Federal Court sets aside arbitration award for breach of natural justice

Master Mulia Sdn Bhd v Sigur Rus Sdn Bhd [2020] 9 CLJ 213; [2020] 12 MLJ 198

Summary

In Malaysia, Section 37 of the Arbitration Act 2005 (“AA 2005”) sets out the instances in which an arbitration award may be set aside. In this case, the Federal Court considered the circumstances in which it will be appropriate to set aside an arbitration award where an arbitrator has breached the rules of natural justice.

 Brief Facts

At the arbitration

The arbitrator decided in favor of the Appellant and awarded a significant sum in damages. In making the award the arbitrator relied on extraneous evidence that did not form part of the arbitration proceedings, and on which the parties had no opportunity to comment.

At the High Court

The High Court found that the arbitrator had breached the rules of natural justice by failing to inform the parties of the extraneous evidence and allow them an opportunity to test it.

However, the High Court affirmed the award as the Respondent failed to show that it suffered actual or real prejudice arising from the breach of the rules of natural justice.

At the Court of Appeal

The Court of Appeal concurred with the High Court that the extraneous evidence had been considered by the arbitrator without reference to the parties before the award was rendered. It was further found that the evidence was relevant and material to the issue of causation of the damage. The Court of Appeal concluded that there had been a breach of the rules of natural justice which was of sufficient gravity to set aside the award.

At the Federal Court

The Federal Court concurred with the Court of Appeal in setting aside the entire award on the basis that the breach had a material and causative effect on the outcome of the arbitration.

 The key points  

The Court set out the following guiding principles on the exercise of judicial discretion when an application for setting aside an award is founded on the breach of natural justice (summarised from paragraph 53 of the CLJ Report):

1.The court must consider (a) which rule of natural justice was breached, (b) how it was breached, and (c) in what way the breach was connected to the making of the award;

2.The court must consider the seriousness of the breach- whether it was material to the outcome of the arbitral proceeding?

3. If the breach is relatively immaterial or was not likely to have affected the outcome, the application to set aside will be refused;

4. Even if the court finds that 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 conclusion, then the court may refuse to set aside the award;

5. Where the breach is significant and might have affected the outcome, the award may be set aside;

6. In some instances, the significance of the breach may be so great that the setting aside of the award is practically automatic, regardless of the effect on the outcome of the award;

7. The materiality of the breach and the possible effect on the outcome are relevant factors for consideration by the court; and

8. Prejudice is not a pre-requisite or requirement to set aside an award for breach of the rules of natural justice.

CONCLUSION

The Federal Court decided on several issues but the discussion on whether prejudice should be a requirement to set aside an award for breach of the rules of natural justice was arguably the most noteworthy.

Prejudice is a relevant consideration. However, similar to other factors, it is not decisive or necessary for an award to be set aside. Where a breach of natural justice has occurred it may be sufficient to show that it is significant and material to the case for the award to be set aside.

Article prepared by:

Anis Baharin, Legal Associates



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