Malaysia Court Considers Illegal Underlying Contract And Public Policy

Herbert Smith Freehills review the decision in Calibre M&E Sdn Bhd v PT Cooline HVAC Engineering (Originating Summons Nos. WA-24C(ARB)-47-09/2017 and WA-24C(ARB)-49-10/2017), where Calibre appointed Cooline as a sub-contractor to undertake works valued at US$1.378m in circumstances where Cooline was registered with the relevant board to undertake works up to the value of US$240,000 and, following an award in Cooline’s favour, Calibre sought to set aside the award on the basis that the underlying contract was illegal and hence was in breach of Malaysia’s public policy. In dismissing Calibre’s claims, the High Court noted that (i) breach of the regulations was not a matter which was injurious to the public good, or shocks the most basic notion of morality and justice, Calibre could not approbate and reprobate by willingly condoning the non-compliance during the making of the contract but then deny its validity to escape liability, and the board provides a penalty in the form of a fine for non-compliance, suggesting that no illegality flows from non-compliance.

The High Court noted:

“the concept of ‘public policy’ is to be construed narrowly, in that it is only applicable when it is clearly injurious to the public good, or where it violates the most basic notion of morality and justice, or where the upholding of an arbitral award would “shock the conscience”. This can be seen from the decision of the Court of Appeal in MTM Millenium Holding Sdn Bhd v. Pasukhas Construction Sdn Bhd & Anor [2013] 1 LNS 1325, which has cited with approval the decision of the Singapore Court of Appeal in PT Asuransi Jasa Indonesia (Persero) v. Dexia Bank SA [2006] SGCA 41.”

The authors note three other related cases:

  • Westacre Investments Inc v Jugoimport SDPR Holding Co Ltd [2000] QB 288, where the English Court of Appeal enforced an award in which the tribunal had addressed allegations of bribery of public officials and found that the contract underlying the arbitration was not illegal.
  • In Singapore, the Court of Appeal in AJU v AJT [2011] SGCA 41 found it inappropriate for a court sitting on an application to set aside an arbitral award on the basis of illegality of the underlying contract, where the tribunal already made such determination.
  • In Hong Kong, the Court of First Instance in Z v Y [2018] HKCFI 2342 set aside an award in which the tribunal had insufficiently addressed important issues of illegality of the underlying contract.

About Phillip Rompotis

Phillip practices as a barrister and arbitrator in Hong Kong. He has over 25 years’ litigation and arbitration experience in commercial disputes relating to construction & engineering, financial services, joint venture & shareholders agreements, technology, trusts, property and landlord & tenant. He is a Fellow of the Chartered Institute of Arbitrators, the Singapore Institute of Arbitrators, the Malaysian Institute of Arbitrators, and a member of various lists/panels of arbitrators.

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