IMSML Website Article 8/2024: Sabah Shell Petroleum Company Limited v Gumusut-Kakap Semi-Floating Production System (Labuan) Limited and another case [2022] MLJU 3504, The Engineering, Procurement and Construction of a Semi-Submersible Floating Platform

This case is about the engineering, procurement and construction of a semi-submersible floating platform (Semi-FPS), the ‘Gumusut-Kakap’. It is occasionally pictured with the support and accommodation barge, ‘Lewak Crusader’. The reported dispute in this case concerned the events after an arbitration tribunal had given its award. The case before Lim Chong Fong J at the High Court of Kuala Lumpur was about the setting aside of the arbitration award as well as its registration pursuant to Sections 37 and 39 of the Arbitration Act 2005. Full disclosure about this case; Muayyad Khairul Mani, currently a Senior Associate at Lim Chee Wee Partnership, was one of my former Opinion Writing students at UiTM’s Law School. He was in the team acting for the Defendant in this case.

The Commercial Arrangements

In 2004, Sabah Shell Petroleum Co Ltd (SSPC), and its con-venturers Petronas Carigali Sdn Bhd (Petronas), Conoco Phillips Sabah Ltd and Murphy Sabah Oil Co Ltd, found a commercially viable oil at the Gumusut-Kakap field. In 2005, Petronas appointed SSPC under a production sharing contract (PSC) as the unit operator of the Gumusut-Kakap oil field. Under the PSC, SSPC was to undertake operations and extraction of oils therefrom on behalf of all the con-venturers.

In 2012, MISC Bhd incorporated GKL as its wholly owned subsidiary. GKL was a special purpose vehicle to take over the engineering, procurement and construction of the Semi-FPS. On 9 November 2012, by way of a lease agreement (Contract no. C-591672, ie hereinafter referred to as ‘The Contract’), SSPC and GKL contracted for the engineering, procurement, construction and lease of the Semi-FPS.

The Nature of the Dispute

The dispute that arose was in connection with ‘The Contract’, in particular punctuality of completion as well as quality of work of the Semi-FPS. GKL claimed for unpaid disputed variation work claims that allegedly arose under ‘The Contract’. In reply, SSPC sought a set-off and counter-claimed for disputed claims for the costs of defects remediation work carried out to make good allegedly non-conforming done, and liquidated delay damages.

The Arbitration

On 2 September 2016, the dispute that arose under ‘The Contract’ was referred to arbitration at the Kuala Regional Centre of Arbitration (KLRCA), now known as the Asian International Arbitration Centre (AIAC) under KLRCA Arbitration Rules. The following were the renowned arbitrators who were on the arbitral tribunal:

[1] Sir Vivian Ramsey QC, a chartered civil engineer and barrister, as well as retired judge of the English Queen’s Bench Division, Technology and Construction Court;

[2] Professor Doug Jones, lawyer, arbitrator and international judge of the Singapore International Commercial Court;

[3] Dr Robert Gaitskill, a chartered electrical engineer, barrister and arbitrator.

The Arbitral Award

On 8 April 2020, the Arbitral Tribunal published its final award. On 22 May 2020, SSPC filed an Enforcement Application to enforce the terms of the Award. On 7 July 2020, Lim Chong Fong J at the High Court, allowed the application under Section 38 of the Arbitration Act 2005. In addition, SSPC began to set off the sum in the Award against the monthly Semi-FPS lease payment payable to GKL under ‘The Contract’. 

GKL’s Challenge of the Arbitral Award and its Registration

Also on 7 July 2020, GKL applied to the High Court via an Originating Summons (No. WA-24NCCrb0-16-07/2020) to set aside the Arbitral Award in the Commercial Court. Twenty days later, on 27 July 2020, GKL filed an application under the Arbitration Act 2005, Section 39, to challenge and/or set aside the registration of the Award made under the Enforcement Application (hereinafter referred to as the Challenge Application). GKL’s case was largely based against enforcement was largely based on grounds that enforcement of the terms of the Award was in contravention of public policy in Malaysia.

The General Principal of Non-Intervention of the Judiciary in Arbitral Awards

The court cannot re-hear the dispute or review the award on its rightness. In an earlier case of PWC Bian Sdn Bhd v Ideal City Development Sdn Bhd [2022] AMEJ 0147, Lim Chong Fong J, see Para [118], held that the Arbitration Act 2005, Section 8, expressly stipulated that:

… no court shall intervene with matters governed by this Act, except where so provided for by thus Act’. That was read to mean ‘minimal intervention consistent with the policy underlying the UNCITRAL Model Law’.

The late Gopal Sri Ram explained in the Court of Appeal in Pembinaan LCL Sdn Bhd v SK Styrofoam (M) Sdn Bhd [2007] 4 MLJ 113 that:

A court while examining the objections taken to an award filed by an arbitrator is not required to examine the correctness of the claim on merits. The court cannot sit in appeal over the view of the arbitrator by re-examining and re-assessing the materials.

