Case Update: Federal Court Rules on Scope of An International Arbitration under Malaysia’s Arbitration Act 2005

In its recent grounds of judgment dated 31 October 2018, the Federal Court in the Jan De Nul decision clarified the effect of an international arbitration and the applicability of certain provisions of the Arbitration Act 2005 (AA 2005). The Federal Court also overruled the decision in the Court of Appeal AJWA case. The dispute gave rise to two separate appeals, one in relation to section 42 of the AA 2005 and another relating to the setting aside under section 37 of the AA 2005. This decision only deals with the section 42 aspect.

Legal Background of the AA 2005 Provisions

An ‘international arbitration’ is defined under the AA 2005 as an arbitration where, among others, one of the parties to an arbitration agreement has its place of business in any State other than Malaysia.

There is one important consequence of there being a correct classification of an international arbitration, and where the seat of arbitration in Malaysia. Section 3(3) of the AA 2005 provides that for an international arbitration, Part III of the AA 2005 shall not apply unless the parties agree otherwise in writing. Conversely, if the arbitration is classified as a domestic arbitration (being an arbitration which is not an international arbitration), section 3(2) provides that Part III of the AA 2005 shall apply unless the parties agree otherwise in writing.

Part III of the AA 2005 essentially allowed for greater Court intervention of arbitral proceedings. In particular, the most heavily used provision under Part III of the AA 2005 at the time was section 42 of the AA 2005. Section 42 allowed parties to refer to the Court questions of law arising out of an arbitral award. The Court then had powers to confirm the award, vary the award, set aside the award, or to remit the award to the tribunal for reconsideration. The Part III provisions, and in particular section 42 of the AA 2005, were not part of the Model Law regime.

With that brief legal background, we turn to the background facts of the Jan De Nul decision.

Background Facts

Central Malaysian Properties (CMP) was a developer of a project that involved reclaiming a plot of land on the shoreline of Johor Bahru. Tan Sri Vincent Tan controls CMP. CMP awarded the project to a company, Jan De Nul. Jan De Nul was a Malaysian company and a specialist in land reclamation. Jan De Nul’s ultimate holding company is Sofidra, a Luxembourg company.

CMP and Jan De Nul executed the contract in 2010. Sofidra provided a parent company guarantee to guarantee the performance of Jan De Nul’s obligations under the contract. There were delays in CMP paying Jan De Nul for the progress claims. To resolve the dispute, Tan Sri Vincent Tan executed a personal guarantee to guarantee the due performance by CMP of all of CMP’s obligations.

Later on, in November 2010, the reclaimed platform gave way and collapsed into the sea. It resulted in the loss of one life. Jan De Nul received a notice from the Superintending Officer to suspend all reclamation works. In the meantime, there were further disputes on the non-payment by CMP to Jan De Nul. Jan De Nul also demanded for the outstanding payment from Tan Sri Vincent Tan under the personal guarantee.  Jan De Nul terminated the contract, sought for payment Jan De Nul referred the dispute to arbitration.

The Arbitration Proceedings

Initially, the arbitration was between Jan De Nul and Tan Sri Vincent Tan for the non-payment for the work done. Subsquently, CMP and Sofidra were added into the arbitration by way of a submission agreement. This was to allow all the disputes arising out of the contract, parent company guarantee and the personal guarantee to be determined by the arbitral tribunal. CMP had also counterclaimed against Jan De Nul for damages for breach of contract and/or negligence due to the collapse of the reclaimed platform.

In 2015, the arbitral tribunal gave its award. Essentially, it was held that Jan De Nul had validly terminated the Contract. However, Jan De Nul had also breached the contract in causing the collapse of the reclaimed platform. Jan De Nul’s claim was allowed in the sum of approximately RM48 million and CMP’s counterclaim was allowed in the sum of approximately RM51 million. The claims were set off against each other. Jan De Nul and Sofidra were ordered, joint and severally, to pay CMP approximately RM2.7 million.

The Court Setting Aside Proceedings

All parties filed Court applications to challenge the arbitral tribunal’s award. JDN and Sofidra, as well as Tan Sri Vincent Tan and CMP, filed applications under section 42 of the AA 2005 to refer questions of law. In addition, JDN and Sofidra also filed an application under section 37 of the AA 2005 to set aside parts of the final award which allowed CMP’s counterclaim.

