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The Asia-Pacific Arbitration Review 2020

Malaysia

Malaysian arbitration law is underpinned by the Malaysian Arbitration Act 2005 (the 2005 Act). The 2005 Act, which came into force on 15 March 2006, repealed the Arbitration Act 1952 and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985. The 2005 Act provides a legislative framework in support of international arbitration in line with generally recognised principles of international arbitration law. Initial teething problems arising from the language of the act were addressed by the Arbitration (Amendment) Act 2011 (the 2011 Amendment Act).

In 2018, there were two rounds of amendments to the 2005 Act. In early 2018, the Arbitration (Amendment) Act 2018 came into force (the First 2018 Amendment Act). Its purpose was to facilitate the rebranding of the Kuala Lumpur Regional Centre for Arbitration (KLRCA) to the Asian International Arbitration Centre (AIAC); the rebranding was itself driven by the centre’s increasing recognition as a hub for international dispute resolution. On 8 May 2018, the Arbitration (Amendment) (No. 2) Act 2018 (the Second 2018 Amendment Act) came into force. The Second 2018 Amendment Act updated the 2005 Act to bring it in line with the latest revision of the UNCITRAL Model Law on International Commercial Arbitration 1985 (the Model Law). The Second 2018 Amendment Act also addressed various deficiencies in the 2005 Act that had been identified in the case law.

The jurisprudence of the Malaysian courts has developed in tandem with the progressive attitude of the legislature and is strongly influenced by the general principle of minimal curial intervention. Moreover, the Malaysian courts readily draw on case law from other pro-arbitration jurisdictions, thereby demonstrating a transnational approach and sensitivity to the development of local law on the subject.

The KLRCA has similarly developed progressively. The KLRCA was set up in 1978 by the Asian-African Legal Consultative Organization to provide a neutral venue in the Asia-Pacific region for the arbitration of disputes in relation to trade, commerce and investment. Today, as the newly rebranded AIAC, it hosts and administers domestic and international commercial arbitrations and offers other dispute resolution processes, such as adjudication and mediation. The AIAC is housed in purpose-oriented premises that contain all the trappings expected of a modern venue for international arbitration. The rebranding of the AIAC has a statutory underpinning – section 3(1) of the First 2018 Amendment Act provides that:

[a]ll references to the Kuala Lumpur Regional Centre for Arbitration in any written law or in any instrument, deed, title, document, bond, agreement or working arrangement subsisting immediately before the coming into operation of this Act shall, when this Act comes into operation, be construed as a reference to the Asian International Arbitration Centre (Malaysia).

The AIAC’s rules are comparable to those of other major arbitration institutions. The main set of rules – the AIAC Arbitration Rules – incorporates the UNCITRAL Arbitration Rules. The AIAC has a separate set of rules for expedited arbitrations (termed the Fast Track Arbitration Rules) as well as a set of rules that are specifically designed for the arbitration of disputes arising from commercial transactions premised on Islamic principles (the AIAC i-Arbitration Rules). A central feature of the AIAC i-Arbitration Rules is that they incorporate a reference procedure to a shariah advisory council or shariah expert whenever the arbitral tribunal has to form an opinion on a point related to shariah principles.

The rules were revised in 2018. Key features of the new AIAC Arbitration Rules 2018 are provisions for the joinder of third parties as well as for consolidation and technical review of awards before they are issued. In addition, the AIAC Arbitration Rules 2018 also create a self-contained code in relation to emergency arbitrators. The 2018 AIAC Fast Track Rules, applicable by agreement of the parties, provide for short time limits. The proceedings under the Fast Track Rules are designed to last no longer than 180 days. Under the Fast Track Rules, the arbitral tribunal in principle has only 90 days from the start of the arbitration to conclude the oral hearing and a further 90 days to draft the award.

The 2005 Act

The primary source of law in relation to both international and domestic arbitration in Malaysia is the 2005 Act, as amended by the 2011 Amendment Act and the Second 2018 Amendment Act. As alluded to above, the 2005 Act is modelled on the UNCITRAL Model Law. It also incorporates important articles from the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, to which Malaysia is a signatory. As Malaysia is a common law jurisdiction, the 2005 Act is further supplemented by case law that interprets and applies its provisions. In this regard, the 2005 Act vests the power of judicial intervention in the High Court, which is itself defined under section 2 of the 2005 Act to encompass both the High Court of Malaya and the High Court in Sabah and Sarawak. [1]

Section 8 of the 2005 Act provides the foundation of the approach now taken by Malaysian law and the Malaysian courts to arbitration. It provides that ‘[n]o court shall intervene in matters governed by this act, except where so provided in this act’; thus espousing the Model Law philosophy of providing within the statute itself for all instances of potential court intervention in matters regulated by the statute. [2]

The 2005 Act distinguishes between international and domestic arbitration, with the more ‘interventionist’ sections of the 2005 Act applying only to domestic arbitrations. International arbitration is defined, in general accordance with the Model Law provisions, as an arbitration where:

  • one of the parties has its place of business outside Malaysia;
  • the seat of arbitration is outside Malaysia;
  • the substantial part of the commercial obligations are to be performed outside Malaysia;
  • the subject matter of the dispute is most closely connected to a state outside Malaysia; or
  • the parties have agreed that the subject matter of the arbitration agreement relates to more than one state. [3]

The interventionist regime in the 2005 Act is set out in Part III of the act, which applies by default to domestic arbitrations but not international arbitrations. Parties to a domestic arbitration are free to opt out of the interventionist regime. Likewise, parties to an international arbitration may opt in to the interventionist regime.

The Second 2018 Amendment Act has significantly eroded the differences between the interventionist and non-interventionist regime by repealing sections 41 and 42 of the 2005 Act. Section 41 had permitted a party, with the consent of the other parties to the arbitration proceedings or alternatively the consent of the arbitral tribunal, to apply to the High Court for a determination of a question of law arising in the course of the arbitration, while section 42 had permitted a party to refer a question of law arising out of an award to the High Court. Sections 41 and 42 were provisions applicable to the ‘interventionist’ domestic arbitration regime, which could have been opted in to by parties to an international arbitration. These provisions no longer form part of the 2005 Act. The AIAC has described the change as being motivated by the desire to ‘. . . make Malaysia a safe seat and to put the Act in line with other arbitration acts worldwide . . .’.

