Malaysia - Case Spotlight: Setting Aside An Arbitral Award On Grounds Of Public Policy.
Legal News & Analysis - Asia Pacific - Malaysia - Dispute Resolution
13 August, 2019
Under the Arbitration Act 2005 (“Act”), an arbitration award is final and binding. However, under Section 37 of the Act, a dissatisfied party may apply to the High Court to set aside an arbitral award in certain circumstances. Among other things, an arbitration award can be set aside if the award is in conflict with the public policy of Malaysia. The Act clarifies that an award is in conflict in situations where the award was induced or affected by fraud or corruption, or a breach of the rules of natural justice occurred.
The recent High Court decision of Calibre M&E Sdn Bhd v PT Cooline HVAC Engineering (Originating Summons No. WA-24C(ARB)-47-09/2017, 23 July 2019) examines the applicability of Section 37 of the Act in setting aside an arbitration award.
- Calibre M&E Sdn Bhd (“Calibre”) is a consultant company involved in mechanical and electrical works in the construction industry whereas PT Cooline HVAC Engineering (“PT Cooline”) is an air-conditioning systems contractor
- Calibre appointed PT Cooline as its subcontractor to undertake the supply and installation of air-conditioning ducts and related accessories for a project (“Works”), pursuant to a letter of award dated 7.4.2012 (“Contract”) for a lump sum of RM 5.7 million.
- A dispute arose between the parties and arbitration was commenced. After a hearing, the arbitrator delivered a final award which allowed most of PT Cooline’s claim against Calibre, and dismissed Calibre’s counterclaim (“Award”)
- Calibre filed an application under Section 37 of the Act to set aside the Award.
- Among other things, Calibre alleged that the Award is against public policy on the grounds that it allegedly recognised the unlawful construction works undertaken by PT Cooline, which had exceeded its grade of registration with the Construction Industry Development Board (“CIDB”).
- Calibre further alleged that the Award is also against public policy on the grounds that it condoned cheating, and that it had breached natural justice as Calibre was not accorded a fair hearing during the arbitration proceedings.
The High Court’s Findings
The High Court held as follows:
- The concept of “public policy” under Section 37 of the Act is to be construed narrowly, in that it is only applicable when it is “clearly injurious to the public good, or where it violates the most basic notion of morality and justice, or where the upholding of an arbitral award would shock the conscience.”
- It was not in dispute that PT Cooline was registered with CIDB only as a Grade G3 contractor, which only allowed them to undertake construction works with a value not exceeding RM 1,000,000.00 pursuant to the Registration of Contractors (Construction Industry) Regulations 1995 (“Regulations”) However, the contract value of the Works was RM 5.7 million which requires a G5 Grading. The High Court was of the view that the difference in grading is not a matter which is against public policy such that it would shock the conscience. In any event, Calibre had entered into the Contract with PT Cooline, despite its G3 grading.
- PT Cooline’s failure to comply with the Regulations does not render the Contract itself void, illegal and unenforceable, as the same is already subject to a penalty under Section 29 of the CIDB Act 1994. The High Court referred to the Court of Appeal decision in MTM Millenium Holding Sdn Bhd v Pasukhas Construction Sdn Bhd & Anor which held that “to void an agreement by an Act of Parliament is a serious matter and unless there is a clear and unequivocal provision in existence, the Courts in the interest of ensuring certainty in trade and commerce, will not strike down agreements.” As such, non-compliance with the Regulations does not taint the Contract with illegality and does not affect public policy.
- In respect of Calibre’s allegation that it was not treated fairly in the arbitration proceedings, Calibre alleged that the arbitrator had imposed a more onerous burden on Calibre, rejected the evidence of Calibre’s witnesses but accepted the evidence of the witnesses for PT Cooline. The High Court rejected this argument as the arbitrator had applied the correct test on the onus and burden of proof, and it is within the exclusive domain of the arbitrator to assess the evidence of witnesses.
- Based on the above, the High Court dismissed Calibre’s application to set aside the Award, and allowed PT Cooline’s application for recognition and enforcement of the Award.
This decision by the High Court demonstrates the high threshold that applicants need to meet in order to set aside an arbitration award.
While the phrase “public policy” and “natural justice” are general terms, the court will adopt a narrow approach in interpreting these terms. It is common to see parties attempt to use these general terms to support a setting aside application, but litigants should be mindful that Section 37 of the Act cannot and should not be used as an attempt to “appeal” the Award.
For further information, please contact:
Donovan Cheah, Partner, Donovan & Ho