Malaysian arbitration legislation and court cases
Legislation
Arbitration law in Malaysia is governed by the Arbitration Act 2005 (also the "AA"). This came into force on 15 March 2006, and repealed the outdated Arbitration Act 1952. In a significant departure from its original framework, the AA is modeled on the UNCITRAL Model Law.[1]
Malaysia has also been a signatory to the New York Convention since 1985. The New York Convention was passed into domestic law in Malaysia through the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985. However, the 1985 Act was also repealed on 15 March 2006, as the AA now sets out a uniform procedure for the recognition and enforcement of both local and foreign arbitral awards.
Consistent with the Model Law, the AA distinguishes between domestic and international arbitrations. An “international arbitration” is defined in the same way as it is defined in the Model Law. Unlike Article 1(2) of the Model Law however, Section 3 of the AA provides generally for the application of the Act to domestic and international arbitrations only where the seat of arbitration is in Malaysia, with no exceptions.
In 2008, the High Court had the opportunity to interpret Section 3 of the AA in Aras Jalinan Sdn Bhd v. Tipco Asphalt Public Company Ltd. & Ors.[2]The Aras Jalinancase involved an application by the plaintiff for an interim injunction pending the determination of an arbitration between the parties in Singapore. In opposing this application, the defendants argued that the court had no jurisdiction to grant the orders sought, as the seat of arbitration was in Singapore, citing Sections 3 and 8 of the AA.[3]
The High Court agreed with the defendants and dismissed the plaintiff's application. It held that on a strict construction of Section 3 of the AA, read together with the provision on the restricted extent of court intervention in Section 8 of the AA, the High Court had no inherent or residual powers to intervene in arbitrations where the seat was outside Malaysia. It was also held that such jurisdiction could not be conferred by the agreement of the parties.
The effect of the Aras Jalinandecision, which was approved by the Court of Appeal in an unreported decision, left in serious doubt the ability of the High Court to exercise any powers in aid of arbitrations seated outside Malaysia, including the power to observe Malaysia's treaty obligation to enforce all valid arbitration agreements by ordering a mandatory stay of parallel court proceedings brought in breach of such agreements.
The AA was subsequently amended to address the implications of the Aras Jalinandecision, and other shortcomings of the AA.[4]Key amendments that came into force on 1 July 2011 can be summarized as follows:
a) Clarification of Section 8 of the AA that all sources of jurisdiction of the courts other than the AA itself, including the inherent jurisdictionof the courts, are excluded, to clearly limit the ability of the courts to intervene in matters governed by the AA
b) Inclusion of express provisions in the AA on the application of the powers of the court to grant relief in aid of arbitration under Section 10 of the AA (stay of parallel court proceedings) and Section 11 of the AA (interim measures and other relief) to foreign-seated arbitrations
c) Introduction of specific provisions under Sections 10 and 11 of the AA to govern admiralty disputes in arbitration, such as provisions on the arrest of vessels and the securing of the amount in dispute
d) Removal of the ground that there is no dispute between the parties with regard to the matters to be referred to arbitration, as a reason for refusal to stay parallel court proceedings
e) Reinstatement of party autonomy in choice of governing law clauses for domestic arbitrations to enable parties to apply laws other than the laws of Malaysia
f) Additional requirement for the reference on questions of law arising out of an award that the question of law substantially affects the rights of one or more of the parties.
The amendments reflected a clear policy decision by all major stakeholders to harmonize Malaysian arbitration laws with that of the international arbitration community in order to promote Malaysia as a regional center for arbitration in the Asia Pacific region.
2018 saw another major amendment made following the Arbitration (Amendment) (No. 2) Act 2018 (“Amendment Act 2018”).
The lacuna in respect of pre-award interest (the 2005 Arbitration Act did not empower arbitrators to award pre-award interest, a position confirmed by the Federal Court in case of Far East Holdings Bhd & Anor. v. Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals[5]) was rectified by section 10 of the Amendment Act 2018 such that the arbitral tribunal is now empowered by the act to grant pre- and post-award interest on any sums that are in dispute.
