MCIS Insurance Bhd v Associated Cover Sdn Bhd [HC]

www.ipsofactoJ.com/highcourt/index.htm [2002] Part 1 Case 15 [HCM]

HIGH COURT OF MALAYA

MCIS Insurance Bhd

- vs -

Associated Cover Sdn Bhd

Coram

KC VOHRAH J

14 JULY 2001

Judgment

KC Vohrah, J

In respect of a dispute between Malaysian Co-operative Insurance Society Ltd (MCIS) and Associated Cover Sdn Bhd (Associated Cover) which was referred to arbitration, the arbitrator made two awards,
- an "interim award" on liability and
- a later award on quantum of damages published on November 5, 1996 (the quantum award).
There was an application to the High Court to remit or set aside both the awards.

On March 23, 2001 I dismissed the application of MCIS in respect of the interim award on liability and I subsequently heard submissions in respect of the quantum award.
To understand what MCIS's complaint on the quantum award is about it is necessary to set out the brief facts MCIS is relying on.
MCIS, an insurance company and Associated Cover, an insurance agent, entered into an agreement whereby Associated Cover was to sell an insurance package called the "Kinta Package" being a combination of accident and householders' policies issued by MCIS.

The Kinta Package policy was a contract for one year which could be renewed by the insured and even if the insured wished to renew it, the renewal could be rejected by MCIS pursuant to Clause 9.1.3 in the agreement. Associated Cover was to be paid commissions as set out in the schedule of incentives annexed to the agreement.
The Bank Negara (the Governor of Bank Negara was also the Director General of Insurance at the material time) issued guidelines dated December 27, 1990 entitled "Guidelines to Control Operating Costs of General Insurance Business" wherein they, inter alia, set out the structure for commissions to be paid to insurance agents. The guidelines took effect from January 2, 1991.

The effect of the Bank Negara guidelines was to reduce the rate of commissions paid to insurance agents.
Associated Cover, being of the view that the Kinta Package would not be profitable, sent a letter to MCIS terminating the agreement and MCIS confirmed by its letter that the termination took effect from March 31, 1991.
MCIS paid commissions to Associated Cover in accordance with the rate in the Bank Negara guidelines which was lower than the rate set out in the agreement.
Associated Cover wanted the commission rate to remain the same as provided in the agreement. A dispute arose. Associated Cover claimed that it was entitled to commissions at the higher rate as stated in the agreement because:
1. it was pursuant to the terms in Clause 19 of the agreement; and
2. the Bank Negara guidelines do not have the force of law.
In an "interim award" on liability the arbitrator ruled that the Bank Negara guidelines did not have the force of law and did not take away Associated Cover's contracted rights to the commissions claimed. As adverted to earlier, this court dismissed the application by MCIS to set aside the interim award and we are now concerned with the quantum award only.
The arbitrator after giving his interim award proceeded to assess damages.
The agreement having been terminated by Associated Cover, the arbitrator relied on Clause 19.1.1 of the agreement to assess the quantum of damages. That clause provided for the rights of the parties subsequent to termination. He awarded damages relying on the actuarial calculation from the firm of Watson Wyatt. MCIS submits that the arbitrator did not interpret the clause correctly and there is therefore error of law on the face of the award.

In its motion to set aside the quantum award, MCIS seems to rely on ground 1(ii), that-

[the] award is bad in law on the face of it... for the law in respect of damages payable for breach of contract and/or termination of contract has been erroneously interpreted and/or applied.

It also relies on ground 3 that the arbitrator-

had misconducted himself (in the technical sense) and/or to the proceedings in that in construing the terms of the said agreement the arbitrator did not confine himself to the four corners of the said agreement and in not giving reasons for the award.

The affidavit of one Meyyappan supporting the notice of motion to set aside the award touches on the matter of quantum in two paragraphs.

