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The Malaysian Arbitration Scene – The relationship between the Courts and the Arbitral Tribunal in the 21^st Century

by ©W.S.W. Davidson
(16th November, 2005)

1.  The subject on which I have agreed to speak is rather portentous and would be more suitable for a two day dedicated seminar.  Given the time constraints which I am under, I will only be able to speak on one or two topics, which may be of current interest.

2.  At the time I agreed to speak I had hoped that the long awaited new Arbitration Act would have been available at least in Bill form.  Unfortunately this is not the case and hence I am not in a position to speak with any authority on the form or content this document will take.  I am assured however that the publication of the Bill is now only a matter of a few months away, and the topic of this paper demands that I concentrate on the future and not the past.  Malaysia is so far as I am aware the last major jurisdiction in the common law world to embark on a wholesale revision of its arbitration law.

3.   In the half century since the introduction of our Arbitration Act, 1952, there has been a general worldwide trend for the Courts to take a less interventionist approach in the matter of arbitrations and towards greater party autonomy.   Several examples can be taken which illustrate this trend:-

1.  Removal or curtailing of the old case stated procedure (s. 22 of our current Act) which enables either party to an arbitration to apply midstream to the Court to order the arbitrator to state a case on a point of law.  This procedure stems from the time when few arbitrators were legally qualified and the Courts were concerned about their ability to  handle legal issues. This procedure has either been abolished altogether or at least restricted in its use to cases where both parties or the arbitrator himself request the use of this facility.

2. Abolition of the old 'fraud' rule (s. 25(2) of the current Act) which gives the High Court power to revoke the appointment of arbitrator to the extent that fraud becomes an issue.  This provision, which was originally founded on the principle that a party accused of fraud should have the right to trial by jury, has now been abolished in almost all jurisdictions, and arbitrators are considered to be perfectly capable of dealing with issues of fraud.

3. The curtailment of the courts discretion to refuse an application for stay of court proceedings, where the contract contains an applicable arbitration clause.  (See s. 6 of the current Arbitration Act).  The current trend is to make the stay mandatory at least in international arbitrations so as to give effect to the parties own choice of forum.

4. In the matter of interim measures of protection, the trend is to give the arbitrators greater powers; while recognizing that there remains a need for there to be parallel powers remaining in the courts, it should be clarified that these powers should be used by the courts to support and not to interfere with the arbitrators powers.

5. The recognition of the right of parties to agree on the finality of the arbitrators award.

6. The curtailment of the right of the High Court to set aside awards on the ground of technical misconduct (s. 24 of the current Act).

7. The introduction of a 'filter system' for appeals from arbitrators on points of law, whereby leave of the High Court is required in every case and leave is only to be given on the basis of established guidelines.

8. The curtailment of the use of inherent powers  by the Court to take over arbitration proceedings in midstream.

4.   I have chosen to discuss in this paper, the Malaysian Court of Appeal case of Bina Jati Sdn Bhd v. Sum-Projects (Bros) Sdn Bhd [2002] 2 MLJ 71, which  touches on two of the examples referred to above, namely the application of the fraud rule, and the use of inherent powers.  After that I will discuss the well known House of Lords case of Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1993] AC 334 (the Channel Tunnel case) which deals mainly with the policy of the courts in the granting of interim measures of protection where the parties have provided for all disputes to be decided by arbitration. 

I will then touch quite briefly on the local Court of Appeal case of Thye Hin Enterprises Sdn Bhd v. Daimler Chrysler Malaysia Sdn Bhd [2005] 1 MLJ 293, which deals with the availability of interim measures of protection in the context of a Kuala Lumpur Regional Centre Arbitration.

The Bina Jati case

5.  The Bina Jati case, which was fairly recently decided by the Malaysian Court of Appeal has bucked the modern trends referred to in paragraph 3 above and has shown a rather alarming interventionist approach.

