Tan Sri Dato' Cecil W M Abraham Dato’ Sunil Abraham August 4 2022 Judicial approach to application and construction of Arbitration Act 2005 in Malaysia: section 42 Cecil Abraham & Partners | Arbitration & ADR - Malaysia Tan Sri Dato' Cecil W M Abraham, Dato’ Sunil Abraham Arbitration & ADR BackgroundApplicabilityRecent developmentCommentOver 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 the notion of a question of a law to be referred to a court for determination pursuant to section 42.(1)BackgroundSection 42(1) of the 2005 Act was initially enacted as follows: "Any party may refer to the High Court any question of law arising out of an award." On 1 July 2011, section 42(1) of the 2005 was amended to read as follows:Any party may refer to the High Court any question of law arising out of an award.Under subsection (1A), there is a distinct requirement that the High court shall dismiss that reference unless the question of law 'substantially affects the rights of one or more of the parties'.It should be noted that there is no equivalent of section 42 of the 2005 Act in the United Nations Commission of International Trade Law Model Law.ApplicabilityThe court's jurisdiction under section 42 of the 2005 Act is a discretionary one. An applicant would have to identify or formulate questions of law, which have to arise from the arbitral award and should substantially affect the rights of the parties.Madam Justice Mary Lim (as she then was), in MMC Engineering Group Bhd v Wayss & Freytag (M) Sdn Bhd(2) set out a number of guidelines, which may be summarised as follows:the court's awareness of minimalistic intervention in arbitration matters;the general principle that the arbitral tribunal is both the master and final arbiter of the facts applies and there is no reason why any broad approach should be adopted just because a party is now pondering a question of law arising out of an award;the court should not look beyond the award, but where necessary, the documents and correspondence referred to in the award may be examined for context and proper appreciation;the absence of an appeal or leave mechanism advocates for a strict approach;the power under section 42 of the 2005 Act is limited and should not be lightly exercised save in clear and exceptional cases;the court should first determine whether questions of law have been properly identified;the questions of law must arise out of the award and not from the arbitral proceedings;the questions of law must not be academic but must be questions of practical importance requiring the opinion of the court;the questions of law cannot be the same questions that were referred to the arbitral tribunal for determination;the determination of the questions of law must substantially affect the rights of the parties;the grounds for referring the questions of law must be given;the interpretation of the applicable law by the arbitral tribunal must be obviously wrong;public law principles must not be in play in what is otherwise a private contractual dispute; andthe award must be viewed in its entirety in a fair and reasonable manner.(3)Madam Justice Hasnah Mohamed Hashim (as she then was), in Tune Insurance Malaysia Bhd & Anor v Messrs K Sila Dass & Partners,(4) set out a comprehensive list of considerations that would be applicable in an application under section 42 of the 2005 Act:the question of law must be identified with sufficient precision (Taman Bandar Baru Masai Sdn Bhd v Dindings Corporation Sdn Bhd;(5) Maimunah Deraman v Majlis Perbandaran Kemaman);the grounds in support must also be stated on the same basis;the question of law must arise from the award, not the arbitration proceeding generally (Majlis Amanah Rakyat v Kausar Corporation Sdn Bhd, Exceljade Sdn Bhd v Bauer (Malaysia) Sdn Bhd);(6)the party referring the question of law must satisfy the court that a determination of the question of law will substantially affect their rights;the question of law must be a legitimate question of law, and not a question of fact "dressed up" as a question of law (Georges SA v Thammo Gas Ltd (The Belarus));(7)the court must dismiss the reference if a determination of the question of law will not have a substantial effect on the rights of parties (Exceljade Sdn Bhd v Bauer (Malaysia) Sdn Bhd);(8)the jurisdiction under section 42 should be exercised only in clear and exceptional cases (Lembaga Kemajuan Ikan Malaysia v WJ Construction Sdn Bhd);(9)the intervention by the Court must only be if the award is manifestly unlawful and unconscionable;the arbitral tribunal remains the sole determiners of questions of fact and evidence (Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd);(10) andwhile the findings of facts and the application of legal principles by the arbitral tribunal may be wrong (in instances of findings of mixed fact and law), the court should not intervene unless the decision is perverse.(11)The underlying basis for section 42 of the 2005 Act was also analysed by Mr Justice Varghese George in the Court of Appeal in Chain Cycle Sdn Bhd v Kerajaan Malaysia.