As a follow up on an earlier post on the Hong Kong Court of Appeal decision on indemnity costs where a party unsuccessfully opposes an arbitral award (whether through a setting aside of the award or opposing the enforcement), this post on the Kluwer Arbitration Blog summarises both the Hong Kong position as well as in Australia and England.

I look forward to similar submissions being presented for consideration here in Malaysia and for the Malaysian Courts to decide on the policy on whether indemnity costs should be awarded or not in such situations.

I had earlier blogged on the High Court decision in Twin Advance (M) Sdn Bhd v Polar Electro Europe BV confirming that where the seat of arbitration is outside of Malaysia, the Malaysian Courts have no jurisdiction under section 37 of the Arbitration Act 2005 or under its inherent jurisdiction to set aside such an arbitral award.

I now set out the written Grounds of Judgment of this decision.

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.