Party autonomy features strongly in the 2005 Act. Under the 2005 Act, parties are at liberty to make their own decisions on the seat of the arbitration, [4] the substantive law applicable to the dispute, [5] the number of arbitrators [6] and the procedure for their appointment, [7] the time for challenge of an arbitrator and, subject to the provisions of the 2005 Act, the procedure to be followed by the arbitral tribunal in conducting the proceedings. Section 30(1) of the 2005 Act provides for the arbitral tribunal in an international arbitration to decide the dispute in accordance with the law, as agreed upon by the parties as applicable to the substance of the dispute. In the event that parties to an international arbitration fail to agree on the applicable substantive laws, the arbitral tribunal shall apply the law determined by the conflict of laws rules. [8]

The arbitration agreement and the jurisdiction of the tribunal

Malaysia takes a broad approach to the construction of arbitration agreements. The Fiona Trust single-forum presumption – that ‘rational businessmen are likely to have intended any dispute arising out of the relationship into which they have entered or purported to enter to be decided by the same tribunal’ [9] – represents the law in Malaysia. [10]

The doctrine of competence-competence is also recognised in Malaysia. Section 18(1) of the 2005 Act provides that the arbitral tribunal may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement. [11] The doctrine has been applied by the courts in the cases of Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor, [12] Chut Nyak Isham bin Nyak Ariff v Malaysian Technology Development Corp Sdn Bhd & Ors, [13] and TNB Fuel Services Sdn Bhd v China National Coal Group Corp. [14] Malaysian law also recognises the principle of separability; namely that the arbitration agreement is separate from the main contract in which it may be contained. [15] An arbitration agreement, therefore, will not be invalidated because of, for example, an illegality invalidating the main contract. [16]

Section 10 of the 2005 Act allows a party to apply to the High Court for a stay of legal proceedings if the subject matter of the dispute is subject to an arbitration agreement. The application must be taken out before any other step is taken in the court proceedings. Where the applying party had utilised the court’s process, such as by requesting for an extension of time from the court to file its statement of defence, that would be construed as a step in the proceedings, as seen in Mun Seng Fook v AIG Malaysia Bhd. [17] Section 10 of the 2005 Act makes it mandatory for the High Court to grant a stay unless the arbitration agreement is null and void, inoperative or incapable of being performed.

Moreover, the Malaysian courts recognise the principle that it is for the arbitrators to first decide on questions of jurisdiction, and not the courts. In Press Metal Sarawak v Etiqa Takaful Bhd, [18] the Federal Court specifically approved the following pronouncement of the Canadian Supreme Court in Dell Computer Corporation v Union des Consommateurs: [19]

In a case involving an arbitration agreement, any challenge to the arbitrator’s jurisdiction must be resolved first by the arbitrator in accordance with the competence-competence principle, which has been incorporated into art. 943 CCP. A court should depart from the rule of systematic referral to arbitration only if the challenge to the arbitrator’s jurisdiction is based solely on a question of law. This exception, which is authorized by art. 940.1 CCP, is justified by the courts’ expertise in resolving such questions, by the fact that the court is the forum to which the parties apply first when requesting referral and by the rule that an arbitrator’s decision regarding his or her jurisdiction can be reviewed by a court. If the challenge requires the production and review of factual evidence, the court should normally refer the case to arbitration, as arbitrators have, for this purpose, the same resources and expertise as courts. Where questions of mixed law and fact are concerned, the court must refer the case to arbitration unless the questions of fact require only superficial consideration of the documentary evidence in the record. Before departing from the general rule of referral, the court must be satisfied that the challenge to the arbitrator’s jurisdiction is not a delaying tactic and that it will not unduly impair the conduct of the arbitration proceeding.

The Federal Court also specifically approved the following propositions, taken from the Singapore cases of Dalian Hua Liang Enterprise Group Co Ltd v Louis Dreyfus Asia Pte Ltd [20] and Tjong Very Sumito v Antig Investments: [21]

. . . if it was at least arguable that the matter is the subject of the arbitration agreement, then a stay of proceedings should be ordered.

. . . if the arbitration agreement provides for arbitration of ‘disputes’ or ‘difference’ or ‘controversies’, then the subject matter of the proceedings in question would fall outside the terms of the arbitration agreement if

(a) there was no ‘disputes’ or ‘difference’ or ‘controversy’ as the case may be; or (b) where the alleged dispute is unrelated to the contract which contains the arbitration agreement.

This was echoed in AOS Travel & Tours Sdn Bhd v Asean Bintulu Fertilizer Sdn Bhd: [22]

in the event there is any doubt as to the validity or applicability of an arbitration agreement, the court should lean towards compelling the parties to honour the ‘arbitration agreement’ even if the court is in some doubt about the validity of the arbitration agreement. [I]t is only in the clearest of cases that the court ought to make a ruling on the inapplicability of an arbitration agreement.

Similarly, in the case of Asiagroup Sdn Bhd v PFCE Timur Sdn Bhd, [23] the High Court recognised the statutory power and jurisdiction of arbitrators to rule on their own jurisdiction and affirmed the principle that, even if the court had doubts concerning the existence of the arbitration agreement within a contract, it should lean in favour of granting a stay so that the dispute may be referred to arbitration in order to let the arbitrators first decide whether they had jurisdiction to arbitrate the dispute.

Malaysian law recognises the principle of incorporation by reference: [24]

According to section 9(5) of [the 2005 Act], an arbitration agreement may come into existence by reference . . . the agreement itself need not have an arbitration clause in it as long as the agreement refers to an arbitration clause in another document and the agreement is in writing and the reference incorporates the said clause into the agreement . . .

. . . There is no requirement that the arbitration agreement contained in the document must be explicitly referred to in the reference. The reference need only be to the document and no explicit reference to the arbitration clause contained therein is required.

