1. Home
  2. Insights
  3. Alerts
  4. December 2023

Application for Security for Award Sum Pending Determination of a Setting Aside Application: Time for an Update?

04 December 2023

In this article, we will discuss the application of Section 37(7) of the Arbitration Act 2005 (“Section 37(7)”) vis-à-vis an application by a defendant for the award sum to be paid by the plaintiff as security pending the determination of an application to set aside an arbitration award (“Application for Security for Award Sum”) by the Malaysian Courts. We will also examine the application of a similar provision under the English Arbitration Act 1996, i.e. Section 70(7), by the English Courts with a view to providing some insights as to the English jurisprudence in respect of an Application for Security for Award Sum which could serve as a guidance for the development of the Malaysian jurisprudence in this respect.
 
For context:
 
  1. the applicant in an Application for Security for Award Sum is the defendant in the application to set aside arbitration award under Section 37 of the Arbitration Act 2005 (“Setting Aside Application”). The applicant would usually also be the winning party of the arbitration between the parties; and

  2. the party defending an Application for Security for Award Sum is the plaintiff in the Setting Aside Application, and would usually also be the losing party in the arbitration between the parties.
The Malaysian Approach
 
Section 37(7) provides as follows:
 
“Where an application is made to set aside an award, the High Court may order that any money made payable by the award shall be brought into the High Court or otherwise secured pending the determination of the application”
 
It is pertinent to note that the only reported case in respect of Section 37(7) is the case of Mechanalysis Sdn Bhd (in Liquidation) v. Appraisal Property Management Sdn Bhd1.
 
In Mechanalysis2, the Court referred to the case of Luminous Crossroads Sdn Bhd v. Lim Kong Huat Construction3 where Low Hop Bing J (as he then was) in considering Section 24(3) of the repealed Arbitration Act 1952 which is in pari materia with the present Section 37(7), stated as follows:
 
“Section 23(3) of the English Arbitration Act 1950 which is in pari materia with our s. 24(3) has been considered only once, by the English Court of Appeal in Alexandria Cotton & Trading Company (Sudan), Ltd v. Cotton Company Of Ethiopia, Ltd [1965] 2 Lloyd's List Law Reports 447. In this case, a dispute on a contract for the sale of cotton between the claimant sellers and the respondent buyers was referred to arbitration where an award of 60,990 pounds 11s. 8d. was made in favour of the sellers. The buyers then filed a motion in court to remit and set aside the award. As the sellers had in hand on other accounts the sum of 45,000 pounds, the court ordered the buyers to pay the sum of 15,000 pounds, into court as security pending the determination of their application to set aside the award. Lord Denning MR did not elucidate or propound any guidelines or factors which the court must take into account when considering whether or not to exercise its discretion under s. 23(3), but said at p. 448:
 
It does not hurt the buyers to pay it. They have the money, and if they pay it, they can have their motion argued; and on being argued, if they are right, they will get the 15,000 pound back. Therefore, there is no harm to them ... So they are not prejudiced.
 
The sole factor which His Lordship took into consideration in deciding whether or not to exercise the discretion in s. 23(3) is the prejudice which the buyers may suffer if the court orders payment into court of the award sum. The court dismissed the buyers' appeal and security was ordered in the form of payment into court as the buyers would not suffer any prejudice.
 
…
 
Therefore, the crucial issue here is still the exercise of a discretion by reference to the particular circumstances of each individual case and that the court's first consideration is to achieve justice between the parties.”4
 
His Lordship in Luminous Crossroads then exercised his discretion and allowed the Application for Security for Award Sum after considering, amongst others, the following facts and circumstances5:
 
  1. the business address of the plaintiff had changed during the course of the proceedings;

  2. the plaintiff had not submitted any accounts to the Registrar of Companies as required under the Companies Act 1965;

  3. the plaintiff had not shown any record of its assets; and

  4. the plaintiff had not settled its share of the arbitration costs.6
Having set out the observations by Low Hop Bing, J in Luminous Crossroads on Section 24(3) of the now repealed Arbitration Act 1952 and the decision of the English Court of Appeal in Alexandria Cotton, Mohd Nazlan Mohd Ghazali JC (now, JCA), in Mechanalysis allowed the Application for Security for Award Sum on, amongst others, the grounds that there is a patent lack of evidence as to the exact state of the plaintiff’s financial health (apart from the fact of it having been wound-up) and the resources at the plaintiff’s disposal to provide the security. 
 
From the foregoing, it can be seen that the English Court of Appeal in Alexandria Cotton applied the test of prejudice (which was the sole factor considered) and allowed the Application for Security for Award Sum. The Court opined that it would not prejudice the plaintiff to pay the award sum because if the plaintiff pays it then the Setting Aside Application could be heard, and if the plaintiff is successful in the Setting Aside Application, then the plaintiff could get the award sum back. There is no harm to the plaintiff, so the plaintiff was not prejudiced.
 
