The Court of Appeal in the Ajwa for Food Industries appeal (in its as-yet unreported grounds of judgment) set out Malaysia’s continued pro-arbitration stance under the Arbitration Act 2005 (“Act”) and of the very narrow circumstances justifying the Court’s setting aside of an arbitral award under section 37 of the Act.

Narrow Circumstances in Allowing for Setting Aside

In the Grounds of Judgment dated 16 May 2011, Ramly Ali JCA held the following:

Section 37 of the Arbitration Act 2005: setting – aside of arbitral award

13. Section 37(1) of the Arbitration Act 2005 provides for the various grounds on which an arbitral award may be set aside. The onus is on the party making the application to provide proof. The court discretion in setting aside arbitral award is now limited to the narrowly defined circumstances in line with the modern international arbitral practice. The effect of the present sections 8, 9, 37 and 42 of the Arbitration Act 2005 is 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. Once parties have agreed to arbitration they must be prepared to be bound by the decision of the arbitrator and refrain from approaching the court to set it aside. Constant interference of the court as was the case in the past will defeat the spirit of the Arbitration Act 2005 which is for all intent and purpose to promote one-stop adjudication in line with the international practice (see: Taman Bandar Baru Masai v. Dinding Corporation Sdn Bhd [2010] 5 CLJ 83; and Lesotho Highland Development Authority v. Impregilo Spa [2005] UKHL 43).

While there is a suggestion that “patent injustice” could possibly form a ground for intereference, it would have been preferable for the Court of Appeal to emphasise that the grounds for setting aside any arbitral award must be limited to only the narrowly defined circumstances set out in section 37 of the Act, as this would be in line with the Model Law.

Troubling Interpretation of Section 42 of the Act

On the other hand, the other aspect of this case concerned the Court of Appeal’s troubling interpretation of section 42 of the Act. The Appellant raised a challenge to the jurisdiction of the arbitral tribunal as the Appellant had contended that there was no arbitration agreement in the first place. Therefore, the Appellant wanted to refer a question of law on the existence of such an agreement to the Court under section 42 of the Act. However, this arbitration fell within the definition of an international arbitration under the Act since one of the parties was from Egypt. Therefore, section 3 of the Act clearly states that Part III of the Act (under which section 42 falls) shall not apply unless the parties agree in writing (there was no such agreement). A simple application of the clear wording of section 3 of the Act should have been applied.

The Court of Appeal however was swayed by the argument that it could not have been Parliamentary intent to exclude the ability under section 42 of the Act to refer questions of law to the Court on a fundamental question such as jurisdiction. With respect, it is submitted that this rationale is flawed. Aside from the clear Parliamentary intent in section 3 of the Act (that Part III and therefore section 42 of the Act will not apply in this case), there are already sufficient safeguards in the Act to deal with questions of jurisdiction of the arbitral tribunal. Section 18 of the Act, following the Model Law, allows the arbitral tribunal to decide on its own competence and the jurisdiction of the arbitration. There is an appeal mechanism built in to section 18 allowing an aggrieved party to appeal against such a decision of the tribunal if the tribunal does rule that it has jurisdiction. Further, section 37 of the Act allowing for a setting aside of the award would also allow for a challenge on jurisdiction and similarly, section 39 of the Act in setting out grounds of opposing enforcement also allows for a challenge on jurisdiction.

The Astro Group had succeeded in the Singapore High Court in enforcing the arbitral awards it had obtained against the Lippo Group. This decision has been closely watched not just by the Singapore legal circle but the general international arbitration community as well. The Grounds of Judgment have just been published and I set out below a summary of the dispute and then highlight the significance of some of the legal issues.

The Facts and Brief Legal Background

The Astro Group of companies (eight companies) had initiated arbitration proceedings against the Lippo Group of companies (three companies) in an arbitration in Singapore involving a dispute arising from the failed joint venture between the parties. The Astro Group had succeeded in obtaining five arbitral awards against the Lippo Group, totalling close to US$300 million. The Astro Group had then applied to enforce these awards in Singapore. The Singapore International Arbitration Act closely follows the UNCITRAL Model Law on International Commercial Arbitration (“the Model Law”), a legal framework under the New York Convention which has been adopted by more than 140 countries (including Malaysia). The one key advantage of adopting the Model Law (in that a country is a party to the New York Convention) is that an arbitral award made in any Convention country can be enforced as a Court Judgment in any other Convention country.

