Federal Court holds arbitrator may draw on own knowledge and expertise to determine loss of profit suffered by subcontractor owing to wrongful termination of contract

30 March 2021

Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd and another appeal [2021] 1 MLJ 1 

In Pancaran Prima Sdn Bhd v Iswarabena Sdn Bhd and another appeal, the respondent appointed the appellant as its subcontractor to carry out construction works. The respondent terminated the subcontract pursuant to clause 12 of the subcontract which entitled the respondent to terminate the contract if the works were delayed “more than 20% financially” (“clause 12”). The appellant argued that the termination was unlawful. After appointing a professional engineer and chartered arbitrator to arbitrate their dispute, the arbitrator found that the percentage of delay stipulated in clause 12 had not been exceeded and the termination was therefore premature and unlawful. The respondent was ordered to pay the appellant approximately RM1.4 million for completed works and RM942,109.52 for loss of profit the appellant had suffered due to wrongful termination.

The appellant applied to the High Court of Malaya (“HC”) to enforce the award under section 38 of the Arbitration Act 2005 (“AA”) whilst the respondent applied to set aside or vary the award under sections 37 and 42 of the AA. The HC dismissed the application to enforce the award, set aside the “loss of profit” granted under the award and affirmed the sum that was granted for completed works. The appellant appealed to the Court of Appeal (“COA”) against the HC’s decision and the respondent cross-appealed to vary the HC’s decision on the ground that the sum awarded for completed works was wrongly assessed by the arbitrator. The COA dismissed the appellant’s appeal, set aside the entire arbitral award for breach of natural justice and held that the arbitrator exceeded his jurisdiction because he had relied on extraneous evidence which he himself “invented” to determine the “loss of profit” payable to the appellant without giving the parties prior notice of that evidence or allowing them an opportunity to submit on it.

The leave questions before the Federal Court (“FC”) included whether:

• an arbitrator who was an engineer and well-acquainted with the construction industry would breach the rules of natural justice if he relied on his own knowledge and expertise to determine loss of profit payable by one party in the arbitration to the other; and 
• the arbitrator’s decision on the value of completed works was a “question of law arising out of the award”.

In allowing the appeals, the FC held, among other things: 

• The arbitrator, a professional engineer, was competent to draw on his own knowledge and expertise on the existence of the 10-15% “no profit” risk norm in the Malaysian construction industry without giving the parties the opportunity to respond; 
• Given the evidence before the arbitrator, the question on whether he relied on extraneous evidence that he “invented” did not arise at all. Similarly, the question on whether he had breached the rules of natural justice for failing to give the parties the opportunity to submit also did not arise. Since the arbitrator’s loss of profit ruling was based on evidence before him, the courts below were wrong in setting aside the loss of profit award under sections 37 and/or 42 of the AA; and 
• The sum awarded by the arbitrator for completed works was based purely on factual finding and did not involve any question of law and the courts below had wrongly interfered with the arbitrator’s correct findings of fact by taking the view that he had wrongly applied the physical delay test instead of the financial delay test in deciding the legality of the termination of the subcontract.