In TH Heavy Engineering Bhd v Daba Holdings (M) Sdn Bhd (formerly known as Dugwoo (M) Sdn Bhd), [25] after an examination of the existing jurisprudence, the High Court synthesised the general principles. First, while case law is relevant, the determination of whether an arbitration agreement has been incorporated via reference is a matter of construction and turns on the facts of each particular case. Second, while no specific forms or words need be used to incorporate an arbitration agreement into a contract, and the document to be incorporated need not be signed by the parties, there must on the other hand be evidence of a clear intention to submit to arbitration. Third, where the document containing the arbitration agreement is specifically identified in the contract, either directly or indirectly, that is generally sufficient and the document need not be specifically attached to the contract. On the other hand, where a document is only referred to in general, broad and unspecific terms, attaching it to the contract would be prudent, as its absence might point to an absence of evidence of the parties’ intent to arbitrate.

The decision in Thien Seng Chan Sdn Bhd v Teguh Wiramas Sdn Bhd & Anor [26] affirms that the document containing the arbitration clause need not be signed by the parties in order for it to be incorporated into the contract. The High Court also clarified how arbitration agreements are to be construed when a contract contains multi-tiered dispute resolution clauses: where a contract only expressly mentions mediation as a method of dispute resolution, but incorporates an arbitration agreement indirectly by reference to another document, the court will uphold the arbitration agreement: [27]

It is only too obvious that much as parties may want to first try to resolve their disputes through mediation, there may be times when resolution through mediation fail. Whilst hoping for the best, one must be prepared for the worst. The [incorporated arbitration agreement] takes over where mediation is terminated.

In line with the broad approach to the construction of arbitration agreements, under the Second 2018 Amendment Act, the definition of ‘arbitration agreement’ has been expanded so as to encompass agreements that are made or recorded by electronic means.

An area of Malaysian law that has seen some recent development relates to winding-up petitions. In NFC Labuan Shipleasing I Ltd v Semua Chemical Shipping Sdn Bhd, [28] a winding-up petition had been filed on the basis of a debt said to arise out of a charterparty. The respondent to the petition filed an application under section 10 of the 2005 Act to stay the winding up proceedings, on the basis that the debt was disputed and that the charterparty provided for disputes to be resolved by arbitration. The High Court of Kuala Lumpur found that:

  • a winding-up petition is premised on the inability of the debtor to pay the debt of the creditor;
  • the issues to be considered by the court before deciding to grant the order or dismiss the petition would be focused on whether the presumption of insolvency is satisfactorily rebutted and whether there was any bona fide dispute over the debt on substantial grounds;
  • a winding-up petition is not a substantive claim that is contemplated by section 10 of the 2005 Act, but a statutory right that may be invoked and exercised at any time in accordance with the law on winding-up, and cannot be modified or diluted by section 10; and
  • a winding-up petition is not a claim for payment, but a sui generis proceeding with different reliefs and end results from a civil proceeding subject to arbitration, and is therefore not susceptible to a stay pending arbitration;

The High Court however recognised that its power to wind-up was discretionary, and, following the English decision of Salford Estates (No. 2) v Altomart Ltd, [29] considered that if the debt upon which the petition was based was the subject of an arbitration agreement and was disputed, the petition would ‘be dismissed (rather than stayed) unless there is evidence that there is another creditor willing to be substituted as a petitioning creditor’. A case in contrast to this is Goh Nguang Chian v Dynapack Eoss Packaging Sdn Bhd. [30] Here, the High Court of Johor Bahru ordered a stay of winding-up proceedings in favour of arbitration proceedings. The court did not cite the NFC Labuan case or Salford Estates in its judgement; notwithstanding that the winding-up petition in Goh appears to have been based in part on a debt said to have been due and owing. The High Court of Johor Bahru, however, considered that the petitioner had ‘characterised the dispute as being that of a shareholders’ dispute, minority oppression and misrepresentations . . .’, which fell within the ambit of an arbitration clause in a shareholders’ agreement to which the petitioner was considered party. In so doing, the court observed that ‘the staying of [winding-up petitions] on the basis of an arbitration agreement is not unusual’. The court further held that the fact that the remedy of winding-up was not available in arbitration was not ipso facto a ground to render a dispute non-arbitrable. The court concluded that since the shareholder’s dispute underlying the winding-up petition was arbitrable, the stay of winding-up proceedings in favour of arbitration should be granted.

The decision in Goh is a welcome development to the extent that it recognises that shareholders’ disputes are arbitrable. However, in so far as Goh is concerned with the appropriate procedural response to a winding-up application that purportedly engages a dispute falling within the ambit of an arbitration clause, the approach in Goh is difficult to reconcile with the decision in NLC Labuan. It remains to be seen how the higher courts will deal with the issue.

The seat of arbitration

In The Government of India v Petrocon India Limited, [31] the Federal Court was faced with a question regarding the identification of the seat of arbitration in circumstances where the law applicable to the container contract was Indian law, but where the contract specified the ‘venue’ of the arbitration as Kuala Lumpur, while at the same time expressly providing that the ‘arbitration agreement’ was to be ‘governed by’ the ‘laws of England’. The Court of Appeal had concluded that the juridical seat was London, because English law was chosen as the law of the arbitration.

The Federal Court disagreed and held that ‘. . . the seat of arbitration will determine the curial law that will govern the arbitration proceeding’, and drew on English case law to come to the conclusion that ‘. . . there is a strong presumption that the place of arbitration named in the agreement will constitute the juridical seat.’ [32]

The Federal Court expressly recognised that there was a distinction between the seat of arbitration for the purposes of identifying the curial law and the physical or geographical place where the arbitration was held, considering that ‘[i]n the case of place of arbitration it can be shifted from place to place without affecting the legal seat of the arbitration’. The court, however, held that the word ‘venue’ in the clause meant the juridical seat, reasoning that if it had merely been a reference to the geographical or physical seat, it would not have been necessary to have it inserted in the agreement; and that in any event the word ‘venue’ and ‘seat’ are often used interchangeably. Ultimately, however, the Federal Court did not overturn the decision of the Court of Appeal, as it accepted the argument of the respondent that, on the facts of the case, the parties had subsequently expressly agreed to change the seat of the arbitration to London.

