Arbitration Yearbook Malaysia

By: Elaine Yap1

A. Legislation, Trends and Tendencies

International arbitration in Malaysia continues to be governed by the Arbitration Act 2005, to which no legislative amendment was made in 2015.

B. Cases

B.1 Strict Requirements for Registration of Arbitral Awards

In International Bulk Carriers SPA v. CTI Group Inc.,2 the Court of Appeal set aside the registration of a foreign award under Section 38 of the Arbitration Act 2005 due to noncompliance with the requirement that the applicant produce the original arbitration agreement or a duly certified copy of the agreement.

The dispute arose from a Share Transfer Agreement (STA) between CTI Group Inc. and several other parties, including CNAN Group SPA. CNAN Group SPA are ship owners, some of whose ships are owned through International Bulk Carriers SPA, a wholly owned subsidiary. Although not a signatory to the STA, International Bulk Carriers SPA was given a loan of US$5 million as part of the transaction and had signed certain security agreements, the terms of which were recorded in annexures to the STA (the “Annexures”).

CTI Group Inc. commenced an ICC arbitration against parties to the STA and International Bulk Carriers SPA pursuant to the arbitration agreement contained in the STA. The arbitral tribunal found International Bulk Carriers SPA liable. However, CTI Group Inc. did not produce the Annexures when it registered the award in Malaysia under Section 38 of the Arbitration Act 2005.3

The High Court did not regard the absence of the Annexures as relevant, since the arbitration agreement was contained in the STA and was binding on International Bulk Carriers SPA for reasons determined by the arbitral tribunal. However, the Court of Appeal disagreed with that approach and ruled that in the absence of the Annexures, International Bulk Carriers SPA was prima facie not a signatory to the STA and had no nexus to it. Thus, the mandatory requirement of Section 38 of the Arbitration Act 2005 was not complied with on the face of the record.

This case is of practical importance for parties intending to register an arbitral award in Malaysia where the arbitration agreement exists otherwise than in a document signed by the parties. Although the Court of Appeal did not disagree with the finding that a binding arbitration agreement existed,4 it applied a strict interpretation of Section 38 of the Arbitration Act 2005, justifying such strict compliance especially in the context of Section 38, where parties are given the exclusive privilege and benefit of registering a foreign award that can only be challenged in limited circumstances.

B.2 No Power to Order Pre-Award Interest

In another interesting development in arbitration case law in Malaysia, the decision of the Court of Appeal in Far East Holdings Bhd & Anor v. Majlis Ugama Islam Dan Adat Resam Melayu Pahang & Anor Appeal5 will also have some practical implications for parties who arbitrate in Malaysia.

Majlis Ugama Islam Dan Adat Resam Melayu Pahang (MUIP) was a statutory body and had commenced arbitration proceedings against Far East Holdings Bhd and its wholly owned subsidiary. The parties had entered into an agreement to cooperate in a project for palm oil cultivation and subsequently fell into a shareholding dispute. MUIP obtained an arbitral award in its favor, which was challenged on registration. One of the issues that arose in the challenge was whether the arbitrator could, in law, award pre-award interest and post-award interest.

The High Court set aside the award of post-award interest on the basis that it was not pleaded, but the award of pre-award interest by the arbitrator was set aside on the basis that the arbitrator had no power to grant this, even if it were pleaded. It was common ground that there was no arbitration agreement empowering the arbitrator to grant pre-award interest.

The Court of Appeal agreed with the High Court decision that the Arbitration Act 2005 does not actually contain any provisions that confer power on an arbitral tribunal to order pre-award interest. Since Section 33(6) of the Arbitration Act 20056 expressly allows post-award interest, but does not provide for pre-award interest, the Court of Appeal held that it was implicit that the legislature did not intend to confer on an arbitrator the power to award pre-award interest, and the granting of pre-award interest in such circumstances was accordingly in excess of jurisdiction.

This decision departs from existing case law authorities decided under the Arbitration Act 1952 (repealed) and observations from the practice of arbitration that the power of the arbitrator to award pre-award interest is implied. The Court of Appeal in Leong Kum Whay v. QBE Insurance (M) Sdn Bhd & Ors7 had remarked that it was well settled in law that an arbitrator, in the absence of a specific clause in the agreement, has power to award interest from the date on which a debt accrued. In fact, the Court of Appeal had, in that case, further remarked that an arbitrator who departed from the established principle of awarding interest without reason was liable to have his or her award set aside.

Although it may not accord with commercial reality, the decision of the Court of Appeal in Far East Holdings Bhd is currently good law and is consistent with the policy of the Arbitration Act 2005 to eliminate any exercise of inherent or implied powers of the Court in matters governed by the Act. Considering that accrued interest can have a significant impact on the quantum of recovery in arbitration, parties should take note until such time as the legislature sees fit to amend Section 33(6) of the Arbitration Act 2005.