 It arises out of s. 25(2) of the current Arbitration Act which reads as follows:-                                   

"Where an agreement between any parties provides that disputes which may arise in the future between them shall be referred to arbitration, and a dispute which so arises involves the question whether any such party has been guilty of fraud, the High Court shall, so far as may be necessary to enable that question to be determined by the High Court, have power to order that the agreement shall cease to have effect and power to give leave to revoke the authority of any arbitrator or umpire appointed by or by virtue of the agreement."

7.   In that case, proceedings were first brought in the High Court by the appellant Bina Jati who was main contractor for a construction project against the Respondent, Sum Projects (Sum), the employer.  Throughout these proceedings, Sum always insisted that the arbitration clause in the contract should be honoured and all disputes referred to arbitration.  It was then agreed by both parties that the disputes should be referred to arbitration.  An experienced engineer arbitrator was then appointed and Bina Jati filed a claim involving a number of issues commonly found in construction disputes including claims for extension of time and acceleration costs; the Respondent in its counterclaim in the arbitration then sought a declaration that the Claimant had procured the contract by fraud and that the architect’s certificate was false and fraudulently made.  They also counterclaimed for defective works.  All these were issues well within the competency of an experienced technical arbitrator.

8.  The Respondent, who had hitherto insisted on arbitration, then changed tack and applied to the High Court under s. 25(2) of the Arbitration Act for:-

1. a declaration that the disputes under the building contract were not arbitrable;

2. an injunction to restrain Bina Jati from proceeding with the arbitration;

3. the authority of the arbitrator be revoked;

4. the arbitration proceedings be stayed.

9.  Bina Jati argued that while there was a discretion in the Court under s. 25(2) for the Court to take jurisdiction over the fraud issues, there was no power for the Court to take over the entire case and the balance of convenience therefore favoured a single trial of all issues before the arbitrator; however the High Court gave an order in terms to Sum and the Court of Appeal ruled unanimously that the appeal be dismissed.

10.  There are three points in the judgment of Alauddin JCA in the Court of Appeal on which I would like to comment:-

(a)   at page 80D, the Learned Judge said:-

"The second ground raised by learned counsel for the appellant deals with the issues of assignments, fraud, collusion and misconduct of the appellant involving the architect and engineer.  We agree with the learned Judge [of the High Court] that these are issues outside the arbitrators jurisdiction."

The judgment does not go on to give reasons for this statement, which I believe to be incorrect unless of course the arbitration agreement is very restricted, which was not the case here: and there is nothing in the language of s. 25(2) which deprives the arbitrator of jurisdiction.  S 25(2) merely gives the High Court a discretionary power to revoke the arbitrators authority 'so far as may be necessary' to enable that question [i.e. the fraud issue] to be determined.

(b)  this brings me to the second point.  The respondent Sum wished to bring in other parties including the architect and engineer into the proceedings.  The Learned Judge was of course correct in stating that third parties who are not parties to the arbitration clause cannot be brought into the arbitration proceedings.  He went on to say:-

"where some are parties and others are not parties to the arbitration it is best that their dispute be dealt with by the Court", (p 81 A); and

"disputes between parties cannot be divided so that part is dealt with by arbitration and another part in Court". (p 81D).

He therefore concluded that:-

"We are in entire agreement with the learned judge's finding that many issues have arisen which are outside the jurisdiction of the arbitrator".  (p. 81E).

While the two earlier quoted statements are unobjectionable per se, the conclusion is with respect incorrect, for two reasons:-

1. firstly if the respondent Sum had wanted all issues to be dealt with by the Court, he had an opportunity to do so by filing proceedings in the High Court including the third parties as Defendants, and then resisting a stay application to have the matter referred to arbitration by calling on the High Court to invoke its discretion under s. 6 of the Act; multiplicity of parties is one of the recognized circumstances for the Court to exercise that discretion.  But the decision in this case did not arise in that context; the respondent Sum had all along insisted on arbitration in the earlier High Court proceedings and what he was trying to do was to cut off the arbitration in midstream and bring it back to Court;

2. secondly, the learned Judged failed to realize that it was only the arbitrator who had power to deal with all issues between the parties. The operative words of s. 25(2) are "so far as may be necessary to enable that question [i.e. the fraud issue] to be determined by the High Court." The Courts jurisdiction under s. 25(2) was strictly limited to taking over the fraud issue; the Court could have done that, but it would have left all other issues with the arbitrator.

