High Court refuses indemnity costs on successful application for referral to arbitration and determines the effect of time bars on a tribunal’s jurisdiction

In Lineclear Motion Pictures Sdn Bhd v Measat Broadcast Network Systems Sdn Bhd (High Court Civil Appeal No.: WA-12ANCC-45-04/2021), the High Court refused to award indemnity costs to a party who successfully obtained a stay of court proceedings under section 10 of the Arbitration Act 2005 (“Act“), on the basis of the conduct of the successful party and the party acting in breach of the arbitration agreement. Following this decision, a party seeking indemnity costs upon successfully obtaining a stay bears the burden to demonstrate unreasonable conduct by the breaching party, and reasonable conduct on its own part, to obtain indemnity costs.

Background

Measat Broadcast Network Systems Sdn Bhd (“Measat“) commenced proceedings against Lineclear Motion Pictures Sdn Bhd (“Lineclear) in the Sessions Court for breach of contract. Prior to the commencement of the proceedings, Measat issued a pre-action letter to Lineclear but was met with no response. As Lineclear did not formally enter its appearance under the rules of the court, nor respond to the claim, Measat obtained a default judgment against Lineclear. Subsequently, Lineclear applied to set aside the default judgment and to stay the proceedings in the Sessions Court pursuant to section 10 of the Act in light of a valid arbitration agreement between the parties. Measat did not object to the application, instead offering to record a consent order to stay the court proceedings pending arbitration. Lineclear rejected this offer and insisted Measat discontinue its claim. The Sessions Court judge refused to stay the proceedings and refused to grant indemnity costs to Lineclear.

On appeal to the High Court, the key issues were:

  • in the event a stay is allowed, whether Measat is entitled to seek an order to preclude Lineclear from pleading the defence of limitation at arbitration; and
  • whether Measat is liable to pay indemnity costs to Lineclear given that (a) the proceedings were in breach of the arbitration agreement and (b) Measat unreasonably declined Lineclear’s offer to discontinue the claim.

First, the High Court judge granted a stay on the condition that Lineclear be precluded from raising the defence of limitation at arbitration, in accordance with established precedent for imposing similar conditions. The judge reasoned that the stay would be rendered futile without the condition, as Measat’s claim – while within the limitation period when first commenced in the Sessions Court – would be time-barred when referred to arbitration.

Second, the High Court judge refused to award Lineclear’s costs on an indemnity basis. The established test requires “some conduct or some circumstance which takes the case out of the norm“. In particular, a judge is required to review the unreasonableness of unsuccessful party’s conduct during the proceedings, including: (i) whether it was reasonable for the party to raise and pursue particular allegations and the manner in which the party pursued its case and allegations; and (ii) whether a claim was speculative, weak, opportunistic or thin. Examples of such unreasonable conduct are where a case was brought with an ulterior motive or an improper agenda, or where a party had conducted its case in “bad faith, or as a personal vendetta, or in an improper or oppressive manner, or who caused costs to be incurred irrationally or out of all proportion as to what is at stake“. However, these examples are not meant to be exhaustive. In this regard, the High Court found that Lineclear’s conduct throughout the proceedings, including its indifference to the pre-action letter and the proceedings leading to the default judgment, as well as its refusal to accept Measat’s offer to record a consent order, was unreasonable and did not justify an award of indemnity costs. The High Court judge also found it unreasonable for Lineclear to insist that Measat discontinue the proceedings, given that a successful application under section 10 of the Act would only stay – and not discontinue – an action.

Lineclear relied on  the Western Australian Supreme Court’s decision in Pipeline Services WA Pty Ltd v ATCO Gas Australia Pty Ltd [2014] WASC 10 (see our blog post here) and the English court’s decision in A v B and others (No. 2) [2007] EWHC 54 (Comm) for the proposition that as a general rule, costs should be recoverable on an indemnity basis upon a successful application for a stay as a remedy for breach of an arbitration clause. The High Court did not appear to accept this proposition, and distinguished these cases on the basis that Measat had acted reasonably throughout the proceedings, whereas Lineclear’s conduct justified it being deprived of an order for indemnity costs.

Comment

In practice, Malaysian courts have on rare occasions awarded costs on an indemnity basis upon a successful application to stay court proceedings in favour of arbitration. However, this is the first known written judgment from the Malaysian courts which addressed the principles of awarding costs on an indemnity basis in the context of a breach of an arbitration agreement.

An award of indemnity costs is attractive to parties seeking to uphold an arbitration agreement which has been breached by its counterparty. The advantages include a presumption of reasonableness on the part of the receiving party, and a shift in burden to the paying party to establish that the costs were not reasonably incurred. This achieves indirect compensation for most – if not all – of the legal costs incurred by the innocent party following a breach of an arbitration agreement.

Jurisdictions such as England, Hong Kong (see our blog post here), Singapore and Western Australia take the position that as a general rule, a party who unsuccessfully challenges an arbitration agreement before the court should expect to pay costs on an indemnity basis, unless there was unreasonable conduct by the successful party or special circumstances. By contrast, the current Malaysian position is that a party seeking indemnity costs upon successfully obtaining a stay bears the burden to demonstrate unreasonable conduct by the breaching party, and reasonable conduct on its own part, to obtain indemnity costs. The fact of a breach of an arbitration agreement alone is not necessarily sufficient to justify indemnity costs. Where indemnity costs are not awarded, parties should consider seeking damages for breach of an arbitration agreement which, though untested in Malaysia, is an accepted cause of action in various common law jurisdictions.

Further, in precluding Lineclear from raising the defence of limitation in the arbitration, the court did not appear to give any consideration as to whether limitation was an issue of admissibility or jurisdiction. The distinction holds practical importance: an issue of admissibility is a matter for the arbitral tribunal to decide, and not a question of jurisdiction to be reviewed by the courts. As described by the English courts, “[i]ssues of jurisdiction go to the existence or otherwise of a tribunal’s power to judge the merits of a dispute; issues of admissibility go to whether the tribunal will exercise that power in relation to the claims submitted to it.” (see our blog posts here and here). It should also be noted that the Singapore Court of Appeal in BBA v BAZ [2020] 2 SLR 453, recognising the distinction between jurisdiction and admissibility, held that whether a claim was time barred was a question of admissibility, not a question of jurisdiction.

Although the Malaysian court did not characterise the limitation defence as an issue of admissibility or jurisdiction, its upholding of the arbitration agreement may imply that limitation is a question of admissibility as it does not affect the Tribunal’s jurisdiction. The net result of the decision provides some measure of welcome certainty that arbitration agreements will be upheld by the Malaysian courts, even where there are questions regarding the limitation period for commencing claims. However, this approach appears to remove a tribunal’s ability to determine issues of admissibility for itself where a Malaysian court is first seised of the matter.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, 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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Michele Yee
Michele Yee
Associate, Kuala Lumpur
+60 3-2777 5159

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.