C. Costs in International Arbitration

C.1 Allocation of Costs

There is no statutory provision in the Arbitration Act 2005 that deals with the allocation of the costs of arbitration except Section 44. This section is in Part III of the Arbitration Act 2005, and according to the scheme of the Act, Part III provisions only apply by default to domestic arbitrations. They may apply to international arbitrations only if the parties agree to adopt the provisions in Part III.8 Section 44(1)(a) provides that unless otherwise agreed by the parties, the costs and expenses of an arbitration are in the discretion of the arbitral tribunal, who may –

(a) direct to and by whom and in what manner those costs or any part thereof are to be paid;

(b) tax or settle the amount of such costs and expenses;9 and

(c) award such costs and expenses to be paid as between solicitor and client.

It is generally the case in arbitration practice that the costs and expenses of an arbitration are allocated by the arbitral tribunal, which has the discretionary power to do so.10 Although there is no statutory rule which stipulates that costs must always “follow the event,” this is the most common approach to the allocation of costs. Any departure from the rule should be reasoned to avoid the risk of a challenge to the award, which was the case in SDA Architect (sued as a firm) v. Metro Millenium Sdn Bhd.11 In that case, the Court of Appeal considered a challenge to an award of costs by the arbitrator, who had awarded full costs to the appellant although the appellant was only partially successful.12 The Court of Appeal recognized that failure by the arbitrator to exercise its discretion judicially in the award of costs can amount to an error of law,13 but found no error as the arbitrator had stated his reasons for the award of full costs.

For completeness, the concept of a “Calderbank” offer14 and its implication on allocation of costs has also taken statutory form in Part III of the Arbitration Act 2005.15 The common law concept is well recognized in Malaysia and forms part of the national court rules.

C.2 Security for Costs

The powers of the arbitral tribunal to award interim measures include the power to order security for costs.16 The courts also have a concurrent power to grant security for costs, as a party may, before or during arbitral proceedings, apply to a High Court for security for costs as an interim measure.17 It is well established that where there is concurrent jurisdiction, a party should first apply before the arbitral tribunal unless there are countervailing factors, since the role of the High Court is to support arbitration.18 In such cases, the High Court is required to treat any findings of fact made by the arbitration tribunal in the course of such ruling as conclusive for the purposes of a subsequent application to the court for interim measures.19

It has also been held that the same grounds will apply to any application for security for costs before the arbitrator as do applications to the court.20 For example, the power to order security for costs is a discretionary one, and the court may do so if the plaintiff is ordinarily resident outside the jurisdiction of the court, has no assets within the jurisdiction, is a nominal plaintiff21 or, in the case of companies, if it appears by credible testimony that a plaintiff company will be unable to pay the defendant’s costs.22 That said, the High Court in Measat Broadcast Network Systems Sdn Bhd v. AV Asia Sdn Bhd23 recently considered the policy considerations of the House of Lords in Coppee-Lavalin SA/NV v. Ken-Ren Chemicals and Fertilizers Ltd. (in liq); Voest-Alpine AG v. Ken-Ren Chemicals and Fertilizers Ltd. (in liq) [1994] 2 All ER 449 in respect of security for costs in international arbitrations. The extensive review of that decision is indicative of a broadened view of the subject and an acceptance by the court of the argument that in the context of international arbitrations, an order for security for costs should only be made in exceptional circumstances, since the parties intended that the arbitration should, as far as possible, be independent of the national legal system of the country in which the arbitration is to take place and that the possible encroachment of interim measures on the arbitrator’s function should be minimized.

C.3 Recovery of Costs

The Arbitration Act 2005 provides that the arbitral tribunal may tax or settle the amount of costs and expenses and award such costs and expenses to be paid on a “solicitor and own client” basis.24 Alternatively, any party may also apply to the High Court for costs to be taxed where an arbitral tribunal has in its award directed that costs and expenses be paid by any party, but failed to specify the amount within 30 days of having been requested to do so.25 There is no definition of what constitutes recoverable costs and expenses of an arbitration in the Arbitration Act 2005. According to the Rules of Arbitration of the Kuala Lumpur Regional Centre for Arbitration (KLRCA) and the UNCITRAL Rules (as revised in 2010) it adopts, costs include:26

(a) The fees of the arbitral tribunal, to be stated separately as to each arbitrator and to be fixed by the tribunal itself in accordance with Article 41

(b) The reasonable travel and other expenses incurred by the arbitrators

(c) The reasonable costs of expert advice and of other assistance required by the arbitral tribunal

(d) The reasonable travel and other expenses of witnesses to the extent such expenses are approved by the arbitral tribunal

(e) The legal and other costs incurred by the parties in relation to the arbitration to the extent that the arbitral tribunal determines that the amount of such costs is reasonable

(f) Any fees and expenses of the appointing authority as well as the fees and expenses of the Secretary-General of the PCA

(g) The expenses reasonably incurred by the KLRCA in connection with the arbitration, the administrative costs of the KLRCA, as well as the costs of the facilities made available by the KLRCA

There is no consistent approach to the recovery of legal fees of counsel. Under the KLRCA Rules, legal fees of counsel should, in principle, be recoverable in full, provided the amount is determined to be reasonable by the arbitral tribunal. The costs of a party’s in-house counsel and other members of a party’s staff (contract managers, engineers, etc.) are not usually considered recoverable unless the costs are incidental to their attendance as witnesses. The onus is on the party claiming the costs to demonstrate that costs as claimed have been incurred and are proper and reasonable. There is no rule as to how this is achieved, and the procedure and degree of substantiation for costs claimed will depend largely on the directions of the arbitral tribunal.

