Introduction
It has been 4 years since the Federal Court of Malaysia delivered its landmark ruling in Thai-Lao Lignite Co Ltd & Anor v. Government of Laos [2017] 9 CLJ 273 (‘Thai-Lao Lignite’). Unanimously, the Court clarified Malaysia’s position concerning the law governing the arbitration agreement when the parties have not expressly agreed on one. It was the first Malaysian apex court’s decision on that issue. In this article, we will examine the decision. We will also compare it with the recent cases by the courts in Singapore and the United Kingdom.
Facts
Thai-Lao Lignite Co Ltd and Hongsa Lignite Co Ltd (the ‘Appellants’) entered into a series of contracts with the Government of Laos (the ‘Respondent’) for a mining and power plant construction project in Laos. On the Respondent’s termination of the contracts, the Appellants commenced arbitration proceedings. The invoked arbitration clause provided for “arbitration conducted in Malaysia at the [KLRCA] in accordance with the UNCITRAL Rules”. It was silent on the law governing its interpretation. In the arbitration, the arbitral tribunal ruled in favour of the Appellants. The termination was wrongful.
The Respondent proceeded to challenge the award at the High Court of Malaya under the Arbitration Act 2005. It was undisputed between the Parties that the seat of arbitration was Malaysia. The Parties differed in terms of the law that governed the arbitration agreement. The Appellant submitted that it was New York law, being the law governing the contract of which the arbitration clause was a part; the Respondent argued for Malaysian law, being the law of the seat. Ruling in favour of the Respondent, the High Court annulled the whole of the award on the ground that it contained decisions on matters beyond the scope of the submission to arbitration. The Court of Appeal affirmed the same.
On appeal to the Federal Court, the Appellants advanced 6 questions of law, but the Court minded to answer only one. The question of law is as follows:
“Where the governing law of the contract is foreign law and the seat of arbitration (seat) is Malaysia, does the parties’ stipulation of Malaysia as the seat constitute an express agreement that the law governing the arbitration agreement is Malaysian law?”
The Court answered the question by stating that, barring an express choice made by the parties, the determination of the law governing the arbitration agreement is based on the conflict of laws rules of the seat. The rules entail finding the law which has the closest and most real connection to the arbitration agreement. More often than not, this is the law of the seat. Thus, the law of the seat will ordinarily govern the arbitration agreement, in the event that the parties have not provided for it. This represents the current position on this issue in Malaysia.
Conundrums
This decision is not one without difficulty. Principally, the Court has not minded to elucidate the jurisprudence underpinning the conflict of laws approach. Despite a wealth of authority cited by the Court, it is difficult to appreciate the Court’s decision beyond the fact that the arbitration was conducted in Malaysia which made Malaysian law the curial law. That Malaysian law was the curial law, it thus had the closest and most real connection to the arbitration agreement. In so holding, the Court has not minded to discuss some important legal principles raised by counsel and and even by the Court itself.
Closest connection test or implied choice of law?
In Sulamerica CIA Nacional De Seguros SA and Others v. Enesa Engenharia SA and Others [2012] EWCA Civ 638 (‘Sulamerica’), the English Court of Appeal laid down a 3-stage test in determining the law governing the arbitration agreement. This involves first identifying the express or implied choice made by the parties, without which, the law having the closest and most real connection to the arbitration agreement. Further, in reckoning an implied choice, the law governing the contract is a strong indication, barring any indication to the contrary. The Court in Thai-Lao Lignite did not adopt the test, although it did remark that it would yield the same conclusion.
But, herein lies the difficulty; for the closest and most real connection analysis premises on the finding that parties have not designated the law that governs the arbitration agreement, whether expressly or impliedly. In other words, the analysis should only be resorted to, when parties’ intention as to that choice of law is not expressly stated and could not be impliedly inferred. In Thai-Lao Lignite, the Court embarked on the closest and most real connection analysis, having no regard to the Parties’ implied choice. On its facts, New York law could very well have been inferred as the the Parties’ implied choice, in the sense of Sulamerica. This the Court did not consider. Neither did it justify how, if at all, the law of the contract was displaced by the law of the seat as the Parties’ implied choice of law.
Muddling the waters is the Court’s summary that the stipulation of Malaysia as the seat is a “tacit agreement” by the Parties to resort to the seat law. This is odd. If there was a tacit agreement, why venture into a conflict of laws analysis? If there was a tacit agreement, why did it point to Malaysian law and not New York law?
Doctrine of separability
On the doctrine of separability, the Court has not taken the liberty to examine it in the broader context. It accepted that an arbitration agreement is autonomous and separate from the contract that contains it; but it did not consider its intended effects. As explained by the English Courts in Fiona Trust & Holding Corporation v. Yuri Privalov & Ors [2007] 4 All ER 951 and Sulamerica, the purpose of separability is not to isolate the arbitration agreement from the main contract for the purpose of conflict of laws. Rather, it is to give effect to the intention to arbitrate, in the event that the main contract is found to be ineffective. The separate nature of the arbitration agreement does not, in itself, mean that it must necessarily be governed by a law different from the underlying contract. As appreciated by the Court, the principal choices of laws were between the law of the seat and the proper law of the contract. Much had been discussed about the former while little to no attention was given to the latter.
A not-so-settled position?