Background

On 14 May 2019, Shell Malaysia Trading Sdn Bhd (SMT) entered into a Design and Build contract with Vertex Superieur Sdn Bhd (Vertex) for the construction of a petrol station in Selangor (Contract). At the same time, the two shareholders and directors of Vertex executed an irrevocable guarantee and indemnity in favour of SMT to jointly and severally indemnify SMT for any loss or damage suffered by SMT in the event of any breach of the Agreement by Vertex (Indemnity). The salient terms of the transaction are as follows:

  • Under the Contract, Vertex warranted that it had not made, offered or authorised any payment to any person which could comprise a facilitation payment or violate anti-corruption laws in Malaysia. SMT was entitled to terminate the Contract by written notice if SMT held a reasonable opinion that Vertex had breached anti-corruption laws in Malaysia.
  • The Contract also provided a dispute resolution clause, requiring the parties to attempt to settle any dispute arising under the Contract by way of negotiation for a period of 30 days prior to commencing arbitration. The Indemnity signed by the two shareholders, however, did not contain any arbitration clause.

On 18 February 2020, SMT issued a notice of termination to Vertex on the basis that SMT had discovered that Vertex had breached the latter’s warranty under the Contract that it had not violated any anti-corruption laws in Malaysia. The notice purported to take effect immediately, and required Vertex to cease its works and deliver vacant possession of the site to SMT. Following receipt of the notice, Vertex lodged a police report on the same day, alleging that an employee of SMT had, sometime in 2017, requested for “gratification” from Vertex and a shareholder director (First Guarantor) in order to facilitate the award of the Contract to Vertex. It was understood that that SMT employee had been arrested by the Malaysian Anti-Corruption Commission prior to the termination.

Following the termination, Vertex and the First Guarantor commenced court proceedings in the Kuala Lumpur High Court, alleging that the First Guarantor had reported the request for a bribe to a number of other employees of SMT between 2017 and 2018, but there was no action taken against the employee. In response, SMT filed an application under section 10 of the Arbitration Act 2005 (Act) to stay the court proceedings brought by Vertex in breach of the arbitration agreement in the Contract, and for the First Guarantor’s claim in the High Court to be stayed pending the resolution of Vertex’s claim against by SMT in arbitration.

The main issues before the High Court were:

  1. whether Vertex and SMT were required to negotiate the subject matter of the termination notice prior to SMT’s issuance of the said notice; and
  2. whether the court should stay the court proceedings and refer the dispute to arbitration in light of the First Guarantor’s claims against SMT in the court proceedings.

For the second issue, the judge considered three options, which are:

  • to stay the court proceedings and refer Vertex’s claim to arbitration under section 10 of the Act, and try the First Guarantor’s claim upon final disposal of the arbitration;
  • to stay the court proceedings and refer Vertex’s claim to arbitration under section 10 of the Act, and proceed to try the First Guarantor’s claim; or
  • refuse to stay Vertex’s claim and proceed to try both Vertex and the First Guarantor’s claims.
Decision

The judge dismissed the first issue on the basis that it was contrary to public policy for the subject matter of the termination notice (regarding the alleged breach of anti-corruption laws) to be settled by negotiation.

The judge did not refuse a stay on the basis that the arbitration agreement was null and void, inoperative or incapable of being performed. Instead, the judge exercised his discretion under Order 92 rule 4 of the Rules of Court and the inherent power of the High Court to refuse SMT’s application to stay Vertex’s claim and allow the dispute to be litigated, for the following reasons:

  • It is in the public interest for any corruption offence which has been committed regarding the Agreement to be tried expeditiously in court in order to publicly expose any party involved in such wrongdoing and deter the public from undertaking corrupt activities.
  • All the evidence of corruption (if any) adduced in the arbitration would be subject to the requirement of confidentiality and consequently, the public has no access to such evidence.
  • The First Guarantor’s liability under the Indemnity is independent of Vertex’s claim under the Contract. The court speculated that SMT might object to the admissibility of evidence on corruption at the trial of the First Guarantor’s claim.
  • It is just, expeditious and economical for the court to deal with the claims given that the evidence that will be led by Vertex and the First Guarantor is likely to be the same.
  • The cost of maintaining two separate arbitration and litigation proceedings would be uneconomical to Vertex and the First Guarantor.
  • The exhaustion of any review of an award from the arbitral tribunal presiding over Vertex’s claim against SMT, and any appeal, would delay the trial of the First Guarantor’s claim.
  • A stay of the proceedings in favour of arbitration might result in conflicting decisions in the arbitration and the trial of the First Guarantor’s claim against SMT.
  • Vertex and the First Guarantor have the right to sue SMT in the court proceedings.
  • No injustice is caused to SMT by having the dispute resolved in court as it would have the right to resist Vertex’s and the First Guarantor’s claims, and could initiate a counterclaim against the two directors and shareholders of Vertex in the proceedings premised on the Indemnity.

The judge concluded that the public interest of having the issue litigated in court far outweighed the practical effect of allowing Vertex to circumvent the arbitration agreement.

Comment

The dispute brought out nuanced issues relating to the potential extension of an arbitration agreement to non-signatories, and the potential effect of bribery allegations underlying the procurement of a contract on the validity of an arbitration agreement, the jurisdiction of a tribunal to resolve such disputes, and the admissibility of such claims to arbitration. Although none of these issues appears to have been canvassed, there are two observable trends following this judgment.

The treatment of claims of bribery and corruption which are the subject of an arbitration agreement

Allegations of bribery, fraud and corruption are not uncommon in arbitration, but the effect of such allegations on questions of validity, jurisdiction and admissibility remain undeveloped in Malaysia.  In the past, the Malaysian courts did not intervene when private bribery allegations were the subject of an arbitration agreement. In Bina Jaya Mantap Sdn Bhd v Institute of Technology Petronas Sdn Bhd (Originating Summons No. 24C-4-08/2013), the High Court, in issuing an injunction to restrain the defendant from calling on a bank guarantee in support of arbitration proceedings, acknowledged that the plaintiff’s allegations of private bribery against an employee of the defendant’s agent “form[ed] the subject matter of arbitration and are to be resolved by arbitration as to its merits“. This approach is consistent with the approach of the English Court of Appeal in Fiona Trust & Holding Corp v Yuri Privalov & Ors [2007] EWCA Civ 20, which held that claims to rescind charterparties on the grounds of bribery fell within the scope of valid arbitration clauses contained in those charterparties.

