The ambiguous legal position of the grounds to set aside an arbitral award since the Arbitration Act 2005 came into force has finally been settled in the recent Federal Court decision in Far East Holdings Bhd & Anor v. Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals.
This case arose from a domestic arbitration where the arbitral tribunal made an award in favor of the respondent (ie, the claimant in the arbitration) against the appellant (ie, the respondent in the arbitration). Thereafter, the respondent applied for recognition and enforcement of the award, whereas the appellant referred a series of questions of law arising out of the award under Section 42 of the Arbitration Act 2005, one of which is whether the grounds to set aside an arbitral award developed under the previous Arbitration Act 1952 are applicable to Section 42 of the Arbitration Act 2005.
Prior to the Arbitration Act 2005, an award could be set aside on the grounds that (i) the arbitrator has misconducted themselves or the proceedings; or (ii) an arbitration or award has been improperly procured. Nevertheless, the Malaysian common law also accepted the common law ground of “error of law on the face of the award” although there was no such provision made in the previous legislation.
After the coming into force of the Arbitration Act 2005, the application to set aside an award has to be made within 90 days of the date on which the party making the application has received the award or of the date on which the request to correct or interpret an award is disposed, and that too will only be allowed if one of the prescribed circumstances is fulfilled. The circumstances envisaged are given below for easy reference:
(a) the party making the application provides proof that:
(i) a party to the arbitration agreement was under any incapacity;
(ii) the arbitration agreement is not valid under the law to which the parties have subjected it, or, failing any indication thereon, under the laws of Malaysia;
(iii) the party making the application was not given proper notice of the appointment of an arbitrator or of the arbitral proceedings or was otherwise unable to present that party’s case;
(b) the High Court finds that:
Nevertheless, Section 42 of the Arbitration Act 2005 provides that parties may refer to the High Court “any question of law arising out of an award” and the High Court can only dismiss such reference “unless the question of law substantially affects the rights of one or more of the parties,” where on determination, the High Court may confirm or vary the award, remit the award wholly or partly to arbitral tribunal for reconsideration, or set aside the award wholly or partly.
The Federal Court held that the common law ground of “error of law on the face of the award” and the considerations of “illegality,” “manifestly unlawful and unconscionable,” “perverse” and “patent injustice” are no longer applicable, and proceeded to hold that the only consideration is whether there is a question of law arising from the award and substantially affecting the rights of one or more of the parties.
The Federal Court also provided a non-exhaustive list of questions which constitute a “question of law” under Section 42 of the Arbitration Act 2005, which includes questions as to:
(a) the law in relation to the identification of all material rules of statute and common law, the identification and interpretation of the relevant parts of the contract, and the identification of those facts that must be taken into account when the decision is reached;
(b) whether the decision of the tribunal was wrong;
(c) whether there was an erroneous application of law;
(d) whether the correct application of the law inevitably leads to one answer and the tribunal has given another;
(e) the correctness of the law applied;
(f) the correctness of the tests applied;
(g) the legal effect to be given to an undisputed set of facts;
(h) whether the tribunal has jurisdiction to determine a particular matter (which may also come under Section 37 of the Arbitration Act (2005); and
(i) construction of a document.
This non-exhaustive list of questions appears to undermine the finality of an award where a litigant who is dissatisfied with the award may seek to vary or set aside the award by referring the award to the High Court, so long as there exists a question of law which substantially affects the rights of one or more of the parties.
In hindsight, it may also be a relief to the aggrieved party who obtained an award with some form of error but would not have been able to seek relief under the previous law as the error of law on the face of the award is not such that is “patent and obvious as to render the award manifestly unlawful and unconscionable to subsist.”9
Be that as it may, Section 42 is only applicable to domestic arbitration unless otherwise agreed by the parties in writing, and will only apply to international arbitration if it is so agreed by the parties in writing.