MALAYSIA: HIGH COURT DECLINES TO STAY ARBITRATION PROCEEDINGS ON THE BASIS OF A NON-SIGNATORY’S ALLEGATION OF BRIBERY AND CORRUPTION UNDERLYING THE CONTRACT

In Vertex Superieur Sdn Bhd & Anor v Shell Malaysia Trading Sdn Bhd (Civil Suit No. BA-22C-5-03/2020), the Malaysian High Court refused to stay court proceedings brought in breach of an arbitration agreement on the basis that it was in the public interest that allegations by a non-signatory that an underlying contract was procured by private bribery and corruption should be tried expeditiously through court proceedings. While the case is indicative of how bribery and corruption allegations brought by a related but non-signatory party to an arbitration agreement would be treated in Malaysian courts, it highlights the need for a more sophisticated approach in dealing with these nuanced but increasingly common issues in arbitration.

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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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LAUNCH OF AIAC ARBITRATION RULES 2021

The Asian International Arbitration Centre has launched the latest revisions to its Arbitration Rules, following their last update in 2018. Upon coming into effect on 1 August 2021, the AIAC Arbitration Rules 2021 will apply to all AIAC arbitrations commenced after this date, unless parties agree otherwise. The 2021 revisions come following an extensive study by an international External Advisory Committee for the Revision of the AIAC Arbitration Rules (including Peter Godwin, Partner, HSF Kuala Lumpur) and a public consultation of the draft rules.

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MALAYSIA: HIGH COURT ISSUES ANTI-ARBITRATION INJUNCTION AGAINST LONDON ARBITRATION AND REJECTS PARALLEL APPLICATION TO STAY COURT PROCEEDINGS

In MISC Berhad v Cockett Marine Oil (Asia) Pte Ltd (Admiralty in Personam No. WA-27NCC-46-05/2020), the Malaysian High Court issued an anti-arbitration injunction to halt a London-seated arbitration on the grounds that the arbitration proceedings were in breach of an exclusive jurisdiction clause in favour of the Malaysian courts. The decision confirms the power of Malaysian courts to restrain a foreign-seated arbitration where the court takes the view that it has jurisdiction over the dispute, and provides guidance on the circumstances in which a Malaysian court will exercise this power.

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MALAYSIA: HIGH COURT APPLIES HALLIBURTON V CHUBB ON ARBITRATOR APPARENT BIAS AND THE DUTY OF DISCLOSURE

In Low Koh Hwa @ Low Kok Hwa (practising as sole Chartered Architect at Low & Associates) v Persatuan Kanak-Kanak Spastik Selangor & Wilayah Persekutuan and another case (Originating Summons Nos. BA-24C(ARB)-4-05/2020 and BA-24C-87-09/2020), the High Court allowed an application to set aside an award on the basis that (i) arbitrator apparent bias resulted in the award being in conflict with the public policy of Malaysia, and (ii) a breach of the rules of natural justice occurred during the arbitral proceedings or in connection with the making of the award (section 37(1)(b)(ii) and (2)(b)(i) of Malaysia’s Arbitration Act 2005 (the Malaysian Act)). In doing so, it provided valuable insight into how the principles on arbitrator bias and an arbitrator’s duty of disclosure as recently restated by the UK Supreme Court in Halliburton Co v Chubb Bermuda Insurance Ltd [2020] UKSC 48 (Halliburton) (discussed in our blog post here) are applied in Malaysia.

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Malaysian High Court clarifies limits of post-award court intervention

For the first time in recent years, the Malaysian courts have clarified the limits of judicial intervention under Malaysian law once an arbitral award has been issued.

The Malaysian High Court held that the powers of Malaysian courts in respect of arbitral awards are limited to their recognition and enforcement under Section 38 of the Arbitration Act 2005 (AA). It follows that Malaysian courts cannot grant relief or orders in respect of an award unless recognised in Malaysia pursuant to Section 38 AA. This may have implications for enforcement strategies with a Malaysian nexus.

Danieli & C Officine Mecchaniche SPA v Southern HRC Sdn Bhd (WA-24NCC-471-10/2020)

Background

The Plaintiff, an Italian company, entered into an agreement with the Defendant, a Malaysian company, for the construction of a hot rolled coil plant in Malaysia (Plant) and a related services agreement. Both contracts required disputes to be arbitrated in Singapore.

Disputes arose and were referred to arbitration, in which the parties cross-claimed for, among other things,  damages. They made submissions on the return of the Plant to the Plaintiff and the condition of the Plant in such event. The arbitrators found in the Defendant’s favour and awarded damages against the Plaintiff, which were reduced to reflect the diminution in the value of the Plant, sums previously paid by the Plaintiff and the Defendant’s previous use of the Plant.

The Plaintiff resisted demands for payment of the award and made payment conditional on the Defendant granting it access to the Plant to determine its condition and operability. This was rejected by the Defendant noting that site access would only be given once the Plaintiff had paid the award.

Court proceedings

Concurrently, the Defendant initiated Italian court proceedings to enforce the arbitral award. The Plaintiff resisted the Italian proceedings and applied to the Malaysian High Court for various declarations and orders allowing it to inspect the Plant and equipment referenced in the arbitral award. Neither party sought to enforce the award in Malaysia.

