Malaysian Federal Court provides guidance on identifying place of arbitration in Malaysia for the purpose of determining the supervisory court of the arbitration

In Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd (Civil Federal Court Civil Appeal No.: 02(i)-20-03/2020(S)), the Federal Court held that the courts of first instance of the place specified as the seat of arbitration in Malaysia has exclusive supervisory jurisdiction over arbitrations seated in that place, including any award arising from such proceedings. In this respect, a court of a state in Malaysia which is not the court of the place specified as seat of arbitration will have no supervisory jurisdiction over that arbitration or its award. As a result, parties seeking to have their arbitrations seated in Malaysia will need to identify specifically a local state or city in Malaysia as the seat of arbitration.

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MALAYSIAN FEDERAL COURT CONFIRMS THAT ONLY DISPOSITIVE SECTIONS OF ARBITRAL AWARDS ARE TO BE REGISTERED

The Malaysian Federal Court has resolved the recent debate about whether courts should recognise and enforce whole arbitral awards under Malaysian law. The Court clarified that only the dispositive sections of arbitral awards will be enforced by Malaysian courts under Section 38 of the Malaysian Arbitration Act 2005 (AA). Parties seeking to enforce arbitral awards before the Malaysian courts need no longer disclose any other section of their awards, including the tribunal’s reasoning or summary of findings.

The Siemens decision widens the confidentiality of arbitral awards under Malaysian law, which carries practical implications for parties to Malaysian-seated arbitrations going forward. Parties intending to take advantage of this enhanced protection should also be mindful that their awards may not be afforded a similar degree of confidentiality by other rules connected to their arbitrations.

Siemens Industry Software Gmbh & Co KG (Germany) (formerly known as Innotec Gmbh) v Jacob and Toralf Consulting Sdn Bhd (formerly known as Innotec Asia Pacific Sdn Bhd) (Malaysia) & Ors, Civil Appeal No: 02(f)-115-12/2018(W)

Background

On 31 July 2008, the appellant and respondents concluded an agreement for the full and final settlement of all matters and certain legal proceedings between them (Settlement Agreement). The Settlement Agreement contained an arbitration clause requiring the resolution of any dispute arising from it through Singapore-seated arbitration under the arbitration rules of the International Chamber of Commerce (ICC).

A dispute subsequently arose between the parties in relation to the Settlement Agreement. This dispute was eventually referred to a panel of three arbitrators.

On 8 May 2015, the arbitral tribunal delivered its final award and dismissed the appellant’s claim. In arriving at its decision, the tribunal made certain findings against the appellant and about the circumstances in which the Settlement Agreement was concluded. These findings were recorded in the tribunal’s reasoning but not in the award’s dispositive section. The “dispositive section” refers to the section of the award, usually at the very end, declaring which of the parties’ claims/counterclaims succeed and the reliefs they are entitled to.

The respondent subsequently applied to the Malaysian High Court for the recognition and enforcement of the arbitral award pursuant to Section 38 AA. Where enforcement was granted, the entire arbitral award would be registered as if it were a judgment of the High Court.

The appellant did not resist the recognition and enforcement application on any of the grounds under Section 39 AA, which largely mirror Article 36 of the UNCITRAL Model Law. However, the appellant challenged the extent to which the High Court should register the award, arguing that the award should not be registered in its entirety, but confined to the award’s dispositive section only. The appellant argued that a bifurcated registration would fit the statutory enforcement scheme and protect the arbitration’s confidentiality.

The High Court accepted the appellant’s challenge and held that only the dispositive section of the award was capable of being registered and enforced as a judgment of the High Court under Section 38 AA. This was subsequently overturned on appeal to the Malaysian Court of Appeal.

Dissatisfied with the Court of Appeal’s decision, the appellants raised an appeal to the Federal Court.

Federal Court decision

The Federal Court allowed the appeal, and agreed with the High Court that only the dispositive section of an arbitral award was capable of being registered and enforced under Section 38 AA.

In so deciding, the Federal Court drew an analogy between arbitral awards and judicial decisions, which comprise two separate parts, namely the:

  • order or judgment, which sets out the reliefs or prayers granted by the court. The Federal Court considered that the dispositive section of an arbitral award was equivalent to an order/judgment; and
  • Grounds of judgment, which refer to the court’s reasoning and findings that form the basis of the order/judgment. The Federal Court found that this was akin to the reasoning and findings of an arbitral tribunal.

Emphasising this distinction, the Federal Court noted that, as a matter of law and practice, a successful party to a court action would only file and rely upon an order/judgment for execution, and not the grounds of judgment. Arbitral awards, which the Federal Court viewed as analogous to court decisions, should therefore be given similar treatment for the purposes of recognition and enforcement. The court considered that this was consistent with the approach of Malaysian courts when enforcing foreign judgments under the Reciprocal Enforcement of Judgments Act 1958 (REJA), which could be adopted for the purposes of enforcing arbitral awards. Under REJA, Malaysian courts are concerned only with the registration of the operative part of the judgment and not with the foreign court’s findings or reasoning underlying its decision. Accordingly, this meant that the ambit of Section 38 AA should be confined to the dispositive section of an arbitral award only, which the Federal Court found reflected the practice of other jurisdictions.

A further reason for the Federal Court’s decision was that the bifurcation of awards functioned to protect the confidentiality of the arbitration. The court found that the registration of the entire arbitral award would have undermined its confidentiality. Further, as Malaysian courts are not required to assess the merits of the tribunal’s award when enforcing it under Section 38 AA, the registration of the entire award was unnecessary.

Another point of interest was the Federal Court’s view that the wording of the relevant AA provisions supported the bifurcation of awards, notably the court’s view on the statutory definition of “award” under the AA:

“[I]f the intention is to register the findings as part of the decision of an arbitral tribunal, the definition of “award” in section 2 of the AA 2005 ought to be “a decision of the arbitral tribunal and the substance of the dispute…” rather than the present definition “a decision of the arbitral tribunal on the substance of the dispute”.”[1]

While this definition was interpreted within the context of recognition and enforcement of arbitral award, the Federal Court did not expressly limit its discussion to this part of the AA. It will be interesting to see how this aspect of the Federal Court’s decision will be interpreted in the future.

Implications for Malaysian-seated arbitrations

The Federal Court decision in Siemens strengthens the confidentiality of arbitrations in Malaysia. It was not uncommon for parties to produce entire arbitral awards when seeking enforcement under Section 38 AA, making the award publicly accessible. Siemens makes it clear that parties should dispense with this practice.

However, parties intending to rely on this enhanced confidentiality should note that different confidentiality regimes may apply to their arbitral awards under the rules applicable to their arbitration. This is particularly relevant in ICC-administered arbitrations, where awards made as from 1 January 2019 may be published in their entirety, unless parties object to publication or restrict this by agreement. Therefore, a party intending to keep the tribunal’s findings confidential must make sure to take such steps. Failure to do so can result in the award’s unintended publication by the ICC.

A further discrepancy may arise where a party seeks to enforce awards in investor-state arbitrations under the UNCITRAL Rules in the Malaysian courts. Such awards may be published in whole under the UNCITRAL Transparency Rules, which apply by default to investment treaties concluded after 1 April 2014 or, in the case of earlier investment treaties, where Contracting States or disputing parties have agreed to their application. While there are exceptions to this publication requirement, it remains to be seen how they will interact with Malaysian law and the Siemens decision.

Parties intending to take advantage of the Siemens decision should, therefore, revisit the rules applicable to their arbitration and ensure that confidentiality standards are consistent across the whole arbitration regime chosen by parties.

[1]       Siemens, at [33]

 

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 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.