  1. Elaine Yap is a local partner in Baker & McKenzie’s Kuala Lumpur office and is attached to the Dispute Resolution Practice Group. Elaine is a Fellow of the Chartered Institute of Arbitrators and Malaysian Institute of Arbitrators and a panel arbitrator with the KLRCA.
  2. [2014] 8 CLJ 854.
  3. Section 38(2) of the Arbitration Act 2005 provides that in an application to register an arbitral award for recognition and enforcement, the applicant shall produce : (a) the duly authenticated original award or a duly certified copy of the award; and (b) the original arbitration agreement or a duly certified copy of the original.
  4. Section 9(5) of the Arbitration Act 2005 provides that a reference in an agreement to a document containing an arbitration clause shall constitute an arbitration agreement, provided that the agreement is in writing and the reference is such as to make that clause part of the agreement. Specific reference to the arbitration clause in another document is not necessary for effective incorporation according to Ajwa For Food Industries Co. (MIGOP) Egypt v. Pacific Inter-Link Sdn Bhd [2013] 5 MLJ 625, Federal Court. This has been followed in several subsequent cases, including International Bulk Carriers SPA v. CTI Group Inc. (ibid) and Best Re (L) Ltd. v. ACE Jerneh Insurance Berhad [2015] 2 AMCR 332, Court of Appeal.
  5. [2015] 8 CLJ 58.
  6. Section 33(6) of the Arbitration Act 2005 provides as follows: “Unless otherwise provided in the arbitration agreement, the arbitral tribunal may – (a) award interest on any sum of money ordered to be paid by the award from the date of the award to the date of realisation; and (b) determine the rate of interest.”
  7. [2006] 1 CLJ 1.
  8. Section 3 Arbitration Act 2005.
  9. Section 44(1)(b) provides that any party may also apply to the High Court for costs to be taxed where the tribunal does not specify the amount within 30 days of having been requested to do so.
  10. Consistent with Section 44(1)(a)(i) of the Arbitration Act 2005 where applicable.
  11. [2014] 2 MLJ 627.
  12. The application was made pursuant to Section 42 of the Arbitration Act 2005, which provides that any party may refer to the High Court any question of law arising out of an award. It should be noted that this provision also resides in Part III of the Arbitration Act 2005 and only applies to an international arbitration award if the parties had opted in to Part III.
  13. Citing President of India v. Jadranska Sobodna Plovidba [1992] 2 Lloyd’s Rep 274.
  14. Calderbank v. Calderbank [1975] 3 WLR 586. According to the principle established in this case, where a party makes an offer to the other party to settle the dispute or part of the dispute and the offer is not accepted, and the award of the arbitral tribunal is no more favorable to the other than that was the offer, the arbitral tribunal, in fixing and allocation the costs and expenses of the arbitration, may take the fact of the offer into account in awarding costs and expenses in respect of the period from the making of the offer to the making of the award.
  15. Section 44(2) Arbitration Act 2005.
  16. Section 19(1)(a) Arbitration Act 2005.
  17. Section 11(1)(a) Arbitration Act 2005.
  18. Cobrain Holdings Sdn Bhd v. GDP Special Projects Sdn Bhd [2010] 1 LNS 1834. Citing NCC International AB v. Alliance Concrete Singapore Pte Ltd. [2008] 2 SLR (R); instances where a party may look to a court of law to intervene in granting interim measures include where third parties are involved, where matters are very urgent or where the court’s coercive powers of enforcement are required.
  19. Section 11(2) Arbitration Act 2005; NBC Land Sdn Bhd v. Teras Kiara Gemilang Sdn Bhd [2011] 1 LNS 669.
  20. Jiwa Harmoni Offshore Sdn Bhd v. Ishi Paower Sdn Bhd [2009] 1 LNS 849.
  21. Sir Lindsay Parkinson & Co v. Triplan Ltd. [1973] QB 609.
  22. Section 351(1) Companies Act 1965.
  23. [2014] 3 CLJ 931.
  24. Section 44(1)(a)(ii) and (iii) Arbitration Act 2005 where applicable. See n8.
  25. Section 44(1)(b) Arbitration Act 2005.
  26. Article 40. The UNCITRAL Rules are incorporated as part of the Rules of Arbitration of the KLRCA.