KEBABANGAN PETROLEUM OPERATING COMPANY SDN BHD v Malaysia Marine And Heavy Engineering Sdn. Bhd.

Case Significance

Confirms that an arbitral tribunal's failure to give a reasoned award and to address a party's substantive defences can constitute a breach of the agreed arbitral procedure under section 37(1)(a)(vi) of the Arbitration Act 2005, justifying the award being set aside and enforcement refused.

This Court of Appeal decision concerns the setting aside and enforcement of an arbitral award under the Arbitration Act 2005, and it turns on the tribunal's failure to make a reasoned award and to deal with the respondent's defences. The dispute arose out of a contract for the supply of valves, in which the appellant, an oil-and-gas operating company, alleged that the respondent, a marine and heavy-engineering company, had breached express and implied terms — that the valves did not correspond with their description and were not of merchantable quality — causing it substantial loss. The matter went to arbitration, and the resulting award was challenged in the High Court through two linked proceedings: one to set aside the award and one to enforce it. The High Court set the award aside and dismissed the enforcement application, and both sides appealed, the two appeals being heard together.

The Court of Appeal examined the grounds on which the award had been impugned. It found that the tribunal had failed to consider and make findings on the respondent's arguments — on the quantification of damages for one of the claims, on the defences of waiver, acquiescence and estoppel, and on whether the appellant had mitigated its loss. It further held that the arbitral procedure had not been in accordance with the parties' agreement within the meaning of section 37(1)(a)(vi) of the Arbitration Act 2005, because the tribunal had failed to make a reasoned award in respect of that claim.

The Court of Appeal held there was no appealable error in the High Court's decision to set aside the award and to dismiss the enforcement application, and it dismissed both appeals with costs of RM50,000 in the set-aside appeal and RM15,000 in the enforcement appeal, subject to allocatur. The judgment illustrates that an arbitral tribunal's failure to give reasons and to address a party's substantive defences can amount to a breach of the agreed arbitral procedure justifying the award being set aside.