This article first appeared in The Edge Malaysia Weekly on August 10, 2020 - August 16, 2020

This monthly report is compiled and briefly summarised by a group of lawyers on a voluntary basis for the benefit of readers of The Edge.

Please consult your own lawyers if you need advice on the cases, issues and related matters highlighted here.

Federal Court: Only the dispositive portions of an arbitral award is required to be registered for enforcement purposes

Where an arbitration award is given by an arbitral tribunal seated in Malaysia or in a foreign State, which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, that award is recognised. The successful party may bring enforcement proceedings under s 38 of the Arbitration Act 2005 (‘AA’). If registered, it operates as a judgment of the High Court (‘HC’). Registration by the HC will be refused at the request of the unsuccessful party on any of the grounds provided for in s 39 of the AA against recognition or enforcement as a judgment of the HC.

In an application for recognition and enforcement of an arbitral award by a successful party under s 38 of the AA, must the award in its entirety be registered, or only the dispositive portions of the award? This issue arose in Siemens Industry Software GMBH & Co KG (Germany) (formerly known as Innotec GMBH) v Jacob and Toralf Consulting Sdn Bhd & 4 Ors — the successful party in the arbitration proceedings wanted the entire award to be registered with the intention of using the findings of the arbitral tribunal against the unsuccessful party in an action filed in the HC inter alia for fraudulent misrepresentation.

The respondents, the successful parties in the arbitration proceedings, applied to register the entire award against Siemens Industry Software GMBH & Co KG (Germany) (‘Siemens’) in enforcement proceedings pursuant to s 38 of the AA. The HC held that the term ‘award’ means only the dispositive portion of the award, or the terms of the relief granted by the arbitral tribunal and not the entirety of the award embodying the totality of the case before the arbitral tribunal. On appeal, the Court of Appeal (‘CA’) came to a different conclusion —

(a) the term ‘award’ means the entire body of the award; (b) registration of the entirety of the award is granted as of right unless the unsuccessful party can show reason under s 38 or s 39 of the AA as to why registration and enforcement should be refused; and (c) the HC had no jurisdiction save to register the entire award. The CA also dismissed an argument by Siemens that the registration of the entire award breached the confidentiality rule in arbitral proceedings.

On appeal to the Federal Court (‘FC’), the decision of the CA was reversed and the HC’s decision was restored. In the unanimous decision of the FC delivered by Tengku Maimun CJ (Mohd Zawawi, Idrus Harun FCJ (as he then was), Nallini Pathmanathan and Abdul Rahman Sebli FCJJ concurring), it was held that the CA erred in its construction of the AA. When a successful party in arbitration seeks to enforce an arbitral award, he is seeking the leave of the Court to enforce the award as a judgment or order of the Court. In this respect, an ‘award’ is defined in s 2 to mean “a decision of the arbitral tribunal on the substance of the dispute” and not “a decision of the arbitral tribunal and the substance of the dispute”. By analogy, an award is akin to a judgment or order of the Court, which is distinct from the grounds of judgment that embodies the totality of the case. The CA was also wrong in relying on s 39 of the AA in support of its decision. Section 39 is only available to the unsuccessful party against whom the award is sought to be enforced, claiming that the recognition and enforcement of the award under s 38 should be refused. The objection of Siemens was that only the dispositive portions of the award should be registered and Siemens did not make application under s 39 of the AA to resist recognition of the award.   

Clockwise from top left: Tengku Maimun CJ, Mohd Zawawi, Idrus Harun FCJ (as he then was), Abdul Rahman Sebli FCJJ and Nallini Pathmanathan

… the material part of the award capable of being registered to be recognised and enforced in the same manner as a judgment is the dispositive portion on its own. The entire award … includes inter alia the issues to be tried, the witnesses’ testimonies, the submission of the parties, the findings, reasoning and analysis of the arbitral tribunal is not necessary to be registered for enforcement purposes under section 38 of the AA 2005. The issue of bifurcation of the award did not arise and the respondents’ argument that the High Court judge had exceeded her jurisdiction in her decision to bifurcate the award is devoid of any merit.

