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The Asia Pacific Arbitration Review 2008
Section 2: Country Overviews
The Arbitration Act 2005 (the 2005 Act) came into force on 14 March 2006. This chapter will explore some of the decisions and issues that have arisen in respect of the operation of the 2005 Act and the repeal of the Arbitration Act 1952 (the 1952 Act) that warrant consideration. It will also look at the more important amendments to the 2005 Act proposed by the Malaysian Bar Council, which are pending consultation with the attorney general's chambers.
Decisions under the 2005 Act
A substantial number of the decisions that have been handed down under the 2005 Act relate to a stay of proceedings pending a reference to arbitration, both domestic and international arbitrations. It is gratifying to note that the Malaysian courts have recognised and given effect to the provisions for a mandatory stay of proceedings, under the 2005 Act.
In the case of Standard Chartered Bank Malaysia Berhad v City Properties & Anor [2007] MLJU 0581, a stay of proceedings pending a reference to arbitration was sought. The dispute involved a retention bond issued by the Bank in favour of City Properties.
The retention bond was issued pursuant to a construction contract which was the subject matter of pending arbitration proceedings between the first and second defendants. The second defendant, in support of its application to have the dispute relating to the retention bond stayed and referred to arbitration, contended that the dispute arose out of the construction contract and hence was within the purview of the arbitration clause contained in the construction contract. The first defendant contended that the issues pertaining to the retention bond were ultimately contractual issues involving the plaintiff and the first defendant and the arbitration clause did not encompass the retention bond. The High Court, in allowing the stay, recognised the difference in approach under the 1952 Act with respect to the grant of a stay of proceedings, and the fact that the grant of a stay under the 2005 Act is mandatory so long as the arbitration agreement is valid and there is a dispute falling within its ambit. The High Court also recognised the fact that what constitutes an arbitration agreement under the 2005 Act is far wider than that under the 1952 Act and held the arbitration agreement contained in the construction contract was wide enough to include disputes arising out of the retention bond. The court also recognised that to rule otherwise would result in a multiplicity of proceedings and possible inconsistent decisions being reached on the same issues.
In the case of Majlis Ugama Islam v Adat Resam Melayu Pahang v Far East Holdings [2007] MLJU 0523, the High Court upheld an application for a stay of arbitral proceedings under section 10 of the 2005 Act pending a reference to arbitration. In that case, there was a dispute involving a joint venture agreement which contained an arbitration clause. The parties could not agree on the choice of arbitrator. The appellant took the position that the matter could only be referred to arbitration provided the choice of arbitrator was agreed by the parties. As it had not been so agreed, the matter could not be referred to arbitration and the appellant commenced a civil suit in court. The respondent in turn filed an application for a stay of proceedings and a stay was granted. The court took advantage of the provision in section 10(2) of the 2005 Act to make a consequential order to refer to the matter of the appointment of an arbitrator to the director of the Kuala Lumpur Regional Centre for Arbitration. Section 10(2) allows the court, in granting a stay, to impose any conditions it deems fit.
In the case of Innotec Asia Pacific v Innotec GmbH [2007] 8 CLJ 304, the court, in granting a stay of proceedings, spoke in favour of upholding arbitration clauses. The dispute in that case was in relation to a partnership contract and resellers agreement. There was an arbitration clause which provided for arbitration at the 'SIHK'.
It was contended by the plaintiff that the arbitration clause was void for uncertainty as the reference to 'SIHK' could be a reference to any number of institutions. The court there held that in construing the arbitration agreement, the court should not hold a provision void for uncertainty unless the ambiguity could not be resolved. The court found that there was no uncertainty as to whether 'SIHK' referred to the other localities as identified by the plaintiff. The court also held that so long as the seat of arbitration is capable of being made certain with reasonable certainty, the court will uphold the agreement to arbitrate. The fact that the respondent had not objected to the inclusion of arbitration clause in the agreement was held to be a relevant consideration in upholding the arbitration clause. The court further held that even if there was a mistake as to the venue or seat of arbitration, such a mistake was not 'essential' to the arbitration agreement within the meaning of section 21 of the Contracts Act 1950 such as to render the agreement unenforceable. On a separate note, the court recognised that the 2005 Act empowers the arbitral tribunal to decide on a dispute relating to the law applicable to the arbitration. On the construction of section 10 of the 2005 Act, the court was of the view that section 10 does not exclude the courts' general jurisdiction to grant a stay of proceedings on any appropriate grounds including the ground to refer the dispute to an international arbitration (outside Malaysia). The court held further that any objection as to the propriety of the commencement of arbitration proceedings or the objection as to the failure to abide by the relevant procedure on the appointment of an arbitration was not a ground within section 10(1)(a) or (b) of the 2005 Act. As such, it was not a ground upon which the court could properly exercise its power not to grant stay. In any event, the court recognised that such objection should be made to, and decided by, the arbitral tribunal.