The Model Law framework sets out two different methods of ‘challenging’ an arbitral award. The first method of challenge is through an application to set aside the arbitral award within 90 days of the date of the award (equivalent to section 37 of Malaysia’s Arbitration Act 2005). The second method is that when the award is being enforced in any country, the Model Law lists out the specific grounds in which the respondent can rely on to oppose the enforcement (equivalent to section 39 of Malaysia’s Act). This dual mechanism was described as a ‘double control’ by the Counsel for the Lippo Group. However, in the Singapore context, I will deal with below on how the Singapore regime departs from this dual mechanism.

Further, the Model Law framework allows for challenges to the jurisdiction of the arbitral tribunal to be appealed to the Court within a set time frame (equivalent to section 18(8) of Malaysia’s Act). So for instance, issues on the validity of the arbitration agreement or whether the parties brought in to the arbitration are proper parties to the arbitration agreement are questions relating to the jurisdiction of the arbitral tribunal which can be determined firstly by the tribunal, and if dissatisfied with the decision, any party may appeal to the Court.

Under Singapore law, the Court can grant leave to enforce the award without the presence of the respondent (i.e. on an ex parte basis) and this Order must then be served on the respondent which provides the respondent with a set time limit to apply to set aside this leave to enforce (in effect the respondent relies on one of the specific grounds to oppose the enforcement).

In the Astro-Lippo dispute, there were two important time limits that had passed. Firstly, the Lippo Group had challenged the jurisdiction of the arbitral tribunal as three of the Astro Group companies in the arbitration was said to not have been parties to the arbitration agreement. The tribunal ruled against the Lippo Group and held that there was no jurisdiction. The Lippo Group chose not to appeal to the Singapore Court against this decision but instead continued with the arbitration under protest. The time limit for appeal had long passed. Secondly, once the five arbitral awards were issued in favour of the Astro Group, the Lippo Group chose not to apply to set aside the awards and the time limit for this setting aside application had also expired.

The Astro Group then obtained leave to enforce the awards against the Lippo Group. Upon being served with this Order in Indonesia, the Lippo Group applied to set aside this leave in order to oppose the enforcement of the awards in Singapore. The Lippo Group raised the issue of lack of jurisdiction as one of the grounds to oppose the enforcement. In the meantime, the Astro Group had also gone to the Indonesian Court to enforce the arbitral awards there but the Indonesian Court had not allowed the enforcement.

This then sets the stage in the Singapore High Court proceedings on whether the Lippo Group could oppose the enforcement of the arbitral awards or whether the Astro Group would instead be allowed to enforce these awards and they would take the form of Singapore Court Judgments.

Legal Issues

This dispute gave rise to certain novel and complex questions of law. These issues led to the Singapore Courts allowing the ad hoc admissions of two Queen’s Counsel to argue on behalf of the two competing groups. In an interesting decision on the admission of David Joseph QC to act as Counsel for the Astro Group, Justice VK Rajah JA identified the complex questions of law which justified the admission of the English QC to argue before the Singapore High Court. I set out below two of these questions and how they were then addressed in the High Court proceedings.

1. Whether the Lippo Group is entitled to resist enforcement of the awards in the country in which the awards were made when they did not, within the statutorily prescribed period, take any steps to set aside these same awards; and
2. Whether the Lippo Group have a right to revive a challenge based on the alleged lack of an arbitration agreement and a misjoinder of some of the Astro Group companies to the arbitration well after the award has been made.

Decision

Issue 1: Failure to Apply to Set Aside and Ability to Resist Enforcement

The High Court explained that  in relation to the setting aside and opposition to enforcement, being the  ‘double control’ mechanism, the Singapore International Arbitration Act makes a distinction between an international arbitral award rendered in Singapore (i.e. a domestic international arbitral award) and an international arbitral award rendered in a foreign New York Convention country.

