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.

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.