Notably, the Plaintiff was not seeking relief under the AA, but the Specific Relief Act 1950 and Rules of Court 2012 (ROC) instead. In its application, the Plaintiff noted that the inspection could have a material impact on the Italian recognition proceedings and asserted a genuine interest in having its rights declared and the condition of the Plant verified before making any payment of the award sum.

The Defendant resisted the Plaintiff’s application and, in turn, applied to the Malaysian High Court for a declaration that it lacked jurisdiction over the Defendant in respect of the Plaintiff’s relief (Order 28 rule 3B(f) ROC). The Defendant argued that, where an arbitral award has been rendered, the Court’s powers under the AA are limited to enforcing the award, therefore the Court had no jurisdiction to grant the relief requested by the Plaintiff. The Plaintiff disagreed, contending that the relief sought was not governed by the AA in which case the Court could invoke its inherent jurisdiction to grant such relief.

The Defendant also contended that arbitration was the proper forum to grant the Plaintiff’s relief. The Plaintiff, who had not invoked this right during the arbitration, denied that this was a relevant factor.

Malaysian High Court decision

The Malaysian High Court dismissed the Plaintiff’s application, finding that the Malaysian courts’ powers in respect of arbitral awards are limited to their recognition and enforcement under Section 38 AA – the equivalent of Article 35 of the UNCITRAL Model Law 2006 (ML).

The Court emphasised the restriction under Section 8 AA (which mirrors Article 5 ML) that “no court shall intervene in matters governed by this Act, except where so provided in this Act.” Section 8 AA, in the Court’s view, was intended to discourage reliance on the Malaysian courts’ inherent powers and restrict judicial intervention to those situations listed in the AA.

The AA, as the Court noted, does allow for judicial intervention in support of arbitration. The central provision is Section 11 AA, which permits an arbitral party to apply to the Malaysian High Court for any interim measure “before or during arbitral proceedings“. However, the Court pointed out that there was no similar provision for judicial intervention upon the conclusion of arbitral proceedings. In view of the Section 8 restriction, Malaysian courts could not grant any other relief in respect of an arbitral award once issued.

The Court viewed the Plaintiff’s conduct during the arbitration proceedings as a relevant factor, in particular that the Plaintiff did not exercise its opportunity to apply for the relief sought during the arbitration. The circumstances indicated that the relief sought was intended to re-open matters already decided in arbitration or an attempt to attack the award in the Italian recognition proceedings. Malaysian courts would decline to intervene on such occasions.

Further, the Court disagreed that this was a situation warranting resort to the Court’s inherent jurisdiction. Although accepting that Section 8 AA does not preclude the Court’s inherent jurisdiction to determine matters not expressly governed by the statute (La Kaffa International Co Ltd v Loob Holding Sdn Bhd & Anor [2018] 9 CLJ 593), the Court held that the Plaintiff’s application was not such a circumstance.

Key takeaways

Overall, the High Court’s decision illustrates the pro-arbitration inclination of Malaysian courts. Even where an application is not brought under the AA, the Malaysian courts will firmly apply the principles and spirit of the statute and the ML to ensure the finality of arbitral awards even where seated in foreign jurisdictions.

Nevertheless, the decision appears to restrict the right of parties to post-award judicial assistance, which could arguably include those in aid of enforcing arbitral awards in Malaysia, such as examination of judgment debtor proceedings (Order 48 ROC). Such orders are vital tools for information gathering in order for an award creditor to determine how it might enforce the award. Parties intending to seek such orders from Malaysian courts must now ensure that they first register the relevant arbitral award in Malaysia under Section 38 AA.

A further point of interest is that, while the decision analyses the interplay of Sections 11 and 38 AA and the court’s inherent jurisdiction, the High Court did not have the opportunity to consider how this analysis interacts with Section 19J AA (as adapted from Article 17J ML). Briefly, Section 19J AA  empowers the Malaysian High Court to issue interim measures “in relation to arbitration proceedings, irrespective of whether the seat of arbitration is in Malaysia…in accordance with its own procedures in consideration of the specific features of international arbitration“. While both Sections 11 and 19J AA give Malaysian courts the power to issue interim measures in relation to arbitration proceedings, Section 19J is worded more expansively. Further, unlike Section 11 AA, Section 19J is not expressly limited to interim measures “before or during arbitral proceedings“. It will be interesting to see how future Malaysian decisions approach this difference in wording.

For now, it is clear that Malaysian courts will endeavour to uphold the finality of arbitral awards regardless of where the arbitral seat is located.

For further information, please contact Peter Godwin, Lim Tse Wei, or your usual Herbert Smith Freehills contact.

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+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.

2019 caseload statistics show continued demand for arbitration by Malaysian parties

Last year, we examined the caseload statistics of various arbitral institutions with the aim of providing an empirical perspective on the participation of Malaysian parties in institutional arbitration over recent years. This was done by reference to published caseload statistics of various arbitral institutions across the globe starting from a mean year of 2015 and ending in 2018. This year, we continue to trace the trend of Malaysian involvement and usage of arbitration based on published statistics of these major arbitral institutions.

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AIAC receives a Director after eight month vacancy

On 16 November 2020, Minister in the Prime Minister’s Department announced that former Malaysian federal court judge, Tan Sri Suriyadi Halim Omar, has been appointed Director of the Kuala Lumpur-based Asian International Arbitration Centre (AIAC) effective 1 December 2020. The third former judge to take this office and the first in 13 years, Suriyadi will be filling a vacancy left in the AIAC following the passing of Mr Vinayak Pradhan in March this year.

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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.

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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