JDN and Sofidra raised a preliminary objection that all the applications under section 42 of the AA 2005 should be dismissed. This was because the arbitration was an international arbitration and Part III of the AA 2005 (including section 42) did not apply unless the parties opted in. Sofidra was a foreign party and hence, it was an international arbitration. JDN and Sofidra had filed their own section 42 application without prejudice to their rights to raise such a preliminary objection that it was an international arbitration and hence, section 42 did not apply.

The High Court dismissed the preliminary objection. It held that it was a domestic arbitration. One of the grounds by the High Court was that Sofidra, the foreign party, was only a nominal party to the arbitration.

The Court of Appeal reversed the decision. It held that the arbitration was indeed an international arbitration. Since parties had not opted in to Part III of the AA 2005, section 42 did not apply.

The Federal Court Decision

The essential legal question before the Federal Court was:

“Whether section 42 of the AA 2005 automatically applies to an arbitration governed by the laws of Malaysia notwithstanding that one or more parties to the arbitration may be foreign, as stated in Ajwa for Food Industries Co (MIGOP) v Pacific Inter-Link Sdn Bhd [2013] 2 CLJ 395, CA”

The Federal Court answered this question in the negative.

Counsel for Tan Sri Vincent Tan and CMP heavily relied on the Court of Appeal AJWA decision. In AJWA, the Court of Appeal essentially held at [37] that where Malaysia law was the law governing the arbitration agreement, then section 42 of the AA 2005 could still be applied.

The Federal Court in this case returned back to the very definition of an international arbitration under section 2 of the AA 2005. Here, Sofidra, being an international party, rendered the arbitration an international arbitration.

Further, section 2 of the AA 2005 merely requires a party to have its place of business in any State other than Malaysia. It does not require the party to be a substantive party. The extent of the party’s participation is immaterial in determining whether the arbitration is an international arbitration. In any event, while Sofidra was a nominal claimant in the arbitration because it had no cause of action against CMP and Tan Sri Vincent Tan, Sofidra was certainly a substantive party by reason of its exposure to pay damages under the final award.

The Federal Court was also emphatic in overruling the Court of Appeal approach in the AJWA decision. The Federal Court remarked that the “approach taken by the Court of Appeal in AJWA is unprecedented.” The Federal Court held that the Court of Appeal in AJWA fell into error in disregarding and not giving full effect to the provision of section 2.

Commentary

The Federal Court’s made a careful analysis of the clear definition of an international arbitration. This clarifies this point of law and ensures certainty. It is interesting to note that one of the Federal Court judges in this decision was the same Court of Appeal judge that wrote the grounds of judgment in the AJWA decision. With the benefit of fuller arguments, the anomalous decision of AJWA can now be put to rest.

In the present Malaysian landscape, Part III of the AA 2005 has already seen a big decline. As observed by the Federal Court, in the recent amendment to the AA 2005, section 42 has already been removed. This is a sign of ensuring Malaysia’s closer adherence to the Model Law regime rather than to promote a bespoked mechanism for Court intervention. As far back as 2013, the then KLRCA Arbitration Rules had been revised such that Rule 1 stated that for all arbitrations where the seat of arbitration is Malaysia, sections 41, 42, 43 and 46 of the AA 2005 (all Part III provisions) shall not apply. This was a further move away from Part III of the AA 2005.

For any foreign party arbitrating with the seat in Malaysia, this Federal Court decision provides certainty that Part III would by default not apply. It provides more comfort to a foreign party that they would arbitrate under a framework more closely aligned with the Model Law.

 

 

 

 

2 thoughts on “Case Update: Federal Court Rules on Scope of An International Arbitration under Malaysia’s Arbitration Act 2005

  1. Hon Pan Mak November 8, 2018 / 4:01 pm

    Wow.. Leesh… you’re impressively quick in getting the updates with court judgments. I was just about to alert you to this case as I recall you commented on AJWA a few years back. We just got the grounds late last week and you have already written about it!

    • Lee Shih Lee Shih November 10, 2018 / 7:56 pm

      I check the Kehakiman website quite regularly. So I am always on the look out for new judgments.

Leave a Reply