Malaysian Federal Court provides guidance on identifying place of arbitration in Malaysia for the purpose of determining the supervisory court of the arbitration

In Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd (Civil Federal Court Civil Appeal No.: 02(i)-20-03/2020(S)), the Federal Court held that the courts of first instance of the place specified as the seat of arbitration in Malaysia has exclusive supervisory jurisdiction over arbitrations seated in that place, including any award arising from such proceedings. In this respect, a court of a state in Malaysia which is not the court of the place specified as seat of arbitration will have no supervisory jurisdiction over that arbitration or its award. As a result, parties seeking to have their arbitrations seated in Malaysia will need to identify specifically a local state or city in Malaysia as the seat of arbitration.

Background

Sabanilam Enterprise Sdn Bhd (Sabanilam) appointed Masenang Sdn Bhd (Masenang) as its main contractor to construct a technology and commercial centre in the district of Penampang, located in the state of Sabah. Claims arose between the parties which was submitted to arbitration in the Kuala Lumpur Regional Centre for Arbitration (now Asian International Arbitration Centre (AIAC) in accordance with the Arbitration Rules of the Malaysian Institute of Architects (the Arbitration).  The arbitration clause provided for the seat of arbitration as Kuala Lumpur, Malaysia. The Tribunal dismissed Sabanilam's claims and allowed Masenang's counterclaims against Sabanilam in the sum of RM23,432,463.54 (the Award). Masenang commenced enforcement proceedings at the Kuala Lumpur High Court (KLHC), while Sabanilam initiated an action at the Kota Kinabalu High Court in Sabah (KKHC) to set aside the Award.

The issue was whether the KLHC (being the court of the place named as the seat of the Arbitration) or KKHC (being the court of the place where the cause of action underlying the dispute arose) had exclusive supervisory jurisdiction over the Arbitration and the Award. Under section 23 of the Courts of Judicature Act 1964 (CJA), a local court possesses jurisdiction to try civil proceedings arising from a cause of action which arises within the local territorial jurisdiction of that court.

The KKHC, noting that the concept of a seat of arbitration was relevant in Malaysian domestic arbitrations, held that the KLHC – and not the KKHC – possessed jurisdiction as the supervisory court of the Arbitration to vary or set aside the Award. This was by virtue of the KLHC being the court of the place named as seat of arbitration. As a result, the KKHC struck out Sabanilam's application to set aside the Award. The KLHC then allowed the Award to be recognised and enforced in Malaysia.

On an appeal by Sabanilam against both decisions of the High Courts, the Court of Appeal remitted Sabanilam's application to set aside the Award to the KKHC for determination, and set aside the enforcement of the Award ordered by the KLHC. The Court of Appeal had disagreed with the analysis of the KKHC, concluding that the concept of a seat of arbitration was not relevant to domestic arbitrations in Malaysia. It found that a Malaysian court can validly exercise jurisdiction over the supervision of a domestic arbitration and its award by reference to the criteria in section 23 of the CJA. In this regard, the Court of Appeal held that while the curial law of any arbitration seated in Malaysia will be the Arbitration Act 2005 (AA), the determination of the supervisory court of a domestic arbitration would be determined by reference to the CJA.

Dissatisfied with the Court of Appeal's decision, Masenang appealed to the Federal Court.

Federal Court

The Federal Court allowed the appeal and reinstated the orders of the KKHC and KLHC. The Federal Court held that the designation of a place within Malaysia as the seat of arbitration will determine the identity of the local court which has exclusive supervisory jurisdiction over the arbitration and its award. As such, by agreeing to a place named as the seat of arbitration, parties shall be deemed to have agreed that any court proceedings relating to the arbitration and any award arising thereunder shall only be brought in the local court of the place designated as the seat. Alternatively, where no designation of a seat is made in the arbitration agreement, the arbitral tribunal is empowered under section 22 of the AA to determine the seat of arbitration having regard to the circumstances of the case, including the convenience of the parties. In either case, the court of the place designated as the seat of arbitration would have exclusive supervisory jurisdiction over that arbitration to the exclusion of the court of first instance of any other place within Malaysia. As such, section 23 of the CJA has no application in determining which court in Malaysia has supervisory jurisdiction over an arbitration or award.

Comment

The choice of seat of arbitration has always been important in international arbitration. For arbitrations seated in Malaysia (whether international or domestic), parties will need to designate a city or state within Malaysia as its seat of arbitration, given that the Malaysian courts have a number of branches in each of Malaysia's 13 constituent states and three federal territories.

The choice of a place within Malaysia as the seat of an arbitration will have practical consequences to the conduct of both domestic and international arbitrations. For example:

• Access to party representation is limited in the states of Sabah and Sarawak virtue of the Federal Court's decision in Samsuri Bin Baharuddin & 813 Others v Mohamed Azahari Bin Matiasin (heard together with GBB Nandy @ Gannesh v Mohamed Azahari Bin Matiasin) (Civil Appeal Nos.: 02(f)-34-04/2014(S) and 02-35-04/2014(S)) which held that only individuals admitted to legal practice in Sabah have exclusive right to represent parties in arbitration proceedings held or seated in Sabah. This limitation on party representation is also likely to apply to arbitrations held or seated in the state of Sarawak by virtue similar local legislation.
• Malaysia's specialist commercial courts which determine disputes in various commercial sectors including commerce and banking, markets and exchanges, maritime, insurance, oil and gas, insolvency, intellectual property and information technology, construction, competition, Islamic banking and commercial disputes, as well as the recognition and enforcement of arbitration awards, are predominantly located in Kuala Lumpur. The AIAC and its hearing centre in Bangunan Sulaiman are also located in Kuala Lumpur.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, Associate or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.