S 37(1)(b)(ii) Arbitration Act 2005 (“AA 2005”) allows the setting aside of an arbitral award where the award is in conflict with the public policy of Malaysia. A breach of natural justice during the arbitral proceedings or in connection with the making of the award would be in conflict with the public policy of Malaysia pursuant to s 37(2)(b) AA 2005.

Despite the clear wording of s 37 AA 2005, nevertheless the Federal Court in Master Mulia Sdn Bhd v Sigur Rus Sdn Bhd [2020] 12 MLJ 198 qualified the same by saying that “the court must consider the seriousness of the breach in the sense of whether the breach was material to the outcome of the arbitral proceeding”. Where the breach was relatively immaterial, the application to set aside an arbitral award would have to be refused.

The proposition that an immaterial breach of natural justice ought not to lead to the setting aside of the award is laudable. This is a practical approach especially when considering complex arbitrations involving voluminous submission of evidence.

However, the Federal Court also goes on to say that “even if the court found that there was a serious breach (of natural justice), if the breach would not have had any real impact on the result and the arbitral tribunal would not have reached a different conclusion, the court might refuse to set aside the award”.

One may be hard pressed to imagine how a serious breach of natural justice (as opposed to an immaterial breach) would not have any real impact on the result. It appears as if the Federal Court is merely reserving the widest scope of discretion for judges when faced with a setting aside application of an arbitral award.

Such wide discretion almost immediately came into play in another Federal Court decision of Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd and another appeal [2021] 1 MLJ 1.

In Pancaran Prima, the arbitrator was a professional engineer. He made a finding that “it was almost a norm when asked to indicate a ‘profit and attendance’ for having to manage a nominated subcontractor, most contractors would include a margin of 10-15%”. That finding was entirely unsupported by evidence, and the arbitrator did not invite parties to submit on the same to boot.

Hence, in so far as a breach of natural justice was concerned, there clearly was such a breach in the case of Pancaran Prima.

However, the application to set aside the arbitral award failed before the Federal Court. In rejecting the setting aside, the Federal Court found that “the arbitrator was competent to draw on his own knowledge and expertise on the existence of the 10-15% ‘no profit risk’ norm in the Malaysian construction industry without giving the parties the opportunity of answering it and showing that his view was wrong”.

In making such a finding, the Federal Court drew upon s 21(3)(b) of the AA 2005 which essentially allowed the arbitrator to “draw on his own knowledge and expertise”. According to the Federal Court, the provision allowing the arbitrator to draw on his own knowledge and expertise effectively meant that no actual evidence had to be produced. In the words of the Federal Court, “(actual) evidence was the very antithesis of a person’s own knowledge and expertise”.

With due respect, it would seem that the Federal Court may have taken a step too far in making such findings. If an engineer were permitted to draw on his own knowledge and expertise without any evidence tendered, then a lawyer arbitrator would be permitted to rely on precedents within his own knowledge and expertise without the need to allow counsels to submit. That would clearly lead to an unsafe award, bearing in mind that a breach of natural justice would in most occasions be the only practical remedy available to a party who is dissatisfied with the arbitral award, as most findings of the arbitrator would be beyond challenge.

It would be a different scenario if, for instance, evidence was duly tendered, and the arbitrator drew on his own knowledge and expertise to determine the evidence to be preferred, or even to reject any particular evidence, after due process has been afforded to the parties to submit on the same. In other words, the right afforded to the arbitrator to draw on his own knowledge and expertise cannot trump the requirements of due process.

The saving grace in Pancaran Prima, perhaps, is the conclusion reached by the Federal Curt that “(even) if the parties were denied of the opportunity to submit on the matter, the breach was not of such gravity or materiality as to have affected the outcome of the arbitrator’s decision on the loss of profit award”. In other words, Pancaran Prima ought to be understood in the context that the breach of natural justice therein was immaterial.

Otherwise, the world of arbitration may well descend into the arena of “rough justice” normally associated with adjudication proceedings. It would be rough justice indeed for parties to be handed down awards by arbitrators drawing on their own knowledge and expertise without reliance on evidence and without affording parties the reasonable right to be heard.

With due respect, Pancaran Prima, unfortunately, ought to be confined to its own set of facts.

This article is written by Chan Kheng Hoe ([email protected])

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