In Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd,(1) the key issue before the Federal Court was whether the Sabah and Sarawak High Court at Kota Kinabalu had jurisdiction to hear an application filed by a project developer to set aside an arbitration award pursuant to sections 37 and 42 of the Arbitration Act 2005 (the Act).(2) In regard to this specific issue, the Federal Court recognised arbitration law as a special law that generally operates independently from civil law. This method of harmonious interpretation was also used to interpret the Constitution.
This case was a typical construction dispute between a developer and the main contractor of a development project at ITCC Penampang, Sabah. At the end of the arbitration proceedings, the arbitrator awarded the total principal sum of over 26 million ringgit to the main contractor, which primarily consisted of payments for work done and damages due to unlawful termination.
The "chaos" and "confusion"(3) started after the award's publication. The successful party (the main contractor) filed an application to enforce and register the arbitration award as a high court judgment, pursuant to section 38 of the Act, before the Malaya High Court at Kuala Lumpur. Two days later, the unsuccessful party (the developer) applied to set aside the same award before the Sabah and Sarawak High Court at Kota Kinabalu, pursuant to sections 37 and 42 of the Act.
Due to the parallel proceedings before the Malaya High Court at Kuala Lumpur and the Sabah and Sarawak High Court at Kota Kinabalu, there was a plethora of interlocutory applications and proceedings before the two courts and the Court of Appeal. For example, the same award was recognised by the Malaya High Court at Kuala Lumpur, but it was partially set aside by the Sabah and Sarawak High Court at Kota Kinabalu, thus resulting in two conflicting high court decisions.
The Federal Court was cognisant of the potential repercussion of its decision on the proceedings before the high courts and Court of Appeal between the same parties. As such, the Federal Court invited the solicitors acting for the parties in the affected appeals before the Court of Appeal to appear as "interested parties" in the appeal.
The Federal Court granted leave to the main contractor to appeal on three questions of law:
- question one – by reason of Hap Seng Plantations (River Estates) Sdn Bhd v Excess Interpoint Sdn Bhd,(4) among other things, did the Malaya High Court and the Sabah and Sarawak High Court each have its own separate territorial jurisdiction? There are two separate supervisory jurisdictions in Malaysia over arbitrations or arbitration awards:
- under the Malaya High Court; and
- under the Sabah and Sarawak High Court;
- question two – by reason of Hap Seng, among other things, did the Sabah and Sarawak High Court at Kota Kinabalu have supervisory jurisdiction to hear an application to set aside an arbitration award issued in Kuala Lumpur?
- question three – in the context of there being two separate territorial jurisdictions in Malaysia, can the seat of a domestic arbitration may be a state or territory within Malaysia?
As well as the questions of law, the Federal Court formulated five issues for determination:
- Is seat relevant to domestic arbitrations in Malaysia?
- If seat is relevant, does the supervisory court have exclusive jurisdiction over the domestic arbitration?
- If seat is irrelevant, how is the supervisory court to be ascertained?
- Is the concept of territorial jurisdiction or the concept of place of cause of action used to regulate domestic arbitrations?
- When there are conflicting decisions from registrations and setting aside proceedings, which decision should prevail?
Is seat relevant to domestic arbitrations?
This issue was important, as the Court of Appeal held that the concept of "seat" is irrelevant in domestic arbitrations, given that the same curial law (ie, the Act) applies throughout Malaysia. In this regard, the Federal Court held that the Court of Appeal had failed to appreciate that seat is important not just in identifying the curial law, but also in identifying the supervisory court (ie, the court which has exclusive jurisdiction over the arbitration).
In determining the supervisory court, the Federal Court held that the Act must be the starting point, as it comprises the primary source of regulating arbitration in Malaysia. Upon interpreting the preamble of the Act and sections 2, 3, 10, 22, 33, 37, 38 and 41 of the Act, the Federal Court noted that it makes no distinction between international and domestic arbitrations in relation to seat. In respect of the phrase "seat in Malaysia" in section 22 therein, the Federal Court held that the only reasonable interpretation is that the seat is within Malaysia. Thus, the seat cannot be Malaysia, but must be a location within Malaysia.
