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

 

MALAYSIAN HIGH COURT UPHOLDS ARBITRATOR DISCRETION IN DECISION MAKING

The Malaysian High Court has set a useful precedent for arbitrator discretion when writing reasons in arbitration awards. In Allianz General Insurance Company Malaysia Berhad v Virginia Surety Company Labuan Branch, Originating Summons No. WA-24NCC(ARB)-13-03/2018, the Court dismissed an application to set aside a majority arbitration award under Section 37 of the Malaysian Arbitration Act 2005 (MAA) for alleged breaches of natural justice predicated on the drafting of the arbitrators’ reasoning.

This case provides an authoritative statement protecting the decision-making latitudes of Malaysian-based tribunals, providing a reminder of Malaysia’s arbitration-friendliness and committed alignment with international best practices in arbitration.

Background

The grounds for setting aside arbitration awards under Malaysian law replicate those of the UNCITRAL Model Law but with slight modification. Under Section 37(2)(b)(ii) MAA, awards can be set aside where there has been “a breach of the rules of natural justice in connection with the making of the award“. A natural justice challenge assesses the arbitration’s compliance with due process requirements. In Allianz, the plaintiff sought to extend the scope of the natural justice ground to cover the manner in which the arbitrators’ reasoning was set out in the majority arbitration award.

The award determined a dispute on the subsistence and interpretation of two reinsurance agreements. The plaintiff was an insurer providing insurance cover for motor vehicles under an extended warranty programme. The defendant provided long-term reinsurance cover for the extended warranty programme, which was recorded in two “treaty” agreements between them.

Both agreements contained express provisions on reinsurance coverage periods, which deemed a mutual intent to terminate the policies at their next anniversary dates. This deemed intent was effected by provisional notices of cancellation (PNOC) being issued automatically 90 days before their next anniversary dates, unless the parties advised otherwise. A dispute arose regarding the actual meaning of the PNOC regime; whether both agreements were renewed; and whether there existed a duty of utmost good faith between the parties. This dispute subsequently went to arbitration seated in Malaysia before a three-member tribunal.

The majority of the tribunal dismissed the claim and issued a majority award in favour of the defendant. A separate dissenting award was issued by the remaining arbitrator. Dissatisfied with the majority award, the plaintiff applied to the Malaysian High Court to set it aside under, amongst others, Section 37(2)(b)(ii) MAA on grounds that the tribunal’s majority had breached natural justice requirements.

The alleged natural justice breach was that the majority award failed adequately to address the issue and submissions on the duty of utmost good faith, which it viewed as a fundamental issue to be determined by the tribunal. To substantiate this alleged failure, the plaintiff emphasised that the tribunal’s majority had only made reference to the utmost good faith principles in four paragraphs of the majority award. The defendant denied that there had been any such alleged infraction by the tribunal.

Malaysian High Court’s decision

The plaintiff’s natural justice challenge against the majority award was dismissed in its entirety. In its decision, the Malaysian High Court emphasised that natural justice did not entitle an arbitral party to receive an arbitrator’s response to all submissions and arguments presented. It was sufficient that the parties were given a right to be heard on these matters.

This further meant that the arbitrators were not bound to explain their disagreement with the plaintiff’s position regarding the existence of an utmost good faith duty beyond the four paragraphs in the majority award. The arbitrators’ choice not to do so could therefore not be an immediate basis to suggest a breach of natural justice and due process.

Preserving arbitrator discretion

The Malaysian court’s decision gives significant assurance to Malaysian-seated tribunals. It highlights the latitude afforded to arbitrators under Malaysian law in determining what issues and arguments are essential in order to write the arbitration award. When identifying what is “essential”, arbitrators are given the discretion to find that a question can be determined without further consideration of certain issues.

Where an arbitrator does address an issue, the High Court in Allianz made it clear that the arbitrator cannot legitimately be expected to “religiously follow the stance or any specific arguments presented by one party or the other” (see also Intraline Resources Sdn Bhd v Exxonmobil Exploration and Production Malaysia Inc [2017] MLJU 1299 at [88]). Arbitrators have discretion to reformulate and refashion the way in which different arguments and concepts have been consolidated, and to make their own value judgements and conclusions between the range of contentions made before it.

Although not raised in Allianz, it is likely that the international practice of allowing issues to be addressed implicitly in an award would have found favour with the Malaysian High Court. Arbitrators generally do not need to address all issues expressly, particularly those with outcomes tied to the conclusion of a specific logically prior issue. In such event, arbitrators can dispense with an assessment of the merits of the arguments and evidence for the former, thus making the decision-making process and arbitration award more efficient (see TMM Division Maritima SA de CV v Pacific Richfield Marine Pte Ltd [2013] 4 SLR 972 at [72]-[74]).