Paragraph 18(a) thereof states,

the Arbitrator erred in applying the law, in respect of damages payable for breach of contract and/or termination of contract.

Paragraph 18(c) states,

Further the damages awarded by the Arbitrator are too remote.
There is also misconduct alleged in the affidavit. Paragraph 18(b) states,

The Arbitrator went outside the ambit of Clauses 19.1 and 19.1.1 of the said Agreement.
In addition paragraph 15 stated that the arbitrator had misconducted himself in that he did not give reasons for the award nor why he accepted the recommendation of one expert witness over another.
It must be pointed out that although the main ground for setting aside the quantum award is because of error on the face of the award both the notice of motion and the affidavit-in-support did not advance the reasons for so stating why the award is bad in law on the face of it.

Before I go further I need to back track in order to point out what was awarded and determined in the interim award on liability. The arbitrator stated thus,

1.	I award and determine, for reasons stated in the reasons for award annexed hereto, that the respondent is liable to pay to the claimant commissions at the rates specified in the Schedule of Incentives to the Kinta Package Agency agreement, in respect of:
	(1)	all those personal accident insurance policies and house holders policies (referred to as the "Kinta Package" in the Kinta Package Agency agreement) which had been issued by the respondent before January 2, 1991; and
	(2)	all renewals of those policies effected after the said January 2, 1991.

It is clear that in regard to liability, the claims allowed on April 15, 1995 by the arbitrator cannot be challenged as this High Court on March 23, 2001 had dismissed the application by MCIS to set aside or remit the award. That means MCIS is left with the principal complaint in its submission that the manner in which the two heads of damages were computed was erroneous.

A challenge against the award in that the computation in the award is erroneous is not enough for the court to act. As was pointed out in the Court of Appeal decision in Hartela Contractors Ltd v Hartecon JV Sdn Bhd [1999] 2 AMR 2501 the general rule at common law is that, absent a contrary intention in agreement to arbitrate entered into between the parties to a controversy, the award of an arbitrator is final, binding and conclusive. It may not be challenged merely on the ground that it is erroneous.

Gopal Sri Ram JCA quoted Union of India v Pallia Ram AIR [1963] SC 1685, at p 1691 where Shah J stated,

An award being a decision of an arbitrator whether a lawyer or a layman chosen by the parties, and entrusted with power to decide a dispute submitted to him is ordinarily not liable to be challenged on the ground that it is erroneous ... The court may also set aside an award on the ground of corruption or misconduct of the arbitrator, or that a party has been guilty of fraudulent concealment or wilful deception ... The award of the arbitrator is ordinarily final and conclusive, unless, a contrary intention is disclosed by the agreement. The award is the decision of a domestic tribunal chosen by the parties, and the civil courts which are entrusted with the power to facilitate arbitration and to effectuate the awards, cannot exercise appellate powers over the decision. Wrong or right the decision is binding if it be reached fairly after giving adequate opportunity to the parties to place their grievances in the manner provided by the arbitration agreement.

One however has to remember the availability of the common law remedy of error on the face of the award and this is clear from the words of Williams J in Hodgkinson v Fernie [1857] 3CB (NS) 189,

The law has for many years been settled, and remains so at this day that, where a cause or matters in difference referred to an arbitrator, a lawyer or a layman, he is constituted the sole and final judge of all questions both of law and of fact... The only exceptions to that rule are cases where the award is the result of corruption or fraud, and one other, which though it is to be regretted is now, I think firmly established viz, where the question of law necessarily arises on the face of the award or upon some paper accompanying and forming part of the award. Though the propriety of this latter may very well be doubted I think it may be considered as established.