The court is not permitted to set aside an award in a manner not prescribed by the Arbitration Act 2005. In particular, an error of fact or law on the face of the award, is not a prescribed statutory ground for court intervention, see LW Infrastructure Pte Ltd v Lim Chin San Contractors Pte [2012] 57 per Sundaresh Menon JA.

Dealing with Question of Law

‘Any question of law arising out of award’, may be ‘referred’ by any party to the arbitration to the High Court, see the Arbitration Act 2005, Section 42. This is akin to an ‘appeal on a question of law arising out of an award’ in other Commonwealth jurisdictions such as the UK, Singapore, Australia, New Zealand or Canada. Although the label may be different, the jurisdictions commonly concern a ‘reference’ or an ‘appeal’ pertaining to a ‘question of law arising out of the award’. In the Sabah Shell case, Lim Chong Fong J said that ‘in truth, a Section 42 ‘reference’ is indistinguishable from an ‘appeal on a question of law arising out of award under the aforementioned Commonwealth jurisdictions’, see Para [123].

Note: The legislations being referred to in these Commonwealth jurisdictions include the UK Arbitration Act 1979 and 1996, the Singapore Arbitration Act 2001, the Australian Uniform Commercial Arbitration Act , the New Zealand Arbitration Act 1996, and the Canadian Commercial Arbitration Act 1996.

The question being referred to for appeal must be one concerning ‘law’, ‘not fact’. An error of fact alone will not suffice, see Dept of Education v Azmitia [2015] WASCA 246 per Mazza JA, see Para [150], adopted by Lim Chong Fong J in the Sabah Shell case at Para [26]. The learned judge Mazza J also said that Arbitration Act 2005, Section 42 allows an appeal on 'any question of law' arising from the award. His Lordship observed that 'any question of law' under Section 42, on the face of it, looks like it is wider than just 'a question of law' under English Law and the laws of various Commonwealth jurisdictions, see Para [152].

Dealing with a Question of Fact

The arbitrators remain the masters of fact. It is irrelevant whether the court considers the findings of fact by the arbitrators are right or wrong. This remains the position regardless of the financial consequences of the mistakes of fact. In the Sabah Shell case, Lim Chong Fong J, see Para [26], agreed with Mazza JA in Azmitia at para [150] that the very reason why the parties conclude an arbitration agreement is that they do not wish to litigate in the courts, ie because of the principle of party autonomy.

Two very famous judges have chimed in on this matter. In Future Heritage Sdn Bhd v Intelek Timor Sdn Bhd [2003] 1 MLJ 49 per Richard Malanjum JCA as he then was, and Syarikat Pemborong Pernanian and Perumahan v Federal Law Development [1971] 2 MLJ 210 have held that evidence presented to the arbitrator will not be re-opened even if he drew the wrong inference from it, because this would be contrary to the principle of party autonomy with respect to arbitration agreements. Parties will not be allowed to circumvent the rule the tribunal’s findings of fact are conclusive merely by alleging that they are inconsistent or they constitute a serious irregularity or an excess of jurisdiction, or on the basis that there was insufficient evidence to support the findings in question, see Russell on Arbitration (1997) at 8-057, see the Sabah Shell case per Lim Chong Fong J at Para [26].

The Issue of Public Policy

In the Sabah Shell case, Lim Chong Fong J largely adopted the views of Ramli Ali FCJ in the Federal Court decision in Jan de Nul (M) Sdn Bhd v Vincent Tan Chee Yioun and Another [2019] 1 CLJ 1, see Para [49] - [58]. Although ‘public policy’ is not defined in the Arbitration Act 2005, the phrase the appear in Section 4, 37 and 39. ‘Public policy’ was not is not equivalent the political stance or international policies of a State but comprised the fundamental notions and principles of justice. It also covered fundamental principles of law and justice in substantive as well as procedural aspects, see ‘A Guide to the UNCITRAL Model Law on International Commercial Arbitration: Legislative History and Commentary’ by Howard M Holtzmann and Joseph E Neuhaus (Kluwer, 1989) at para [51] of the Jan de Nul case.

In the Jan de Nul case, it was explained that generally ‘public policy’ was a broad concept. However, when it came to the process of setting aside an award under the Arbitration Act 2005, Section 37, it must be construed narrowly and ore restrictedly. The reason for this is that the court’s intervention should be used sparingly, and that a strong case must be made out the arbitral award conflicts with public policy in Malaysia, see Para [55]. In particular, any intervening court should bear in mind the policy of encouraging arbitral finality and a minimalist intervention is the spirit of the UNCITRAL Model Law, see Para [57].

A breach of public policy has to fall under categories of ‘patent injustice’, ‘manifestly unlawful and unconscionable’, ‘substantial injustice’, ‘serious irregularity’ or other similar serious flaws in the arbitral process or award, see the Jan de Nul case at Para [58]. The injustice must have had a real effect and had prejudiced the basic right of the person seeking a setting aside of the award, see Soh Beng Tee and Co Pte Ltd v Fairmount Development Pte Ltd [2007] 3 SLR 86.

