Malaysia - The Arbitration Act 2005 And Arbitrators’ Jurisdiction To Award Pre- And Post-Award Interest.
Legal News & Analysis - Asia Pacific - Malaysia - Dispute Resolution
28 February, 2018
Majlis Ugama Islam dan Adat Resam Melayu Pahang (“Majlis”) entered into negotiations with Far East Holdings Bhd (“Far East”) and Kampong Aur Oil Palm Sdn Bhd (“KAOP”) to cultivate 11,073 acres of land. Vide an agreement between the three parties, the land was to be developed by a wholly owned subsidiary of KAOP and that the Majlis would transfer the land to the subsidiary of KAOP. In consideration of the transfer, Majlis would be allotted 33% shares in KAOP. The agreement provided options to Majlis to purchase further shares (“1st option”) and issued share capital of KAOP (“2nd option”) from Far East, which would ultimately result in Majlis owning 60% of the equity of KAOP.
In 1998, Far East extended loans to KAOP to finance the development of the land. KAOP capitalised those loans as paid up capital and allotted shares to Far East. This resulted in the allotment to Majlis amounting to 17.5% and not 33% equity of KAOP.
It was the Majlis’ contention that, in 1998, Far East unlawfully increased the paid up capital of KAOP and failed to transfer the shares to Majlis despite the exercise of the 1st option and that Far East diluted the interest of Majlis in KAOP.
Far East and KAOP argued that Majlis failed to exercise the options within time and there was no prohibition in the agreement to increase the issued share capital of KAOP, which Majlis was aware of and consented to.
The arbitrator concluded that Majlis was entitled to exercise the two options to ultimately own 60% shares. The arbitrator ordered Far East to return the certificates of its shares for cancellation and the company secretary to restore the issued share capital of KAOP to the proportions of 67.61% to Far East and 32.39% to Majlis.
Further, Far East was to transfer 27% shares to Majlis which would ultimately give Majlis an ownership of 60% shares and Far East was required to pay damages to Majlis for loss of dividends with a post-award interest at 4% per annum.
Decision of the High Court and the Court of Appeal
Further to the award and pursuant to section 42 of the Arbitration Act 2005(“AA 2005”), Far East and KAOP referred questions of law arising out of the award to the High Court. Majlis also applied to the High Court for recognition and enforcement of the award pursuant to section 38 of AA 2005.
The High Court held that there was no error by the arbitrator in construing the agreement and finding of facts by the arbitrators should not be disturbed. However, on the interest awarded, the High Court held that the arbitrator had no jurisdiction to award pre-award interest. Further, post-award interest could be awarded but in this case was not pleaded and, hence, should not have been awarded.
The Court of Appeal agreed with the decision of the High Court.
The decision of the Federal Court
The Federal Court held that under section 42 of AA 2005, the only ground which merits judicial intervention is where there is a question of law arising out of the award that substantially affects the rights of one or more of the parties. A perverse, unconscionable and unreasonable award is not a ground to set aside the award under section 42. There is also no jurisdiction to deal with questions of fact under section 42.
The Federal Court also held that “a point of law in controversy” is not a question of law within the meaning of section 42 as there would be “points of law” in controversy in every case.
The Federal Court held that the question of construction of a document is a question of law. There was no error of law by the arbitrator in his construction of the agreement. However, with respect to the award of pre-award interest, the Federal Court agreed with the courts that AA 2005 does not contemplate pre-award interest unless so provided in the arbitration agreement. Hence, pre-award interest was not permitted.
With respect to post-award interest, because it was not pleaded, the Federal Court took the position the arbitrator ought not to have granted the same. The Federal Court also varied the award of the arbitrator to order Far East to return all ultra vires dividends to KAOP and to require Majlis to pay the consideration payable on exercise of the options to purchase shares.
The Federal Court is taking the approach that, absent an express provision in the Arbitration Act for the grant of pre-award interest, the same cannot be awarded unless agreed by the parties, and the award of such interest may be challenged. The question arises how this will be dealt with in international arbitrations where a section 42 challenge is not available to the parties.
For further information, please contact:
Tan Chuan Yi, Shearn Delamore & Co