The Islamic Religious and Malay Customs Council entered into negotiations with Far East Holdings Bhd and Kampong Aur Oil Palm Sdn Bhd (KAOP) in order to cultivate 11,073 acres of land. According to an agreement between the parties, the land was to be developed by a wholly owned subsidiary of KAOP, to which the council would transfer the land in exchange for a 33% shareholding in KAOP. The agreement gave the council the options to:
- purchase further shares; and
- receive share capital of KAOP from Far East, which would result in the council owning 60% shareholding in KAOP.
In 1998 Far East extended loans to KAOP to finance the development of the land. KAOP capitalised the loans as paid-up capital and allotted shares to Far East, which reduced the council's equity from 33% to 17.5%.
The council contended that Far East had unlawfully increased the paid-up capital of KAOP and failed to transfer the shares to it, even though it had exercised the first option above, and had diluted its interest in KAOP. Far East and KAOP argued that the council had failed to exercise the options in time and that there was no prohibition in the agreement against increasing the share capital of KAOP, which the council was aware of and had consented to.
Arbitration proceedings
The arbitrator concluded that the council was entitled to exercise both options and therefore to own a 60% shareholding in KAOP. The arbitrator ordered Far East to return its shares certificates for cancellation and the company secretary to restore the issued share capital of KAOP to 67.61% to Far East and 32.39% to the council. Further, it ordered Far East to transfer 27% shares to the council, which would mean that the council owned a 60% shareholding in KAOP. Far East was also required to pay damages to the council for loss of dividends with a post-award interest at 4% per year.
High court and Court of Appeal
Further to the award and pursuant to Section 42 of the Arbitration Act 2005, Far East and KAOP referred questions of law arising out of the award to the high court. The council also applied to the high court for recognition and enforcement of the award pursuant to Section 38 of the Arbitration Act. The high court held that the arbitrator had not erred in its interpretation of the agreement and upheld its findings. However, the high court found that the arbitrator had no jurisdiction to grant pre-award interest. Further, although post-award interest could be awarded, it was not pleaded in this case and therefore should not have been granted.
The Court of Appeal agreed.
Federal Court
The Federal Court held that under Section 42 of the Arbitration Act, judicial intervention is warranted only where the award substantially affects the rights of one or more parties. A perverse, unconscionable and unreasonable award is not grounds to set aside the award under Section 42. Further, Section 42 provides no jurisdiction to deal with questions of fact. The Federal Court further held that a "point of law in controversy" is not a question of law within the meaning of Section 42, as there are points of law in controversy in every case.
However, the Federal Court held that the construction of a document does constitute a question of law and that the arbitrator had not erred in its construction of the agreement. With respect to pre-award interest, the Federal Court agreed that the act does not permit pre-award interest unless the arbitration agreement so provides. It further held that the arbitrator should not have granted post-award interest as it was not pleaded.
The Federal Court ordered Far East to return all illegal dividends to KAOP and required the council to pay what was necessary in order to exercise its options to purchase the shares.
The Federal Court has taken the approach that, in the absence of an express provision in the Arbitration Act, pre-award interest cannot be granted unless agreed by the parties. Further, the award of such interest may be challenged. The question remains as to how this will be dealt with in international arbitrations where a Section 42 challenge is unavailable.
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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.