Chief Justice Tengku Maimun

Federal Court rules on testamentary capacity and secret trusts

A person of sound disposing mind, or who has testamentary capacity,  may make a valid will (‘Will’). A testator’s Will may contain a secret trust directing the disposition of the testator’s property upon his demise without naming the beneficiary. A secret trust may be a full secret trust or a half secret trust. In the former case, the trust obligation is fully concealed on the face of a Will and the trust obligations are communicated to the legatee during the testator’s lifetime. In the latter case, the existence of a trust is made known but the terms are concealed from the testator’s Will but which are made known to the legatee during the testator’s lifetime.

If a person is terminally ill, does it follow that he or she is without testamentary capacity? Are secret trusts recognised in Malaysia and whether secret trusts are contrary to public policy? These issues came before the Federal Court in Chin Jhin Thein & Chin June Song v Chin Huat Yean @ Chin Chun Yean & Chin Jhin Khim (Judgment dated 7 July 2020).

The testator was diagnosed with terminal cancer. On 18.12.2013, he made a Will prepared by his lawyer. Six days later, he passed away. In the High Court (‘HC’), Chin Jhin Thein and Chin June Song (‘Plaintiffs’), the children of the deceased, sued the Defendants, the executors of the Will. The Plaintiffs sought orders that the probate granted to the Defendants be declared null and void, premised on the grounds that the deceased did not have testamentary capacity and secret trusts are against public policy and should not be recognised in Malaysia. The HC held that the deceased had no testamentary capacity and that the full secret trust was not established. The Court of Appeal reversed the decision of the HC. On appeal, the Federal Court (‘FC’), in a judgment delivered by Mohd. Zawawi Salleh FCJ (Idrus Harun FCJ (as he then was), Nallini Pathmanathan, Zaleha Yusof and Hasnah Hashim FCJJ concurring), upheld the decision of the CA.

The FC held that a testator has testamentary capacity if he understands the nature and effects of the act, the extent of the property he is disposing and comprehends the claims to which he ought to give effect. Partial unsoundness of mind is not sufficient provided the person’s general faculties are not affected and not operating on the person’s mind in regard to the testamentary disposition. Also, testamentary capacity is not to be equated with contractual capacity. This is because a person’s capacity to make a decision respecting a particular task is distinct and separate from his capacity to perform another task. The FC clarified that mere proof of serious illness without clear evidence that the illness affected the testator’s mental faculties is not sufficient to displace his testamentary capacity.

From left: Mohd Zawawi, Idrus Harun FCJ (as he then was), Nallini Pathmanathan, Zaleha Yusof and Hasnah Hashim FCJJ

… the position in law on testamentary capacity is clear: if the testator is ill, it does not deprive [him of] his ability or capacity to execute it. There must be clear evidence to depict on insane delusion existing in the testator’s mind at the time of making of the will. Essentially, it is sufficient for the testator, at the time the will is executed, to have sufficient mental ability to understand [that] he is making a will, the effect of making the will, and the general nature and extent of his property. The duty of the court is to give effect to the will of the testator and not deprive him of the right to select the beneficiaries based on his wishes.

Justice Mohd Zawawi

The FC held that the law of trusts is derived from the rules of equity in Malaysia by reason of the statutory application of s 3(1)(a) of the Civil Law Act 1956. Accordingly, the concept of secret trusts, which is part of the law of trust, is applicable in Malaysia in the absence of an explicit abrogation or modification by written law. Secret trusts are upheld by the Courts in order to prevent fraud on the testator by the trustee and the rules of equity are applied to compel the trustee under a Will to fulfill his promises to the testator.

The argument of the Plaintiffs/Appellants that the doctrine of secret trust is against public policy was premised on the ground that it is used mainly to assist or camouflage the testator’s purported ‘sins’ or ‘skeletons’ during his lifetime. In principle, the FC held that there are no valid reasons to deny the testator’s right to distribute his estate as the testator thinks fit.

… The overriding purpose behind secret trusts is to enable property to be left in a will without explicitly naming who the property is being left to, by a bequest to a person who has previously promised to hold that property as trustee for the intended recipient. As wills are, by nature, public documents open to scrutiny, the concealment of identity that a secret trust provides is vital for those desiring a degree of privacy in the final disposal of their estate. In one sense, it would indeed not be in ‘good conscience’ to deny a testator the ability to distribute their estate as they see fit.

