The Federal Court's recent decision in Jan De Nul (Malaysia) Sdn Bhd v Vincent Tan Chee Yioun(1) arose from a dispute between Jan De Nul (JDN) and Central Malaysian Properties Sdn Bhd (CMP) during a land reclamation project.
CMP was the developer of the project. It awarded the construction work to JDN. While completing the project, part of the reclaimed platform collapsed into the sea, leading to the loss of a life. In the meantime, CMP defaulted on its progress payments to JDN, leading JDN to terminate the contract. The parties referred the dispute to arbitration.
The arbitral tribunal made the following orders as part of its award:
- As JDN had validly terminated the contract, the tribunal allowed its claim.
- However, as JDN was responsible for the disaster that led to the loss of life, CMP's counterclaim was allowed.
- Both parties' respective claims were set off against each other with the consequence that JDN had to pay CMP RM3,154,861.29.
JDN applied to set aside the award pursuant to Sections 37(1)(b)(ii) and 37(2)(b)(ii) of the Arbitration Act 2005. One of its grounds to set aside the award was that the award breached public policy and natural justice. The relevant high court and Court of Appeal dismissed JDN's appeal. However, JDN was granted leave to appeal to the Federal Court.
The question referred to the Federal Court was:
Whether as a matter of law the Court of Appeal is correct in ruling that the test for the intervention of the court under s. 37 Arbitration Act 2005 as 'one where the award suffer[ed] from patent injustice and/or where the award is manifestly unlawful and unconscionable', bearing in mind that:
1. the same cannot be found in the language of s. 37 Arbitration Act 2005;
2. the same is not derived from any jurisprudence of the Model Law; and
3. the same has been rejected by the Federal Court in Far East Holdings Bhd & Anor v. Majlis Ugama Islam dan Adat Resam Melayu Pahang & 2 Other Appeals as the test for intervention under s. 42 Arbitration Act 2005.
Public policy considerations Section 37 The Federal Court held that although public policy is a broad concept, when applying it for the purpose of setting aside an award under Section 37 of the Arbitration Act, this concept should be read narrowly.
The Federal Court further held that even where such a conflict with public policy is established, the court's power to set aside an award under Section 37 remains discretionary. Further, the Federal Court reiterated that the courts should be slow to interfere with or set aside an arbitral award, as constant interference would defeat the spirit of the Arbitration Act, which seeks to promote one-stop adjudication in line with international practice.
Therefore, the scope of the public policy ground for setting aside an arbitral award can be invoked only in deserving cases (eg, where an award violates the most basic notions of morality and justice or would shock the public conscience or be injurious to the public good).
In referencing Ajwa for Food Industries Co (MIGOP) v Pacific Inter-Link Sdn Bhd,(2) the Federal Court stated that instances of "patent injustice", "manifestly unlawful and unconscionable" actions, "substantial injustice", "serious irregularity" and other flaws in the arbitral process and award fall within the concept of public policy. Therefore, where these injustices can be proved, Section 37(1)(b)(ii) allows the court to exercise its discretion to set aside an award.
UNCITRAL Model Law on International Commercial Arbitration The Federal Court held that in considering whether to set aside an arbitral award on grounds of public policy under Section 37 of the Arbitration Act, the court must adopt the principles set out in A guide to the UNCITRAL Model on International Commercial Arbitration: Legislative History and Commentary.(3) The term 'public policy' is not equivalent to the political stance or international policies of a state, but rather comprises the fundamental notions and principles of justice. It is understood that the term 'public policy', which was used in the 1958 New York Convention and many other treaties, covers fundamental principles of law and justice in substantive and procedural respects.
Intervention under Sections 37 and 42 The Federal Court held that Sections 37 and 42 of the Arbitration Act relate to different purposes and tests for consideration. An application to set aside an award under Section 37 largely deals with issues relating to the award-making process and has nothing to do with errors of fact or law on the face of the record, unless the exception applies (eg, in the case of public policy). An application under Section 42 cannot relate to the award-making process, but rather must concern the award per se and errors of law on the face of the record which substantially affect the rights of one or more of the parties.
The court in Far East Holdings Bhd v Majlis Ugama Islam dan Adat Resam Melayu Pahang held that perverse, unconscionable or unreasonable injustices are not tests for setting aside an award under Section 42. However, according to the Federal Court before this instant appeal, that decision applies only in the context of Section 42, not Section 37, of the Arbitration Act.
Test for Section 37 That said, the Federal Court found there was nothing to show that the Court of Appeal had dismissed JDN's appeal on the grounds of patent injustice or a manifestly unlawful and unconscionable act. As such, the Federal Court ruled that it was unable to answer the question of law posed.
The Federal Court has clarified the high threshold required for an arbitral award to be set aside on grounds of public policy pursuant to Section 37 of the Arbitration Act.
For further information on this topic please contact K Shanti Mogan at Shearn Delamore & Co by telephone (+60 320 272 727) or email (firstname.lastname@example.org). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.