Malaysia’s arbitration-friendliness

Overall, Allianz demonstrates Malaysia’s commitment to upholding arbitral awards. As the Malaysian High Court has emphasised, the court will not treat Section 37 MAA as an appellate provision. Where the provision is invoked, Malaysian courts are required to refrain from sitting in appeal over the arbitrator’s decisions by re-examining and re-assessing the materials brought in the arbitration (see also Antara Steel Mills Sdn Bhd v CIMB Insurance Brokers Sdn Bhd [2015] 5 CLJ 1018).

This approach is particularly reassuring where a set aside application is premised on an alleged breach of public policy, which could be an inherently amorphous assessment. Allianz makes clear that, in such cases, the Malaysian courts adopt a similar approach to that taken by other Model Law jurisdictions (see also Jan De Nul (M) Sdn Bhd & Anor v Vincent Tan Chee Yioun & Anor [2019] 2 MLJ 413 at [41]-[58]; Sigur Ros Sdn Bhd v Master Mulia Sdn Bhd [2018] 3 MLJ 608).

While the ultimate outcomes of recent public policy-based challenges before Malaysian courts have been very consistent, the way in which the Malaysian courts have interpreted the concept of public policy or phrased the test under Malaysian law has been far less consistent. The High Court in Allianz provided helpful guidance in summarising the current Malaysian approach to public policy-based challenges under the MAA:

  • The concept of public policy, and breaches of it, has to be assessed narrowly and restrictively. This accords with the peremptory principle that the court’s curial intervention should be sparingly used, keeping with Section 8 MAA (Article 5 UNICTRAL Model Law).
  • The threshold to be met for a public policy-based challenge is a high one. By its nature, “it should be immediately obvious or at least fairly rapidly apparent that there has been such a breach“.
  • The mere fact that an arbitration award is irrational or unreasonable will not justify its setting aside. When considering a public policy-based challenge, the concept of public policy must be one taken in the “higher sense, where some fundamental principle of law and justice is engaged, some element of illegality, where enforcement of the award involved clear injury to public good or the integrity of the court’s process and powers will thereby be abused“.

Malaysian courts should be slow in accepting arguments that a breach of public policy, including where the rules of natural justice are involved, occurred where this results in an arbitration award being set aside.

Conclusion

The judicial consideration of the Malaysian set aside regime in Allianz is important, as it provides an encouraging restatement of Malaysia’s arbitration-friendly philosophy in public policy-based challenges, particularly those involving elements of natural justice. Tribunals in arbitrations governed by Malaysian law can therefore rest with a degree of assurance when exercising their discretion in the deliberation of issues and their drafting of arbitration awards in making their arbitrations more efficient.

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

Peter Godwin
Peter Godwin
Managing Partner
+60 3 2777 5104

Tse Wei Lim
Tse Wei Lim
Associate
+60 3 2777 5135

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.

 

Malaysian High Court considers the legal test for obtaining subpoenas in aid of arbitration

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.

Background

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.

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CASELOAD STATISTICS SHOW INCREASING DEMAND FOR ARBITRATION BY MALAYSIAN PARTIES

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.

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Malaysia’s High Court rules that third parties are not prohibited from disclosing confidential documents produced in arbitration proceedings

In Dato’ Seri Timor Shah Rafiq v Nautilus Tug & Towage Sdn Bhd [2019] 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.

Background

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.

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MALAYSIAN COURT OF APPEAL CONSIDERS INJUNCTIONS TO RESTRAIN THE CALLING OF PERFORMANCE BONDS IN SUPPORT OF ARBITRATION

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,[1] and the practical considerations arising from the Malaysian courts’ treatment of such applications.

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Indian Supreme Court rules that Indian courts have jurisdiction to hear an application to set aside an award issued in Malaysia

In its recent decision in Union of India v Hardy Exploration and Production (available here), the Supreme Court of India found that a contractual clause stipulating Kuala Lumpur as the ‘venue’ of arbitration did not amount to a choice of juridical seat. While the Indian courts’ jurisdiction to hear set-aside applications will be excluded if the seat of the arbitration is outside India, the Supreme Court found that in this case there was no chosen seat (and the tribunal had not determined a seat), notwithstanding the choice of Kuala Lumpur as the venue for the arbitral proceedings, and the fact that the award was signed in Kuala Lumpur. Since this was a case where the arbitration agreement pre-dated 6 September 2012 (the date of the key Supreme Court ruling in BALCO), it appears that the Court did not find it necessary to positively determine that the seat was in India; the fact that an overseas seat had not been established appears to have been sufficient for the Indian courts to have jurisdiction to hear the application.

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