Federal Court: It is against public policy to uphold a contract where its intention is to deceive others

Section 24 of the Contracts Act 1950 (‘CA’) sets out several categories of unlawful contracts and that unlawful contracts are void. Under s 24(e) of the CA, a contract which the Court regards as immoral or opposed to public policy is void.

If a contract on its face appears to be valid but the contract is designed to deceive others by concealing the true nature of the transaction, is it against public policy to recognise such contracts? This issue arose in Yogananthy A S Thambaiya v Harta Pusaka Idris Osman [2020] 6 CLJ 151.

Idris bin Osman (‘Idris’) held 55% of the shares in a stockbroking company (‘R & I Securities Sdn Bhd’ or ‘Ris’). Ris was in receivership, and the receiver of Ris was the employer of Balakrishnan (‘Bala’). Bala was the husband of Yogananthy (‘Yogananthy’). Yogananthy claimed that there was an agreement between Idris and her (‘Contract’) that (a) Idris had agreed to sell his 55% shareholding in Ris in consideration for her help in the reorganisation of Ris and for putting up the collateral deemed necessary by the bankers for the rescue of Ris; and (b) Idris held the shares on trust for her. Yogananthy sued Idris for breach of the contract when Idris sold all the shares to a third party.

Idris argued that the Contract was unlawful and void under s 24(e) of the CA. This was because all the transactions in reality were between Idris and Bala — Yogananthy (Bala’s wife) was merely used as a front to pursue secret monetary benefits for Bala, the employee of the receiver of Ris. The High Court held that the Contract was void under s 24(e) of the CA as it was contrary to public policy. Yogananthy’s appeal to the Court of Appeal was dismissed and an appeal was made to the Federal Court (‘FC’).

In a unanimous judgment delivered by Abang Iskandar FCJ (now CJSS) (Ahmad Maarop PCA (as he then was), Ramly Ali FCJ (as he then was), Idrus Harun FCJ (as he then was) and Alizatul Khair Osman FCJ (as she then was) concurring),  the FC dismissed the appeal. It was held that public policy as a ground to void an agreement is a special provision, which the legislature had deemed it fit to expressly trust the Court to void an agreement which it regards as adverse to public policy, or otherwise being immoral. The FC held that the Contract was a sham document — the real intention was to create an obligation between Bala and Idris but this could not done as it would reveal the breach of duty by Bala to his employer. Thus, Yogananthy was used to facilitate Bala’s breach of duty and the modus was inherently deceptive. The FC observed that the public policy ground as a consideration to void a contract embedded in s 24(e) of the CA is also recognised at common law. It is built upon the principle that no man can lawfully do something that is injurious to the public welfare.

Clockwise from top left: Ahmad Maarop PCA (as he then was), Ramly Ali FCJ (as he then was), Alizatul Khair Osman FCJ (as she then was), Idrus Harun FCJ (as he then was) and Abang Iskandar FCJ

What would amount to something that is against public policy would vary from place to place. But one universal element in an agreement that would weigh considerably against public policy is one that concerns the matter of honesty or lack of it. It may or may not amount to outright fraud or an outright illegality for an agreement to be struck down as being void on the ground of public policy, in the context of our existing statutory regime. A thing or conduct that is bad need not necessarily be illegal, as not everything reprehensible is expressly made illegal by statute. Dishonesty comes in many forms and manifestations. The fact that a dishonest act is not made an offence or a tort does not disqualify it from being regarded by a court of law to be unenforceable on the ground of public policy.

Justice Abang Iskandar

Federal Court reaffirms the sanctity of a valid arbitration agreement and the judicial policy of non-intervention

If a party to an arbitration agreement initiates proceedings in Court and obtains a default judgment (‘DJ’), and the other party applies to set it aside on the grounds that there are valid disputes and the matter be referred to arbitration, may the Court adjudicate upon the merits of the disputes and refuse to stay the court proceedings? The Federal Court (‘FC’) was called upon to decide these two issues in Tindak Murni Sdn Bhd v Juang Setai Sdn Bhd (Judgment dated 17.2.2020).