For a domestic international arbitral award, an award is already deemed “final and binding” but subject to the sole and exclusive challenge through the setting aside mechanism. For such a domestic international arbitral award, Singapore’s Act specifically excludes the application of the mechanism of opposing the enforcement (since the Act specifically refers to the fact that Articles 35 and 36 of the Model Law do not apply in that situation). The grounds for opposing the enforcement is only allowed when enforcing a foreign international arbitral award (where Articles 35 and 36 of the Model Law would apply).

This difference in approach to domestic and foreign international arbitral awards is not unique to Singapore, with several civil law countries such as Germany and Quebec adopting this similar difference in treatment of domestic and foreign international arbitral awards.

Therefore, the Lippo Group’s sole line of challenge to the arbitral awards was through an application to set aside those awards (which were domestic international arbitral awards), which the Lippo Group had failed to do. Therefore, the Lippo Group could not avail itself of the remedy of opposing the enforcement of those awards.

Issue 2: Failure to Appeal on Jurisdiction Challenge

The High Court held that it should not be open to a party to hold off bringing a jurisdictional challenge (i.e. by failing to appeal to the Court within the set time limit) and, at the same time, participate in the arbitration on the merits in the expectation that it can revive its jurisdictional challenge at a later stage should it prove to be unsuccessful in the arbitration. It was held that such behaviour is bound to make a mockery of the finality and effectiveness of arbitral awards on jurisdiction.

Challenging such an award on jurisdictional grounds is thus excluded from the grounds which a party may invoke at the setting-aside or the enforcement stage if the party has chosen not to bring an  appeal  under  Article 16(3)  of  the  Model  Law.  There  is  no  avenue under  the  Model  Law  to  participate in a  hearing  on  the  merits  under  protest without having lodged an appeal under Article 16(3) if a party wishes to properly and   effectively   retain   its   right   to   raise   an   objection   to   the   tribunal’s jurisdiction.  There  are  no  passive  remedies  when  it  comes  to  challenging jurisdiction under the Singapore Act – a party wishing to oppose a jurisdictional award must act.

As held at [62]:

Should a losing party decide to hedge its bets as [the Lippo Group] has done in the present case, the disadvantages and  risks  of  this  tactic  are  dire  under  the  IAA  if  the  outcome  is  an  adverse award on the merits. The time limits under Arts 16(2) and 16(3) are intended to promote the finality of a decision on jurisdiction at an early stage. As stated, should a party elect to remain within the Model Law system, it must lodge an appeal  on  jurisdiction  under  Art 16(3)  within  the  30-day  time  limit  set  out; otherwise, the tribunal’s award on jurisdiction will become final and binding on the parties and be taken as accepted by the parties, after which there is no possibility of further recourse at the post-award stage to challenge jurisdiction.

Conclusion

I would expect this decision to be appealed to the Court of Appeal and it will be interesting to see the appellate decision on these points. The dichotomy of approach for setting aside and opposition to enforcement of domestic and foreign international arbitral awards is something specific to Singapore (along with some other countries) and where Malaysia makes no such distinction. The issue of failure to appeal against jurisdiction would be relevant to the interpretation of Malaysia’s Act.

I will post up on this blog later my thoughts on how these issues relate to Malaysia’s Arbitration Act.

The English High Court in Michael Wilson & Partners Ltd v Sinclair and others [2012] EWHC 2560 (Comm) confirmed that factual disputes decided in concluded arbitral proceedings should not be re-litigated. The subsequent litigation proceedings can be struck out as an abuse of court process as re-litigating it acts as a collateral attack on the concluded arbitral proceedings.

In this case, essentially the claim by A against B was struck out as an abuse of process even though B was not a party to the arbitration between A and C. B had merely appeared as a witness in the arbitration between A and C.

Justice Teare held the following:

59. In the present case there is no doubt that the factual allegations being made as to the conduct of Mr. Emmott in this action mirror exactly the failed allegations in the arbitration. The difference between the arbitration and the litigation is that the claim in the arbitration was against Mr. Emmott alleging that he had acted in breach of fiduciary duty whereas the claim in the litigation is against Mr. Sinclair alleging that he dishonestly assisted in that breach of duty. However, the underlying factual allegations concerning Mr. Emmott are the same. There is therefore a collateral challenge to the findings of the arbitration tribunal. But that can be said to be justified because Mr. Sinclair was not a party to the arbitration and had refused to be party to it. The Max action is therefore the only means by which MWP can bring its claim against Mr. Sinclair. It cannot, it is said, be an abuse of the process for MWP to seek to use its process in those circumstances.