The Malaysian High Court judge in the present case found that it was contrary to public policy for disputes involving private bribery allegations to be resolved by negotiation. However, it did not make any determination as to whether such allegations affected the validity of the arbitration agreement between Vertex and SMT or the prospective arbitral tribunal’s jurisdiction over the dispute. While the judge did not go as far to suggest that such claims are not arbitrable, some of the reasons outlined by the judge arguably hint that such claims may be inadmissible before an arbitral tribunal.

The judicial treatment of arbitration agreements where non-signatories are involved in litigation

Following the decision of the Federal Court in Jaya Sudhir a/l Jayaram v Nautical Supreme Sdn Bhd & Ors (discussed here), Malaysian courts may refuse to give effect to an arbitration agreement where the interests of third parties are involved or where there is a risk of parallel proceedings and inconsistent decisions arising out of the conduct of an arbitration. Priority would ordinarily be given for the matter to be determined by the court if that would be the fairest approach to all parties taking into consideration the interests of the justice of the case.

While it is difficult to balance competing interests between upholding arbitration agreements and the rights of non-signatory third parties, the High Court judge did not appear to consider whether joinder provisions could be applied to balance the interests of all parties. Further, it is difficult to conclude whether the rights of a non-party to the transaction were actually affected, given that the First Guarantor was one of two of the shareholders and directors of Vertex, and that both directors had signed the Indemnity as part of the transaction. There is no indication that the High Court considered whether the First Guarantor should have been joined to the arbitration based on established principles of veil-piercing and the alter ego doctrine.

Finally, we note that:

  • the findings on confidentiality and admissibility of evidence appear to be speculative.
  • no standard of review was considered or applied to ascertain the veracity of the allegations of private bribery and corruption, given their weight in persuading the court not to give effect to the arbitration agreement.
  • the assumptions held by the High Court point towards a policy of preferring litigation over arbitration where a non-signatory is involved.

When agreeing to arbitration provisions, few parties anticipate criminal misconduct as a source of dispute. However, it is not uncommon for a disputing party to raise allegations of bribery, corruption or some other wrongdoing – merited or otherwise – as a means to pressure a counterparty into settlement or circumvent an arbitration agreement. The decision of the High Court confirms the potential for circumventing an arbitration agreement on that basis.

Further, Malaysian courts do not have a track record of giving effect to arbitration agreements where non-signatories are involved in the dispute. Based on this judgment, parties are likely to face an uphill task in arguing that an agreement to arbitrate can be extended to a non-signatory third party under Malaysian law.

The decision should remind parties to consider carefully the wording of their arbitration agreements if they wish to include all relevant parties in an arbitration agreement, or to exclude certain types of claims and allegations from arbitration, whilst maintaining the efficacy of their dispute resolution procedures.

For further information, please contact Peter Godwin, Partner, 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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101

Federal Court provides guidance on identifying places 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 specifically identify a local state or city in Malaysia as the seat of arbitration.

Background

Sabanilam Enterprise Sdn Bhd (Sabanilam) appointed Masenang Sdn Bhd (Masenang) as its main contractor to construct a technology and commercial centre in the district of Penampang, located in the state of Sabah. Claims arose between the parties which were submitted to arbitration in the Kuala Lumpur Regional Centre for Arbitration (now Asian International Arbitration Centre (AIAC)) in accordance with the Arbitration Rules of the Malaysian Institute of Architects (the Arbitration).  The arbitration clause provided for the seat of arbitration as Kuala Lumpur, Malaysia. The Tribunal dismissed Sabanilam’s claims and allowed Masenang’s counterclaims against Sabanilam in the sum of RM23,432,463.54 (the Award). Masenang commenced enforcement proceedings at the Kuala Lumpur High Court (KLHC), while Sabanilam initiated an action at the Kota Kinabalu High Court in Sabah (KKHC) to set aside the Award.

The issue was whether the KLHC (being the court of the place named as the seat of the Arbitration) or KKHC (being the court of the place where the cause of action underlying the dispute arose) had exclusive supervisory jurisdiction over the Arbitration and the Award. Under section 23 of the Courts of Judicature Act 1964 (CJA), a local court possesses jurisdiction to try civil proceedings arising from a cause of action which arises within the local territorial jurisdiction of that court.

The KKHC, noting that the concept of a seat of arbitration was relevant in Malaysian domestic arbitrations, held that the KLHC – and not the KKHC – possessed jurisdiction as the supervisory court of the Arbitration to vary or set aside the Award. This was by virtue of the KLHC being the court of the place named as seat of arbitration. As a result, the KKHC struck out Sabanilam’s application to set aside the Award. The KLHC then allowed the Award to be recognised and enforced in Malaysia.

On an appeal by Sabanilam against both decisions of the High Courts, the Court of Appeal remitted Sabanilam’s application to set aside the Award to the KKHC for determination, and set aside the enforcement of the Award ordered by the KLHC. The Court of Appeal had disagreed with the analysis of the KKHC, concluding that the concept of a seat of arbitration was not relevant to domestic arbitrations in Malaysia. It found that a Malaysian court can validly exercise jurisdiction over the supervision of a domestic arbitration and its award by reference to the criteria in section 23 of the CJA. In this regard, the Court of Appeal held that while the curial law of any arbitration seated in Malaysia will be the Arbitration Act 2005 (AA), the determination of the supervisory court of a domestic arbitration would be determined by reference to the CJA.

Dissatisfied with the Court of Appeal’s decision, Masenang appealed to the Federal Court.

Federal Court

The Federal Court allowed the appeal and reinstated the orders of the KKHC and KLHC. The Federal Court held that the designation of a place within Malaysia as the seat of arbitration will determine the identity of the local court which has exclusive supervisory jurisdiction over the arbitration and its award. As such, by agreeing to a place named as the seat of arbitration, parties shall be deemed to have agreed that any court proceedings relating to the arbitration and any award arising thereunder shall only be brought in the local court of the place designated as the seat. Alternatively, where no designation of a seat is made in the arbitration agreement, the arbitral tribunal is empowered under section 22 of the AA to determine the seat of arbitration having regard to the circumstances of the case, including the convenience of the parties. In either case, the court of the place designated as the seat of arbitration would have exclusive supervisory jurisdiction over that arbitration to the exclusion of the court of first instance of any other place within Malaysia. As such, section 23 of the CJA has no application in determining which court in Malaysia has supervisory jurisdiction over an arbitration or award.

Comment

The choice of seat of arbitration has always been important in international arbitration. For arbitrations seated in Malaysia (whether international or domestic), parties will need to designate a city or state within Malaysia as its seat of arbitration, given that the Malaysian courts have a number of branches in each of Malaysia’s 13 constituent states and three federal territories.