The Appellant (‘Employer’) entered into a building and construction contract (‘BCC’) containing an arbitration agreement with the Respondent (‘Contractor’). The Contractor claimed that the Employer failed to make payments due and it terminated the BCC. Thereafter, the Contractor filed proceedings in Court to claim sums due under interim certificates of payment (‘Action’). The Employer did not enter appearance to the Action and DJ was entered against it. Subsequently, the Employer applied to set aside the DJ on grounds that there are valid disputes against the Contractor’s claim and the existence of the arbitration agreement. The Registrar of the High Court set aside the DJ.

The Contractor filed an appeal to the Judge of the High Court (‘HC’) in Chambers. The Employer applied to stay the proceedings. The learned Judge dealt with the two applications separately — (a) upheld the decision of the Registrar; and (b) allowed a stay of proceedings pending arbitration. On appeal, the Court of Appeal (‘CA’) (a) reversed the decision of the HC setting aside the default judgment; and (b) did not consider the stay application. On further appeal by the Employer to the FC, in a unanimous decision delivered by Nallini Pathmanathan FCJ (Tengku Maimun CJ, Azahar Mohamed CJ, Vernon Ong and Abdul Rahman Sebli FCJJ concurring), the CA’s decision was reversed.

The FC held that the CA was wrong to have treated the two matters (setting aside of the DJ and the stay application) separately, ‘as if the two had no nexus whatsoever with the other’ in circumstances where the two matters ‘were inextricably intertwined’. In particular, the arguments of the Contractor that (a) the CA was correct in refusing to set aside the DJ  because there was no meritorious dispute as to the sum owing; and (b) the CA need not to consider staying the proceedings, were rejected. The FC held that in the face of a valid arbitration agreement, the merits or demerits of the Contractor’s claim and the Employer’s defence, as a matter of jurisdiction, was for the arbitrator to decide under s 10 of  Arbitration Act 2005 (‘AA’). The FC pointed out that unlike the immediate predecessor of s 10 of the AA, the current provision no longer allows the Court to determine whether there is dispute between the parties with regard to the matters to be referred to arbitration. This is consistent with the judicial non-interventionist approach prescribed under s 8 of the AA. The FC also dismissed the Contractor’s argument that the AA does not contain provisions having the effect of subordinating a judgment of the High Court, a matter which must be specifically and deliberately legislated.    

Clockwise from top left: Tengku Maimun CJ, Azahar Mohamed CJM, Nallini Pathmanathan, Abdul Rahman Sebli FCJJ and Vernon Ong

… the submission for the Contractor that any subordination of a judgment of the High Court had to be specifically and deliberately legislated is misplaced … section 10 of the Arbitration Act 2005 [does not] have the effect of ‘subordinating’ a judgment in default. This is because the parties had chosen and agreed to arbitration as the sole and exclusive mode of dispute resolution in respect of any dispute or difference arising from this contract…

In point of fact if this form of legal rationale is allowed to persist, as stated earlier, all forms of dispute resolution agreed to between parties in their contracts would be rendered ineffectual and nugatory as it would be open to one party to breach the same and effectively put an end to the agreement to resolve disputes by way of arbitration. The defaulting party would be effectively ‘rewarded’ for breaching the agreement to arbitrate. This is the very mischief which section 10 seeks to prohibit.

Justice Nallini Pathmanathan

Court of Appeal (‘CA’): A company can use its own name as its trademark

Trademark owners of a mark named after the company’s name (‘Own Mark’) may be prevented from using their Own Mark in the market of another jurisdiction due to the registration of the same mark by local entities in that other jurisdiction. An example of this is seen in a landmark decision of the CA concerning the registered ‘Diesel’ trademarks in Malaysia.

May the Court grant recognition of trademarks of a foreign entity under the ‘Own Name Doctrine’ where that name is already registered as a trademark of a local entity? If so, can the Court grant a negative declaration that the use of trademarks under the Own Name Doctrine does not infringe the local trader’s registered mark having the same name? These issues confronted the CA in Diesel S.p.A v Bontton Sdn Bhd.