60. If those had been the only material circumstances I would not have been persuaded that the proceedings in this court were being abused. However, there are, it seems to me, special circumstances in this case which must, in my judgment, be taken into account. First, Mr. Sinclair was a witness in the arbitration and was cross-examined. Second, Mr. Sinclair, no doubt because of his interest in the outcome of the arbitration, funded Mr. Emmott’s defence in the arbitration. Third, the arbitration tribunal concluded that the Max shares were held to the order of Mr. Sinclair. Fourth, the arbitration tribunal intended and expected that the effect of its award would be that EPIL would transfer the Max shares to Mr. Sinclair. To that end it authorised disclosure of the relevant section of its award to Mr. Sinclair, the EPIL Trustees and the Bahamian Court. That explains how Mr. Sinclair, a non-party to the arbitration, has a copy of the award and reasons which would ordinarily be private and confidential to the parties.

I believe this is the first occasion on which an English court has applied the abuse of process doctrine to a collateral challenge to an arbitration award.

The Singapore High Court in PT Pukuafu Indah and others v Newmont Indonesia Ltd and another [2012] SGHC 187 has confirmed that under the Singapore International Arbitration Act, the Court has no power to set aside interim orders of the arbitral tribunal as such orders do not fall under the definition of “award”.

The policy argument as to why the Singapore Act was drafted in that manner, to deliberately omit the power to set aside interim orders, was set out as follows:

26     The temporary character of interim orders, as distinct from the finality of awards, also necessitates a separate approach towards these orders. It is possible that interim orders may be modified or terminated during the course of the arbitral proceedings. While the courts are willing to enforce these orders to ensure that the arbitration progresses smoothly, allowing parties to challenge an interim order would have the undesirable effect of staying the arbitration while judicial determination of the issue is pending. The better remedy, and one which could be determined with proper consideration of the substantive context of the dispute and which focuses on the actual merits of the grounds for ordering such relief, would be to have recourse to the arbitral tribunal and not the courts.

The provisions in Malaysia’s Arbitration Act 2005 would appear to also lead to a similar result in that a Court has no power to set aside an interim order (or interim measure) given by the tribunal. Section 2 of Malaysia’s Act also sets out that an “award” does not include interlocutory orders. Therefore, section 37 of Malaysia’s Act which provides for the setting aside of an “award” should not apply to interlocutory orders made by the tribunal.

Similar to the Singapore position, section 19 of Malaysia’s Act also provides that interim measures granted by the tribunal can be enforced by way of enforcement under section 38 (and be subject to opposition under section 39). There is an explicit omission to refer to section 37 for setting aside.

The Hong Kong Court of Appeal in decision of Pacific China Holdings Ltd (in Liquidation) v Grand Pacific Holdings Ltd CACV 136/2011 has affirmed the principle that an unsuccessful party in applying to set aside an arbitral award, or in resisting the enforcement of the award, in the absence of special circumstances, will then be liable to pay costs on an indemnity basis.

The Court of Appeal affirmed this principle set out by Reyes J in the Hong Kong Court of First Instance case of A v R [2009] HKCFI 342. It is worth setting out the relevant passages by Reyes J which has the underlying principle that Courts should more readily respect arbitration proceedings and dissuade frivolous attempts to delay the enforcement of arbitral awards:

67. Parties should comply with arbitration awards. A person who obtains an award in his favour pursuant to an arbitration agreement should be entitled to expect that the Court will enforce the award as a matter of course.

68. Applications by a party to appeal against or set aside an award or for an Order refusing enforcement should be exceptional events. Where a party unsuccessfully makes such application, he should in principle expect to have to pay costs on a higher basis. This is because a party seeking to enforce an award should not have had to contend with such type of challenge.