(Emphasis added)

The Court of Appeal in Hartela Contractors Ltd also alluded to this limited exception which grudgingly allows a court to intervene and set aside an award on the face of which there appears an error of law and continued,

That is an important exception that prevails until today. In Champsey Bhara Co v The Jivraj Balloo Spinning & Weaving Co Ltd AIR [1923] PC 66, Lord Dunedin, when delivering the advice of the Board, explained the breadth of this limited common law jurisdiction over arbitration awards. He said (at p69):

An error in law on the face of the award means, in Their Lordships' view, that you can find in the award or a document actually incorporated thereto, as for instance, a note appended by the arbitrator staling the reasons for his judgment, some legal proposition which is the basis of the award and which you can then say is erroneous. It does not mean that if in a narrative a reference is made to a contention of one party that opens the door to seeing first what that contention is, and then going to the contract on which the parties' rights depend to see if that contention is sound.

In regard to error on the face of the award, bearing in mind the words of William J in Hodgkinson, the exposition of what it means in Champsey Bhara Co and the recognition that this anomalous rule of common law applies here in spite of our legislation, the Arbitration Act 1952, let us examine the quantum award which allegedly shows error on its face.

Since there is the issue of error of law on the face of the award I would go to examine the relevant parts of the quantum award. In the award the arbitrator dealt with three heads of claim and allowed the first and second claims of the claimant and disallowed the third claim. I reproduce the relevant parts of the awards as they relate to the first and second claims (in the award "claimant" refers to Associated Covers and "respondent" to MCIS)-

Heads of damages claimed

1.	The damages claimed fall under three heads:-
	(i)	The discounted value of future commissions generated by all the personal accident insurance policies and householders policies issued by the claimant under the agreement as at January 2, 1991 ("the first claim");
	(ii)	The discounted value of the loss of commissions in respect of new policies which could have been issued under the agreement during the period between January 2, 1991 and March 31, 1991 when the agreement became terminated ("the second claim"); and
	(iii)	Loss in commission revenue due to loss of future new business ("the third claim").

The third claim is not relevant for our purposes as the arbitrator held it to be untenable and no issue arises on that. In respect of the first claim the arbitrator dealt with Clause 19.1 of the agreement which he set out and ruled that it must succeed. He dealt with it thus,

The first claim is brought under Clause 19.1 of the agreement. That clause provides that after termination of the agreement for any reason whatsoever:

19.1.1

either party shall not be entitled from the other to compensation on any grounds whatsoever in respect of any future new business lost, or to future commissions, or to any other payment whatsoever other than monies payable under the terms of this agreement prior to the termination of the Agency herein created and to commissions earned and service charge payable on renewal of policies sold by the Agent prior to such termination.

19.1.2

The Society (Respondent) shall forthwith cease to sell the Kinta Package, or any similar or identical product described by any other name.

The first claim, being for commissions payable in respect of policies issued under the agreement as at January 2, 1991 and of commissions earned in respect of the renewal of those policies must, by virtue of the interim award, succeed.

The quantum of the commissions payable under this head will be dealt with later in this award.

The arbitrator then dealt with the second claim setting out facts which he considered relevant and ruled that Associated Cover was entitled to the second claim.

The second claim.

As for the second claim, the following facts are relevant for understanding the circumstances under which it is made:-

(1)	On December 27, 1990 Bank Negara Malaysia issued "Guidelines to Control Operating Costs of Business" (the guidelines) which, inter alia, fixed the maximum commission payable to insurance agents for certain general insurance policies including personal accident policies, at 25% of the premiums. The guidelines [AB3 (15-23)] were expressed to take effect from January 2, 1991.
(2)	By letter dated January 21, 1991 [AB3(25)] the respondent gave notice to the claimant that the agreement would be amended in order to give effect to the guidelines and that, accordingly, the commission payable to the claimant in respect of the 'Personal Accident Portion' of the agreement would be 25% and that the revised rate would apply to alI premiums received by the respondent after January 2, 1991.
(3)	By letter dated March 13, 1991 [AB3(26)] the claimant gave notice to the respondent that it was invoking Clause 19 of the agreement (already referred to above).
(4)	On March 21, 1991 [AB3(27)] the respondent wrote to the claimant to confirm that - with effect from 31 March 1991 the said Agreement shall be deemed to be terminated and no new business will be underwritten under this Agreement. According as per the Agreement, commissions due on renewal business will continue to be paid subject to the amended commission rates as stated in our letter dated 21 January 1991.

