If You Go To Caesar You Must Take Caesar’s Judgment

A commentary on The Government of India v Cairn Energy India Pty Ltd by Janice Tay

The decision of the Federal Court in The Government of India v Cairn Energy India Pty Ltd & Anor [2011] 6 MLJ 441 provides authoritative confirmation of the circumstances in which an arbitral award may be set aside under the Arbitration Act 1952 ("1952 Act").

BACKGROUND

Cairn Energy India Pty Ltd (“Cairn”) and Ravva Oil (Singapore) Pte Ltd (“Ravva”) had entered into a Production Sharing Contract (“Contract”) with the Government of India (“GOI”). As disputes arose between the contracting parties concerning the “costs recoveries” and the “calculation of Post Tax Rate of Return (“PTRR”) for production sharing purposes”, these disputes were referred to arbitration, the chosen seat of arbitration being Malaysia.

The Arbitration

Six issues were referred to and decided by a panel of three Arbitrators (“Arbitral Tribunal”). In the final Award, the Arbitral Tribunal determined four issues in favour of GOI, and the other two, in favour of Cairns and Ravva. Dissatisfied with the determination, the GOI applied to the Malaysian High Court to set aside the Award pursuant to Section 24(2) of the 1952 Act.

The sole issue of challenge raised by GOI pertained to the part of the Award that determined “the Companies are entitled to include in the accounts, for the purposes of PTRR calculation in accordance with the provisions of Article 16 and Appendix D of the said Contract, sums paid by the Companies in accordance with Article 3.3 of the said Contract”. The challenge was premised on three grounds, namely, that there had been (i) an error of law on the face of the Award, (ii) an excess of jurisdiction, and (iii) misconduct by the majority Arbitrators.

The Decisions of the High Court and Court of Appeal

The learned Judicial Commissioner in the High Court held that there was a manifest error on the face of the Award and set aside that part of the Award.

The High Court's decision was overturned on appeal to the Court of Appeal. Although the judges in the Court of Appeal differed in their grounds for allowing the appeal, their Lordships were unanimous in their view that the learned Judicial Commissioner had erred in his decision warranting the decision to be set aside. The decision of the Court of Appeal was reported at [2010] 2 CLJ 420.

Leave to Appeal to the Federal Court

The Federal Court allowed GOI’s application for leave to appeal against the decision of the Court of Appeal on 5 questions of law, 4 of which were raised for the first time before the Federal Court. These 5 questions may be summarised as follows:

  1. Where an award from an international commercial arbitration is submitted for review before the Malaysian Courts under Section 24(2) of the 1952 Act, and the contract provides for the application of one foreign law to govern the contract (namely the laws of India) and another foreign law to govern the arbitration agreement (namely the laws of England), is it proper for the Malaysian Court to apply Malaysian law exclusively to decide the scope of intervention in arbitration awards or the dispute at hand where the seat of arbitration is in Malaysia?

  2. If English law is to apply, whether the appropriate law is that as stated in the English Arbitration Act 1979 which provides for an appeal to the High Court on any question of law arising out of an award?

  3. If Malaysian law is to apply, whether the common law limitation adopted in Sharikat Pemborong Pertanian dan Perumahan v Federal Land Development Authority (1971) 2 MLJ 210 (“Sharikat”) between a specific reference and general reference in determining the scope of intervention is valid in the light of section 24(2) of the 1952 Act which carries no limitations by itself or where a construction question is involved?

  4. Whether the scope of intervention in arbitration awards is that as stated in Ganda Edible Oils Sdn Bhd v Transgrain BV (1988) 1 MLJ 428 (“Ganda Edibile”) given that there are conflicting positions presently taken by the Court of Appeal?

  5. Whether the Court of Appeal, as did the Majority Arbitrators before them, failed to appreciate that the paramount rule in the construction of contracts under Indian law is to ascertain the intention of the parties to the bargain and should therefore rely on the wording of the contract as opposed to the commercial sense or industry practice as aids to construction?

 

THE DECISION OF THE FEDERAL COURT

In determining the first question, the Federal Court held that the curial law applicable for a challenge to an arbitral award was to be determined in accordance with the chosen seat of arbitration. As the seat of arbitration for this Arbitration was Malaysia, the Malaysian law would be the applicable curial law.

Given the Federal Court’s finding that Malaysian law was the applicable curial law, the second question which was premised on the finding that English law would be the applicable law was thus rendered redundant.