Diesel S.p.A (‘Diesel Italy’) is an Italian fashion brand established in 1978. Its founder coined the company’s name and trade mark ‘DIESEL’. Diesel Italy started as a manufacturer of jeans and had since expanded into a lifestyle company offering for sale apparel including its iconic jeans as well as related fashion products and accessories, all bearing its DIESEL trademarks. Diesel Italy’s products have had a presence in Europe since 1978 and in Asia since 1982 with the youth as its target consumer. It is one of Italy’s leading business enterprises with over 1,429 trademarks registrations worldwide, one of which dates back to 1978.

Bontton Sdn Bhd, a Malaysian entity, is a retailer and distributor of ready-made casual wear. It is the registered proprietor in Malaysia of four trademarks comprising the word ‘Diesel’ in Class 25 in respect of inter alia clothing, footwear, headgear (Bontton’s Diesel Registrations), the earliest of which is dated 1985. The registered ‘Diesel’ trademarks were not Bontton’s in  the beginning. It was assigned to it by a local entity which traded under the name of Diesel Trading Sdn Bhd. Whilst Diesel Italy had successfully registered its DIESEL trademarks in several classes in Malaysia and launched its perfume and eyewear in Malaysia bearing its DIESEL trademarks, it was unable to secure registration for its DIESEL word mark in Class 25 for apparel and to sell inter alia its clothing in Malaysia due to Bontton’s Diesel Registrations in Class 25.

Diesel Italy filed an application in the High Court (‘HC’) for a negative declaration under the Specific Relief Act 1950 (‘SRA’) that its use of its DIESEL trademarks is not an infringement of Bontton’s Diesel Registrations as it amounts to use in good faith of its own name pursuant to s 40 (1)(a) of the repealed Trade Marks Act 1976 (‘TMA 76’) (now s 55(1)(a) of the Trade Marks Act 2019). The HC dismissed Diesel Italy’s  application — in the absence of an infringement action, Diesel could not rely on s 40(1)(a) of the TMA 1976 because it would circumvent the rights of the registered owner; and (b) there is no provision in the TMA 1976 to obtain a negative declaration of non-infringement. Diesel appealed. In a landmark decision delivered by Mary Lim JCA (now FCJ) (Abdul Rahman Sebli JCA (now FCJ) and Suraya Binti Othman JCA concurring), the appeal was allowed.

The CA held that the power to grant declaratory decrees under the SRA should not be construed narrowly and restrictively. In appropriate cases, the Court should recognise that declaratory orders perform a critical function in both public and private law and that such decrees should be granted where it would resolve a question on differing or competing rights. It was also held that the grant of declaratory orders is not restricted to positive orders and negative declaratory orders (such as in this case for ‘non infringement’) under the SRA should be granted even if it is an ‘unusual remedy’ to serve the ends of justice.

The TMA 1976, the CA held, implicitly recognises the Own Name Doctrine and the use by an entity of its own name does not infringe another’s registered trade mark provided the use is in good faith. This gives rise to a ‘legal entitlement’ within the meaning of s 41 of the  SRA, for which a declaration of non-infringement ought to be issued to protect and allow for such use. Also, the monopoly and exclusivity conferred upon registered proprietors of trademarks is not absolute and is subject to other provisions of the TMA 1976, which includes the Own Name Doctrine in s 40(1)(a) TMA 1976.

From left: Abdul Rahman Sebli JCA (now FCJ), Mary Lim JCA (now FCJ) and Suraya Othman JCA

The evidence is overwhelming and it is beyond doubt that the appellant, Diesel S.p.A, has used and uses its own corporate name as its trade name and house mark and has done so for decades. The inception or coining of that name has been well-explained and documented by the creator himself, Mr. Rosso. The word “Diesel” in the context of the appellant is not merely a word; it is more. It is its name and it is the key, essential or distinctive feature of the appellant’s corporate or trade name. That name, “Diesel”, used in the entire range of its goods whether clothing, accessories, footwear or headgear, has come to be associated or identified with the appellant. That name is its trade mark and with its very many variations as explained earlier, has also been registered in many jurisdictions worldwide. The extent of its intensive advertising and promotion is also evident …

Justice Mary Lim

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