Fraud and arbitration: a critical view on the Sulu case

 

From Hamid Sultan Abu Backer

Fraud and the issue of arbitrability was an ongoing debate even before the New York Convention of 1958 which dealt with the enforcement of foreign arbitration awards.

The debate has not abated even in countries which have wholly or partly adopted the Model Law 1985 by the UN commission on trade law to support the convention obligation by providing a civilised arbitration process as well as enforcement of awards which are not in breach of the convention itself.

One of the shortcomings of NYC 1958 is that it can promote the issuance of fraudulent awards without the participation of the victim, that is, the respondent to the award, which is not within the prescribed terms of the convention and get it enforced through the courts by an ex-parte order if the enforcement court is not vigilant.

Basically, what it means in crude terms is that a purported claimant can sit in a coffee shop and purportedly appoint an arbitrator, who may not even have any qualification, and get him to issue an award, which need not be approved by the state court, and enforce it in about 170 countries who are signatories to the convention, provided the enforcement court is naïve enough to allow the enforcement of the award or at least provide an ex-parte attachment order against the victim of fraud.

The framers of the convention must have envisaged high ethical standards in the arbitration industry as well as legal industry at that time, and the tragedy that Malaysia is suffering now will not have happened at all if such ethics were present.

The framers removed a safety net for the respondent by not sustaining the “double exequatur rule” which would have given legitimacy to the award.

In simple terms this rule requires, after obtaining the award, to get leave of the state court as well as the enforcement court for its enforcement. In practice, leave may not be given if the respondent is not notified of the leave application.

Ads by Kiosked

Prior to the convention, the “double exequatur rule” was in place as per the Geneva Convention 1927. However, NYC 1958 as well as Model Law 1985 did not preserve that rule, which would have checked fraudulent awards at the earliest opportunity.

The irony in the Sulu case arose because of the government’s refusal to pay a small payment which can be construed as symbolic in nature under the terms of an agreement.

That breach can technically be construed as a self-inflicted wound which is still bleeding. However, the government’s case for refusal of payment was further fortified, based on media reports, when a Sabah court ruled that the Sulu heirs had no legitimate claim.

To the surprise of all legal pundits, the claimant managed to get an arbitrator to issue an award, purportedly under the New York convention, even though there is strong legal argument to say that the claimants have no locus to rely on the convention, based on the condition precedent which is required to initiate the arbitration process under NYC 1958.

The problem was further compounded when legal pundits on behalf of the government took the position that the arbitration process was illegal and the government would not participate – ignoring a fundamental principle under the Model Law 1985 related to the arbitrator having the right to determine his jurisdiction to hear the dispute which is often referred to as the “Kompetenz–Kompetenz” principle.

Basically, this means that a victim-respondent cannot take a passive approach when, rightly or wrongly, an arbitration process has been commenced, that, too, against a sovereign state.

Ads by Kiosked

In addition, the legal pundits in the past regime also appear not to have taken any court orders or committal orders against the claimant or initiated an action in the state court to stop the arbitration process.

There are also other steps the legal pundits could have advised the government to stop this nuisance at limine.

The Sulu case is a classic example to show that little or inadequate knowledge in law, practice and ethics may ultimately destroy the growth of a nation.

In addition, a country which is infested with single degree holders (with some exception to seniors) in the legal industry at this time and era is not a reflection of a learned society sufficient to protect the rule of law and public interest.

The Sulu case also reflects the need for the government to strengthen legal knowledge in the legal industry, by legislation or constitutional amendment, by increasing the qualification and expertise of our legal industry to sustain the rule of law in the country as well as to protect the country from being invaded by fraudulent awards or oppressive conduct against our sovereignty in breach of private and public international law inclusive of convention obligations.

One easy and inexpensive path for the government to get our academia and legal industry to become robust in legal knowledge is to introduce the “University cum Court Annexed Arbitration” concept to inspire them to enhance their qualifications and expertise to sit as arbitrator and assist to clear the backlog of court cases.

Ads by Kiosked

It is heartening to note that the current minister for law and institutional reforms is putting a major effort to correct the blunders of the past which may have cost the government substantial costs and could be ongoing for many more years to come.

It is also inspiring to note that the judiciary is giving an opportunity to doctorate holders from academia and practitioners to sit as judges, and this will inspire the legal industry to acquire additional qualifications.

On my part, I have acquired a string of qualifications without being a full-time scholar in any university or professional bodies, inclusive of qualifying as a barrister, paying only a small sum in fees and without any scholarship from the government or public bodies. I went to London to do law at the age of 28. Before that, I was a master chef.

I am confident that all in the legal industry who have passion for the law can acquire these qualifications and contribute in a robust manner to uphold social justice, ethics as well as the rule of law as per our constitutional framework.

Madani policy makers must take note that the security of the nation in this time and era is not only dependent on a strong police and military force, but it also needs an ethical and
knowledgeable legal industry to preserve, protect and defend the rule of law and sovereignty from internal and external aggression. The government must take immediate steps to ensure that the legal industry does not become a paradise for single degree holders. - FMT

Hamid Sultan Abu Backer is a retired judge of the Court of Appeal, a professor of arbitration and dispute resolution at MAHSA University, and an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.