(c)        On the matter of the Court's jurisdiction, the Learned Judge went on to hold that:-

"the High Court can  invoke its inherent powers under O 92 r 4 of the High Court Rules to make any order as may be necessary to prevent injustice".

The implication of this is disturbing.  It suggests that despite the limitations in the Arbitration Act itself, the Court can exercise inherent powers to take over arbitrations in midstream.  The use of inherent powers is an unruly horse, and should not be lightly exercised otherwise there will be chaos in the system. Moreover The Court of Appeal decision is in conflict with the Court of Appeal decision of  Sarawak Shell v. PPES Oil and Gas Sdn Bhd [1998] 2 MLJ 20 where Dato' Mahadev Shankar delivering the judgment of the Court followed the House of Lords decision in Bremer Vulcan v. South India Shipping Corp [1981] 1 AER 289 and held that there was no inherent or common law jurisdiction in the High Court to intervene in the conduct of arbitrations.

11. One final point before I leave the Bina Jati case.  We are now left with two conflicting Court of Appeal cases concerning the existence or extent of the Court's inherent powers with regard to arbitration.  It cannot be denied that this is an important issue which justified deliberations by the highest court in the land.  Besides the existence of conflicting Court of Appeal decisions is one of the recognized circumstances where the Federal Court should grant leave to appeal: yet in this case the Federal Court declined to intervene without giving grounds for their decision.

12.  Parties to an international arbitration are commonly very wary of choosing a forum where there is a possibility of the arbitration proceedings being 'high jacked' by the local Courts of that forum.  The UNCITRAL Model Law on international arbitration recognizes that the courts of the chosen forum do have a role to play, for example in:-

1. the use of interim powers of protection and other forms of assistance to support the arbitration proceedings;

2. for the appointment challenge and removal of arbitrators, where the mechanism provided by the arbitration agreement fails;

3. to deal with issues of jurisdiction and public policy.

13. However article 5 of the Model Law provides that:-

"In matters governed by this Law, no Court shall intervene except where so provided in this Law."

14. I believe that the reason for this is precisely to exclude the possibility of the Courts taking over arbitration proceedings though the use of inherent powers.  I hope that our new Arbitration Act will address this issue.

Channel Tunnel Group Ltd v. Balfour Beatty Construction Ltd [1993] AC 334
(the Channel Tunnel case)

15.  This case is of great interest and importance on the matter of the policy of the courts in relation to the use of interim measures of protection, where the parties have chosen an arbitral forum.

16.  In that case plaintiffs, Channel Tunnel Group Ltd, employed the defendants, Balfour Beatty Construction, to build a tunnel under the English channel between England and France.  The contract provided a two tiered dispute resolution procedure involving initial reference to a panel of experts and final settlement by arbitration in Brussels, Belgium.  A dispute having arisen, the defendants threatened to suspend work alleging that the plaintiffs were in breach of contract.  The plaintiffs then issued a writ in the English High Court and sought an interim injunction to restrain the defendants from suspending work.  The defendants filed an application in these proceedings for a stay of the action in favour of arbitration under s. 1 of the Arbitration Act, 1975.

17. The Court of Appeal had granted the defendants a stay of the action, holding that a party to an arbitration agreement was not entitled to disregard the arbitration procedure and that the court's power to grant an injunction (if it existed) should not be exercised as a matter of judicial restraint where there was an agreement to submit a dispute to an arbitration abroad.

18.  On the plaintiffs appeal to the House of Lords there was argument inter alia on:-

1. whether there was powers under s. 12(6)(h) of the Arbitration Act, 1950 (the equivalent of s. 13(6)(h) of our Act), to grant an interim injunction in respect of a foreign arbitration;

2. whether there was a power to grant an injunction independently of the Arbitration Act under the general statutory power of section 37(1) of the Supreme Court Act.