In the case of Hello Marketing (M) v Siemens Malaysia (unreported) the High Court upheld an application to stay court proceedings pending a reference to arbitration. In that case, the plaintiff sought to bring itself within the two exceptions to section 10 and contended that the agreement giving rise to the dispute was inoperative or incapable of being performed and that there was in fact no dispute as the defendant had assigned the agreement to a third party. The court dismissed both grounds of objection and held there was a valid agreement between the parties and the dispute ought to be referred to arbitration.
Interim relief
In the case of I-Expo v TNB Engineering Corporation [2007] 3 MLJ 53, the High Court of Malaya considered the grant of interim relief pending arbitration proceedings. The plaintiff and defendant entered into a contract for the decommissioning and dismantling of the defendant's power station. The defendant subsequently terminated the contract on the basis that the plaintiff failed to pay certain sums of money allegedly due including a performance bond of 3 million ringgits. The defendant further barred the plaintiff from entering the project site to carry on work. The plaintiff commenced an action in the High Court and applied for an injunction to allow him to enter the site to remove scrap. The defendant applied to stay proceedings pending arbitration pursuant to section 10 of the 2005 Act.
The defendant advanced the argument that the application to stay proceedings was a challenge to the civil proceedings being instituted to resolve the dispute in the face of an arbitration clause. Hence he contended the application for the injunction could not be heard until the disposal of the stay application. The High Court, in allowing the plaintiff 's application for the injunction, held that the power to grant an interlocutory injunction encompasses all situations, whether before or during arbitral proceedings where the court is required to intervene to preserve the status quo of a dispute in order that its subsequent decision would not be rendered nugatory.
The High Court also disagreed with the defendant that the application for stay should be heard before the application for the injunction and held there was no reason for such a position to be taken.
The repeal and savings provision
In the case of Majlis Ugama Islam (referred to above) the question arose as to which Act should apply in determining an application for a stay of proceedings. The court held that section 10 of the 2005 Act applied as the arbitral proceedings were commenced after the 2005 Act came into force. That case dealt with a domestic arbitration which had commenced after the coming into force of the 2005 Act.
A more complex question has arisen in a matter where the High Court is being asked to register a foreign arbitral award pursuant to the 2005 Act where the arbitral proceedings were commenced before the 2005 Act came into operation. This issue involves a consideration of the repeal and savings provisions under the 2005 Act.
Section 51(1) of the 2005 Act provides for the repeal of the 1952 Act and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985 (the 1985 Act). Section 51(2) and (3) of the 2005 Act provides that the 1952 Act shall apply where the arbitral proceedings were commenced before the coming into operation of the 2005 Act:
Repeal and savings 51. (1) The Arbitration Act 1952 [Act 93] and the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985 [Act 320] are repealed. (2) Where the arbitral proceedings were commenced before the coming into operation of this Act, the law governing the arbitration agreement and the arbitral proceedings shall be the law which would have applied as if this Act had not been enacted. (3) Nothing in this Act shall affect any proceedings relating to arbitration which have been commenced in any court before the coming into operation of this Act.The question that arose relates to the application of the 2005 Act in respect to the enforcement of a foreign arbitral award, arising out of arbitral proceedings which took place before the commencement of the 2005 Act. The argument being advanced is that the 2005 Act does not apply as the repeal and savings provision in section 51(2) of the 2005 Act provides for the 1952 Act to apply where arbitral proceedings were commenced before the coming into operation of the 2005 Act. The argument is founded on the premise that the reference to 'arbitral proceedings' in section 51(2) of the 2005 Act governs all arbitral proceedings, whether or not commenced within Malaysia. This, with respect, is misconceived. The reference to 'arbitral proceedings' in the 2005 Act must necessarily refer to arbitral proceedings governed by the 1952 Act. Foreign arbitral proceedings were not governed by the 1952 Act nor was there any award handed down prior to the repeal of the 1985 Act, which governed the enforcement of foreign arbitral awards. As both the 1985 Act and the 1952 Act were repealed prior to the enforcement of the foreign arbitral award, no rights accrued under the 1952 Act and the 1985 Act prior to their repeal. There is presently no decision of the Malaysian Court that has considered the ambit of the phrase 'arbitral proceedings' in section 51(2) of the 2005 Act. The issue has, however, been considered by leading Malaysian arbitrators in 'The Arbitration Act 2005 - UNCITRAL Model Law as applied in Malaysia' by Sundra Rajoo and WSW Davidson, where the authors said:
Foreign arbitrations are outside the scope of the Act and the reference to 'arbitral proceedings' in section 51(3) should in our view be taken to refer to arbitral proceedings where the seat of arbitration is in Malaysia (see section 3 and the commentary on that section). Hence proceedings for enforcement of a convention award commenced after the Act has come into operation should be governed by section 38 and 39 of the Act regardless of when the foreign arbitral proceedings commenced.