With regard to the third question, the Court held the common law distinction adopted in Sharikat between a specific reference and general reference in determining the scope of intervention was valid. The Federal Court endorsed the observations made in Sharikat and the distinction made between a specific reference and general reference in determining the scope of intervention. The Federal Court said:

“With respect we are not persuaded that we should depart from the long line of authorities holding such a distinction. Where a specific matter is referred to arbitration for consideration, it ought to be respected in that ‘no such interference is possible upon the ground that the decision upon the question of law is an erroneous one’. However, if the matter is a general reference, interference may be possible if and when any error appears on the face of the award.”

The Court took the view that the question of construction of an agreement referred for determination by the Arbitral Tribunal was a question of law which came within the category of specific reference. Hence, it was not open for any challenge in the broad sense except in the limited circumstances of illegality. In this regard, reference was made to the observation made by the Supreme Court in Ganda Edible which stated that an award may be set aside if the decision of the arbitrator was tainted by illegality by deciding on evidence which was not admissible or on principle of construction which the law did not countenance.

As to the fourth question, it was contended that there was conflict between 3 Court of Appeal decisions, 2 of which did not follow Ganda Edible while the other did. The Court took the view that the Court of Appeal cases were not in conflict with each other in applying Ganda Edible and that they could be read harmoniously. Nevertheless, the Federal Court emphasised that the decision of the Supreme Court in Ganda Edible would prevail in the event of any conflict between those Court of Appeal cases.

The Federal Court agreed with the views of the majority of the Court of Appeal on the fifth question, that the issue in question was a specific reference on a question of law. The Court held that as the Appellant could not establish any illegality in the Award, the Court would not intervene. The Federal Court cited with approval, a passage from Scrutton LJ's judgment in African & East Malaya Ltd v White Palmer & Co Ltd [1930] 36 Lloyd's LR 113, 114:

“... if you refer a matter expressly to the arbitrator and he makes an error of law you must take the consequences; you have gone to an arbitrator and if the arbitrator whom you choose makes a mistake in law that is your look-out for choosing the wrong arbitrator; if you choose to go to Caesar you must take Caesar’s judgment.”

Accordingly, the Federal Court dismissed the appeal as the decision of the Arbitral Tribunal on the referenced issue had not been tainted with illegality.


ANALYSIS

The Federal Court has made it expressly clear that if the parties have agreed to refer a specific question of law to an arbitral tribunal for its determination and the arbitral tribunal has done so, the parties must accept the determination by the arbitral tribunal and none of them can thereafter ask the Court to intervene in the Award on error on the face of the award except in the limited circumstances of illegality as set out in Ganda Edible.

Although the Federal Court decision was in respect of an application made pursuant to Section 24(2) of the now repealed 1952 Act, it has been held in at least two High Court cases after the introduction of the Arbitration Act 2005 ("2005 Act") that the common law principles relating to challenging an award on the ground that there has been an error on the face of the award would still be applicable under Section 42(1) of the 2005 Act which allows a party to refer to the High Court any question of law arising out of an award.

However, it should be noted that Section 42 falls within Part III of the 2005 Act which inter alia provides that the provisions of this Part would apply to domestic arbitrations unless the parties have agreed to opt out of it and would not apply to international arbitrations unless the parties have agreed to apply it.

Nevertheless, the Federal Court's decision on the principles on “error on the face of the award” may be less significant as a result of the recent amendments made to the 2005 Act under the Arbitration (Amendment) Act 2011 ("Amendment Act") which came into effect on 1 July 2011.

The Amendment Act introduced a new Section 42(1A) to the 2005 Act which limits the scope of reference to the High Court to questions of law which substantially affect the rights of one or more of the parties. There has yet to be any reported decision in Malaysia in relation to an application for reference on a question of law under Section 42 of the 2005 Act after the introduction of Section 42(1A). However, it is likely that the application of the common law jurisprudence on error of law on the face of the awards will now be subjected to the criterion that the question of law must be one that substantially affects the rights of one or more of the parties.

The Amendment Act also introduced a new sub-section (4) to Section 51 of the 2005 Act which provides that the 2005 Act will govern all court proceedings relating to arbitration which are commenced after 15 March 2006 notwithstanding that such proceedings arise from arbitration proceedings that were commenced before 15 March 2006. In other words, while arbitration proceedings which were commenced before 15 March 2006 continue to be governed by the 1952 Act, any court proceedings which arise from such arbitration are to be governed by the provisions of 2005 Act and not the 1952 Act.



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