Judicial Approach To Application And Construction Of Arbitration Act 2005 In Malaysia: Section 37

• Published date: 06 October 2022
• Subject Matter: Litigation, Mediation & Arbitration, Arbitration & Dispute Resolution, Trials & Appeals & Compensation
• Law Firm: Cecil Abraham & Partners
• Author: Mr Tan Sri Dato' Cecil W. M. Abraham, Dato' Sunil Abraham and Anne Sangeetha Sebastian

Over the past few decades, Malaysia has sought to develop a refined and efficient system for alternative dispute resolution. Today, Malaysia has a relatively robust arbitration ecosystem. This article is part of a series that considers how the courts in Malaysia have construed and interpreted sections 8, 37 and 42 of the Arbitration Act 2005 (the 2005 Act) and, in particular, focuses on challenges to arbitral awards pursuant to section 37.¹

Background

Section 37(1) reads as follows:

1. An award may be set aside by the High Court only if -
   
   1. the party making the application provides proof that -
      
      1. a party to the arbitration agreement was under any incapacity;
      2. the arbitration agreement is not valid under the law to which the parties have subjected if, or, failing any indication thereon, under the laws of Malaysia;
      3. the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present that party's case;
      4. the award deals with a dispute not contemplated by or not falling within the terms of the submission to arbitration;
      5. subject to subsection (3), the award contains decisions on matters beyond the scope of the submission to arbitration or
      6. the composition of the arbitral tribunal or the arbitral procedure was not in accordance with the agreement of the parties unless such agreement was in conflict with a provision of this Act from which the parties cannot derogate, or, failing such agreement was not in accordance with this Act; or
   2. the High Court finds that -
      
      1. the subject-matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia; or
      2. the award is in conflict with the public policy of Malaysia.

As a general rule the courts in Malaysia do not interfere with an award of an arbitrator unless the award is tainted with infirmities that are identified pursuant to section 37(1)(a)(i) to (vi) and 37(1)(b) of the 2005 Act. Clear, definitive and specific allegations must be spelt out for the application to succeed. Section 37 of the 2005 Act vests discretionary powers in the court regarding whether to accede to an application to set aside the award.

Interpretation

Notwithstanding the general rule in effect, the Federal Court appears to have taken what some may argue as diametrically opposite approaches in Master Mulia Sdn Bhd v Sigur Rus Sdn Bhd² and Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd and another appeal³ in interpretating and applying section 37 of the 2005 Act.

Master Mulia

The dispute in Master Mulia concerned whether the alleged negligence by a charterer had caused damage to an owner's vessel. This issue turned on how the damage had been caused. Extraneous evidence was therefore the central issue of causation. The Federal Court, having heard the arguments, set aside the award on the principal premise that the arbitrator relied on extraneous evidence without according parties a right to be heard.

The Federal Court held that the High Court retains a residual discretion not to set aside an arbitral award, notwithstanding the fact that a ground for setting aside the arbitral award is made out. The Federal Court set out the following guiding principles on the exercise of residual discretion:

Subsection 37(1) clearly provides that the High Court retains a residual discretion not to set aside an award even though a ground for setting aside may be made out. What is important is to ascertain the principles applicable to the exercise of such discretion in cases where an application is grounded on breach of the rules of natural justice . . .

[T]he guiding principles on the exercise of residual discretion when an application for setting aside an award is grounded on breach of natural justice may be stated as follows:

first, the court must consider: (a) which rule of natural justice was breached; (b) how it was breached; and (c) in what way the breach was connected to the making of the award;

second, the court must consider the seriousness of the breach in the sense of whether the breach was material to the outcome of the arbitral proceeding;

third, if the breach is relatively immaterial or was not likely to have affected the outcome, discretion will be refused;

fourth, even if the court finds that there is a serious breach, if the fact of the breach would not have any real impact on the result and that the arbitral tribunal would not have reached a different conclusion the court may refuse to set aside the award;

fifth, where the breach is significant and might have affected the outcome, the award may be set aside;

sixth, in some instances, the significance of the breach may be so great that the setting aside of the award is practically...