The Court seemed to have relied on a “fairly settled [position] in English law” - an opinion expressed in Redfern and Hunter on International Arbitration 5th Edn. This opinion was postulated by cases such as XL Insurance Ltd v Owens Corning [2001] 1 All E.R. (Comm) 530 and C v D [2007] EWCA Civ 1282, [2008] 1 All E.R. (Comm) 1001. Nevertheless, it is to be noted that the opinion in question was outdated. The authoritative book was published in 2009, before the Sulamerica decision was rendered. In its later edition, published in 2015 - to which the Court had actually made reference in its judgment - the same opinion had been removed, presumably in light of Sulamerica. Granted, and with respect, the Court is entitled to accept some views while rejecting others; but it is baffling that the Court should have arrived at a decision having taken into account a settled law, which in fact is not so settled.
The Singaporean approach
BCY v BCZ [2016] SGHC 249 (‘BCY’)
In this case, the Parties had employed a similarly structured arbitration agreement as seen in Thai-Lao Lignite. The law of the contract and the seat of arbitration were spelled out. The law governing the arbitration agreement was not. The Singapore High Court adopted the Sulamerica 3-stage test, finding that the law of the contract would govern the arbitration agreement as there was nothing to rebut the strong presumption or ‘starting point’.
BNA v BNB & another [2019] SGCA 84 (‘BNA’)
The Singapore Court of Appeal in this case adopted the approach taken by BCY as it was common ground between the Parties. It was held that the arbitration agreement was governed by the law of the contract as the implied choice made by the parties. This was because the law of the seat and the law of the contract were the same - the issue of the former displacing the latter as the implied choice did not arise. This is significant in that the Court was prepared to accept the law of the contract as the parties’ implied choice of law for the arbitration agreement before examining on the facts, if a contrary intention could be shown, in the form of the law of the seat. Equally as significantly, it also stated that the “closest connection test” which involved the judicial imputation of a choice of law for the arbitration agreement, only comes in if it is found that the parties have entirely failed to select a proper law as such, whether expressly or impliedly. The Federal Court in Thai-Lao Lignite had none of those.
The UK position
The United Kingdom Supreme Court, by a majority in Enka v Chubb [2020] UKSC 38 (‘Enka’), provided an expansive guideline to determining the law governing the arbitration agreement in various scenarios. Three important points which are relevant to this article:
1. The law that governs the arbitration agreement, if not specified, is:
The law chosen by parties to govern it, which is to be determined by construing the arbitration agreement and the contract containing it, as a whole, applying the rules of contractual interpretation.
Absence of such a choice, the law with which it is most closely connected.
2. Where the law governing the arbitration is not specified, the law of the contract will generally apply to an arbitration agreement which forms part of the contract
3. The choice of a different country as the seat of arbitration is not, without more, sufficient to negate an inference that a choice of law to govern the contract was intended to apply to the arbitration agreement
It would appear that Enka has modified the 3-stage test in Sulamerica by amalgamating parties’ choice of law, whether express or implied, into one of contractual interpretation. Granted, where parties have expressly specified the law governing the arbitration agreement, then there is no need to undertake an extensive enquiry into the applicable law - it will be clear and uncontentious. It is when the parties have not, that such an interpretative exercise would have to be carried out, bearing in mind the natural inference pointing to the law of the contract. What is also of significant importance is that the Court has rejected, as a general inference, that the seat law should of itself be the law that governs the arbitration agreement on the basis that it is the curial law of the arbitration. This contrasts sharply with Thai-Lao Lignite.
Conclusion
The Federal Court in Thai-Lao Lignite has acknowledged that each jurisdiction may apply its own ‘spin’ in deciding the many aspects of an arbitration. Whether that was the impetus behind the Court taking a somewhat dissimilar approach compared to the prevailing authorities at that point in time is unclear. What is clear is that this decision, while welcomed, is not one, with respect, that is poised to stand the test of time, particularly given the recent developments in some common law jurisdictions. It remains to be seen if these overseas decisions would impact future decisions by our courts. Having said that, this issue could very well become academic in the future as parties to an arbitration agreement are now often advised to clearly spell out the governing laws for the various aspects of their contractual relationship.
Reference:
Thai-Lao Lignite Co Ltd & Anor v. Government of Laos [2017] 9 CLJ 273
Sulamerica CIA Nacional De Seguros SA and Others v. Enesa Engenharia SA and Others [2012] EWCA Civ 638
Fiona Trust & Holding Corporation v. Yuri Privalov & Ors [2007] 4 All ER 951
XL Insurance Ltd v Owens Corning [2001] 1 All E.R. (Comm) 530
C v D [2007] EWCA Civ 1282, [2008] 1 All E.R. (Comm) 1001
BCY v BCZ [2016] SGHC 249
BNA v BNB & another [2019] SGCA 84
Enka v Chubb [2020] UKSC 38
Sutton D and others, Russell on Arbitration (24th Edn, Sweet & Maxwell)
Blackaby and others, Redfern and Hunter on International Arbitration (5th edn, Oxford University Press, 2009)
Blackaby and others, Redfern and Hunter on International Arbitration (6th edn, Oxford University Press, 2015 )
Sundra Rajoo, Law, Practice and Procedure of Arbitration (2nd edn, Lexis Nexis, 2011)
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