3. if the answer to either (a) or (b) is in the affirmative, whether such an injunction should be granted in the circumstances of the case.

19. The decision of the House of Lords dismissing the appeal was unanimous and the leading speech was made my Lord Mustill.

20.  It was first decided that on a true construction of s. 12(6)(h) of the Arbitration Act, 1950, there was no power to grant an interim injunction in respect of a foreign arbitration.  I do not intend to comment on this part of the decision except to say that it would be a powerful precedent to support a similar conclusion in Malaysia since the wording of the equivalent provision of our Act, so long as it remains in force, is identical.

21.  Coming to the next point (b), the Respondents had argued that, following the Bremer Vulcan case referred to above, the English Courts had no inherent supervisory power over the conduct of arbitrations more extensive than the powers conferred by the Arbitration Acts.  Lord Mustill was in full agreement with the general principle laid down in the Bremer Vulcan case holding (at p. 364 F):

"this principle is an essential element in the balance of the partnership which exists under English law between the arbitral process and the Courts and I say nothing to shed any doubt whatever upon it."

22.  But Lord Mustill held that the Bremer Vulcan principle had no application to the Channel Tunnel case.  He said:-

"Secondly the injunction claimed in Bremer Vulkan would have involved a direct interference by the court in the arbitral process, and thus an infringement of the parties' agreement that the conduct of the dispute should be entrusted to the arbitrators alone, subject only to the limited degree of judicial control implicit in the choice of English law, and hence of English statute law, as part of the curial law of the contract.  The purpose of interim measures of protection, by contrast, is not to encroach on the procedural powers of the arbitrators but to reinforce them, and to render more effective the decision at which the arbitrators will ultimately arrive on the substance of the dispute.  Provided that this and no more is what such measures aim to do, there is nothing in them contrary to the spirit of international arbitration."

23. Lord Mustill went on to hold that the inherent power to grant injunctions in aid of a foreign arbitration did exist and could be combined with a stay of the action.  However whether that power should be exercised in the circumstances of the Channel Tunnel case was an entirely different matter; and on this last aspect Lord Mustill went on to decide that, since the grant of the injunction claimed would largely pre-empt any decision ultimately to be made by the panel of arbitrators, it would not be appropriate in the circumstances to grant that relief.  At p. 367 G, Lord Mustill commented:-

"There is always a tension when the court is asked to order, by way of interim relief in support of an arbitration, a remedy of the same kind as will ultimately be sought from the arbitrators: between, on the one hand, the need for the court to make a tentative assessment of the merits in order to decide whether the plaintiff's claim is strong enough to merit protection, and on the other the duty of the court to respect the choice of tribunal which both parties have made, and not to take out of the hands of the arbitrators (or other decision-makers) a power of decision which the parties have entrusted to them alone.  In the present instance I consider that the latter consideration must prevail.  The court has stayed  the action so that the panel and the arbitrators can decide whether to order a final mandatory injunction.  If the court now itself orders an interlocutory mandatory injunction, there will be very little left for the arbitrators to decide."

24.   The reasoning of Lord Mustill in the matter of the exercise of the discretion is a powerful illustration of what I consider is and should rightly be the guiding principle that the High Court should bear in mind i.e. it should grant interim relief to support and not to preempt, interfere with or obstruct the arbitral proceedings.

25. One more question before I leave the Channel Tunnel case.  Does the decision in the Channel Tunnel case on the existence of the inherent power to grant injunctions cast any doubt on the correctness of the decision of the Court of Appeal in the Sarawak Shell cited above or suggest that Bina Jati may have been correctly decided after all?

26.  My answer is an emphatic no to both questions for the reason given by Lord Mustill in the passage cited at paragraph 22 above.