The choice of a place within Malaysia as the seat of an arbitration will have practical consequences to the conduct of both domestic and international arbitrations. For example:

  • Access to party representation is limited in the states of Sabah and Sarawak by virtue of the Federal Court’s decision in Samsuri Bin Baharuddin & 813 Others v Mohamed Azahari Bin Matiasin (heard together with GBB Nandy @ Gannesh v Mohamed Azahari Bin Matiasin) (Civil Appeal Nos.: 02(f)-34-04/2014(S) and 02-35-04/2014(S)) which held that only individuals admitted to legal practice in Sabah have exclusive right to represent parties in arbitration proceedings held or seated in Sabah. This limitation on party representation is also likely to apply to arbitrations held or seated in the state of Sarawak by virtue similar local legislation.
  • Malaysia’s specialist commercial courts which determine disputes in various commercial sectors including commerce and banking, markets and exchanges, maritime, insurance, oil and gas, insolvency, intellectual property and information technology, construction, competition, Islamic banking and commercial disputes, as well as the recognition and enforcement of arbitration awards, are predominantly located in Kuala Lumpur. The AIAC and its hearing centre in Bangunan Sulaiman are also located in Kuala Lumpur.

 

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, 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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Michele Yee
Michele Yee
Associate, Kuala Lumpur
+60 3-2777 5159

Launch of AIAC Arbitration Rules 2021

By Peter Godwin, Nicholas Hoh, Daniel Chua, Lim Tse Wei, Rebecca Pang, Michele Yee and Loi Kin-Hoe

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.

The revision includes significant changes to existing Malaysian arbitral practice and extends the AIAC’s various efforts to improve the efficiency of arbitration. It also responds to the growing calls for enhanced cost and time savings and transparency in arbitration by introducing new procedures for summary determination, expedited procedure and the publication of AIAC arbitral awards. No doubt, the 2021 Rules demonstrate the AIAC’s focus on modernising its rules in line with international best practices. We set out below the key features of the 2021 Rules.

NOTABLE AMENDMENTS IN THE 2021 AIAC RULES

New streamlined structure

The 2021 Rules consolidate into its main body the UNCITRAL Arbitration Rules 2013 and the institution’s standalone expedited arbitration procedure (Fast Track Arbitration Rules). This provides a more streamlined document for users, and dispenses with the AIAC’s previous practice of referring to the UNCITRAL Arbitration Rules (previously Part II) or requiring a separate submission to the Fast Track Arbitration Rules.

Summary determination procedure

A significant update is new Rule 19, which introduces a summary determination mechanism into AIAC arbitrations. This brings the 2021 Rules into line with the new practices of leading arbitration institutions, such as LCIA, ACICA, HKIAC and SIAC, and provides the potential for considerable cost and time savings to users.

The new Rule 19 expressly empowers arbitrators to dismiss a claim, counterclaim or defence that is manifestly outside the jurisdiction of the tribunal, is inadmissible, or is manifestly without merit. This closely mirrors the equivalent provisions under the SIAC and LCIA Arbitration Rules.

The summary determination procedure can be engaged upon a request by an arbitral party. Such requests must be filed within 30 days from the filing of the statement of defence and counterclaim. Notably, it is common for further submissions to be filed after the statement of defence and counterclaim, as the AIAC’s new fast track procedure acknowledges in the new Rule 8.8(i). However, the wording of Rule 19.2 would mean that, in practice, parties will have to ensure that their factual and legal positions are sufficiently developed in early submissions to avoid challenge under the summary determination procedure.

Fast Track Procedure

Under the previous versions of the AIAC Arbitration Rules, the Fast Track Arbitration Rules existed as a standalone set of rules, alongside the main AIAC Arbitration Rules.

The new Rule 8 under the 2021 Rules introduces an expedited procedure for all AIAC arbitrations, known as the Fast Track Procedure, which repurposes and revitalises the Fast Track Arbitration Rules by incorporating it into the 2021 Rules itself. The new Fast Track Procedure will be applicable where:

  • the parties have agreed to adopt the Fast Track Procedure (i.e. by expressly agreeing to this in the arbitration clause or subsequently by way of a submission agreement – the 2021 Rules provides a model clause which the parties can insert into their arbitration agreement or submission agreement), or where the parties have adopted any edition of the Fast Track Arbitration Rules (Rule 8.2(a));
  • the amount in dispute, at the time of the commencement of the arbitration pursuant to Rule 7, is quantified at less than USD500,000.00 for an international arbitration or less than RM2,000,000.00 for a domestic arbitration (Rule 8.2(b)); or
  • there is exceptional urgency (Rule 8.2(c)).

Two observations arise:

  • First, apart from arbitrations where the parties have expressly agreed to adopt the Fast Track Procedure or any previous edition of the Fast Track Arbitration Rules (i.e. as per Rule 8.2(a)), please note that the Fast Track Procedure may also apply to arbitrations where the parties have not expressly adopted it but the amount in dispute is below the specified threshold or if there is exceptional urgency (Rule 8.2(b) and Rule 8.2(c)). In such circumstances, a Fast Track Request submitted under these limbs would be determined by the Director of the AIAC, having regard to all circumstances considered appropriate (Rule 8.3).
  • Second, the Fast Track Procedure appears to be available to all proceedings relating to arbitration agreements concluded before the effective date of the 2021 Rules. It will be interesting to see if Malaysian courts have any concerns when enforcing arbitral awards issued under the Fast Track Procedure. Enforcement of such awards may be given different treatment depending on jurisdiction (see here and here).

Where the Fast Track Procedure is adopted, the arbitration will have the following key features:

  • The determination of disputes by a sole arbitrator unless parties agree otherwise.
  • By default, the arbitration will proceed on a documents-only basis, with there being no oral hearing. The tribunal may, however, convene an oral hearing upon consulting the parties, but any such hearing cannot exceed five days.
  • Significantly truncated timelines for the arbitration. Most notably, the tribunal is required to declare proceedings closed no later than 90 days from its delivery of the first Procedural Order; and thereafter the tribunal is required to submit its draft Final Award for the AIAC’s technical review within 90 days from the date the proceedings were declared closed.

Enhanced transparency

New Rule 44.6 allows the AIAC to now publish the whole, excerpts or summaries of arbitration awards, with the written consent of the parties. Published awards will be redacted to remove all references to the parties’ names and other identifying information. This marks a fundamental shift from current Malaysian arbitration practice and is a welcome response to calls for institutions to improve transparency in arbitration and facilitate the development of commercial jurisprudence in Malaysia.

