Malaysian High Court Considers The Legality Of An Underlying Contract Which Was The Subject Of Arbitration

In Calibre M&E Sdn Bhd v PT Cooline HVAC Engineering (Originating Summons Nos. WA-24C(ARB)-47-09/2017 and WA-24C(ARB)-49-10/2017), the Malaysian High Court considered an application to set aside an arbitral award on the basis that the recognition by the tribunal of the allegedly illegal underlying contract was in conflict with the public policy of Malaysia. Section 37 of Malaysia's Arbitration Act 2005 (“Act“) (which is modelled after the Article 34 of the UNCITRAL Model Law on International Commercial Arbitration 1985 (as amended in 2006)) allows an award to be set aside on the basis that the award is in conflict with the public policy of Malaysia.

Facts

Malaysia's Registration of Contractors (Construction Industry) Regulations 1995 (“Regulations“) sets out various grades of registration for contractors, which determines the value of construction works which a contractor registered under Malaysia's Construction Industry Board Act 1994 (“CIDBA“) is able to carry out. PT Cooline was registered as a Grade 3 contractor, which allowed it to carry out works to a value not exceeding RM1,000,000 (approx. US$240,555).

Calibre M&E appointed PT Cooline as its sub-contractor to undertake the supply and installation of air-conditioning ducts and related accessories for mechanical and electrical works for the construction of a public hospital in Putrajaya, Malaysia, for a lump sum of RM5,730,000 (approx. US$1,378,000).

After the works were well underway, a dispute arose as to whether the Calibre M&E wrongfully terminated the contract. The parties agreed to ad hoc arbitration by way of a submission agreement. The tribunal found in favour of PT Cooline and awarded it all its claims, while dismissing Calibre M&E's counterclaims.

Calibre M&E sought to set aside the award on various grounds, predominantly that the award was in breach of Malaysian public policy. It alleged that the Tribunal “had recognised the unlawful construction works undertaken by PT Cooline, which had exceeded its grade of registration with the Construction Industry Development Board“.

Decision

The High Court rejected Calibre M&E's assertions entirely. In particular, the High Court considered that:

breach of the Regulations is not a matter which is clearly injurious to the public good, or shocks the most basic notion of morality and justice; Calibre M&E cannot approbate and reprobate by willingly condoning the non-compliance during the making of the contract, but to deny its validity to...