High Court affirms binding effect of arbitration award notwithstanding pending proceedings to challenge award in seat of arbitration

25 July 2022

In IPL Middle East DMCC v KNM Process Systems Sdn Bhd [2022] MLJU 136, the plaintiff was a foreign company incorporated in the United Arab Emirates, and the defendant was a Malaysian company. The plaintiff as supplier and the defendant as purchaser had entered into a contract for freight forwarding, transportation, and certification of certain equipment. A dispute arose concerning the payment of certain invoices, which the plaintiff argued had become due and payable. The defendant disagreed.

The plaintiff commenced arbitration under the Arbitration Rules of the Arbitration Institute of the Stockholm Chamber of Commerce (“SCC”) (“SCC Rules”). The arbitral tribunal (seated in Sweden) issued an arbitral award (“Award”) in favour of the plaintiff. As the defendant did not satisfy the terms of the Award, the plaintiff sought, via an ex parte application, the recognition and enforcement of the Award in Malaysia, which was allowed by the High Court (“Recognition Order”). The defendant sought to set aside the Recognition Order on the grounds that the Award had yet to become binding as the defendant’s application to challenge and annul the Award was pending before the Court of Appeal in Sweden.  The defendant relied primarily on section 39(1)(a)(vii) of the Arbitration Act 2005 (“Act”) which stated that, among other things, “recognition or enforcement of an award may be refused […] if the award has not yet become binding on the parties”.

Decision

The High Court of Malaya dismissed the defendant’s application to set aside the Recognition Order.

It held that the phrase “the award has not yet become binding on the parties” should not be given a liberal interpretation. The phrase should not be construed to mean that an award was not yet binding on the parties simply because there was a pending challenge. If so, the clause on recognition and enforcement of an arbitral award in the Act would become redundant given that, in general, recourse against arbitral awards is always an option.

Additionally, the court also considered that Article 46 of the SCC Rules clearly states that “an award shall be final and binding on the parties when rendered” (emphasis added). Both parties are therefore bound by this provision, and the Award had therefore become final and binding the moment it was made, despite a pending challenge against it in Sweden.

The court also distinguished this case from the Court of Appeal’s decision in Malaysian Bio-Xcell Sdn Bhd v Lebas Technologies Sdn Bhd and another appeal [2020] 3 MLJ 723 (“Bio-Xcell”), which is the only reported Malaysian court decision that defined the meaning of “not yet become binding” under section 39(1)(a)(vii) of the Act. The court found that Bio-Xcell turned on its own particular facts in that the issue was whether the first arbitral award obtained by the respondent became binding when there was a second arbitration pending between the respondent and the appellant that was related to the first arbitral award.

Comment

This decision provides helpful guidance on whether Malaysian courts will consider an arbitral award as final and binding for the purpose of enforcement if there are a pending proceedings to challenge the award in the seat of arbitration.

By narrowly defining the meaning of “not yet become binding” in section 39(1)(a)(vii) of the Act, this decision signifies the pro-arbitration and pro-enforcement approach of the Malaysian courts. It also demonstrates the Malaysian courts’ inclination to allow enforcement of an award despite a pending challenge against the award in the court of the seat of arbitration.

The court’s reliance on Article 46 of the SCC Rules to determine that the Award was binding upon its issuance, notwithstanding that the defendant had sought recourse against the Award, is also consistent with the practice in other jurisdictions as noted in the UNCITRAL Secretariat Guide on the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (New York, 1958) (2016 edition).

This case summary has been prepared with the assistance of Associate Kimberly Lim Ming Ying.