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A notable victory of obtaining RM10 million security in one of the first security for payment applications pursuant to Section 37(7) of the Arbitration Act 2005

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31 July 2023

Our Partner, Susan Tan Shu Shuen and Associates, Koh Shien Lin and Noor Sumaeya Sofea Shamsudin from Zul Rafique & Partners’ Construction Dispute Resolution Practice Group achieved resounding success of obtaining RM10 million security in one of the pioneering applications for the security of sums payable under an arbitral award in accordance with section 37(7) of the Arbitration Act 2005 (“AA 2005”). 

As a background, the defendant has obtained an arbitral award in its favour, amounting to approximately RM10 million. The plaintiff sought to set aside the arbitral award under section 37 of the AA 2005.

Zul Rafique & Partners (“ZRp”) represented the defendant in filing an application to secure the awarded sum under the arbitral award of approximately RM10 million (“Award Sum”) pending the determination of the plaintiff’s setting aside application pursuant to section 37(7) of the AA 2005 ("Security for Payment Application"). Section 37(7) of the AA 2005 provides that:
                                        
“(7) 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.”

In the course of the hearing of the Security for Payment Application, the High Court was faced with the task of determining the applicable test to be adopted as conflicting tests were put forth by the parties, and there is no binding precedent available:-
 
1) ZRp, as the defendant’s counsel, argued that the applicable test is whether there is any prejudice caused to the party who is required to make payment of the awarded sum as security and to achieve justice between the parties, as propounded in the High Court case of Luminous Crossroads Sdn Bhd v Lim Kong Huat Construction [2002] 5 CLJ 100 (“Luminous case”). This test was followed in the subsequent High Court case of Mechanalysis Sdn Bhd (In Liquidation) v Appraisal Property Management Sdn Bhd [2016] 8 CLJ 8.
 
2) Based on the aforesaid test, ZRp submitted that the High Court should exercise its discretion to allow security for payment as the plaintiff’s financial position is doubtful and there is lack of resources to provide the security. Assuming that the plaintiff indeed is financially sound as it alleged, there is no prejudice caused to the plaintiff to provide the security following the test propounded in the Luminous case. The overarching aim of the Security for Payment Application is to ensure that the plaintiff, as the losing party in arbitration, will continue to be able to meet the arbitral award in the event the plaintiff’s setting aside application is unsuccessful.

3) The plaintiff’s counsel on the other hand submitted that the applicable test is set out in the High Court case of Zenbay Sdn Bhd v Yong Choo Kui Shipyard Sdn Bhd [2015] 10 CLJ 924 (“Zenbay case”). It was submitted that applying the test in the Zenbay case, the High Court should not order security for payment unless the defendant demonstrates prejudice to its right to enforce the arbitral award, such as risk of dissipation of assets by the plaintiff. Further, the plaintiff’s counsel submitted that the Security for Payment Application should not be allowed so as to ensure that the setting aside application can be disposed of expeditiously without unnecessary delay. On this note, the plaintiff’s counsel went on to argue that the plaintiff has acted swiftly in filing the setting aside application and even before the lapse of the payment due date of the awarded sum stipulated in the arbitral award.

4) ZRp highlighted that the Zenbay case did not take into consideration the test established in the Luminous case decided earlier and if it was considered, the decision in the Zenbay case may take a different turn. ZRp further distinguished the Zenbay case by submitting that the court in the Zenbay case has adopted the English position by referring to sections 67 to 70 of the English Arbitration Act 1996 while acknowledging that the AA 2005 does not have equivalent provisions.

The High Court was persuaded by ZRp’s arguments and was satisfied that there are doubts regarding the plaintiff’s ability to pay the Award Sum based on its financial statements. Therefore, the High Court allowed the defendant’s Security for Payment Application and ordered, amongst others, that:
 
1) the Award Sum shall be paid into a stakeholder account as security pending the determination of the plaintiff’s setting aside application; and
 
2) the Award Sum held in the stakeholder account shall be released to the defendant if the plaintiff’s setting aside application is dismissed or shall be refunded to the plaintiff if the plaintiff’s setting aside application is allowed.

For more insight into this area of law, please contact our Partners in the Construction Dispute Resolution Practice Group:
Kuhendran Thanapalasingam
Susan Tan Shu Shuen

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