Further transparency measures are inserted by new Rule 44.4. Parties will now be required to obtain undertakings of confidentiality from “all those that they involve in the arbitration”. This includes a wide range of participants, including “any authorised representative, witness of fact, expert or service provider”, which may extend to providers of transcription, electronic discovery and virtual hearing hosting services. This will be an additional step that users will need to actively comply with in AIAC arbitrations going forward.

Consolidating multi-contract disputes

The revisions will now allow a claimant to file a single notice of arbitration in respect of claims arising from multiple contracts between the same parties together with a consolidation request (new Rule 22.4). This is a departure from the previous requirement that a claimant issue multiple arbitration requests even where the disputes could be consolidated.

The AIAC has also given further guidance on the factors to be considered for a consolidation request. Unlike previous iterations, the 2021 Rules require parties seeking consolidation to consider:

  • whether the disputes under each arbitration concern the same legal relationship;
  • whether the rights or reliefs claimed are in respect of, or arise out of, the same transaction or a series of related transactions; and
  • the compatibility of the arbitration agreements.

Clarifying multi-party appointments

New Rule 9.7 streamlines the default mode of appointment of arbitrators in multi-party arbitrations. Where an even-numbered tribunal is used, all claimants and respondents will nominate half the required number of arbitrators. For odd-numbered tribunals, all claimants and respondents will nominate an equal number of arbitrators who shall thereafter nominate a presiding arbitrator. If joint nomination fails, the entire Arbitral Tribunal shall be constituted by the Director. In this case, any nominated arbitrators shall be excluded from consideration and any appointed arbitrators shall be released,n unless the parties agree to retain such nominations or appointments.

Further, the 2021 Rules insert a new requirement for prospective arbitrators to ensure their capacity to determine the case in a prompt and efficient manner (new Rule 10.4). This mirrors the diligence duty under the initial draft of ICSID’s Code of Conduct for Adjudicators in Investor-State Dispute Settlement.

Emergency arbitrators’ powers

The 2021 Rules maintain the AIAC’s existing emergency arbitration mechanism, which allows users to seek urgent temporary relief from an emergency arbitrator prior to the formation of the arbitral tribunal that will determine the main dispute. New Rules 17 and 18 insert helpful clarification on the authority of emergency arbitrators, including:

  • confirming that emergency arbitration proceedings can be conducted virtually or on a documents-only basis (new Rule 18.4).
  • clarifying that emergency arbitrators may proceed with the arbitration in the absence of a non-participating party (new Rule 18.5).
  • expressly empowering emergency arbitrators to rule on their own jurisdiction (new Rule 18.6).
  • confirming that emergency arbitrators may make any order or award that the main arbitral tribunal can make. This includes adjourning all or any part of the claim for emergency interim measures for determination by the main arbitral tribunal (new Rule 18.7).

Other notable changes in the 2021 Rules include:

  1. substantive revisions to the provisions on the closure and termination of proceedings, the technical review process, and the release, correction and interpretation of awards to enhance clarity (new Rules 32 – 39).
  2. revisions to the provisions relating to costs and deposits to enhance clarity (new Rules 40 and 41).

If you have any questions about the 2021 Rules or how they might affect you, please reach out to the contacts below.

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Nicholas Hoh
Nicholas Hoh
Senior Associate, Kuala Lumpur
+60 3 2777 5106
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Tse Wei Lim
Tse Wei Lim
Associate, Kuala Lumpur
+60 3 2777 5135
Rebecca Pang
Rebecca Pang
Associate, Kuala Lumpur
+60 3 2777 5111
Michele Yee
Michele Yee
Associate, Kuala Lumpur
+60 3-2777 5159
Kin Hoe Loi
Kin Hoe Loi
Associate, Kuala Lumpur
+60 3 2777 5158

Asian International Arbitration Centre launches new arbitration rules for public consultation

On Sunday, 20 June 2021, the Asian International Arbitration Centre (AIAC) launched its new International Arbitration Rules for public comment following extensive consultations with an international External Advisory Committee for the Revision of the AIAC Arbitration Rules (including Peter Godwin, Partner, HSF Kuala Lumpur). A copy of the draft rules can be found here.

The draft marks a significant departure from the existing arbitral practice in Malaysia and demonstrates the AIAC’s focus on modernising its arbitration rules and widening its appeal to a truly international market. The new rules incorporate the UNCITRAL Arbitration Rules and the AIAC’s standalone expedited arbitration procedure (dispensing with the need for the AIAC to maintain its current practice of referring to the UNCITRAL Arbitration Rules or maintaining its standalone Fast Track Arbitration Rules). The draft rules also introduce a new summary determination procedure, rules for appointment of the tribunal in multi-party situations, ability to commence a single arbitration under multiple contracts by submitting in parallel an application to consolidate, and provisions on third party funding. In addition, the rules contained refined provisions relating to emergency arbitrators, appointment, challenge and replacement of an arbitrator, the tribunal’s powers in the conduct of proceedings, and the scope of technical reviews of draft final awards.

The AIAC welcomes comments on the draft rules until 30 June 2021 here.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Rebecca Pang, 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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Rebecca Pang
Rebecca Pang
Associate, Kuala Lumpur
+60 3 2777 5111

High Court issues anti-arbitration injunction against London arbitration and rejects parallel application to stay court proceedings

Peter Godwin, Daniel Chua and Michele Yee

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. Continue reading

High Court applies Halliburton v Chubb on arbitrator apparent bias and the duty of disclosure

Peter Godwin and Daniel Chua

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.

Background

The dispute between Mr. Low Kok Hwa (Low) and Persatuan Kanak-Kanak Spastik Selangor & Wilayah Persekutuan (the Association) arose in relation to architectural consultancy services provided by Low for the redevelopment of the Association’s building in Selangor. Low claimed that he had completed his consultancy services but was not paid in full by the Association. Low’s claim was referred to arbitration before a sole arbitrator (Arbitrator), in which the Association was represented by its Honorary Director and counsel.

An arbitrator’s duty of disclosure and the grounds for challenging the appointment of an arbitrator on the basis of apparent bias is set out in section 14 of the Malaysian Act, which provides the following:

(1)   Any person who is approached in connection with that person’s possible appointment as an arbitrator shall disclose any circumstances likely to give rise to justifiable doubts as to that person’s impartiality or independence.

(2)   An arbitrator shall, without delay, from the time of appointment and throughout the arbitral proceedings, disclose any circumstances referred to in subsection (1) to the parties unless the parties have already been informed of such circumstances by the arbitrator.