The concept of territorial jurisdiction in civil law cannot be used to determine seat in arbitral law. In Malaysia, arbitrations are governed by its special, complete and comprehensive codification of arbitration law (ie, the Act); the Act is modelled on the United Nations Commission on International Trade Law (UNCITRAL) Model Law and it is designed to accommodate both domestic and international arbitrations. A reference was also made in the judgment of this case to the Latin maxim of generalia specialibus non derogant. Thus, references should not be made to section 23 of the Courts of Judicature Act 1964 or article 121 of the Constitution. Arbitration is not a civil dispute in the context envisaged by the Courts of Judicature Act. The Federal Court held that such interpretation is in line with article 121 of the Constitution.
The Federal Court was particularly influenced by Indian case law, as the arbitration legislation in India – the Arbitration and Conciliation Act – is also based on the UNCITRAL Model Law. In BGS SGS Soma JV v NHPC Ltd(5) the Indian Supreme Court held that the seat was New Delhi, rather than Faridabad, both of which are in India.
Hence, the Malaysian Federal Court concluded that seat is relevant in domestic arbitrations. In this case, the seat was Kuala Lumpur. As such, the supervisory court was only the Malaya High Court at Kuala Lumpur. The Malaya High Court and the Sabah and Sarawak High Court at Kota Kinabalu cannot enjoy concurrent jurisdiction in all domestic arbitrations.
The Federal Court adopted the same reasoning process to deal with the remaining issues in the main contractor's favour.
The supervisory court is vested with the exclusive jurisdiction to regulate or supervise the arbitrate proceedings, be they domestic or international arbitrations.
The concepts of territorial jurisdiction or place of cause of action (applicable to civil disputes in general) cannot be used to regulate domestic arbitrations. Arbitrations (be they domestic or international) are regulated by the Act in Malaysia.
As the Federal Court had held that only the supervisory court has jurisdiction over an arbitration, any decision from a non-supervisory court purporting to exercise jurisdiction over the arbitration is void, including the Sabah and Sarawak High Court at Kota Kinabalu's decision, which purported to partially set aside the award and to remit the award for redetermination before the arbitrator. Hence, the Malaya High Court at Kuala Lumpur's decision, which registered the award, prevailed.
Questions of law
Adopting similar analysis to that used to resolve the first issue, the Federal Court answered the three questions of law as follows:
- question one – not answered;
- question two – the Sabah and Sarawak High Court at Kota Kinabalu does not have the supervisory jurisdiction to hear an application to set aside an arbitration award where the seat of the domestic arbitration is in Kuala Lumpur; and
- question three – answered in the affirmative.
Ultimately, the Federal Court:
- allowed the main contractor's appeal, with costs of 100,000 ringgit;
- set aside the Court of Appeal's reinstatement decision; and
- set aside the Sabah and Sarawak High Court at Kota Kinabalu's setting aside decision.
For further information on this topic please contact Foo Joon Liang or Lee Xin Div at Gan Partnership by telephone (+603 7931 7060) or email ([email protected] or [email protected]). The Gan Partnership website can be accessed at www.ganlaw.my.
(1) Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd  1 LNS 1245 (Federal Court).
(2) Section 42 of the Act was repealed by the Arbitration (Amendment) (2) Act 2018, which came into force on 8 May 2018.
(3) The words "chaos" and "confusion" were mentioned three times by the Federal Court in this case.
(4) Hap Seng Plantations (River Estates) Sdn Bhd v Excess Interpoint Sdn Bhd  3 MLJ 553 (Federal Court).
(5) BGS SGS Soma JV v NHPC Ltd  3 MLJ 336 (Indian Supreme Court).