The authors considered the Indian authorities, in so concluding. The case of Thyssen Stahlunion GmbH v Steen Authority of India Ltd [1999] AIR SC 3923 was referred to. There the Supreme Court of India held that where arbitral proceedings were commenced in a foreign jurisdiction before the repeal of the Foreign Awards Act, the award which was issued after the repeal of the Act would be enforceable under the new Act. The Supreme Court expressed its reasoning in the following passages:
The Foreign Awards Act gives the party the right to enforce the foreign award under that Act. But before that right is exercised the Foreign Awards Act has been repealed. It cannot, therefore, be said that any right had accrued to the party for him to claim to enforce the foreign award under the Foreign Awards Act. After the repeal of the Foreign Awards Act a foreign award can now be enforced under the new Act on the basis of the provisions contained in Part II of the new Act depending on whether it is a New York Convention Award or Geneva Convention Award. It is irrespective of the fact when the arbitral proceedings commenced in a foreign jurisdiction. Since no right has accrued section 6 of the General Clauses Act would not apply.
The decision in Thyssen has been affirmed in two cases of the Indian Supreme Court, namely Fuerst Day Lawson v Jindal Exports [2001] AIR SC 2293 and Milkfood v GMC Ice Cream [2004] AIR SC 3145. Both those cases affirmed the decision in Thyssen that 'arbitral proceedings' in the savings provision in the new Act applies only to domestic arbitral proceedings so that foreign awards are enforceable under the new Act regardless of when the foreign arbitration commenced.
It is noted thus far, that the decisions of the Malaysian courts have given effect to the spirit and intent of the Model Law and have leaned heavily in favour of upholding arbitration clauses and staying court proceedings to give effect to arbitration agreements.
Proposed amendments to the 2005 Act
The Malaysian Bar Council has proposed certain amendments to the 2005 Act, which are being considered by the attorney general's chambers. The more substantive of the proposed amendments are discussed below.
Waiver of right to object
A common approach adopted by parties seeking to avoid the rigours of an award unfavourable to them is to delay proceedings by taking technical objections at the eleventh hour. This understandably delays proceedings and frustrates the legitimate claimant. The 2005 Act seeks to address this problem by virtue of section 7 of the 2005 Act which provides for the waiver of the right to object. An amendment has been proposed to section 7 of the 2005 Act to fine-tune the implementation of section 7. A deeming provision has been proposed to provide that where parties know or are deemed to know of any provision of the 2005 Act or the arbitration agreement which the party is of the view has not been complied with, the party is required to raise its objection at the earliest opportunity or shall be deemed to have waived its right to object. The deeming provision is proposed to import an objective reasonable diligence standard. This proposed amendment is intended to give effect to the Model Law, which requires technical objections to be taken at the earliest opportunity.
Stay of proceedings
Criticisms have been levelled against the proviso to section 10 of the 2005 Act (which deals with the grant of a mandatory stay). The proviso empowers the court to refuse a stay where there is no dispute between the parties with regard to the matters to be referred. The proposed amendment seeks to do away with the proviso, which is not in line with the Model Law, and may well breach the New York Convention, which requires contracting states to make it mandatory to refer parties to arbitration unless the arbitration agreement is null, void, inoperative or incapable of being performed. The introduction of the proviso with respect to the existence or otherwise of a dispute leaves too much discretion with the courts to determine if there is in fact a dispute. The exercise of such wide powers is likely to result in protracted litigation and is an unnecessarily wide conferment of discretion to the courts. On a separate note, a new provision has been proposed with respect to the stay of admiralty proceedings and the powers of the court pending the determination of an arbitration in relation to an admiralty dispute. The provision includes the power to order the retention of the vessel or the provision of security in lieu.
Interim measures
An amendment to section 11 of 2005 Act, which deals with interim measures by the High Court, has been proposed. This proposed amendment is intended to limit the court's power to grant interim measures to the following circumstances; where it is satisfied that the arbitral tribunal is not yet fully constituted; or for some reason is unable to exercise its own power to grant relief interim within the required timeline; or that in acting, the High Court will not encroach on the powers of the arbitrator; or, if such intervention is necessary to support the arbitral process or to render more effective, the arbitral award. This proposed amendment is intended to codify the principles laid down by Lord Mustill in the Channel Tunnel case to ensure that the power to grant interim relief given to the national court is used to support and not to obstruct arbitration.
