Can A Party Challenge An Arbitration Award Because The Arbitrator Or Procedure Was Unfair?
By Chu Ai Li, Partner of Azman Davidson & Co.
A common complaint made by disgruntled parties when arbitration awards do not favour them is that the arbitrator was unfair to them, or that the arbitration procedure was unfair to them. Is this complaint sufficient for a party to challenge an arbitration award?
One of the most common grounds relied on by disgruntled parties in court to challenge arbitration awards is “the breach of rules of natural justice”. The term “rules of natural justice” refers to an important legal concept. In law, the rules of natural justice comprise of two limbs, namely:
(ii) the right to a fair hearing[1] and
(i) the rule against bias[2].
The right to a fair hearing focuses on the procedure before a judgment or decision is made, and involves the legal principle that no person should be judged without a fair hearing in which each party is given the opportunity to respond to the case against them. In the context of arbitration, instances of breach of the right to fair hearing include:
- An arbitrator deciding a case based on information received from one party in the absence of the other party
- An arbitrator deciding a case based on extrinsic evidence not presented by the parties and the arbitrator did not give the parties a chance to comment.
The rule against bias focuses on the person making a judgment or decision, in that he/she should not have any financial or other interest in the outcome or any bias that could have affected his/her impartiality.
There is no doubt that the rules of natural justice apply to arbitration. Aspects of the right to a fair hearing are incorporated in the Malaysian Arbitration Act 2005 in Section 20 which provides as follows:
“20. The parties shall be treated with equality and each party shall be given a fair and reasonable opportunity of presenting that party’s case.”
The significance of the rules of natural justice is cemented in the Arbitration Act 2005 by the inclusion of provisions in Section 37(2)(b) read with Section 37(1)(b)(ii) of the Arbitration Act 2005 which allow the court to set aside arbitration awards for breach of rules of natural justice:
“37 (1) An award may be set aside by the High Court only if:
(b) the High Court finds that –
(ii) the award is in conflict with the public policy of Malaysia.
(2) Without limiting the generality of subparagraph (1)(b)(ii) an award is in conflict with the public policy of Malaysia where –
(b) a breach of the rules of natural justice occurred –
(i) during the arbitral proceedings; or
(ii) in connection with the making of the award
The recent Federal Court judgment in the case of Master Mulia Sdn Bhd v Sigur Ros Sdn Bhd [2020] 9 CLJ 213 sets out the guiding principles as to when arbitration awards will be set aside for breach of rules of natural justice.
First, the Federal Court held that the Court retains a residual discretion whether to set aside an arbitration award or not even though a ground for setting aside in Section 37(1) of the Arbitration Act 2005 may be made out.
In other words, the Court does not automatically set aside an arbitration award once it is proven that there was in fact a breach of the rules of natural justice in the arbitration. The Court still has a discretion to exercise as to whether to set aside the arbitration award or not.
Secondly, these are the guiding principles for the Court in the exercise of its discretion whether to set aside an arbitration award or not:
(1) The Court must consider which rule of natural justice was breached, how it was breached, and in what way the breach was connected to the making of the arbitration award.
(2) The court must consider the seriousness of the breach in the sense of whether the breach was material to the outcome of the arbitration.
(3) If the breach is relatively immaterial or was not likely to have affected the outcome, the Court will not set aside the award.
(4) Even if the court finds that there is a serious breach, if the fact of the breach would not have any real impact on the result and that the arbitral tribunal would not have reached a different conclusion 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 cases, 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.
(8) Prejudice is not a pre-requisite or requirement to set aside an arbitration award for breach of the rules of natural justice.
The Federal Court took pains to emphasise that a mere finding of a breach of the rules of natural justice is in itself insufficient to set aside an arbitration award, and that it must be shown that the breach was significant or serious enough to have an impact on the outcome of the arbitration.
In conclusion, in order to succeed in an application to set aside an arbitration award, the disgruntled party cannot merely make general complaints that the arbitrator or the procedure was unfair to him, he must show there was in fact a breach of a specific aspect of the rules of natural justice and that the breach was significant or serious enough to have impacted the arbitrator’s decision on the outcome of the arbitration.
[1] The Latin phrase is audi alteram partem, which means “listen to the other side” or “let the other side be heard as well”.
[2] The Latin phrase is nemo iudex in causa sua, which means, literally, “no one is judge in his own cause.”