Further changes that the Amendment Act 2018 had introduced to the Arbitration Act 2005 include:
a) inclusion of an emergency arbitrator in the arbitral tribunal and recognition of the orders and/or awards granted by an emergency arbitrator (section 2 and new section 19H);
b) recognition of parties' right to choose any representative, not limited to just lawyers (new section 3A);
c) enhancement of the court's power to not only look at the subject matter of the dispute in the event that the arbitration agreement is contrary to public policy, but also if the subject matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia (section 4);
d) clarification of the definition and form of an arbitration agreement, including that an arbitration agreement should be in writing and the recognition of electronic communication (section 9);
e) recognition of powers of the High Court and arbitral tribunal to grant interim measures (section 11, section 19 and new sections 19A-19J);
f) restoration of parties' right to choose any law or rules of law applicable to the substance of a dispute and recognition of arbitral tribunal's right to decide according to equity and conscience, if expressly authorized by the parties (section 30);
g) provisions ensuring confidentiality of arbitration and arbitration-related court proceedings (new sections 41A and 41B);
h) reinforcement of principles of minimum court intervention and finality of arbitral awards by repealing sections 42 and 43 of the Arbitration Act 2005.
Major Malaysian Court Decisions on Arbitration Related Matters in 2017-2019
Limited role of the court in arbitration
The most notable Federal Court decision on the Arbitration Act 2005 (also “the Act”)in 2016 isPress Metal Sarawak Sdn Bhd v. Etiqa Takaful Berhad.[6]This case concerned an application for a stay of court proceedings under Section 10 of the Act, where the dispute related to a claim for insurance coverage for machinery breakdown and loss of profits due to a temporary shutdown of a plant following a power outage in Sarawak.
The appellant contended that there was no arbitration agreement in the placement slip for insurance coverage and that the dispute as to both liability and quantum of the insurance claim would, in any event, fall outside the scope of the arbitration agreement relied upon by the respondent in the expired policy.
The High Court found that there was a reference in the placement slip to the expired policy that contained the arbitration agreement, which satisfied the requirements of an arbitration agreement in writing, and that the claim fell squarely within the ambit of the arbitration agreement.
Section 9(5) of the Act defines the form of arbitration agreements. The Federal Court first dealt with the interpretation of Section 9(5) of the Act in Ajwa For Food Industries Co. (MIGOP), Egypt v. Pacific InterLink Sdn Bhd.[7]It further clarified in the Press Metalcase that there is imputed knowledge that the terms of the arbitration agreement in a document referred to in an agreement are binding, as if they were written in the agreement.
In confirming the decision of the High Court and Court of Appeal to stay court proceedings pending arbitration, the Federal Court also usefully restated the following principles:
The court must mandatorily stay court proceedings if the sole requirement of Section 10 of the Act is satisfied, namely that there is an arbitration agreement between the parties that is not null and void or incapable of being performed.
In determining whether to stay court proceedings in favor of arbitration, the court is not concerned with whether there is in existence a dispute between the parties with regard to the matter referred, so long as it is within the scope of the arbitration agreement in order to make it operative.
ThePress Metalcase is an important one for arbitration law in Malaysia, as the Federal Court applied the following key tenets of internationally recognized arbitration law principles for the first time:
a) An arbitration clause ought to be interpreted widely, based onits express terms and the intention of the parties, taking into consideration the commercial reality and the purpose for which the agreement was made and to give effect, so far as the language used by the parties in the arbitration clause would permit, to that purpose.[8]
b) The threshold to ascertain the validity of an arbitration
agreement and whether the subject matter of a claim falls within its ambit is low, and it is only in the clearest of cases that the court ought to make a ruling on the inapplicability of an arbitration clause.[9]
The decision underscores the pro-arbitration attitude of the judiciary in Malaysia and the welcome consistency and harmonization with international arbitration law. This is important, since it provides certainty and comfort to users choosing Malaysia as a seat of arbitration
No foreign counsel in arbitration proceedings in Sabah and Sarawak
The concerted efforts to propel Malaysia as an arbitration center saw other developments in 2013, such as the relaxation of immigration requirements for foreign arbitrators entering Malaysia for short periods to conduct hearings, and amendments to the Legal Profession Act 1976 (“LPA”).
It had never been an issue for foreign arbitration practitioners in Malaysia with a supportive Bar Council, but amid steps to liberalize the legal profession, restrictions remained that prohibited unlicensed persons from practicing law in Malaysia.[10]The amendments to the LPA expressly excluded the application of such restrictions in the case of:
· Foreign arbitrators
· Any person representing any party in arbitral proceedings
· Any person giving advice, preparing documents and renderingany other assistance arising out of arbitral proceedings in Malaysia[11]
However, the LPA only applies in Peninsular Malaysia and not in the Borneo states of Sabah and Sarawak in Malaysia.[12]Until the issue of whether foreign lawyers could practice as arbitration counsel in Sabah was litigated in In Re Mohamed Azahari Matiasin (Applicant),[13]it was always assumed that there was a uniformity of practice for arbitration throughout Malaysia.