The appointment of arbitrators

Sections 12 to 17 of the 2005 Act governs the appointment of arbitrators. Section 12(2) of the 2005 Act provides that, in the event, that the parties to the arbitral proceedings fail to determine the number of arbitrators, the arbitral tribunal shall consist of three arbitrators in the case of an international arbitration and a single arbitrator in the case of a domestic arbitration.

The default procedures for the appointment of arbitrators are provided for under section 13 of the 2005 Act. Parties are, however, free to determine the procedures that are to be adopted with regard to the appointment of arbitrators. Arbitrators are expected to disclose circumstances that may result in a conflict of interest, as provided in section 14 of the 2005 Act. A recent amendment in the Second 2018 Amendment Act is that the definition of an arbitral tribunal now extends to an ‘emergency arbitrator’, thereby allowing for the recognition of decisions of emergency arbitrators.

In the event that the parties are unable to agree on the appointment of arbitrators, either party may apply to the director of the AIAC to appoint the arbitrators. In the event that the director similarly fails to appoint the arbitrators, either party may then apply to the High Court for assistance in the appointments.

In the case of Sebiro Holdings Sdn Bhd v Bhag Singh, [33] the Court of Appeal was confronted with the question of whether the KLRCA director’s appointment of an arbitrator was susceptible to challenge. Before the High Court, the appellant had sought, but failed to terminate, the appointment of the respondent as arbitrator on the grounds that he lacked geographical knowledge of Sarawak, which was the place of performance of the underlying contract. In dismissing its appeal, the Court of Appeal noted that ‘the power exercised by the director of the KLRCA under subsections 13(4) and (5) of [the 2005 Act] is an administrative power’ and therefore ‘[his function] is not a judicial function where he has to afford the right to be heard to the parties before an arbitrator(s) is appointed’. [34] Following this, it was held that: [35]

The Court cannot interpose and interdict the appointment of an arbitrator whom the parties have agreed to be appointed by the named appointing authority under the terms of the Contract, except in cases where it is proved that there are circumstances which give rise to justifiable doubt as the [arbitrator’s] impartiality or independence or that the [arbitrator] did not possess the qualification agreed to by the parties.

On the facts, since there was no pre-agreement between the parties as to the arbitrator’s qualification, the arbitrator could not be disqualified on the grounds argued by the appellant.

Representation of parties at arbitration

In the Second 2018 Amendment Act, amendments were also made to allow for broader rights of representation in arbitrations under the 2005 Act. Specifically, section 3A of the 2005 Act has been amended to allow for a party to arbitral proceedings to be ‘represented in the proceedings by any representative appointed by the party.’ This amendment nullifies the effect of the decision in Samsuri bin Baharuddin & Ors v Mohamed Azahari bin Matiasin and another appeal, [36] where the Federal Court had held that the effect of section 8(1) of the Advocates Ordinance 1953, read with section 2(1)(a) and (b) of that statute, was to prohibit foreign lawyers who do not have the right to practise law in Sabah from representing parties to arbitration proceedings in Sabah.

Interim relief

The Second 2018 Amendment Act significantly amended the provisions of the 2005 Act on interim measures to bring the legislation fully in line with the provisions of the UNCITRAL Model Law 2006.

The new provisions introduced through the Second 2018 Amendment Act also permit the tribunal to grant interim relief on an ex parte basis. Thus, 19B(1) of the 2005 Act now provides that:

Unless otherwise agreed by the parties, a party may, without notice to any other party, make a request for an interim measure together with an application for a preliminary order directing a party not to frustrate the purpose of the interim measure requested.

The tribunal may grant such a preliminary order provided that it ‘considers that prior disclosure of the request for the interim measure to the party against whom it is directed risks frustrating the purpose of the measure’.

However, a fundamental difference remains between inter partes interim measures and preliminary orders. Section 19C(6) of the 2005 Act makes clear that a preliminary order ‘shall be binding on the parties but shall not be the subject to any enforcement by the High Court . . .’ and that it ‘shall not constitute an award’. A party may therefore still wish to avail itself of interim relief from the court.

In this regard, the 2005 Act permits both the arbitral tribunal and the courts to grant interim relief. Thus, section 11 of the 2005 Act expressly confers powers on the High Court to make interim orders in respect of the matters set out in section 11(1)(a)–(e) of the 2005 Act, which include orders to:

  • take action that would prevent, or refrain from taking action that is likely to cause, current or imminent harm or prejudice to the arbitral process; and
  • provide a means of preserving assets out of which a subsequent award may be satisfied.

Section 11(3) of the 2005 Act expressly provides that such powers extend to international arbitrations where the seat of arbitration is not in Malaysia.

The scope of the court’s powers under section 11 of the 2005 Act had previously been considered in Telekom Malaysia Bhd v Obnet Sdn Bhd [37] where the plaintiff sought discovery of confidential documents during the course of arbitration, but was refused by the arbitrator. The plaintiff then applied to the court for discovery of those documents under section 11 of the 2005 Act, which was resisted by the respondent on the grounds that:

  • the court was bound by the arbitrator’s finding of fact that discovery ought not to be allowed as grave injustice would be caused to the respondent;
  • section 11 of the 2005 Act only provided for interim measures, and discovery was a permanent measure as the document could not be undisclosed once it was disclosed; and
  • the court should not interfere with the arbitrator’s procedure.

