MALAYSIA: COURT OF APPEAL REFUSES STAY OF PROCEEDINGS WHERE PARTY ACTS INCONSISTENTLY WITH AN EXPRESS RESERVATION OF RIGHT TO REFER DISPUTE TO ARBITRATION

On 10 June 2020, the Court of Appeal in Yeo Eng Lam v Infinity Vantage Sdn Bhd (Civil Appeal No. N-02(IM)(NCvC)-507-03/2018, Court of Appeal considered whether an express reservation of a right to refer a dispute to arbitration in a defence and counterclaim pleading was effective to preserve a right to elect to arbitrate a dispute wrongly commenced in court. The court also considered whether an application to disqualify solicitors in the disputed court proceedings amounts to a step in the proceedings which would preclude a party from staying the court proceedings in favour 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.

MALAYSIA: COURT OF APPEAL SUSPENDS RECOGNITION AND ENFORCEMENT OF AN AWARD ON THE BASIS IT IS NOT YET BINDING

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”).

Background

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”).

Issues

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.

Comment

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.

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
Partner
+60 3-2777 5104

Daniel Chua
Daniel Chua
Associate
+60 3 2777 5101
 

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.

 

AIAC-Herbert Smith Freehills webinar: A computer-side chit-chat with Peter Godwin on 30 March

Join us for an upcoming webinar, presented by Herbert Smith Freehills and the Asian International Arbitration Centre, titled A Computer-Side Chit-Chat with Peter Godwin on Monday 30 March.

Peter – Asia Head of Dispute Resolution and managing partner of the firm’s Kuala Lumpur office – will share his thoughts on arbitration in Asia today, the impact of the COVID-19 outbreak on the international arbitration industry, and share insights from his 20 years of experience in arbitration during an interview with the AIAC’s International Case Counsel, Irene Mira.

 Date: 30 March 2020

Time: 11am Kuala Lumpur time (GMT +8)

Registration: This webinar will be delivered via the AIAC’s Zoom Live Webinar platform. Please register at events@aiac.world and webinar details will be provided to you.

Peter Godwin
Peter Godwin
Asia Head of Dispute Resolution and Managing Partner of Kuala Lumpur office
+60 3-2777 5104

 

 

MALAYSIA’S FEDERAL COURT SETS ASIDE DEFAULT JUDGMENT OBTAINED IN BREACH OF AN ARBITRATION AGREEMENT

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.

Background

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.

Comment

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 [2013] 4 MLJ 857, paragraph 24; Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 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.

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
Partner
+60 3-2777 51042

Daniel Chua
Daniel Chua
Associate
+60 3 2777 5101

 

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.

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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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