Case Summary on the Interpretation of S.37 of the Arbitration Act 2005

MASTER MULIA SDN BHD

v

SIGUR RUS SDN BHD

FEDERAL COURT – CIVIL APPEAL NOS. 02(F)-33-05/2018(W)

MOHD ZAWAWI SALLEH, VERNON ONG LAM KIAT, ABDUL RAHMAN SEBLI, ZALEHA YUSOF FCJ, BADARIAH SAHAMID JCA

27 August 2020

Arbitration — Dispute resolution — Setting aside — Application to set aside decision of arbitrator — Interpretation of s 37 of the Arbitration Act 2005 (‘the AA’) — Applicability of Art 34 of the Model Law — The New York Convention — Breach of natural justice —whether the High Court is bound to set aside an arbitration award as a matter of course where a complaint of breach of the rules of natural justice is established — whether the High Court is bound to set aside the whole award where the complaint in respect of only one of the three principal issues before the arbitrator is made out — whether the Court of Appeal has erred in adopting a strict reading of s 37 and setting aside the whole award — whether breach of natural justice has to affect the outcome of the case

The appellant, Master Mulia, and the respondent, Sigur Rus are parties to a Charter party Agreement (CPA). The appellant hired out its vessel to the respondent for undersea pipelines installation works in the high seas. A pipeline installation arm called Stinger Hitch was installed on the vessel for the purpose of conducting the works. Under the CPA, the original period of hire was from 23.10.2012 to 21.11.2012. The period of hire was extended twice until the final date on 26.01.2013; after which the respondent will be liable to pay a certain daily sum until the redelivery of the vessel. As the Stinger Hitch was damaged on 09.01.2013, the respondent suspended works and carried temporary repairs to the damaged Stinger Hitch to enable it to complete the remaining works. The charter party was paid until 14.02.2013 and the vessel was redelivered to the appellant on 05.03.2013, a period of 37 days after the due delivery date. The appellant claimed that the respondent was obliged to pay daily charter hire for the charter period from 15.02.2013 to 22.05.2013, being the date after the vessel had been dry-docked for reinstatement works, in the sum of USD 3,968,279.00. The appellant also claimed costs of repairs and/or reinstatement of the vessel, usage of consumables, medicine, tools, communications and equipment of the vessel during the charter period and extension of the validity of the Bank Guarantee for the extended period of charter.

The disputes between the parties were firstly referred to arbitration, where an Award was decided in the favour of the appellant. The respondent then applied to the High Court to set aside the Award. The respondent relied on two grounds namely: (i) that the Award was issued in breach of the rules of natural justice in contrary to ss 37(1)(b)(ii) and 37(2)(b); and (ii) that the Award went beyond the scope of submission to arbitration under ss 37(1)(a)(iv) of the AA 2005. Notwithstanding the finding that the Award was in breach of natural justice, the High Court affirmed the Award on the ground that the respondent had failed to show that it suffered actual or real prejudice arising from the breach of the rules of natural justice. The respondent again, appealed to the Court of Appeal, where the appeal was decided in favour of the respondent and the Award was set aside for breaching the rules of natural justice. The Court found that the arbitrator had failed to indicate two pieces of critical and material evidence to the parties, until the Award was rendered, by which time it was too late. The material evidence here related to the cause of damage to the Stinger Hitch, whereby the appellant had chosen to frame the cause as one grounded in negligence. This submission invited response submissions from the respondent, where the respondent denied the claims and required the appellant to prove its claims that the respondent’s negligent act in operating and/or handling the Stinger Hitch had caused the structural alteration and modification to the vessel. The Court of Appeal held that the evidence in question related to the very heart of the dispute between the parties and, without the evidence, the arbitrator could not have been in the position to make the orders for monetary compensation in the form of payment for the extended period of charter hire and the costs of repair and reinstatement that were mentioned at the outset of the judgment. Therefore, the Award was liable to be set aside under ss 37(1)(a) of the AA 2005.

The appellant sought leave to appeal to the Federal Court and the Federal Court allowed leave to appeal to the Federal Court on following questions of law.

Issues

1. Whether the High Court in exercising its jurisdiction under s 37 of the AA 2005 is bound to set aside an arbitration award if any of the grounds of challenge under ss 37(1) or (2) is established?

