On August 17 2017 the Federal Court delivered its decision in a dispute involving the Laotian government and two foreign companies, Thai-Lao Lignite Co Ltd (TLL) and Hongsa Lignite Co Ltd (HLL). The dispute related to the termination of a project development agreement by the Laotian government and was set to be resolved by arbitration. The arbitral tribunal decided in favour of TLL and HLL. Dissatisfied with the arbitration award, the Laotian government applied to the High Court to set aside the award on the ground that the arbitral tribunal went beyond the scope of arbitration. The case was determined at the Federal Court level.
TLL entered into two contracts with the Laotian government on May 29 1992 and July 21 1992 for the mining of lignite in Laos. Subsequently, via the project development agreement, the Laotian government granted TLL the exclusive right to build a power plant in Hongsa to produce electricity. The agreement required TLL to incorporate another company, Thai-Lao Power Co Ltd (TLP), to implement the project. The agreement incorporated terms which touched on the mining rights and required those terms to be read with the mining contracts. HLL was incorporated to undertake the mining venture.
The Laotian government terminated the project development agreement on October 5 2006 and the mining contracts on October 11 2006. TLL and HLL brought arbitral proceedings against the Laotian government for the wrongful termination of the agreement, as party and intended beneficiary, respectively. The termination of the mining contracts was not challenged in the arbitration.
During arbitration, the Laotian government contended that neither TLL nor HLL had the standing to bring the claims, arguing that only TLP, as the assignee of TLL under the project development agreement, had the standing to enforce the agreement and pursue arbitration. TLL and HLL held that when the agreement was terminated, TLL had not assigned its rights under the agreement to TLP, and HLL was an intended beneficiary of the agreement. They further held that the Laotian government had waived any objection to their standing to assert rights under the agreement by dealing with them consistently as the proper parties over a number of years. The arbitral tribunal ruled in favour of TLL and HLL, holding that:
- TLL was a party to and HLL an intended beneficiary under the project development agreement; and
- there was no evidence that either of them had signed away their right to do so.
The Laotian government applied to the High Court to set aside the award under Sections 37(1)(a)(iv) and 37(1)(a)(v) of the Arbitration Act 2005. The government contended that the arbitral tribunal had:
- exceeded its jurisdiction by giving judgment on claims arising from disputes under the mining contracts, despite the fact that the arbitration involved only the termination of the project development agreement; and
- wrongfully exercised jurisdiction over TLP, which was not a signatory to the agreement, by amalgamating TLP's costs with TLL's costs in awarding damages under the project development agreement.
Regarding the first challenge, the High Court found that that the project development agreement and the mining contracts were separate contracts which contained substantial differences. The High Court held that the mining contracts were not subsumed under the agreement and the arbitral tribunal appeared to have "lumped together or co-mingled the claims and disputes under the mining contracts with the claims and disputes under the [project development agreement]". Therefore, the arbitral tribunal had gone beyond the scope of arbitration when it exercised jurisdiction over disputes arising out of the mining contracts.
The High Court also found that HLL, being a non-signatory to the arbitration agreement, could not become a party to the arbitration proceedings, and nor could non-party claims by TLP be lumped together in the arbitration award as the doctrine of intended beneficiary is not a recognised exception to the privity rule under Malaysian law. The award of arbitral tribunal was an aggregation of claims under the mining contracts and the project development agreement, whereby they were treated as a single claim. The resulting award therefore dealt with a dispute neither contemplated by nor falling within the terms of the submission of arbitration established by Section 37(1)(a)(iv), and contained decisions on matters beyond the scope of submission to arbitration established by Section 37(1)(a)(v) (this was also the concurrent finding of the Court of Appeal).
The High Court set aside the arbitral award and ordered the dispute confined to the project development agreement to be re-arbitrated before a new panel.
While the Federal Court affirmed the High Court decision in setting aside the arbitral award, it held that the High Court had no powers to order a re-arbitration. As the claim included claims from the mining contracts, the Federal Court held that the arbitral tribunal had failed to limit itself to the disputes that arose. The Laotian government's challenge to the arbitral award was upheld as it fell within the scope of Sections 37(1)(a)(iv) and 37(1)(a)(v) of the Arbitration Act, in that the arbitral tribunal had dealt with a dispute neither contemplated by nor falling within the terms of the submission to arbitration; further, its award had gone beyond the scope of the submission to arbitration. The Federal Court agreed that an error of fact or law was insufficient to set aside an arbitral award. However, as the award was not wholly made up of claims under the project development agreement, the arbitral tribunal had strayed beyond the arbitration agreement.
A significant element of this decision is that the Federal Court had reinforced the law that arbitral awards may be reviewed by the supervisory court, provided that it is done in accordance with Section 8 of the Arbitration Act (ie, that no court shall intervene in matters governed by the Arbitration Act except where so provided in the act). The Federal Court pronounced that if a supervisory court merely rubber stamps arbitral awards, arbitration will be dead in Malaysia and there will be no confidence in arbitration.
The Federal Court decided that the doctrine of third-party beneficiary may be applicable. Nonetheless, HLL could be an intended third-party beneficiary only under the mining contracts and could not invoke the project development agreement.
The Federal Court also noted that the parties in this case chose different laws to govern different parts of the project development agreement, with Laotian law governing the mining rights under Article 18.1(iv) of the agreement and New York law governing all matters not referenced in Article 18.1(i)-(iv) of the agreement. The parties chose Kuala Lumpur as the seat and the United Nations Commission on International Trade Law rules as the procedural rules of the arbitration. The governing law of the agreement, the seat and the arbitral procedure were designated. However, the law governing the arbitration agreement was left unspecified. In this instance, since the arbitration was conducted in Malaysia at the Kuala Lumpur Regional Centre for Arbitration, the Arbitration Act (with the exception of Part III) was the lex arbitrii and curial law.
This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. Register for a free subscription.
For further information on this topic please contact K Shanti Mogan at Shearn Delamore & Co by telephone (+60 320 272 727) or email ([email protected]). The Shearn Delamore & Co website can be accessed at www.shearndelamore.com.