Firstly, the court took the view that the proper test that the arbitrator should have applied was whether the document was necessary for the fair disposal of the case. The obligation of confidentiality was a mere consideration, and would not necessarily be determinative of the application. Secondly, the court held that even though section 11 of the 2005 Act refers to interim measures, some of the specific orders that the court is empowered to make are not interim in nature. The court considered that the legislature must have intended that the court should be empowered to make such orders whether or not their effect would be interim in nature or otherwise. Thirdly, the court agreed with the general position in law that an arbitrator is master of his own procedure, but emphasised that there were exceptions to this general principle, one of which was section 11 of the 2005 Act. Thus, the High Court dismissed the respondent’s arguments and ordered discovery. In so doing, the High Court seemed to have considered that the statutory framework permitted the court to reconsider an issue that had already been the subject of a determination by the tribunal acting within its powers

On appeal, the Court of Appeal roundly disagreed with the High Court on this point (Obnet Sdn Bhd v Telekom Malaysia Bhd): [38]

We are constrained to observe that [the High Court Judge] . . . treated the discovery application as if it was an appeal. With respect, the learned Judge was bound by the learned Arbitrator’s finding that the disclosure of the Settlement Agreement ought not to be allowed as such disclosure would be prejudicial to the State Government. Whatever the merits of such a finding, the High Court had no jurisdiction to interfere . . . It is pertinent to observe that the policy behind [the 2005 Act] is one of minimal court intervention . . . In keeping with this policy, section 11 of [the 2005 Act] must be read as intending to support the arbitral process and not, as the learned Judge here appears to have done, to exercise some kind of supervisory role over arbitration proceedings . . . It must then follow that in principle s. 11 of [the 2005 Act] is designed to support and facilitate the arbitral process and not to displace it. The approach, in the context of s. 11, must be not to encroach on the procedural powers of the arbitrators but to reinforce them . . . They are certainly not there for the High Court to exert some supervisory function over the arbitral process. In the circumstances, the learned Judge ought to have declined to order discovery.

The legislature has also reacted to the High Court decision. Following the Second 2018 Amendment Act, section 19J(3) of the 2005 Act now expressly provides that:

[w]here a party applies to the High Court for any interim measure and an arbitral tribunal has already ruled on any matter which is relevant to the application, the High Court shall treat any findings of fact made in the course of such ruling by the arbitral tribunal as conclusive for the purposes of the application.’

Confidentiality in arbitration proceedings

The Second 2018 Amendment Act introduced sections 41A and 41B in to the 2005 Act. Section 41A provides that, subject to certain exceptions, the parties are prohibited from publishing, disclosing or communicating any information relating to the arbitral proceedings or an award made in those proceedings. Section 41B provides for proceedings under the 2005 Act to be heard otherwise than in open court.

Admiralty proceedings

The 2005 Act had sought to accommodate the maritime industry by expanding the scope of the high courts’ powers to allow the arrest of ships or vessels for security. Under the 2011 Amendment Act, special provisions were introduced in relation to admiralty proceedings. These provisions permit the court to order the retention of any vessel arrested or any bail or other security given, pending the determination of disputes in admiralty arbitrations, to satisfy any award that may be given in the arbitration proceedings. The 2005 Act also provides that, where a respondent to admiralty proceedings commenced against it in the High Court applies for a stay pursuant to subsection 10 of the 2005 Act, the court granting the stay may order the continued retention of any property, as well as make the stay of the court proceedings conditional upon equivalent security being provided to meet the claim: Section 10(2A) to (2C) of the 2005 Act.

Awards

Section 2(1) of the 2005 Act defines an award as a decision of the arbitral tribunal on the substance of the dispute and this includes any final, interim or partial award and any award on costs or interest. Section 36(1) of the 2005 Act further provides that all awards are final and binding. Pursuant to section 33 of the 2005 Act, an award should state the reasons upon which the award is based unless the parties have otherwise agreed or the award is on agreed terms. Section 35 of the 2005 Act allows the tribunal to correct any clerical error, accidental slip or omission in an award; it also permits the tribunal to give an interpretation of a specific point or part of the award upon request by a party.

Prior to the Second 2018 Amendment Act, one deficiency in the 2005 Act that was identified by the Federal Court was the tribunal’s lack of power to award interest for the pre-award period. In Far East Holdings Bhd & Anor v Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals, [39] the Federal Court held at that under section 33(6) of the 2005 Act, an arbitrator can only award post-award interest, and not pre-award interest, unless specifically provided for in the arbitration agreement. Similarly, in Kejuruteraan Bintai Kindenko Sdn Bhd v Serdang Baru Properties Sdn Bhd and another originating summons, [40] the High Court held that even though the claims and counterclaims of the respective parties had dealt with the issue of pre-award interest, the effect of section 33(6) of the 2005 Act was to preclude the issue of pre-award interest being submitted to arbitration. However, the High Court recognised that the saving provision in section 39(3) operated to preserve the rest of the award. [41]

This lacuna in the 2005 Act has now been cured by the Second 2018 Amendment Act. Following the amendments, section 33(6) now provides that the arbitral tribunal ‘. . .may, in the arbitral proceedings before it, award simple or compound interest from such date, at such rate and with such rest as the arbitral tribunal considers appropriate. . .’.

Section 37 of the 2005 Act addresses the setting aside of the award where the seat of arbitration is Malayisa. Section 37(4) of the 2005 Act provides, inter alia, that an application for setting aside of an award may not be made after 90 days from the date that the award was issued. As was established in Triumph City Development Sdn Bhd v Kerajaan Negeri Selangor Darul Ehsan, [42] this is a strict limit, and the court does not have an inherent jurisdiction to set aside an award even if an application is made out of time: [43]

. . . If the parties are allowed to go to court to challenge arbitration awards even if it is made out of time, then there is no point for the parties to have undergone arbitration process . . . It defeats the very purpose of having arbitration as the chosen mode of dispute resolution contractually agreed to by the parties. This is the reason why the court should be strict in entertaining this kind of application.