In Master Mulia Sdn Bhd v. Sigur Ros Sdn Bhd [2020] 9 CLJ 213, Vernon Ong Lam Kiat FCJ laid down the guiding principles on the exercise of residual discretion when an application for setting aside an award is grounded on breach of natural justice. His Lordship explained (in verbatim) that:

First, 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;

Second, 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;

Third, if the breach is relatively immaterial or was not likely to have affected the outcome, discretion will be refused;

Fourth, 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;

Fifth, where the breach is significant and might have affected the outcome, the award may be set aside;

Sixth, 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;

Seventh, the discretion given to the court was intended to confer a wide discretion dependent on the nature of the breach and its impact. Therefore, the materiality of the breach and the possible effect on the outcome are relevant factors for consideration by the court and …

Eighth, whilst materiality and causative factors are necessary to be established, prejudice is not a pre-requisite or requirement to set aside an award for breach of the rules of natural justice.

In theory, the court has an unfettered discretion to set aside an award under the Arbitration Act 2005, Section 37(1). However this must be exercised with regard to the policies and objectives of the Arbitration Act 2005, in particular, the objective of encouraging arbitration as a method of dispute resolution and facilitating the recognition as well as enforcement of arbitral awards, see the Jan de Nul case at para [59].

Allegations of Duress as well as Undue Influence and Denial of Natural Justice as Breach of Public Policy

GKL had two major allegations that the arbitration award was in breach of public policy. As documented in the Sabah Shell case by Lim Chong Fong J at Para [39]: First, it was alleged that the sampling and extrapolation methodology was imposed on them under duress and under influence by the Tribunal. Second the sampling and extrapolation methodology was a violation of the Contracts Act 1950, Section 74, as it permitted SSPC recovery without proving adequate direct causal linkage between the defect remediation and the resultant costs. Proving a causal connection had been the legal position since the decisions in Garden Bay Sdn Bhd v Sime Darby Property Bhd [2021] 2 MLJ 281 (CA) and ISO Technic Electrical Sdn Bhd v Calibre M&E Sdn Bhd [2017] 1 LNS.

GKL’s first allegation was dismissed by Lim Chong Fong J in the Sabah Shell case. The experts used the in the arbitral proceedings were professionals who had taken a conservative approach, taking into consideration the concerns of the GKL. There were several draft versions of the technical report released by the experts and GKL had not protested the contents of any of these versions. Perhaps, the most damning evidence was that GKL was blowing hot and cold whether it was in fact a victim of the duress or undue influence, even though it had agreed to the sampling methodology, see Para [41].

In the Sabah Shell case, Lim Chong Fong J observed that GKL’s entire case was founded on the premise that duress or undue influence during the arbitral hearing, was the equivalent of GKL being denied natural justice. However, his Lordship pointed out that GKL had not cited any authority for this proposition of law. Lim Chong Fong J held that, at all times, the arbitral tribunal had acted in a fair manned and complied with the procedural requirements. At every stage of the arbitral hearing, GKL had been given ample opportunity to put forward its case, see Para [41]-[43]. However, his Lordship warned, ‘I do not think this is a carte blanche for parties to insist that they have unbridled chance and time to present their case as well as having it dealt by the Tribunal to their satisfaction notwithstanding that they are paying the fees of the Tribunal’, see Para [48].

The sampling an extrapolation methodology employed by the Arbitral Tribunal was reasonable given the large number of claims that were advanced, see Para [49]. This methodology had been approved by the English Technology and Construction Court in Amey LG Ltd v Cumbria County Council [2016] EWHC 2856 (TCC) and Standard Life Assurance Ltd v Gleeds (UK) (a firm) & Ors [2020] EWHC 3419 

Conclusion

In a nutshell, the duty of the court is to preserve arbitral awards and only setting it aside in exceptional cases where there is a breach of public policy. In the words of Abdullah Rahman Seli FCJ of the Federal Court in Pancaran Prima SdnBhd v Iswara Bena Sdn Bhd and Another Appeal [2020] 9 CLJ 466, ‘the principle is trite that courts do not exercise appellate jurisdiction over arbitration awards’.

Thank you for reading IMSML Website Article 8/2024

Stay tuned for the next IMSML Website Article 9/2024: Five Sun Trading Sdn Bhd v Muhammad Sallehudin bin Ramli & Ors [2023] 8 MLJ 822 (seizure of containers by Customs)

Signing-off for today,

Dr Irwin Ooi Ui Joo, LL.B(Hons.)(Glamorgan); LL.M (Cardiff); Ph.D (Cardiff); CMILT

Professor of Maritime and Transport Law

Head of the Centre for Advocacy and Dispute Resolution

Faculty of Law

Universiti Teknologi MARA Shah Alam

Selangor, Malaysia

Thursday, 25 January 2024

Note that I am the corresponding author for the IMSML Website Articles. My official email address is: uijoo310@uitm.edu.my