(12)The courts in Malaysia had therefore set out a number of guidelines with regard to the interpretation of section 42 of the 2005 Act. These guidelines, while not comprehensive, were helpful to determine questions of law under section 42 of the 2005 Act at the time.Recent developmentThe Federal Court in Far East Holdings Bhd & Anor v Majlis Ugama Islam dan Adat Restam Melayu Pahang and other appeals(13) had occasion to interpret section 42 of the 2005 Act and the Federal Court took the view that the question of law must be one of law and not fact. The Court set out a non-exhaustive list that would meet the paradigm of "any question of law" in section 42 of the 2005 Act – namely, a question:of law in relation to matters falling within two of Mustill J's three-stage test;as to whether the decision of the tribunal was wrong (The Chrysalis);as to whether there was an error of law, and not an error of fact (Micoperi) – that is, error of law in the sense of an erroneous application of law;as to whether the correct application of the law inevitably leads to one answer and the tribunal has given another (MRI Trading);as to the correctness of the law applied;as to the correctness of the tests applied (Canada v Southam);concerning the legal effect to be given to an undisputed set of facts (Carrier Lumber);as to whether the tribunal has jurisdiction to determine a particular matter (Premiums Brands). This may also come under section 37 of the 2005 Act; andof construction of a document (Intelek).CommentThis dicta of the Federal Court in Far East Holdings is somewhat controversial because it threatens the finality of arbitral awards and also the concept of the policy of minimal court intervention as provided for in section 8 of the 2005 Act. When section 42 of the 2005 Act (prior to its repeal) is construed, the prerequisites are that it must relate to "any question of law arising out of the Award but the application must be dismissed if the reference with regard to the question of law does not substantially affect the rights of one or more parties".The Federal Court in Far East Holdings merely decided that section 42 of the 2005 Act would be applicable because of the words "any question of law" and did not construe the words brought about by the amendment on 1 July 2011. The decision undermined sections 8 and 42 of the 2005 Act, especially as the courts had been following the various tests and guidelines previously laid down.In this regard, it may be argued that the Federal Court ought to have been more circumspect in its judicial analysis, choice of language and general approach before seeking to state that "any question of law" could form the basis for setting aside an award under section 42 of the 2005 Act. Regard ought to have been had to practical considerations. The ingenuity of lawyers enables them to formulate "so-called questions of law", which are questions of fact in disguise so as to pass the hurdle imposed by test laid down in Far East Holdings.The immediate consequence of the decision in Far East Holdings was that sections 42 and 43 of the 2005 Act were repealed. Some take the view that the expeditious nature in which sections 42 and 43 of the 2005 Act were repealed is indicative of the government of Malaysia's strong support, from a policy perspective, of a non-interventionist court driven approach to arbitration proceedings. Others, however, have opined that the approach of the government at the material time was too drastic.Some within the arbitral community feel that the act of repealing sections 42 and 43 of the 2005 Act ought to be reviewed. In particular, the Malaysian Bar Council has suggested that the way forward is to reinstate section 42 of the 2005 Act by incorporating a leave provision into it, following the practice and procedure in the United Kingdom, Singapore and Hong Kong, where leave is required in order to state the question of law.This proposal would bring the 2005 Act in line with the legislation in countries like Singapore, England and Hong Kong, which are centres that presently attract a considerable amount of arbitration. Dialogue between all stakeholders and the judiciary is needed in order to ascertain the best approach for Malaysia as a whole. Only then should measures possibly be taken to amend the 2005 Act, possibly through the reintroduction of sections 42 and 43 of the 2005 Act with appropriate safeguards in place.For further information on this topic please contact Tan Sri Dato' Cecil Abraham, Dato' Sunil Abraham or Anne Sangeetha Sebastian at Cecil Abraham & Partners by telephone (+60 3 2726 3700) or email ([email protected], [email protected] or [email protected]). The Cecil Abraham & Partners website can be accessed at cecilabraham.com.Endnotes(1) For earlier articles in the series, see:"Judicial approach to application and construction of Arbitration Act 2005 in Malaysia: introduction";"Judicial approach to application and construction of Arbitration Act 2005 in Malaysia: section 8"; and"Judicial approach to application and construction of Arbitration Act 2005 in Malaysia: section 37".(2)  10 MLJ 689.(3) Ibid at para .(4)  4 AMR 741;  9 CLJ, HC.(5)  5 CLJ 83.(6)  1 AMR 253.(7)  1 Lloyd's Rep 2015.(8)  1 AMR 253.(9)  8 CLJ 655.(10)  3 NZLR 318.(11)  4 AMR 741;  9 CLJ, HC at para  (per Hasnah Hashim J). See also Lembaga Kemajuan Ikan Malaysia v WJ Construction Sdn Bhd  5 MLJ 98.(12)  AMEJ 1479;  MLJU 557, CA.(13)  1 MLJ 1.