Sections 38 and 39 of the 2005 Act address the recognition and enforcement of awards. While section 38 of the 2005 Act sets out the procedure for recognising and enforcing awards, section 39 of the 2005 Act sets out the grounds on which the recognition or enforcement of an award will be refused. The court, when deciding whether or not to recognise and enforce the award under section 38(1), will have to consider, apart from the formal requirements therein, whether any of the grounds under section 39(1) of the Arbitration Act apply. After having satisfied itself that the requirements of section 38(1) have been complied with and there are no grounds under section 39(1) for refusing to recognise and enforce the award, it is then mandatory for the court to recognise and enforce the award: Tune Talk Sdn Bhd v Padda Gurtaj Singh. [44] Furthermore, where a setting-aside application had already been dismissed under section 37, and the award is enforced under section 39, the losing party cannot relitigate the issues that had already been decided in the seting-aside action to resist enforcement as it was in Mewaholeo Industries Sdn Bhd v Awan Timur Palm Oil Mills Resources (Johor) Sdn Bhd. [45]

In the 2005 Act, the grounds for setting aside an award, and for refusing recognition or enforcement, are drawn from article V of the New York Convention. A party seeking to set aside or seeking to resist recognition or enforcement must show that:

  • a party to the arbitration agreement was under an incapacity;
  • 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 the state in which the award was made;
  • 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;
  • the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration;
  • the award contains decisions on matters beyond the scope of the submission to arbitration;
  • 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 the 2005 Act from which the parties cannot derogate), or, failing such agreement, was not in accordance with the 2005 Act; or
  • the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made.

An award may also be set aside or have its recognition or enforcement refused where the award is in conflict with the public policy of Malaysia; or on the ground that the subject matter of the dispute is not arbitrable under Malaysian law. In this regard, section 4(1) of the 2005 Act (as amended in 2018) expressly provides that:

any dispute that the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy or the subject matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia.

Various cases illustrate that the prevailing judicial philosophy is to take an extremely restrictive approach to permitting setting aside applications. In Ajwa for Food Industries Co (Migop), Egypt v Pacific Inter-link Sdn Bhd & another appeal, the Court of Appeal explained that ‘the court should be slow in interfering with an arbitral award. The court should be restrained from interference unless it is a case of patent injustice which the law permits in clear terms to intervene.’ [46]

As regards the meaning of the term ‘public policy’, it is defined in section 37(2) of the 2005 Act as including situations where ‘the making of the award was induced or affected by fraud or corruption’, or where a breach of natural justice had occurred during the arbitral proceedings or in the making of the arbitral award. The courts have been clear that the ground is extremely narrow and to be read restrictively. As stated by Lee Swee Seng J in Asean Bintulu Fertilizer Sdn Bhd v Wekajaya Sdn Bhd, [47] ‘[a]n error of law or fact does not engage the public policy of Malaysia. . .’. [48] In this regard, it is clear that the Malaysian courts do not equate public policy in this context with a wide conception of the public interest; rather, the courts have applied the following test: [49]

Although the concept of public policy of the State is not defined in the Act or the model law, the general consensus of judicial and expert opinion is that public policy under the Act encompasses a narrow scope. In our view, it should only operate in instances where the upholding of an arbitral award would ‘shock the conscience’ . . . or is ‘clearly injurious to the public good or . . . wholly offensive to the ordinary reasonable and fully informed member of the public’ . . . or where it violates the forum’s most basic notion of morality and justice. . .. This would be consistent with the concept of public policy that can be ascertained from the preparatory materials to the Model Law. [50]

The law on setting aside awards has seen recent development.

A case in point is Sime Darby Property Berhad v Garden Bay Sdn Bhd. [51] The High Court was faced with an application to set aside an arbitral award. The dispute concerned a landscaping and turfing project. The claimant in the arbitration was the contractor for the project, while the respondent was the employer. The tribunal had found the claimant to be liable for rectification works instructed by the contract administrator, but then held that the parties had, by conduct, accepted the retention sum as a mode to allocate funds for rectification works and sought to limit the amount recoverable by the employer to that amount retained. This, however, was not the position taken by either party.

The court set aside the award and held that ‘. . . if the arbitrator had wanted to rely on her knowledge of what she understood to be the usual practice in construction contracts, then she should inform the parties about it and invite them to challenge such an understanding of usual practice’. [52] The court, however, pointed out that this was not done, and that the arbitrator had thus decided an ‘issue not at play and not pleaded and in that pejorative sense, an “invented issue” and thus was in breach of natural justice in not allowing the parties to be heard on this new issue’. [53] Of significance is the High Court’s view as to the test to be applied where there had been a breach of natural justice. The High Court considered that ‘[a]ny breach of natural justice not in the manner of a technical or inconsequential breach would be sufficient for the court to intervene under section 37(1)(b)(ii) read with section 37(2)(b) application to set aside’. [54]

However, the Court of Appeal (in Garden Bay Sdn Bhd v Sime Darby Property Bhd) [55] subsequently allowed an appeal against the High Court’s decision. The Court of Appeal placed emphasis on section 37(6) of the 2005 Act, which provides the High Court with the power to ‘. . .adjourn the proceedings . . . to allow the arbitral tribunal an opportunity to resume the arbitral proceedings or to take such action as in the arbitral tribunal’s opinion will eliminate the grounds for setting aside’. The Court of Appeal considered that the effect of this sub-section, read in light of the other provisions of the 2005 Act, entailed that it was incumbent on a party applying to set aside an award to simultaneously request the court to consider whether the award should be remitted to the arbitral tribunal:

. . .it is not the court’s function to set aside the award under section 37 . . . without giving an opportunity to the arbitral tribunal to deliver an enforceable award. Any parties who make an application under section 37 or section 42 without seeking appropriate direction pursuant to section 37(6), must be seen to be an abuse of process of court and must be dismissed. . .

The failure of the applicant to apply for a remission to the tribunal under section 37(6) of the 2005 Act was, in the view of the Court of Appeal, fatal to its case to set aside the award.