69. Further, given the recent introduction of Civil Justice Reform (CJR), the Court ought not normally to be troubled by such type of application. A party unmeritoriously seeking to challenge an award would not be complying with its obligation to the Court under Order 1A Rule 3 to further the underlying objectives of CJR, in particular the duty to assist the Court in the just, cost-effective and efficient resolution of a dispute.

70. If the losing party is only made to pay costs on a conventional party-and-party basis, the winning party would in effect be subsidising the losing party’s abortive attempt to frustrate enforcement of a valid award. The winning party would only be able to recover about two-thirds of its costs of the challenge and would be out of pocket as to one-third. This is despite the winning party already having successfully gone through an arbitration and obtained an award in its favour. The losing party, in contrast, would not be bearing the full consequences of its abortive application.

71. Such a state of affairs would only encourage the bringing of unmeritorious challenges to an award. It would turn what should be an exceptional and high-risk strategy into something which was potentially “worth a go”. That cannot be conducive to CJR and its underlying objectives.

72. Accordingly, in the absence of special circumstances, when an award is unsuccessfully challenged, the Court will henceforth normally consider awarding costs against a losing party on an indemnity basis. The Respondent will here pay the Applicant’s costs on an indemnity basis.

This approach set out in A v R was however not followed in Australia, as seen in the Court of Appeal of the Supreme Court of Victoria in IMC Aviation Solutions Pty Ltd v Altain Khuder LLC [2011] VSCA 248.

It will be interesting to see which approach Malaysia takes when these competing arguments are raised before the Courts. I am not aware of any decision directly dealing with the issue of indemnity costs. The reported decisions appear to only award costs on the ordinary party-to-party basis, since parties may not have brought these issues to the attention to the Court.

I can see the strong public policy argument in support of the Hong Kong approach that the Courts should be pro-arbitration and do all that is necessary to minimise delay and umeritorous challenges to arbitral awards.

Originally published in Skrine’s Legal Insights Issue 3/2012

The High Court has confirmed in its oral grounds of judgment in Twin Advance (M) Sdn Bhd v Polar Electro Europe BV (Penang High Court Originating Summons No. 24-2292-12/2011) that where the seat of arbitration is outside of Malaysia, the Malaysian Courts have no jurisdiction under section 37 of the Arbitration Act 2005 (“the Act”) or under its inherent jurisdiction to set aside such an arbitral award.

BRIEF FACTS

The foreign defendant commenced arbitration proceedings against the Malaysian plaintiff where the seat of arbitration was in Singapore. The defendant obtained an arbitral award for damages and thereafter commenced proceedings to enforce the award in Malaysia under section 38 of the Act.

The plaintiff then filed an Originating Summons in the Malaysian courts to set aside the arbitral award, relying on section 37 of the Act. The defendant obtained leave to enter conditional appearance and applied to strike out the proceedings under the Originating Summons on the grounds that the Malaysian courts had no jurisdiction to hear such an application and that any application to set aside the arbitral award should have instead been made in the Singapore courts where the seat of arbitration was.

MODEL LAW AND NON-INTERFERENCE

On 7 August 2012, the Court read out its oral grounds of judgment allowing the defendant’s striking out application. The Court first highlighted the historical context of the Act and the adoption of the United Nations Commission on International Law (UNCITRAL) Model Law on International Commercial Arbitration 1985 (“Model Law”). The Court also agreed with the approach that it was Parliament’s intention to limit the Court’s intervention in international arbitrations and that the Court may only exercise such powers if the Act expressly provides the Court with such powers.

The Court also referred to the Officiating Address by the Chief Justice of Malaysia at the Launch of the KLRCA Fast Track Rules made on 27 February 2012. The Chief Justice had stressed that with the amendments to the Act that came into force in July 2011, the Courts are more receptive to respecting the parties’ choice to go for arbitration. The Chief Justice had also highlighted that section 8 of the Act (being identical to Article 5 of the Model Law) states in clear terms that no court shall intervene in matters governed by the Act, except where expressly provided in the Act.

THE PLAINTIFF’S ARGUMENTS

The plaintiff advanced two main arguments in support of its contention that the Court had jurisdiction under the Act to hear the setting aside. Firstly, that the plain wording of section 37 of the Act (which is based on Article 34 of the Model Law) provides that “an award may be set aside by the High Court” and makes no reference to whether the award had its seat of arbitration in or outside of Malaysia.