(3)   An arbitrator may be challenged only if –

(a)   the circumstances give rise to justifiable doubts as to that arbitrator’s impartiality or independence …

(4)   A party may challenge an arbitrator appointed by that party, or in whose appointment that party has participated, only for reasons which that party becomes aware of after the appointment has been made.

On the first day of the hearing, Low (then unrepresented) was informed by the Arbitrator that the Arbitrator “know[s]” the Honorary Director. The transcript of the hearing reads as follows:

“Arbitrator: [Honorary Director], you can take your seat. Low, like I told you, I know [the Honorary Director]; I know [the Honorary Director], but it is not [the Association]. So it is inevitable that in this field, we know counsels [sic], we know about each other …”

Low did not challenge the Arbitrator’s appointment. 18 months after the hearing, the Arbitrator delivered his award, dismissing a majority of Low’s claims (Award). Low then applied to the High Court to set aside the Award under section 37 of the Malaysian Act on the basis that the Award was in conflict with Malaysian public policy in circumstances where Low contended that the Arbitrator had failed to provide sufficient disclosure of his relationship with the Honorary Director, amongst other grounds (including that the Award contained decisions on matters beyond the scope of the terms of the parties’ submission to arbitration . The main issues before the High Court were:

  1. what is the extent of an arbitrator’s duty of disclosure under the Malaysian Act;
  2. whether there was apparent bias by the Arbitrator in favour of the Association as a result of his relationship with the Honorary Director;
  3. whether Low had lost the right to set aside the Award on the basis of his failure to challenge the Arbitrator during the arbitral proceedings; and
  4. whether the circumstances warrant the court setting aside the Award.
Decision

(i) Duty of disclosure

The High Court confirmed that an arbitrator is under a continuing duty under Malaysian law to make full and timeous disclosure of facts and circumstances which are likely to give rise to justifiable doubts as to the arbitrator’s impartiality or independence. This requires an arbitrator to “disclose to the [p]arties all the relevant details which would enable a “fair-minded and informed observer” to decide objectively on whether there are justifiable doubts on the Arbitrator’s impartiality and/or independence … without delay”. The judge also adopted Halliburton in deciding that an arbitrator’s failure to make disclosure is relevant to assessing whether there are justifiable doubts as to the arbitrator’s impartiality.

The judge held that the factual circumstances warranted prior disclosure by the Arbitrator. Upon receipt of the Parties’ witness statements (including the Honorary Director’s statement), he failed to provide timeous disclosure of his relationship. There were two pivotal occasions where such disclosure should have been made:

  1. Before the hearing – Low had provided the Arbitrator evidence in support of his claims, including letters from the Association which were signed by the Honorary Director. The judge concluded that the Arbitrator had actual knowledge prior to the hearing that the Honorary Director would be the Association’s sole witness in the arbitration. Yet, there was no evidence of disclosure at this stage.
  2. On the day of the hearing – the Honorary Director was present when Loh gave his testimony. It was only after Loh had completed his testimony that the Arbitrator made his disclosure.

The Arbitrator also failed to provide any meaningful disclosure of his relationship  with the Honorary Director. The Arbitrator had merely informed the Parties that he ‘knew’ the Honorary Director. The court held that the Arbitrator should have provided relevant details to enable a fair-minded and informed observer to decide objectively on whether there were justifiable doubts on the Arbitrator’s impartiality and independence. These details included (i) how the Arbitrator knew the Honorary Director; (ii) what was the nature of the relationship, e.g. a family relationship, professional relationship or mere acquaintance; and (iii) the duration and proximity of the Arbitrator’s relationship with the Honorary Director.

(ii) The test for arbitrator apparent bias

The High Court considered that the applicable test for arbitrator apparent bias in Malaysia is the re-stated ‘real possibility of apparent bias’ test approved by Lord Hodge in Halliburton, i.e. “whether the fair-minded and informed observer, having considered the facts, would conclude that there was a real possibility that the tribunal was biased”.

The court was satisfied that the Arbitrator’s relationship with the Honorary Director would lead a fair-minded and informed observer, having considered the facts, to hold an objective perception that there was a real possibility that the Arbitrator was biased towards the Association in the arbitration, and there existed a reasonable suspicion that the Arbitrator was partial towards the Association. The court arrived at this conclusion on the basis of (i) the Honorary Director’s role as a material witness to the dispute; (ii) the delay in the Arbitrator’s disclosure (there was no evidence of the Arbitrator’s purported earlier disclosure to Low); (iii) the lack of particulars in the Arbitrator’s disclosure; and (iv) a decision in the Award which addressed matters beyond the scope of the terms of the parties’ submission to arbitration, the outcome of which was unfavourable to Low).

(iv) No loss of right to set aside the Award

The Association argued that Low was estopped from setting aside the Award on the basis of the Arbitrator’s failure to provide full and timeous disclosure when Low failed to challenge the Arbitrator after his initial disclosure within the statutory time limit provided under the Malaysian Act. Section 15(1) of the Malaysian Act provides that any party who intends to challenge an arbitrator must submit a written statement to the tribunal of the reasons for challenging that arbitrator within 15 days after becoming aware of circumstances that give rise to justifiable doubts as to that arbitrator’s impartiality or independence.

The judge rejected this argument, stating that estoppel cannot be pleaded against an applicant’s failure within the arbitral proceedings to timeously object to an arbitrator’s failure to give full and timeous disclosure because the duty of disclosure is statutorily imposed by section 14(1) and (2) of the Malaysian Act. There was – according to the judge –no “good reason to limit any finding of [a] real danger of bias … only up to the stage of pre-delivery of [the Award]”.

(v) Impact on the Award

Having considered the above, the judge was satisfied that the Arbitrator’s failure to make full and timeous disclosure (i) was “material to the outcome of the [a]rbitration”, (ii) had “a real impact on the Award”, and (iii) were “significant and had affected the Award”. The judge also considered that the Arbitrator “would have reached a different decision if not for the [failure to make full and timeous disclosure]”. As a result, the High Court considered it appropriate to exercise its discretion to set aside the entire Award.

Comment

The main issues decided by the UK Supreme Court in Halliburton were (i) whether and to what extent an arbitrator is entitled to accept appointments in multiple arbitrations relating to the same or overlapping matters and where there is only one common party, without this resulting in an appearance of bias; and (ii) whether and to what extent an arbitrator could accept multiple appointments in this way without providing disclosure. Halliburton also confirmed the existence of a legal duty of disclosure in the context of arbitration under English law. The significance of the case to the wider international arbitration community is evident in its application to interpreting analogous provisions in the UNCITRAL Model Law on International Commercial Arbitration, which is adopted in various jurisdictions, including Malaysia.