The decision is remarkable. It is founded in a robust conception of the statutory philosophy of judicial non-interference and the unique nature of the Malaysian statutory framework, and, as far as the authors can tell, has no parallel in United Kingdom, Hong Kong or Singapore jurisprudence. While jurisdictions such as Singapore recognise the power of the court hearing a setting-aside application to suspend setting-aside proceedings in order for the tribunal to be given the opportunity to eliminate the grounds advanced in support of the application (see, for example, JVL Agro Industries v Agritrade International Pte Ltd), [56] it has never been suggested that it is mandatory for the applicant to move the court for such a suspension. Parties seeking to set aside an arbitral award under the 2005 Act ought to be very cautious in making an application to set aside, without a simultaneous application for the court to direct the tribunal to cure the matter giving rise to the complaint; indeed, the Court of Appeal went so far as to suggest that a failure to couple a setting-aside application with a section 37(6) application could constitute an abuse of process. It remains to be seen whether the decision will be endorsed by the Federal Court. However, two subsequent Court of Appeal decisions have thrown doubt on the ambit of the decision in Garden Bay, as discussed below.

In Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd, [57] the arbitrator had awarded a margin for loss of profit at 10 per cent, reasoning that ‘in Malaysian construction industry . . . most contractors would include a margin of between 10–15 per cent’ for profit and attendance. The respondent argued before the Court of Appeal that this rate of 10 per cent had been arrived at based on extraneous evidence, with a factual basis that was not tendered or submitted by the parties. It was further argued that both parties were not given a chance to address the arbitrator on the same extraneous evidence and that this had caused prejudice to the parties. The Court of Appeal agreed with the respondent, finding that, upon a perusal of all the evidence and submissions of parties filed before the arbitrator, this rate of profit and attendance was ‘not supported by evidence, not contended by any party, neither [was it] raised in their submissions’. This sufficed to set aside the award under section 37 of the 2005 Act. The Court of Appeal further considered that, while it was cognisant of its power under section 37(6) to remit the matter back to the arbitrator, it declined to do so due to ‘clear errors committed by the learned presiding judge’ and instead exercised its discretion to set aside the award.

Likewise, in Sigur Ros Sdn Bhd v Master Mulia Sdn Bhd. [58] The arbitrator had relied on extraneous evidence in coming to its decision and had not allowed parties to deal with or respond to this extraneous evidence. The High Court found that this violated the rules of natural justice. However, the High Court declined to exercise its discretion to set aside the award, as the appellant had not been prejudiced by the breach. On appeal, the Court of Appeal allowed the appeal and set aside the award. The Court of Appeal held that the appellant need not show prejudice for the award to be set aside. No such requirement existed in the 2005 Act. While such a requirement may exist in other jurisdictions, such as Singapore or the United Kingdom, the court considered that it could not import into the Malaysian arbitration regime a principle that was not contemplated by the 2005 Act. The Court of Appeal did, however, observe that in considering whether discretion should be exercised to set aside an award, there had to be an evaluation of relevant factors such as the seriousness, magnitude or materiality of the breach, its nature and its impact, whether the breach would have any effect on the outcome of the arbitration, the costs of a rehearing and whether there was any delay in raising the complaint. The Court of Appeal in Sigur Ros further observed that while section 37(6) provided for the matter to be remitted back to the arbitral tribunal, this option could only be exercised at either party’s behest and not on the court’s own invocation. Given that neither party had made such a request, the court decided that it had no power to remit the matter to the arbitrator and accordingly set aside the award.

Another significant case is Awan Timur Palm Oil Mills Resources (Johor) Sdn Bhd v Mewaholeo Industries Sdn Bhd, [59] where the Court of Appeal declined to set aside an award for an alleged breach of natural justice. There, the dispute was referred to arbitration under the Palm Oil Refiners Association of Malaysia (PORAM). Under the PORAM Rules, an arbitration must commence within 120 days after the expiry of the contract shipment period or the bill of lading, whichever was later. The applicant alleged that the tribunal had failed to adhere to the 120-day period for the commencement of the arbitration, thereby breaching the rules of natural justice. The High Court of Johor Bahru declined to set aside the award. The court observed that the tribunal had allowed an extension of time under the PORAM Rules in the exercise of its own discretion. The applicant had not argued before the court whether such an extension was in excess of the tribunal’s jurisdiction or challenged the proper exercise of such discretion. In light of this, the court found that the tribunal had not offended the rules of natural justice.

In Intraline Resources Sdn Bhd v Exxonmobil Exploration and Production Malaysia Inc, [60] the High Court commented that the mechanism of section 37 of the 2005 Act was not to be abused by applicants and reiterated that the threshold for judicial intervention under section 37 of the 2005 Act was high: [61]

. . .In order to uphold and respect party autonomy the Courts can only intervene in limited circumstances as defined in the statute, focusing on a fair process and on the right of the parties to the arbitration to a decision that is within the true ambit of their consent to have their dispute arbitrated, and plainly do not extend to the realm of vindicating the merits or correctness of the decisions of the arbitral tribunal. Courts cannot entertain setting aside applications which are in truth a manifestation of the desire of the regretful losing party in arbitration to be given another opportunity to argue the merits of its case.

It is also clear that the courts take a pragmatic approach to such applications and will not be strung up by technicalities. This is illustrated by the decision in Tridant Engineering (M) Sdn Bhd v Ssangyong Engineering and Construction Co Ltd. [62]

This was an appeal against a High Court decision to the effect that an award contained a decision on matters beyond the scope of the submission to arbitration. The respondent was the main contractor for a development in Johor. The appellant was a nominated subcontractor, who entered into two contracts with the respondent contractor, one for the installation of electrical services, and the other for extra-low voltage installation works. The dispute in the arbitration concerned a claim by the appellant for sums said to be due and owing. The respondent’s position was that it was entitled to refuse payment on the basis of a ‘pay when paid’ clause in the contracts and that, in any event, the appellant’s claim was time-barred. The appellant’s position was that a reasonable time to pay had lapsed and hence the respondent was liable to pay. Regarding the limitation issue, the appellant’s position was that time only started to run from the date reasonable steps had been taken by the respondent to be paid by the employer.

The arbitrator decided that the respondent’s liability to pay was not contingent on the receipt of the sum from the employer. On the limitation issue, the arbitrator decided that there had been an acknowledgment of debt in a proof of debt filed with an insolvent entity who had an interest in the project, and that this resulted in a postponement of the limitation period pursuant to sections 26 and 27 of the Limitation Act 1953 (the Limitation Act).