In 2011, Mohamed Azahari bin Matiasin applied to court for a declaration that his client could appoint a co-counsel from Kuala Lumpur for arbitration proceedings in Sabah. The High Court dismissed the application and ruled that only lawyers admitted to the Sabah Bar have the right to represent parties in arbitration proceedings. This was based on its interpretation of provisions in the Sabah Advocates Ordinance 1953, which gave such persons the “exclusive right to practice in Sabah.”
On 24 September 2012, the Court of Appeal overturned the High Court's decision and ruled that foreign lawyers can appear in arbitration proceedings conducted in Sabah, without applying for permission to the High Court.[14]However, the Federal Court restored the High Court decision in a landmark unreported decision on 7 December 2015,[15]placing it beyond any doubt that all foreign lawyers, including lawyers from Peninsular Malaysia, are barred from appearing as counsel in arbitration proceedings in Sabah.
Since the corresponding provision in the Sarawak Advocates Ordinance 1953 is in pari materiawith Section 8 of the Sabah Advocates Ordinance 1953, the same position also applies in Sarawak. Unless and until there is legislative change in Sabah and Sarawak, arbitration users should be especially circumspect when deciding on the seat and venue of arbitration in Malaysia where a potential dispute may have some connection to Sabah and Sarawak, and expressly exclude Sabah and Sarawak as a seat or venue in order to retain freedom of counsel.
The consideration to set aside an arbitral award
The ambiguous legal position of the grounds to set aside an arbitral award since the Arbitration Act 2005 came into force has finally been settled in the recent Federal Court decision in Far East Holdings Bhd & Anor v. Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals.[16]
This case arose from a domestic arbitration where the arbitral tribunal made an award in favor of the respondent (ie, the claimant in the arbitration) against the appellant (ie, the respondent in the arbitration). Thereafter, the respondent applied for recognition and enforcement of the award, whereas the appellant referred a series of questions of law arising out of the award under Section 42 of the Arbitration Act 2005, one of which is whether the grounds to set aside an arbitral award developed under the previous Arbitration Act 1952 are applicable to Section 42 of the Arbitration Act 2005.
Prior to the Arbitration Act 2005, an award could be set aside on the grounds that (i) the arbitrator has misconducted themselves or the proceedings; or (ii) an arbitration or award has been improperly procured.[17]Nevertheless, the Malaysian common law also accepted the common law ground of “error of law on the face of the award” although there was no such provision made in the previous legislation.[18]
After the coming into force of the Arbitration Act 2005, the application to set aside an award has to be made within 90 days of the date on which the party making the application has received the award or of the date on which the request to correct or interpret an award is disposed,[19]and that too will only be allowed if one of the prescribed circumstances is fulfilled.[20]The circumstances envisaged are given below for easy reference:[21]
(a) the party making the application provides proof that:
(i) a party to the arbitration agreement was under any incapacity;
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it, or, failing any indication thereon, under the laws of Malaysia;
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present that party's case;
(iv) the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration;
(v) the award contains decisions on matters beyond the scope of the submission to arbitration; or
(vi) the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties, unless such agreement was in conflict with a provision of this Act from which the parties cannot derogate, or, failing such agreement, was not in accordance with this Act; or
(b) the High Court finds that:
(i) the subject matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia; or
(ii) the award is in conflict with the public policy of Malaysia.
Nevertheless, Section 42 of the Arbitration Act 2005 provides that parties may refer to the High Court “any question of law arising out of an award” and the High Court can only dismiss such reference “unless the question of law substantially affects the rights of one or more of the parties,” where on determination, the High Court may confirm or vary the award, remit the award wholly or partly to arbitral tribunal for reconsideration, or set aside the award wholly or partly.
The Federal Court held that the common law ground of “error of law on the face of the award” and the considerations of “illegality,” “manifestly unlawful and unconscionable,” “perverse” and “patent injustice” are no longer applicable, and proceeded to hold that the only consideration is whether there is a question of law arising from the award and substantially affecting the rights of one or more of the parties.
The Federal Court also provided a non-exhaustive list of questions which constitute a “question of law” under Section 42 of the Arbitration Act 2005, which includes questions as to:
(a) the law in relation to the identification of all material rules of statute and common law, the identification and interpretation of the relevant parts of the contract, and the identification of those facts that must be taken into account when the decision is reached;
(b) whether the decision of the tribunal was wrong;
(c) whether there was an erroneous application of law
(d) whether the correct application of the law inevitably leads to one answer and the tribunal has given another;
(e) the correctness of the law applied;
(f) the correctness of the tests applied;
(g) the legal effect to be given to an undisputed set of facts;
(h) whether the tribunal has jurisdiction to determine a particular matter (which may also come under Section 37 of the Arbitration Act (2005); and
(i) construction of a document.
