Federal Court sets out guiding principles on setting aside arbitral awards on grounds of breach of natural justice: Rahmat Lim & Partners

25 February 2021

Master Mulia Sdn Bhd v Sigur Rus Sdn Bhd [2020] 12 MLJ 198

The Malaysian Federal Court in Master Mulia Sdn Bhd v Sigur Rus Sdn Bhd has held that section 37(1) of the Arbitration Act 2005 (“Act”) used the word “may” which meant that the High Court had a discretion whether to set an award aside even though a ground for setting aside had been made out. In this case, the arbitrator considered extraneous evidence and rendered his award based on that extraneous evidence without notifying the parties that he relied on it. The High Court found that the arbitrator had committed two breaches of natural justice, but still declined to set aside the arbitral award on the ground that no prejudice had been suffered by the respondent by the breaches. The Federal Court held that the High Court had erred in this respect by erroneously applying the Singapore position which was not applicable to Malaysia as the Act did not require prejudice to be shown. Although prejudice to the parties is a relevant consideration, it is not a requirement.

In relation to whether a breach of natural justice was sufficient to render an arbitral award to be set aside, the Federal Court held that it must be shown that the breach was significant or serious such as to have had an impact on the outcome of the arbitration. The Federal Court also laid down guidelines for the court in exercising its discretion when confronted with an application to set aside an arbitral award on the grounds of breach of natural justice:

The court has to consider which rule of natural justice had been breached, how it was breached, and how was the breach connected with the award;
The court should consider the seriousness of the breach in the sense of whether the breach was material to the outcome of the arbitration;
If the breach was relatively immaterial or was not likely to have affected the outcome, the award should be allowed to stand and not be set aside;
Even if the breach was serious, the award should not be set aside if the court is satisfied that it would not have resulted in the tribunal reaching a different conclusion;
Where the breach was significant and might have affected the outcome, the award may be set aside;
In some instances, the significance of the breach might be so great that the setting aside of the award was practically automatic, regardless of the effect on the outcome of the award;
The discretion given to the court is intended to confer a wide discretion depending 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
While 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.