2. Whether the High Court in exercising its jurisdiction under s 37 of the AA 2005 is obliged to set aside the whole Award if the plaintiff has succeeded only one out of the three principal issues before the Arbitrator?

3. Where an application is made jointly under s 37 and s 42 of the AA 2005 to set aside an Award and only part of the Award is found to be bad in law, whether the Court would be entitled under ss 42(2) to set aside the Award in part or to vary it accordingly?

4. Where a breach of natural justice is justified to set aside an arbitration award under ss 37(1)(b)(ii) and ss 37(2)(b), is it sufficient for the plaintiff to prove the alleged breach of natural justice without also establishing that the alleged breach would have made a difference to the outcome of the case?

Held, dismissing the appeal with costs, thereby affirming the decision of the Court of Appeal.

1. The guiding principles on the exercise of residual discretion to set aside an arbitral Award on the ground of breach of natural justice is as follows: [see para 53]

• The court must consider (a) which rule of natural justice was breached; (b) how it was breached; and (c) the connection between the breach and the making of the award;
•  The court must consider the seriousness of the breach and whether the breach was material to the outcome of the arbitral proceeding;
•  Discretion will be refused if the breach was immaterial or was not likely to affect the outcome;
•  The court may refuse to set aside the award even if there is a serious breach if the breach would not have any real impact on the result and the arbitral tribunal would not have reached a different outcome;
• The award may be set aside where the breach is significant and might have affected the outcome;
•  In some instances, the significance of the beach may be so great that the setting aside of the award is practically automatic, regardless of the effect on the outcome of the award;
•  The materiality of the breach and the possible effect on the outcome are relevant factors to be considered by the Court, but they are not the determinant factors;
•  Whilst materiality and causative factors are necessary to be established, prejudice is not a pre-requisite or requirement to set aside an Award for breach of the rules of natural justice.

2. The Singapore position is not applicable in Malaysia as ss 37(1)(b)(ii) and 37(2)(b)(ii) do not require prejudice to be established. Instead s 37 mirrors the setting aside provision on the NZ Act. The question of whether an award ought to be set aside for breach of natural justice does not turn on prejudice. It turns instead, on amongst other things, the significance of the breach and the extent to which it might or may have affected the outcome of the arbitration. It is not necessary to show that the breach did in fact affect the outcome. Materiality of the breach and the possible effect on the outcome are treated as relevant factors going to the exercise of the discretion. Prejudice, if it can be shown, would be material. However, no single factor is decisive or necessary for an award to be set aside. Hence, the threshold under s 37 is very low compared to that under s 42 of the AA 2005. [see para 56 – 58]

3. There is no basis on which it can be said that the onus is on the applicant to show that the consequences of the breach are sufficiently material to warrant setting aside an award. The ordinary burden on an applicant cannot be elevated to a legal requirement to show that the outcome would be different had the breach not occurred. [see para 58]

4. Although the Court’s discretion to set aside an award under s 37(1) is unfettered, it must be exercised with regard to the policies and objectives underpinning the AA 2005. The Federal Court held that the High Court in exercising its jurisdiction under s 37 is not bound to set aside an arbitration award merely because any of the grounds of challenge under ss 37(1) or (2) is made out by a party. The Court also held that the High Court is not obliged under s 37 to set aside the whole Award if only one of the three issues is made out. Hence, Questions 1 and 2 are answered in the negative. [see para 59]

5. In this case, the Court of Appeal was correct in setting aside the entire award on the basis that the breach had material and causative effect on the outcome of the arbitration. This was due to the fact that the Court of Appeal found that the two pieces of evidence were relevant and material to the issue of causation of the damage to the Stinger Hitch, and the evidence in question were considered by the arbitrator without informing the parties until the Award was rendered. As such, the case which had been submitted for arbitration had been redefined by the arbitrator without giving the parties the opportunity to present their responses. [see para 60]

6. Question 3 is wrongly premised on the assumption that only one part of the Award is bad in law. The Federal Court declined to deal with Question 3. [see para 61]

7. Question 4 has been answered in the foregoing paragraphs on the guiding principles on the exercise of discretion. To reiterate, a mere finding of a breach of the rules of natural justice is in itself insufficient. It must be shown that the breach was significant or serious such as to have an impact on the outcome of the arbitration. Prejudice is a relevant consideration, not a requirement. [see para 62]

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