Application of interlocutory orders to foreign arbitrations Presently section 10 and 11 of the 2005 Act, which deal with stay of proceedings and interim measures, apply only to arbitrations where the seat is in Malaysia. It has been proposed that sections 10 and 11 ought to apply equally to foreign arbitrations where the seat is not in Malaysia. This will bring Malaysia in line with the Model Law and Malaysia's treaty obligations under the New York Convention and give the Malaysian courts jurisdiction to grant a stay of proceedings or interim relief to aid a foreign arbitration.
The law applicable to the dispute
An amendment to section 30 of the 2005 Act has been proposed. Section 30 deals with the law applicable to substance of the dispute, and as presently worded, requires the arbitral tribunal to decide the dispute in accordance with the substantive law of Malaysia in respect of domestic arbitrations. It is proposed that this provision be substituted with a provision that entitles the arbitral tribunal to decide the dispute in accordance with the choice of law as agreed by the parties. This would place both domestic and the international arbitrations on the same footing and permit parties the right to determine the choice of law to govern their dispute, whether or not it involves a domestic arbitration.
Recognition of arbitral awards
Section 38 of the 2005 Act, which deals with the recognition and enforcement of the arbitral awards is proposed to be amended to correct the drafting error, which presently, only recognises the enforcement of domestic awards and awards from foreign states. It omits reference to awards made in international arbitrations made where the seat is in Malaysia from being enforced in Malaysia. The proposed amendments allows for all awards, both where the seat of the arbitration is within Malaysia and otherwise, to be recognised as binding and being enforced under the 2005 Act.
To ensure the effect of the decision in Sri Lanka Cricket v World Sport Nimbus [2006] 3 MLJ 117 is not felt with the implementation of the 2005 Act, it is proposed that a new section be introduced, placing the burden of proving that a state is not a foreign state (as defined in the 2005 Act) on the party seeking to resist the enforcement of the award. The author of this paper is, however, of the view that the effect of Nimbus will not apply under the 2005 Act, which omits the reference to the requirement of gazettement of contracting countries as provided under section 2(2) of the 1985 Act. On a separate note, an amendment has been proposed to section 39 of the 2005 Act dealing with the recognition or enforcement of an award. The 2005 Act presently provides that the validity of the award be determined under the laws of Malaysia in the absence of the agreement between the parties. The proposed amendments substitute the laws of Malaysia with the laws of the state where the award was made. This is provided for in the Model Law and the New York Convention.
Miscellaneous amendments
A proposed amendment to section 42 of the 2005 Act seeks to limit and to exclude the discretion of the court in ruling on questions of law unless the question of law substantially affects the rights of one or more of the parties to the dispute. This is to avoid parties raising questions of law which are technical in nature and which will not affect the correctness the award or substantially affect the rights of the parties. The repeal and savings provision in section 51 of the 2005 Act is sought to be amended to clarify the problem raised above ('The repeal and savings provision', final paragraph). Section 51 of the 2005 Act provides that where the seat of the arbitration is Malaysia and the arbitral proceedings were commenced before the coming into operation of the 2005 Act, the law governing the arbitration agreement, arbitral proceeding or court proceedings arising therefrom shall be the law in force prior to the enactment of the 2005 Act. It is sought to clarify the repeal and savings provisions are intended to govern only arbitration proceedings where the seat of the arbitration is Malaysia. The 2005 Act shall apply in all other situations. It has been proposed that a gazette notification be effected with respect to the list of the Convention countries or alternatively a validation provision be introduced to provide that a Convention award shall be enforceable in Malaysia whether or not an order under subsection 2(2) of the 1985 Act has been made gazetting the particular Convention country. A further proposal is for arbitrators to be given the power to administer oaths and take affirmation from parties and witnesses.
The proposed amendments to the 2005 Act are both necessary and far-reaching. The author is optimistic that the proposed amendments will be favourably received and implemented. The proposed amendments will serve to smoothen the kinks and inevitable wrinkles in a piece of legislation that has served to transform the practice of arbitration in Malaysia. The 2005 Act is, by all accounts, a welcome development to the law governing arbitrations in Malaysia.
Thus far, its application by the Malaysian Courts has been encouraging. It appears all efforts are being taken to promote Malaysia as a viable venue for arbitrations to take place and the developments are both positive and tangible.
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