The High Court decided that this latter aspect of the arbitrator’s decision fell outside the scope of the reference to arbitration. It is noteworthy, in this regard, that the appellant had not placed any reliance on sections 26 and 27 of the Limitation Act in its pleadings.

The Court of Appeal reversed the decision of the High Court and noted that, although the relevant sections of the Limitation Act were not pleaded, the arbitrator had invited full submissions on the issue. Moreover, there was no evidence that the respondent had protested against the arbitrator’s introduction of the issue of postponement of the limitation period. Similarly, the respondent had not sought to introduce any further evidence.

The Court of Appeal considered, in this context, that the failure to plead was not fatal to the respondent’s claims. There had been no breach of the rules of natural justice. Moreover, the Court of Appeal took an extremely pragmatic approach to the question of whether the issue had been sufficiently engaged on the pleadings:

[32] . . .even though sections 26 and 27 of the Limitation Act 1953 were not formally pleaded, the pleadings as they stood were adequate to put the Respondent on notice the issue of postponement of the limitation period. It was undisputed that the defence of the Respondent in the alternative was that the Appellant’s claim was time barred by virtue of the Limitation Act and once that issue of limitation was put on the table so to speak, the Appellant was fully entitled to avail of any means to rebut the defence of limitation.

The Court of Appeal in this context endorsed the following proposition, drawn from the Singapore decision in PT Prima International Development v Kempinski Hotels SA: [63]

. . .any new fact or change in the law arising after a submission to arbitration which is ancillary to the dispute submitted for arbitration and which is known to all the parties to the arbitration is part of that dispute and need not be specifically pleaded.

Conclusion

Malaysia continues its growth as a centre for arbitration. The 2005 Act provides a coherent modern legislative framework in line with international norms and best practices. As it stands, Malaysia has all the components in place to take off as a centre for international arbitration. Recent decisions of the country’s domestic courts underscore the fact that the Malaysian judiciary is now distinctly pro-arbitration.

Given the current arbitral landscape and the progressive and innovative approach taken by the AIAC in promoting Malaysia as a cost-efficient centre for dispute resolution, the country is poised to tap into the significant growth of international arbitration in the Association of Southeast Asian Nations and Asia-Pacific region. The right foundations are in place, and the future remains bright.


Notes

[1] Section 2 of the 2005 Act.

[2] Paragraph 17 of the Explanatory Note by the UNCITRAL Secretariat on the 1985 Model Law on International Commercial Arbitration.

[3] Section 2 of the 2005 Act.

[4] Section 22(1) of the 2005 Act.

[5] Section 30(2) of the 2005 Act.

[6] Section 12(1) of the 2005 Act.

[7] Section 13(2) of the 2005 Act.

[8] Section 30(4) of the 2005 Act.

[9] Fiona Trust & Holding Corporation and Others v Privalov and Others [2007] 4 All ER 951, at 957.

[10] Press Metal Sarawak v Etiqa Takaful Bhd [2016] MLJU 404, KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd [2013] 1 CLJ 993. See also PLB-KH Bina Sdn Bhd v Hunza Trading Sdn Bhd [2014] 1 LNS 1074.

[11] Section 18 of the 2005 Act also provides for the procedures and time limits for raising objections to the arbitral tribunal’s jurisdiction. It also provides for appeal to court (which shall have the final say) in regard to the arbitral tribunal’s ruling on its jurisdiction.

[12] [2008] 1 MLJ 233.

[13] [2009] 9 CLJ 32.

[14] [2013] 1 LNS 288.

[15] Government of India v Petrocon India Limited [2016] MLJU 233.

[16] Arul Balasingam v Ampang Puteri Specialist Hospital Sdn Bhd (formerly known as Puteri Specialist Hospital Sdn Bhd) [2012] 6 MLJ 104 at 110I-111A.

[17] [2018] MLJU 310.

[18] [2016] MLJU 404.

[19] [2007] SCJ No. 34.

[20] [2005] 4 SLR 646.

[21] [2009] 4 SLR 732.

[22] [2018] MLJU 1814.

[23] [2017] MLJU 515.

[24] Cooperative Rabobank UA (Singapore Branch) v Misc Bhd & Anor [2017] MLJU 2076, at [14]-[19].

[25] [2018] 7 MLJ 1.

[26] [2017] MLJU 1117.

[27] Ibid, at [44].

[28] [2017] MLJU 900.

[29] [2014] EWCA Civ 1575.

[30] [2018] MLJU 885.

[31] [2016] MLJU 233.

[32] Ibid, at [35].

[33] [2015] 4 CLJ 409.

[34] Ibid, at [17].

[35] Ibid, at [21].

[36] [2017] 2 MLJ 141.

[37] [2017] MLJU 1484.

[38] [2018] MLJU 1400.

[39] [2018] 1 MLJ 1.

[40] [2017] MLJU 1332.

[41] Ibid, at [42].

[42] [2017] MLJU 1518.

[43] Ibid, at [4]-[5].

[44] [2019] MLJU 67.

[45] [2018] MLJU 2024.

[46] [2013] 2 CLJ 395, at [13].

[47] [2016] MLJU 354.

[48] Ibid, at [44].

[49] Kelana Erat Sdn Bhd v Niche Properties Sdn Bhd [2012] 5 MLJ 809.

[50] Taken from PT Asuransi Jasa Indonesia (Persero) v Dexia Bank SA [2007] 1 SLR(R) 597, at [59] (internal citations omitted).

[51] [2017] MLJU 145.

[52] Ibid, at [42].

[53] Ibid, at [39].

[54] Ibid, at [25].

[55] [2017] MLJU 1998.

[56] [2016] 4 SLR 768.

[57] [2018] MLJU 968.

[58] [2018] 3 MLJ 608.

[59] [2018] MLJU 1343.

[60] [2017] MLJU 1299.

[61] Ibid, at [90].

[62] [2016] MLJU 5.

[63] [2012] SGCA 35.