This non-exhaustive list of questions appears to undermine the finality of an award where a litigant who is dissatisfied with the award may seek to vary or set aside the award by referring the award to the High Court, so long as there exists a question of law which substantially affects the rights of one or more of the parties.
In hindsight, it may also be a relief to the aggrieved party who obtained an award with some form of error but would not have been able to seek relief under the previous law as the error of law on the face of the award is not such that is “patent and obvious as to render the award manifestly unlawful and unconscionable to subsist."[22]
Be that as it may, Section 42 is only applicable to domestic arbitration unless otherwise agreed by the parties in writing, and will only apply to international arbitration if it is so agreed by the parties in writing.
In 2018 Section 42 of the Malaysia's Arbitration Act 2005 was repealed.
(4) Arbitrator's power to award pre-award interest
The Federal Court in Far East Holdingsalso held that an arbitrator is only empowered to award post-award interest, as the Arbitration Act 2005 does not contemplate the award of pre-award interest, unless otherwise agreed in the arbitration agreement.
Therefore, it is pertinent to enlarge the power of the arbitral tribunal in the arbitration agreement to include the power to award pre-award interest.
After the Federal Court's decision in Far East Holdings, the KLRCA revised Rule 12(10)(a) of the KLRCA Arbitration Rules to give the arbitrator discretion to award interest for the period between the time when the cause of action arose to the date of realization of the arbitral award, effectively empowering the arbitrator to grant pre-award interest.
However, Rule 12(10)(a) will only be applicable to arbitration agreements which adopt the 2017 revision of the KLRCA Arbitration Rules.
The lacuna in the Act was rectified in 2018 by Section 10 of the Amendment Act 2018 such that the arbitral tribunal is now empowered by the act to grant pre- and post-award interest on any sums that are in dispute.
Definition of International Arbitration
The anomalous decision of the Court of Appeal in AJWA For Food Industries Co (MIGOP), Egypt v. Pacific Inter-Link Sdn Bhd & Anor[23](“AJWA case”) on the definition of international arbitration is conclusively determined in the case of Tan Seri Dato' Seri Vincent Tan Chee Yioun & Anor v. Jan de Nul (Malaysia) Sdn Bhd[24](“Jan de Nul case”).
The dispute began when Central Malaysian Properties Sdn Bhd (“CMP”), controlled by Tan Seri Vincent Tan, defaulted in its payment to Jan de Nul (Malaysia) Sdn Bhd (“JDN”) in respect of a construction project in Johor. As a result, JDN commenced arbitration proceedings against Tan Seri Vincent Tan, who personally guaranteed
the performance of CMP, for the sum due to JDN for the work completed for CMP. Subsequently, CMP and Sofidra (the ultimate holding company of JDN), were added into the arbitration proceedings. CMP counterclaimed against JDN for damages resulting from JDN's breach of contract and negligence in connection with the reclamation failure incident, which had unfortunately resulted in the loss of life. The arbitral tribunal held that JDN had validly terminated the contract, but JDN had also breached the contract which resulted in the reclamation failure incident. The claims of both parties were allowed and were set off against each other, with JDN and Sofidra ordered to pay, jointly and severally, CMP approximately USD 660 million (“Award”).
Both parties challenged the Award, applying to refer to questions of law arising out of the Award pursuant to section 42 of the Arbitration Act 2005 (“the Act”). Sofidra and JDN raised preliminary objections that section 42 of the Act is inapplicable in this case as the arbitration between the parties was an “international arbitration” within the meaning of section 2 of the Act. section 3(3) of the Act provides that section 42 of the Act (which is contained within part III of the Act) has no application unless the parties had agreed in writing for it to be applicable.
Section 42 of the Act essentially allows for the court's intervention by allowing the parties to refer to the court on questions of law arising out of an arbitral award. The court then had powers to confirm, vary, set aside, or to remit the award to the tribunal for reconsideration.
The counsel for Tan Sri Vincent Tan and CMP had relied on the AJWA case to support their contention that section 42 is applicable. In the AJWA case, the Court of Appeal held that section 42 of the Act is may be relied on if the arbitration agreement is governed by Malaysian law.
The Federal Court, however, reversed the AJWA decision and held that, notwithstanding that the agreement adopts Malaysian law as the governing law of the contract, such cannot be interpreted and equated to an agreement to include part III (and section 42) of the Act.