Based on Mechanalysis and Luminous Crossroads it can be discerned that the Malaysian Courts will exercise their discretion under Section 37(7) (and Section 24(3) of the repealed Arbitration Act 1952) based on the facts and circumstances of each particular case with the primary consideration of achieving justice between the parties. However, there is still no clear guidance provided by the Malaysian Courts as to the application of the same to reflect the true objective of the provision. For example, based on the “prejudice test” as applied in Alexandria Cotton, it is unlikely that there will be a case where an Application for Security for Award Sum would be rejected. We are therefore of the view that there is a need for the Malaysian Courts to provide more comprehensive guidelines in respect of the application of Section 37(7) to prevent the abuse of the same by a defendant in a Setting Aside Application. In doing so, it is pertinent to point out the material developments in the United Kingdom in the recent years in respect of the application of a similar provision i.e. Section 70(7) of the English Arbitration Act 1996 which has further refined the test to be applied in an Application for Security for Award Sum.
 
The English Approach
 
Section 70(7) of the English Arbitration Act 1996 provides as follows:
 
“The court may order that any money payable under the award shall be brought into court or otherwise secured pending the determination of the application or appeal, and may direct that the application or appeal be dismissed if the order is not complied with.”
 
In both A v B7 and Progas Energy Ltd and others v Islamic Republic of Pakistan8, the English Courts dismissed the Applications for Security for Award Sum and held that as a general principle, the court should not order security unless the defendant can demonstrate that the challenge to the award will prejudice its ability to enforce the arbitral award.
 
Based on the two English cases, there are two requirements to be met for the Court to exercise its discretion to allow an Application for Security for Award Sum, namely:
 
  1. whether the Setting Aside Application 'is flimsy or otherwise lacks substance’ (“1st Requirement”); and

  2. whether the Setting Aside Application in some way prejudices the ability of the defendant to enforce the award or diminishes the plaintiff’s ability to honour the award (“2nd Requirement”).
In particular, as regards the 2nd Requirement, the Court must bear in mind, inter alia, the following:
 
  1. Section 70(7) of the English Arbitration Act 1996 is not designed to put the defendant (the winning party in the arbitration) in a better position than before;

  2. In order to show that the ability of the defendant to enforce the arbitral award has been prejudiced or the ability of the plaintiff to honour the arbitral award has been diminished, it is effectively necessary to satisfy a similar requirement to that of a freezing / Mareva injunction, namely a real risk of dissipation of assets between the time of the Setting Aside Application and its final disposal; 

  3. Evidence showing that the financial position of the plaintiff is generally weak is not sufficient to satisfy the test. If the evidence already shows that the plaintiff is not able to pay now, any further deterioration in its financial circumstances would be of no significance;

  4. A simple delay in enforcement of an arbitral award does not amount to the prejudicing of the defendant’s ability to enforce the award;

  5. If the defendant is in no worse position than it would be if there was no Setting Aside Application, then an order under Section 70(7) of the English Arbitration Act 1996 ought not be made; and

  6. The jurisdiction conferred on the Court by Section 70(7) of the English Arbitration Act 1996 should not be used as a means of assisting the defendant in enforcing the arbitral award which has been made in its favour.
Conclusion

As it stands, the Malaysian jurisprudence in respect of Section 37(7) warrants reconsideration in light of the recent developments under English law which has evolved since the Court of Appeal’s decision in Alexandria Cotton some 60 years ago.
 
It is respectfully submitted that the Malaysian Courts should adopt the principles laid down in the recent English cases of A v B and Progas Energy when considering an Application for Security for Award Sum under Section 37(7). Although Section 37(7) is not in pari materia with Section 70(7) of the English Arbitration Act 1966, the language of the two provisions is sufficiently similar to enable the current principles under English law to be adopted.
 
The adoption of these principles will operate as guidelines on the application of Section 37(7), bearing in mind that an Application for Security for Award Sum is intended to prevent the defendant from being prejudiced in the enforcement of an arbitral award, and not as an indirect means of enforcing the arbitral award under Section 38 of the Arbitration Act 2005, and thereby deprive the plaintiff of the opportunity to be heard in the Setting Aside Application even though there may be valid grounds to set aside the arbitral award under Section 37 of the Arbitration Act 2005.
 
Article by Ashok Kumar Mahadev Ranai (Partner) and Chong Hong Kiat (Associate) of the Construction and Engineering Practice of Skrine.
 
1 [2016] 8 CLJ 81
2 [2016] 8 CLJ 81, paragraph [58].
3 [2002] 5 CLJ 100
4 2002] 5 CLJ 100,  p110a to 111d.
5 [2002] 5 CLJ 100, p109d to p109f.
6 [2002] 5 CLJ 100, p109d to p109f.
7 [2010] EWHC 3302 (Comm), paragraphs [50] and [61].
8  [2018] 2 All ER (Comm) 287, paragraphs [50] to [58] and [78] to [82].

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

  • Proud to be a member of
  • connect with us
  •  
  •