Federal Court rendered strong criticism of this argument, stating that:
“if this form of legal rationale is allowed to persist … all forms of dispute resolution agreed to between parties in their contracts would be rendered ineffectual and nugatory as it would be open to one party to breach the same and effectively put an end to the agreement to resolve disputes by way of arbitration.”
The case demonstrates a number of interesting trends.
First, Malaysian courts no longer consider whether a ‘dispute’ exists for the purposes of an application to stay court proceedings. The Court of Appeal took the wrong approach by making a substantive determination over whether a ‘dispute’ could properly exist. This approach echoes section 10(1) of the Act prior to its amendment in 2011. The pre-2011 provision of the Act reads:
“A court before which proceedings are brought in respect of a matter which is the subject of an arbitration agreement shall, where a party makes an application before taking any other steps in the proceedings, stay those proceedings and refer the parties to arbitration unless it finds –
(a) that the agreement is null and void, inoperative or incapable of being performed; or
(b) that there is in fact no dispute between the parties with regard to the matters to be referred.”
Section 10(1) of Act as it now stands makes no reference to the non-existence of a dispute as a ground for resisting an application to stay court proceedings in favour of arbitration. The Federal Court’s approach is consistent with other post-2011 cases which have dispensed with any formal or substantive review over the existence of a dispute by the courts (see TNB Fuel Services Sdn Bhd v China National Coal Group Corp  4 MLJ 857, paragraph 24; Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd  5 MLJ 417, paragraph 33).
Second, a party seeking to circumvent an arbitration agreement may sometimes choose to obtain a default judgment from a national court, and then seek to enforce that judgment as a debt in the courts of the country where the counterparty is located or has assets. By then, depending on the jurisdiction involved, difficulties may arise under national law to properly challenge the default judgment or the validity of any enforcement proceedings arising out of the default judgment on the basis of an existing arbitration agreement between the parties. In order to avoid the risk of costly procedural complications in any national court, parties should take prompt and proactive steps to stay any court proceedings brought in breach of an arbitration agreement.
Finally, the procedural steps and substantive arguments on the merits of the payment dispute canvassed by both the Court of Appeal and the Federal Court underscores the Malaysian construction industry’s increasing need for arbitrations to address disputes in the construction industry efficiently. To this end, the Queen Mary University of London 2019 International Arbitration Survey (Driving Efficiency in International Construction Disputes) found that the top procedural feature which respondents consider to have the greatest potential to improve efficiency in international construction arbitration was the summary disposal of unmeritorious claims or defences at an early stage. The latest commercial arbitrations rules of a number of institutions, including the Hong Kong International Arbitration Centre (“HKIAC”), the International Chamber of Commerce (“ICC”), the Singapore International Arbitration Centre (“SIAC”) and the Stockholm Chamber of Commerce (“SCC”), provide summary disposition procedures, including early dismissal procedures and summary judgment procedures. It remains to be seen whether the Asian International Arbitration Centre (“AIAC”) would provide such procedures in the revised arbitration rules which it expects to introduce this year.
The judgment of the Federal Court 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.
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.
In Coneff Corporation Sdn Bhd v Vivocom Enterprise (Originating Summons No. WA-24C(ARB)-26-06/2019) the Malaysian High Court for the first time considered the test for an application to subpoena a witness to produce documents for the purpose of an arbitration and give evidence in arbitration proceedings.
The plaintiff (“Coneff”) appointed the defendant (“Vivocom”) to construct and complete a mixed commercial and residential development project in Kuala Lumpur. Disputes arose concerning the adequacy of piling works done by Vivocom’s piling sub-contractor, the latter having appointed Geonamics (M) Sdn Bhd (“Geonamics”), to conduct Pile Driving Analyser (“PDA”) tests to ascertain the integrity of a number of the constructed bored piles.
As a result of expert opinion obtained in the course of the arbitration which cast doubt on the integrity of the PDA test results, Coneff obtained a High Court subpoena against an employee of Geonomics (“Applicant”) to produce the PDA raw data to Coneff, and to give evidence in the arbitration. On an application by the Applicant, the High Court set aside the subpoena to give evidence in the arbitration, but upheld the subpoena to produce documents. Given that the decision is currently under appeal, the High Court produced written grounds for its decision, being the first written judgment addressing the principles relating to the exercise of a Malaysian court’s power to assist in the taking of evidence for arbitration proceedings under the Arbitration Act 2005.
On 22 October 2019, the Asian International Arbitration Centre (“AIAC“) published its 2018 statistics, showing a steady maintenance of its arbitration caseload. Throughout the years, there has been sustained efforts by the Malaysian government and legal community to promote arbitration as a dispute resolution process of choice for Malaysian parties, with the AIAC largely at the forefront of this endeavour.
In this post, we navigate the trend of Malaysian participation and usage of institutional arbitration based on published statistics of leading arbitral institutions across the world.
In Jaks Island Circle Sdn Bhd v Star Media Group Bhd and Another (Originating Summons No. WA-24C(ARB)-11-02/2018), the Malaysian High Court considered whether an inquiry of damages arising out of an undertaking by an applicant to pay damages for an injunction wrongly granted by a court in support of arbitration proceedings should await the outcome of a pending arbitration between the parties.
In Calibre M&E Sdn Bhd v PT Cooline HVAC Engineering (Originating Summons Nos. WA-24C(ARB)-47-09/2017 and WA-24C(ARB)-49-10/2017), the Malaysian High Court considered an application to set aside an arbitral award on the basis that the recognition by the tribunal of the allegedly illegal underlying contract was in conflict with the public policy of Malaysia. Section 37 of Malaysia’s Arbitration Act 2005 (“Act“) (which is modelled after the Article 34 of the UNCITRAL Model Law on International Commercial Arbitration 1985 (as amended in 2006)) allows an award to be set aside on the basis that the award is in conflict with the public policy of Malaysia.
The Central Bank of Malaysia Act 2009 (“Act“) designated Malaysia’s Shariah Advisory Committee on Islamic finance (“SAC“) as the authority for ascertaining Islamic law for the purposes of Islamic financial business. According to Section 2 of the Act, “Islamic financial business” encompasses “any financial business in ringgit or other currency which is subject to the laws enforced by the Bank and consistent with the Shariah“.
In Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd  MLJU 405, the High Court considered for the first time the new section 41A of Malaysia’s Arbitration Act 2005 (“Arbitration Act“), and its application to non-parties to an arbitration.
In the context of a shareholders’ dispute, the plaintiff-director of the defendant company applied for leave to commence derivative proceedings against the defendant company. The defendant company objected to the production of two documents annexed to the plaintiff’s affidavit supporting the application. These documents were originally produced for the purpose of arbitration proceedings between the defendant company and its corporate shareholders, Nautical Supreme Sdn Bhd (to which the plaintiff is a director) and Azimuth Marine Sdn Bhd.
In the first half of 2019, Malaysia’s Court of Appeal considered no less than four appeals relating to applications to restrain the calling of performance bonds in the construction sector. These applications were made in support of arbitration under Section 11(1)(f) and (h) of the Malaysian Arbitration Act 2005 (“Act”) (prior to its amendments in 2018), which reads:
“11 Arbitration agreement and interim measures by High Court
(1) A party may, before or during arbitral proceedings, apply to a High Court for any interim measure and the High Court may make the following orders for:
(f) the preservation, interim custody or sale of any property which is the subject-matter of the dispute;
(h) an interim injunction or any other interim measures”
We briefly consider the four decisions of the Court of Appeal where the injunction sought to restrain the call on a performance bond was based on unconscionability, and the practical considerations arising from the Malaysian courts’ treatment of such applications.