Although this case did not concern multiple appointment issues similar to those decided in Halliburton, the decision is significant given that it  is the first judgment in Malaysia to apply the re-stated principles of arbitrator bias set out in Halliburton for the purposes of determining the extent of an arbitrator’s duty of disclosure under Malaysian law, and the threshold for setting aside an award for apparent bias.

The High Court acknowledged the difficulty in demonstrating apparent bias to the satisfaction of a Malaysian court and the highly fact-specific approach that will be taken. The decision is nevertheless helpful in providing clarity over an arbitrator’s legal duty of disclosure in Malaysian law in light of the Supreme Court’s judgment in Halliburton, and provides helpful guidance as to how Malaysian courts will assess any allegations of arbitrator apparent bias.

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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101

High Court clarifies limits of post-award court intervention

Peter Godwin and Lim Tse Wei

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.

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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Tse Wei Lim
Tse Wei Lim
Associate, Kuala Lumpur
+60 3 2777 5135

2019 caseload statistics show continued demand for arbitration by Malaysian parties

Peter Godwin and Daniel Chua

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.

Overview of institutional statistics

In 2019, the Asian International Arbitration Centre (“AIAC”) largely maintained its pipeline of new arbitration referrals with 98 administered cases (100 in 2018). Notably, the Director of the AIAC, who is the designated default appointing authority under Malaysia’s Arbitration Act 2005, reported at least 27 new ad hoc cases. The AIAC also saw its first emergency arbitrator proceedings administered under its rules.

The International Court of Arbitration of the International Chamber of Commerce (“ICC“) continues to receive a modest level of acceptance among Malaysian parties, with a three-year high of 17 users in 2019.

Dropping from a record high of 82 parties in 2018, only 38 Malaysian parties (including the number of parent companies from Malaysia, whose subsidiaries were parties to an arbitration at the Singapore International Arbitration Centre (“SIAC”) but incorporated elsewhere) participated in new SIAC arbitrations.

2019 has also seen usage of other Asia-based arbitral institutions by Malaysian parties. The Korean Commercial Arbitration Board (“KCAB“) reported that 1.4% of all parties involved in KCAB arbitrations were Malaysian parties. Although the total number of parties are not reported, the KCAB administered 443 arbitration cases in 2019. The 2019 Work Report of the China International Economic and Trade Arbitration Commission (“CIETAC”) also indicates some level of participation by Malaysian parties in CIETAC arbitrations, although the exact numbers are not reported. It is also notable that 2 Malaysian parties (1 claimant and 1 respondent) were involved in arbitrations administered by the Japan Commercial Arbitration Association between 2015 and 2019.

One case involving a Malaysian party was also administered by the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC“), following two registered cases involving Malaysian parties in 2018.

These statistics, of course, should not be taken to mean that other leading arbitral institutions, such as the London Court of International Arbitration (“LCIA“), the Hong Kong International Arbitration Centre (“HKIAC“) and the American Arbitration Association – International Centre for Dispute Resolution (“AAA-ICDR”) have been abandoned by Malaysian parties in 2019; rather that the recorded number of Malaysian parties in their respective caseload reports were not numerically displayed. Though coming in at a relatively small amount, historic Malaysian usage of LCIA and HKIAC arbitration is anecdotally known. The HKIAC does not elaborate on the total number of parties involved in arbitration by nationality, but instead ranks the top 10 nationalities of users most frequently involved in arbitrations it administers. Unlike 2018, Malaysia was not listed in the top 10 party nationalities bracket in 2019. The AAA-ICDR also indicated that Malaysian parties were involved as party to their international arbitration caseloads between 2016-2018.

Comment

AIAC, ICC and SIAC arbitration continue to be among the more highly sought institutions for arbitrations among Malaysian parties. As can be gleaned from the analysis from the published statistics, the appetite for arbitration remains fairly steady amongst various arbitral institutions. Although each institution presents the details of its caseload differently, it is evident that institutional arbitration has continued to remain popular among Malaysian parties. Ad hoc arbitrations also remain a feature in Malaysian arbitration, stemming from ad hoc arbitration clauses in older contracts and contracts which have abstained from administrative oversight from mainstream arbitral institutions. But whether ad hoc or institutional arbitration is preferred will also depend on the nature and background of the dispute in question. Many arbitration users have a preference for arbitrating with institutional support, and these parties will continue to be engaged by the convenience, familiarity, reputation and transparency of the leading institutions.

Users and practitioners will await the release of 2020’s suite of arbitration statistics with interest, given the impact of the COVID-19 pandemic on arbitration, the AIAC’s lack of a Director for much of 2020 (reported here)  and the appetite of users to commence arbitrations in general.

Further, as Malaysia shifts its focus to participation in multilateral and mega-regional investment initiatives, from the Belt and Road Initiative to Malaysia’s signing of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership and recently the Regional Comprehensive Economic Partnership Agreement (which impact is summarised here), there is little doubt that arbitration will continue to play a significant role amongst Malaysian businesses and those who do business with them.

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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101

High Court finds that arbitral tribunal has jurisdiction to determine insolvency set-off

Peter Godwin and Daniel Chua

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.

Background

In January 2010, UDA Land Sdn Bhd (“UDA”) appointed Puncak Sepakat Sdn Bhd (“Puncak”) as its main contractor to carry out and complete a housing project in Hulu Langat, Selangor (“Project”).  In April 2011 and prior to the completion of the Project, Puncak was wound up by a third party.  This led to UDA terminating Puncak’s appointment and the subsequent appointment of a substitute main contractor to complete the Project which caused UDA additional expense.

In June 2013, UDA claimed for losses of RM7,140,877,03 from Puncak as a result of additional costs incurred in having the Project completed by the substitute main contractor.  In October 2013, Puncak disputed the claim and referred its own claim against UDA for the sum of RM3,370,402.58 and refund of RM487,200 in liquidated ascertained charges levied against it to arbitration under the then Kuala Lumpur Regional Centre for Arbitration (now Asian International Arbitration Centre).  Following the appointment of the Arbitrator, UDA obtained leave from the winding up court to advance a counterclaim against Puncak in the arbitration proceedings.

In the course of the arbitration, the Project was completed and a final account of UDA’s costs incurred to complete the Project following its termination of Puncak’s appointment was set out in a Final Certificate of Termination Costs issued on 25 April 2016.

