Malaysian High Court Upholds Arbitral Award in Construction Dispute, Rejects Challenge Over Ignored Witness Admission

Introduction

The High Court of Malaya at Penang, presided over by Judicial Commissioner Aliza Sulaiman, has dismissed an application by M.E.I. Project Engineers Sdn Bhd (MEI) to set aside an arbitral award in favor of Syarikat Success Construction Sdn Bhd (Success) under sections 37(1)(b)(ii) and 37(2)(b) of the Arbitration Act 2005 (AA 2005). The court ruled that the arbitrator's failure to explicitly reference a key witness admission did not constitute a breach of natural justice or conflict with public policy. Instead, the court enforced the award, ordering MEI to pay Success RM7,340,000 in liquidated damages plus interest and costs. This decision underscores the limited grounds for challenging arbitral awards in Malaysia, emphasizing deference to arbitrators' factual findings.

Case Background

The dispute arose from a subcontract under a major construction project for Hershey Malaysia Sdn Bhd's confectionary manufacturing plant in Johor, known as the "Proposed P5000 - CSA Main Building Works." MEI, appointed as the Engineering, Procurement, and Construction (EPC) contractor by Hershey via a Design and Build contract, subcontracted the civil engineering works to Success for RM146,800,000 under the IEM Form of Contract for Civil Engineering Works (2011 edition), awarded on February 17, 2014.

The original completion date was February 28, 2015, but delays led to seven Mutual Agreements (MAs) extending timelines, with the last two (MA 6 and MA 7) setting dates of January 31, 2016, and February 16, 2016, respectively. MEI alleged these extensions were conditional on Success completing specific works, which it failed to do, rendering MA 6 and MA 7 invalid and justifying liquidated ascertained damages (LAD) of RM7,340,000 based on the prior MA 5 date of December 31, 2015. MEI issued certificates of default and non-completion in November 2016.

Prior adjudication decisions in 2017 and 2019 were followed by arbitration under IEM Arbitration Rules 2016. On April 7, 2023, Arbitrator Ir. Zafrul Mahmood ruled in Success's favor, dismissing MEI's counterclaim for LAD and awarding Success the sum plus costs. MEI then sought to set aside the award in Originating Summons No. WA-24C(ARB)-15-04/2023, while Success applied for enforcement in No. WA-24C(ARB)-21-05/2023. The court heard both consolidated applications in 2023.

The main legal questions were: (1) Whether the award conflicted with Malaysian public policy or breached natural justice due to the arbitrator's alleged failure to consider a witness admission by Success's director, Soon Eng Loo; and (2) Whether the court could substitute the award with orders favoring MEI's counterclaims.

Arguments Presented

MEI, represented by counsel Mr. Alvin Julian, argued that the award violated public policy under section 37(1)(b)(ii) AA 2005, both broadly and via natural justice breach under section 37(2)(b)(ii). Central to their case was Soon Eng Loo's (CW1) admission during cross-examination on March 1, 2022, that MA 6 and MA 7 were conditional on completing specific works (e.g., buildings, infrastructural works, and 22 items), which Success failed to do. MEI contended this admission was "the strongest evidence possible," citing cases like So Thian Wan v. Tan Soon Teik and Esso Malaysia Bhd v. Hills Agency (M) Sdn Bhd . Had the arbitrator considered it, MEI argued, he would have invalidated MA 6 and MA 7, upheld the LAD imposition, and rejected Success's claim—rendering the award "manifestly wrong, unlawful, unconscionable," and shocking to public conscience. MEI also sought unusual relief: setting aside the award and entering judgment for their specific counterclaims totaling over RM1.1 million for defects and advances, plus costs.

Success, represented by Ms. Susan Tan, countered that the arbitrator fully considered all evidence, including MEI's submissions on the MAs' conditionality, as stated in paragraph 28 of the award. They argued MEI's challenge was a disguised appeal on merits, impermissible under AA 2005. Success highlighted the parties' conduct—repeatedly entering new MAs despite prior non-completion—showing no strict conditionality. The MAs' express terms waived LAD up to revised dates without preconditions. Success emphasized that natural justice requires only a fair hearing, not responses to every argument, and cited Jan De Nul (M) Sdn Bhd v Vincent Tan Chee Yioun for the high threshold of public policy breaches. They urged enforcement under section 38 AA 2005, noting compliance with formalities.