27. The Sarawak Shell case was to use the words of Mahadev Shankar JCA' an attempt to stymie the arbitration'.  Like Bina Jati, it was a case where one party sought to put an end to the arbitration by a transfer of proceedings to the High Court, and therefore involving a direct interference by the Court in the arbitral process. Both these cases are clearly distinguishable in the words of Lord Mustill to the situation where an injunction is sought 'not to encroach on the powers of the arbitrators but to enforce them and to render more effective the decision at which the arbitrators will ultimately arrive'.

Thye Hin Enterprises Sdn Bhd v. Daimler Chrysler Malaysia Sdn Bhd [2005] 1 MLJ 293
(the Thye Hin case)

28.  I had not intended to talk about s. 34 of the Arbitration Act, about which  much has been written, because hopefully it will be past history in a few months time.  However my analysis of the Channel Tunnel case has led me to take another look at the Thye Hin case, where for the first time the stone wall of s. 34 has been breached to the extent of the granting of interim measures of protection to maintain the status quo pending the decision of the arbitrators in an arbitration to which s. 34 applies. 

29.  I have previously commented on this case that the Court of Appeal relied heavily on the article by Mr. Sundra Rajoo published in [2003] 3 MLJ Xlix where he was essentially expressing a view of what the law ought to be rather than what it was.  However that article refers to the passage of Lord Mustill in the Channel Tunnel case which I have quoted above; and it does seem to me that the reasoning of Lord Mustill as to the existence of a power to grant injunctions more extensive than the powers granted under the Arbitration Act can be extended to overcome the restrictions of s. 34 and that the Thye Hin case was in the end result rightly decided.

30.  In the Channel Tunnel case, it was held that an interlocutory injunction could be granted in aid of a foreign arbitration under section 37(1) of the Supreme Court Act 1981.  That Act does not apply in Malaysia but by the Courts of Judicature Act 1964 s 23(2), the Malaysian High Court does have 'such jurisdiction as was vested in it immediately prior to Malaysia day'.  The jurisdiction of the Malaysian High Court immediately prior to Malaysia Day was set out in the Courts Ordinance 1948, which was only repealed by the Courts of Judicature Act.

31. The Courts Ordinance by s. 47 and the second schedule undoubtedly gives the High Court a general power to grant injunctions to provide for interim preservation of the subject matter of any cause or matter.

32.  As explained by Lord Mustill at p. 361 c of his speech in Channel Tunnel case, s. 37 of the Supreme Court Act 1981 is not a new provision and similar powers were already in existence under s. 45(1) of the Supreme Court of Judicature Act 1925 and before that under s. 25(8) of the Supreme Court of Judicature Act, 1873.  Therefore it is clear that the Malaysian High Court did have a general power to grant injunctions independently of the Arbitration Act.

33. S. 34 of the Arbitration Act does not seek to exclude the powers of the High Court.  It only says that 'the provisions of the Act or other written law shall not apply' to arbitrations coming within its purview.  Following the Channel Tunnelcase, it can be argued that a power to grant an injunction independently of the Arbitration Act exists; and therefore an injunction can be granted by the Malaysia High Court without relying on the Arbitration Act.  The only  drawback to this argument is that the Court of Judicature Act and its predecessor the Courts Ordinance 1948 may still come within the broad description of  'other written law'.

34. However I have always argued in favour of a purposive interpretation of the term 'other written law' in s. 34 of the Act.  At one extreme it could be construed as 'other written law' which replaces the Arbitration Act 1952 or limited to other written law which is concerned with procedural matters relating to arbitration.  On the other, it can be construed in its literal meaning to include substantive laws such as the Contracts Act or even the English common law which is introduced into Malaysian law via the Civil Law Act 1956.  But such an interpretation would lead to absurdities, and I believe that the Thye Hin case when read in the light of the Channel Tunnel case  has opened the doors to a limited and principled exercise by the High Court of injunctive relief to support the arbitration process in RCA,KL arbitrations.

*This paper was delivered at the 13th Malaysian Law Conference.