At the heart of this dispute was whether UDA was entitled to advance its counterclaim and insolvency set-off against Puncak’s claims in the arbitration, given that the claims arose from the Project.  In particular, section 41 of the then Bankruptcy Act 1967 (“Bankruptcy Act”) provided that where there were mutual dealings in an insolvency, an account had to be taken of what was due from each party to the other so that the claims could be set off against one another.  Puncak’s defence to the insolvency set-off centred on the applicable date of the set-off under section 41 of the Bankruptcy Act, and that the set-off would accord UDA’s claims undue preferential payment to a creditor, in breach of section 293 of the then Companies Act 1965. Importantly, UDA relied on the judgment of the Federal Court in Sime Diamond Leasing (M) Sdn Bhd v JB Precision Moulding Industries Sdn Bhd (in liquidation) [1998] 4 MLJ 569 which affirmed that insolvency set-off legitimises a system of accounting whereby a party which successfully asserts the set-off is accorded preference over the general body of creditors in a manner akin to a secured creditor (“Sime Diamond Leasing”).

In March 2019, the Arbitrator rendered its final award which declared that he had no jurisdiction to determine the UDA’s counterclaim and insolvency set-off, for the following reasons:

  1. It was not legitimate for UDA to characterise its claim under the Certificate of Termination Costs as a single continuing transaction which accrued before Puncak’s insolvency which continued to subsist after Puncak was wound up in order to rely on section 41 of the Bankruptcy Act to obtain preferential payment.
  2. A tribunal appointed under the Arbitration Act 2005 (“Arbitration Act”) cannot be conferred – even with the agreement of the parties – the powers of the winding-up court or the liquidator, which was the power to take account of what was due from each party to the other so that the claims could be set off against one another.
  3. The appropriate forum to advance an insolvency set-off would be in a winding-up court or before a liquidator only, because section 41 of the Bankruptcy Act provides a proof of debts procedure which is only available through judicial insolvency procedures.
  4. Insolvency set-off under section 41 of the Bankruptcy Act cannot be invoked where a creditor already had notice that the debtor company was being wound up.  Here, the Final Certificate of Termination Costs was long after Puncak had been wound up, and UDA was fully aware of this.
  5. Section 41 of the Bankruptcy Act cannot be applied to debts claimed under contract to be set-off against any claim by Puncak.

Having disregarded UDA’s counterclaim and set-off, the Arbitrator in its final award allowed Puncak’s claim without abatement.

Aggrieved, UDA applied to set aside the award under section 37(1)(a)(iv), (v) and (2)(b) of the Arbitration Act on the basis that (1) the award deals with a dispute not contemplated by the terms of the submission to arbitration; (2) the award contains decisions on matters beyond the scope of the submission to arbitration; and (3) that the award is in conflict with the public policy of Malaysia where a breach of the rules of natural justice occurred during the arbitral proceedings or in connection with the making of the award.  UDA argued that the Arbitrator’s refusal to consider and determine its counterclaim and set-off is a serious error of law causing a breach of natural justice which conflicted with the public policy of Malaysia.  Apart from the error of law, UDA contended that the Arbitrator could not conclude that it had no jurisdiction to determine the counterclaim given that the parties agreed to have the claim and counterclaim determined by arbitration which was sanctioned by the winding-up court.

Decision of the High Court

Though highlighting that Malaysian courts have only a narrow discretion to set aside an arbitration award for breach of Malaysian public policy, the High Court allowed UDA’s application to set aside the Arbitrator’s findings.

  1. The Arbitrator failed to consider whether Puncak’s claim and UDA’s counterclaim constituted a single transaction within the contract, nor explained the reasons for not doing so.  The Arbitrator did not see the claim and counterclaim as an accounting exercise arising from a single transaction of mutual dealings.  However, he did not explain why it did not constitute mutual dealings, and instead allowed the Puncak’s claim without abatement.
  2. The Arbitrator failed to apply the principles in Sime Diamond Leasing, which legitimises the aim of section 41 of the Bankruptcy Act in giving preferential payment for insolvency set-off where mutual dealings arise under the same contract.

The gravity of the Arbitrator’s errors of law, which caused it to disregard UDA’s counterclaim in its entirety, was sufficient to satisfy the requirements to set aside the final award under section 37 of the Arbitration Act.

The High Court also made an important determination on the intersection between insolvency law and arbitration. Though the High Court noted that Arbitrator’s jurisdiction to deal with insolvency set-off was not challenged by Puncak in the arbitration proceedings, it found that:

“[i]t is certainly not provided in section 41 of the [Bankruptcy Act] that mutual set offs must be dealt only by the winding-up court or the liquidator.  Ordinarily, if a creditor’s claim made against a wound-up company is disputed, then it has to be resolved by a civil action either in the civil or commercial courts. It is not to be resolved in the winding-up court which is already functus officio after the winding-up order has been made save for ancillary matters provided in the [Companies Act] such as application for leave to commence proceedings against the wound-up company. On the facts here, the liquidator of [Puncak] chose to sue [UDA] to recover unpaid payments via arbitration based on the arbitration agreement in the Contract.  It is therefore unsurprising and certainly not wrong of [UDA] to seek to set off its counterclaim for the loss and damages suffered against [Puncak] in the same arbitration with the leave of the winding-up court.  It follows that the arbitrator would be clothed with the jurisdiction and power to deal with mutual set offs pursuant to section 41 of the [Bankruptcy Act].”

Comment

The High Court’s decision indicates that insolvency set-off is arbitrable in Malaysia, which is consistent with recent decisions in England which considered the availability and interaction of insolvency set-off in arbitration (which was considered here) and construction adjudication (the impact of which we considered in detail here).

It is possible that there are gaps in the judgment which may require clarification.  For example, the High Court did not appear to consider in detail whether UDA had notice of Puncak’s insolvency, and whether this would have barred the operation of insolvency set-off under the statutory scheme of section 41 of the Bankruptcy Act, nor was it considered (or argued by either parties) in the wider context of the arbitrability of insolvency-related issues.

On that note, this decision adds an interesting contrast to other first-instance decisions in Malaysia dealing with whether mandatory stay provisions in section 10 of the Arbitration Act should apply to winding-up petitions brought on the basis that a company is unable to pay its debts where the dispute relates to whether the company is, in fact, unable to pay its debts.  Like many other jurisdictions, the interaction between various different aspects of insolvency law and arbitration in Malaysia is a developing area of law, defined by various first-instance decisions of the High Court (though we understand that the issue surrounding the arbitrability of disputes which underlie a winding-up petition is now the subject of an appeal in the Court of Appeal).  However, a prior determination of the Federal Court (discussed here) may hint at a trend against the arbitrability of such disputes.

Nevertheless, this decision makes it clear that there is no reason why book debts cannot be quantified in arbitration.  This decision may, however, be a source of some uncertainty for insolvency practitioners in Malaysia, who will need to consider the circumstances in which they should apply to the court to supervise certain procedures where the parties have submitted disputes to arbitration.

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
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101