Secondly, the plaintiff submitted that as the grounds for setting aside listed in section 37 of the Act are also repeated in the grounds for resisting enforcement under section 39 of the Act, it would be inconsistent to hear the grounds listed in section 39 without also being able to apply the grounds in section 37 of the Act.

FINDING OF NO JURISDICTION

The Court disagreed with the plaintiff’s submissions. The Court held that section 3 of the Act, being based on Article 1(2) of the Model Law, makes it clear that the provisions of the Act would not apply to any arbitration with the seat of arbitration outside of Malaysia. Nonetheless, it further held that section 3 is a general provision which must be read subject to any specific provisions under the Act, for instance enforcement under sections 38 and 39 of the Act (which are based on Articles 35 and 36 of the Model Law). Section 38 has a specific reference to “an award from a foreign State” while section 39 contained the wording “irrespective of the State in which it was made”.

Under the recent amendments to the Act, both section 10 which relates to a stay of Court proceedings (based on Article 8 of the Model Law) and section 11 which allows for interim measures (based on Article 9 of the Model Law) also expressly state that they apply to international arbitrations with the seat of arbitration outside of Malaysia.

The Court further went on to hold that there was a glaring distinction in the references to “an award from a foreign State” and “irrespective of the State in which it was made” in sections 38 and 39 respectively which were omitted from the wording of section 37 of the Act.

The Court also noted that sections 37(2)(a) and (b) of the Act listed out additional grounds allowing for the setting aside of an award which were absent in the grounds listed in section 39 of the Act.

On the basis of statutory interpretation, the Court held that the different wording in sections 38 and 39 compared with section 37 of the Act was not unintentional. It was intended for section 37 to be read in harmony with section 3 which would then only apply where the seat of arbitration is in Malaysia. Sections 38 and 39 are to be construed as an exception to the general position of section 3 of the Act.

Such an interpretation was in line with the Model Law framework and also consistent with the Federal Court authorities of The Government of India v Cairn Energy India Pty Ltd & Anor [2011] 6 MLJ 441 and Lombard Commodities Ltd v Alami Vegetable Oil Products Sdn Bhd [2010] 2 MLJ 23 which held that a setting aside of an award must be applied to the court at the seat of arbitration. While the Court recognised that these authorities were decided under the previous Arbitration Act 1952, the same principles would still apply in interpreting sections 37, 38 and 39 of the present Act.

Having held that section 37 of the Act was not applicable for the award where the seat of arbitration is outside of Malaysia, the Court then considered whether it could invoke its inherent jurisdiction in an application for setting aside. The Court answered in the negative and adopted the Court of Appeal decision of Sarawak Shell Bhd v PPES Oil & Gas Sdn Bhd & Ors [1998] 2 MLJ 20 in finding that the Court has no inherent jurisdiction to interfere with arbitrations.

It was held that it was the consensus of the parties to arbitrate any dispute and for the seat of arbitration to be in Singapore. The plaintiff’s remedy was clearly unaffected as it could have gone to the Singapore Courts to make the necessary application for setting aside. Therefore, the application pursuant to section 37 of the Act could not be maintained for want of jurisdiction and the Court struck out the proceedings. The plaintiff has since filed an appeal against this decision.

COMMENTARY

It is clear from this decision that an application to set aside an arbitral award under section 37 cannot be equated with the opposition to an application to enforce an arbitral award under section 39 of the Act. The former applies only to arbitral awards where the seat of arbitration is in Malaysia whereas the wording of section 39 makes it clear that that provision applies to an arbitral award irrespective of the State in which it was made.

This decision is significant in confirming that Malaysian Courts have no jurisdiction, whether under the Act or under its inherent jurisdiction, to set aside any foreign arbitral awards i.e. an award where the seat of arbitration is outside of Malaysia. This interpretation of the Act harmonises Malaysia’s arbitration laws with that of the approach under the Model Law. The proper venue for setting aside of such a foreign arbitral award must be the national courts of the seat of arbitration.