Legal Analysis

The court applied the pro-arbitration framework of AA 2005, where awards are final and binding under section 36(1), with limited intervention per section 8. Judicial Commissioner Aliza Sulaiman analyzed section 37(1)(b)(ii) and 37(2)(b), drawing on Federal Court precedents like Jan De Nul (M) Sdn Bhd v Vincent Tan Chee Yioun & Anor [2019] 1 MLJ 393, which limits public policy challenges to egregious violations "shocking the conscience" or involving "patent injustice," such as fraud or serious procedural flaws. The court also referenced Master Mulia Sdn Bhd v Sigur Ros Sdn Bhd [2018] 5 MLJ 574 for guiding principles on natural justice breaches: assessing the rule breached, its connection to the award, materiality, and potential impact on outcome.

In Sigur Ros Sdn Bhd v Master Mulia Sdn Bhd and Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd , the emphasis was on whether breaches were material and causative, without requiring prejudice as a prerequisite. The court distinguished this from merits appeals, citing JY Creative Sdn Bhd v Meacs Construction Sdn Bhd [2022] 1 LNS 945, where failure to recognize an admission was deemed a non-reviewable factual error. Other cases like Soh Beng Tee & Co Pte Ltd v Fairmount Development Pte Ltd and Sunway Creative Stones Sdn Bhd v Syarikat Pembenaan Yeoh Tiong Lay Sdn Bhd reinforced that arbitrators need not address every submission exhaustively.

Applying these, the court found the arbitrator considered MEI's arguments on MA conditionality (paragraphs 67-81 of the award), including the admission's substance via post-hearing submissions. The MAs' validity turned on parties' conduct and express terms, not isolated admissions, with no documentary evidence of communicated conditions. Thus, no audi alteram partem breach occurred, as MEI was heard, and the omission did not materially affect the outcome or violate public policy. MEI's substitution prayer was rejected, as AA 2005 allows only remission or resumption under section 37(6), not rehearing.

Key Observations

• On the arbitrator's consideration of evidence: "Now, I, Zafrul Mahmood... having viewed and considered carefully all the documents, all the evidence presented and all the written submissions by them, do hereby make and publish this my final award..." (Award, paragraph 28).
• On MA validity: "I hold that the only condition that is expressly clear and consistent throughout the 7 Mutual Agreements... is that: i. Parties when signing agree to waive loss and expense claims (by the Claimant) and LD (by the Respondent) up to a specific date..." (Award, paragraph 78).
• On public policy threshold: "The scope of public policy ground for setting aside an arbitral award could only be invoked in deserving case ie in instances where it appears a violation of the most basic notions of morality and justice. It covers fundamental principles of law and justice in substantive as well as procedural respect." ( Jan De Nul , paragraph 58, as cited).
• On natural justice: "Natural justice does not demand that MEI is entitled to receive responses to all submissions and arguments presented, including that on CW1’s Admission. The Arbitrator is not obliged to regurgitate and deal with each of MEI’s arguments when arriving at his findings." (Judgment, paragraph 47(i)).
• On merits vs. procedure: "MEI’s real complaint in this case is with the merits of the Award, which is not a permissible ground to set aside the Award under s 37 AA 2005." (Judgment, paragraph 47(j)).

Court's Decision

The court dismissed MEI's setting aside application with costs of RM7,000 and allowed Success's enforcement application with costs of RM5,000, to be paid by MEI. The award sum of RM7,340,000 plus 5% interest from February 16, 2016, and arbitration costs of RM529,709.80 were upheld and enforceable as a High Court judgment under section 38 AA 2005. Funds held in a stakeholder account were ordered released to Success within 10 working days.

This ruling reinforces the finality of arbitral awards, limiting challenges to clear procedural injustices rather than factual disagreements. It may deter merit-based appeals disguised as natural justice claims, promoting efficiency in construction arbitrations, but could raise concerns for parties relying on witness admissions without explicit arbitral acknowledgment. Future cases under AA 2005 will likely require stronger evidence of materiality to succeed on public policy grounds.