While this decision clarifies this point of law and ensures certainty, section 42 of the Act had been deleted by the Amendment Act 2018. Currently, the only recourse against an arbitral award is a setting-aside action under section 37 of the Act, which is contained within part II of the Act and will apply irrespective of it being a domestic or international arbitration.
Recourse against arbitral award
The dispute in the Jan de Nul case had also given rise to an appeal by JDN and Sofidra to set aside the Award under section 37 of the Act.
In dismissing JDN and Sofidra's appeal and upholding the decision of both the High Court and the Court of Appeal, the Federal Court affirmed the distinction between a section 37 application and a section 42 application held by the Court of Appeal in Petronas Penapisan (Melaka) Sdn Bhd. v. Ahmani Sdn Bhd[25](“Petronas Penapisan”). In the Petronas Penapisan, it was held that a section 37 application relates to the award making process while a section 42 application relates to the award itself i.e. whether the award contains an error that substantially affects the rights of one or more of the parties.
While the Federal Court declined to comment if the test for the intervention of the court under section 37 of the Act is “one where the award suffers from patent injustice and/or where the award is manifestly unlawful and unconscionable,” the court nevertheless explained that the test for intervention that was rejected in the Far East Holdings, i.e. “patent injustice” and “manifestly unlawful and unconscionable,” applies only to a section 42 application and not a section 37 application, as the case may be.
In any case, with section 42 of the Act repealed, it is certain that parties may only seek the courts' intervention in very limited circumstances, that is when:
a) the limited circumstances under section 37 of the Act are fulfilled;
b) the subject matter of the dispute in the event that the arbitration agreement is contrary to public policy; or
c) the subject matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia.
(from Baker McKenzie International Arbitration Yearbooks for 2017-2019)
Elaine Yap[1],Eddie Chuah[2]and Meyven Khor[3]
Elaine Yap is a partner in the Dispute Resolution Practice Group of Baker McKenzie's Kuala Lumpur office. She has more than 10 years of experience handling commercial litigation and arbitration. Elaine represents clients in a wide variety of disputes, from breach of contract and negligence to fraud and economic torts. She also provides counsel on breach of directors' duties, shareholder disputes and insolvency litigation, as well as construction, tax, intellectual property, employment and administrative law.
[2]Eddie Chuah is a partner in Wong & Partners, a member firm of Baker McKenzie in Kuala Lumpur.
[3]Meyven Khor is an associate in Wong & Partners, a member firm of Baker McKenzie in Kuala Lumpur
[1]Original 1985 version.
[2][2008] 5 CLJ 654.
[3]Section 8 deals with the extent of court intervention in matters governed by the AA.
[4]Arbitration (Amendment) Act 2011.
[6][2016] 9 CLJ 1.
[7][2013] 7 CLJ 18.
[8]Fiona Trust & Holding Corporation & Ors v. Privalov & Ors[2007] 4 All ER 951.
[9]Tjong Very Sumito & Ors v. Antig Investments Pte Ltd.[2009] SGCA 41.
[10]Section 37 Legal Profession Act 1976.
[11]Legal Profession (Amendment) Act 2013 (Act 1456) and Legal Profession (Amendment) Act 2012 (Act 1444) which came into effect on 3 June 2014.
[12]Sabah and Sarawak joined the Federation of Malaya in 1963 and the Federal Constitution accorded these states certain legislative autonomy and trade protection. The legal profession in Sabah and Sarawak is governed by the Advocates Ordinance 1953 (Sabah Cap. 2) and Advocate Ordinance Sarawak 1953 (Cap. 10) respectively.
[13][2011] 2 CLJ 630.
[14]Mohamed Azahari bin Matiasin v. GBB Nandy v. Gaanesh & Samsuri Bin Baharuddin & 813 Ors[2013] 7 CLJ 277.
[15]Sabah to Lose Out on Arbitration Business, http://www.dailyexpress.com.my/news.cfm?NewsID=105277
[16][2017] MLJU 1726.
[17]Section 24(2) of the Arbitration Act 2005.
[18]Shanmugan Paramsothy v. Thiagarajah Pooinpatarsam & ors[2001] 6 MLJ 305
[19]Section 37(4) of the Arbitration Act 2005.
[20]Section 37(1) of the Arbitration Act 2005.
[21]Section 37(1) of the Arbitration Act 2005.
[22]SDA Architects(sued as a firm) v. Metro Millenium Sdn Bhd[2014] 2 MLJ 627
[23][2013] 2 CLJ 395
[24][2018] 1 LNS 1615
[25][2016] 3 CLJ 403.