When Does an Arbitration Award Become Binding?

A. Introduction

By virtue of the Arbitration Act 2005 (“the Act”), particularly section 38 of the Act, parties can apply to the court for arbitration awards to be recognised as binding and be enforced by way of entry as a judgment. The section applies irrespective of the arbitration seat, be it in Malaysia or from a foreign state. Furthermore, the procedural aspect is governed by Order 69 Rule 8 of the Rules of Court 2012.

As held by the Court of Appeal in Malaysian Bio-Xcell Sdn Bhd v Lebas Technologies Sdn Bhd [2020] 3 MLJ 723 (“Bio-Xcell case”), an order granting the recognition and enforcement of an arbitration award operates just like any other court order. As such, the Rules of Court 2012 and all other relevant laws regarding the same will apply.

However, before such an order can be granted, there are grounds under Section 39 of the Act wherein the courts may refuse an application. One of the many grounds would be when an “award has not yet become binding” pursuant to section 39(1)(a)(vii) of the Act. For ease of reference, section 39(1)(a)(vii) of the Act reads as follows:

“(1) Recognition or enforcement of an award, irrespective of the State in which it was made, may be refused only at the request of the party against whom it is invoked-

(a) where the party provides to the High Court proof that:

(vii) the award has not yet become binding on the parties or has been set aside or suspended by a court of the country in which, or under the law of which, that award was made…”

This sub-section was first tested in the Bio-Xcell case, in which the Court of Appeal laid down the test to determine when an “award has not yet become binding”. The answer, as cliche as it may sound, is that it depends!

B. Background Facts

The appellant subcontracted engineering works to the respondent, which included the procurement of certain equipment. Subsequently, the appellant terminated the subcontract two years after its commencement. A dispute arose as to the lawfulness of the termination and the parties referred the matter to arbitration. It was decided in favour of the respondent and the appellant was ordered to make payment (“First Arbitration”). In this regard, it is pertinent to note that the arbitration award included payment for the procurement of the equipment, which was one of the respondent’s obligations under the subcontract. 

This led to the unresolved issue on the delivery and/or transfer of ownership rights of the equipment procured. Hence, the matter was once again referred to a second arbitration (“Second Arbitration”).

Before the commencement of the Second Arbitration, the respondent applied to the court under section 38 of the Act to recognize and enforce the arbitration award granted in the First Arbitration. In response, the appellant applied for a stay pending disposal of the Second Arbitration.

C. High Court’s Decision

In the first instance, the appellant’s application was dismissed by the High Court.

First, it was held that Section 39(1) of the Act does not permit any stay of an application to enforce or a suspension of the enforcement of the arbitration award.

Second, the contention that the award had yet to become binding was untenable. The High Court was of the view that the disputes in the First Arbitration and the Second Arbitration were discrete and distinct. Therefore, the outcome of the Second Arbitration would not affect the arbitration award as it was.

Third, reference was made to section 36 of the Act which essentially provides that an arbitration award shall be final and binding on the parties.

Fourth, there was no application by the appellant for any correction or interpretation of the arbitration award or an additional award as canvassed in section 35 of the Act.

D. Court of Appeal Decision

On appeal, the Court of Appeal reversed the decision of the High Court. 

Whether the High Court could suspend the enforcement of the arbitration award?

The High Court in arriving at its decision overlooked Section 39(2) of the Act. The provision reads as follows:

“(2) If an application for setting aside or suspension of an award has been made to the High Court on the grounds referred to in subparagraph (1)(a)(vii), the High Court may, if it considers it proper, adjourn its decision and may also, on the application of the party claiming recognition or enforcement of the award, order the other party to provide appropriate security.”

Section 39(2) of the Act, when read together with section 39(1)(vii) of the Act, allows the court to exercise its discretion to adjourn its decision on enforcement and may also order the appellant to provide security. Therefore, the High Court erred in law to find that the appellant’s application for a stay or suspension was not provided by law.

When does the arbitration award become binding?

At the outset, the Court of Appeal made it clear that section 39(1)(a)(vii) of the Act does not contradict section 36 of the Act. Arbitration awards, as provided under section 36 of the Act, are binding and enforceable. Section 39(1)(a)(vii) of the Act merely applies when, due to particular facts and circumstances, the binding force of the arbitration award is still inchoate and has yet to materialise.

International jurisprudence seemed to favour the approach that an award only becomes binding when a party has exhausted avenues of ‘ordinary recourse’, as opposed to ‘extraordinary recourse’. The former refers to a genuine appeal on the merits of the awards. The latter is reserved to set aside a decision for certain irregularities, procedural or otherwise.

However, this was not followed by the Court of Appeal in the Bio-Xcell’s case. In a rather cryptic manner, the Court of Appeal held that:

“However, we do not see a need to lay down any hard and fast definition to the term ‘yet to become binding’, or to draw a distinction between ‘ordinary recourse’ (denoting a genuine appeal on the merits of the award to a second review arbitral tribunal or a court) and ‘extraordinary recourse’ (encompasses what the Convention and Model Law describe as set aside proceedings); suffice to say that the circumstances and reasons for making such a claim need must be carefully scrutinised in the exercise of the discretion under s 39(1)(a)(vii).”

In other words, the courts are vested with the discretion under section 39(1)(a)(vii) of the Act to consider a whole host of possibilities before allowing the recognition and enforcement of arbitration awards. One of the more common contentions is that there is a challenge against the arbitration award. Needless to say, the challenge must be meritorious and not superfluous. Accordingly, the Court of Appeal observed that:

“Where parallel proceedings are undertaken in the same jurisdiction, as cautioned in Europcar Italia v Maiellano Tours Inc ‘and there is a possibility that the award will be set aside, a district court may be acting improvidently by enforcing an award prior to the completion of the foreign proceedings’.”

The same approach ought to be taken even when the arbitration award is not challenged. In the upshot, the application of section 39(1)(a)(vii) of the Act is factually dependent on the circumstances of each case.

Whether the arbitration award granted in the First Arbitration had not yet become binding?

The Court of Appeal answered the question in the affirmative. In brevity, the Court of Appeal noted the interplay of issues between the First Arbitration and the Second Arbitration. It was therefore agreed that the issue on the ownership must first be resolved in the Second Arbitration before the arbitration award can be enforced. Hence, in the circumstances, the arbitration award had not yet become binding.

E. Conclusion

The Bio-Xcell case is the first appellate court decision in Malaysia to discuss the meaning of an “award has not yet become binding“. It adopts a simplistic approach and refuses to lay down any hard-and-fast rule. All in all, any party contending the recognition and enforcement of an arbitration award will have to strenuously rely on the peculiarities of the situation to succeed in their contention.