With effect from January 2, 1991 the claimant was not paid commissions on policies it issued under the agreement at the rate specified in the agreement but at the lower rate of 25%.

Since I had, in my reasons for award annexed to the interim award determined that the guidelines did not have the force of law and did not take away existing rights or the claimant's contractual rights under the agreement, the claimant now contends that it is also entitled to be paid the loss it suffered in respect of policies which it could have issued during the period between January 2, 1991 (the date from which it was not paid its full commissions) and March 21, 1991 (the date when the agreement came to an end),

The claimant argues that but for the respondent's withholding full payment of the commissions due to it under the agreement, the claimant would have continued to issue new personal accident insurance policies and householders' policies and would have been entitled to the commissions in respect of those policies and their renewals.

I hold and determine that the claimant is entitled to commissions on policies which could have been issued under the agreement during that period.

10.

The quantum of the commissions payable will also be dealt with later in this award.

Having found the entitlement of Associated Cover to the first and second claims the arbitrator went on to assess the quantum thus -

Assessment of quantum

18.

I have considered the reports submitted by the two expert witnesses, in particular, the reasons given by each of them for their differing preferences with respect to the bases for their recommendations.

19.

I determine that the amount payable under the First claim should be as recommended by Watson Wyatt in Table 4 at p 4 of their report dated July 10, 1996 and that the amount due as at January 2, 1991 (after setting off payments already made to the claimant by the respondent) is RM663,453. The present value of that amount calculated with interest at 7% per annum up to November 5, 1999 is RM1,074,048.

20.

I determine that the amount payable under the second claim should be RM169,392 as recommended by Watson Wyatt in Table 4 at p 5 of their aforesaid report, based on Alternative C and on a commission of 72% (that is, the rate of commission specified in the schedule to the agreement). Calculated at the rate of 7% per annum up to November 5, 1999, the present value is RM274,225.

Award

21.

Consequent upon the foregoing:-

(1)	I award and direct that the respondent do pay to the claimant the sum of RM1,348,273 (made up of the present values of the commissions payable under the first claim and the second claim), being the total amount of payment to which the claimant is entitled under the agreement arising from the termination.
(2)	.....

I have set out the relevant parts of the quantum award at some length. The thrust of the attack of MCIS on the quantum award is that the arbitrator made an erroneous construction of the various clauses of the agreement between itself and Associated Cover in particular Clause 19.1.1 thereof. It is to be noticed that the award by way of narration has set out the terms of Clause 19.1.1 and the award also showed that the report of Watson Wyatt was used in assessing the quantum as a lump sum under the first and second claims.
It was submitted that the words in Clause 19.1.1 have to be objectively construed bearing in mind the case of IRC v Raphael [1935] AC 96 and that it was the intention of the parties that future commissions will not be paid in one lump sum upon the termination of the agreement between the parties "on a close reading of certain portions of Clause 19.1.1" and reference was made by MCIS to Clauses 14.2 and 14.3 that commissions will be paid to Associated Cover after premium is paid by the insured and that these two clauses reinforce the notion that payment of future commission before the receipt of premium from an insured was never contemplated by the parties.

What has been put forward is merely an argument on a rule of construction, nothing more. In any event Clauses 14.2 and 14.3 are not referred to in the award and this court is not permitted to look at them.

As was observed by Diplock LJ in the Court of Appeal case of Giacomo Costa Fu Andrea v British Italia Trading [1963] 1 QB 201 at 216.

on the cases, there is none which compels us to hold that a mere reference to the contract in the award entitles us to look at the contract. It may be that in particular cases a specific reference to a particular clause of a contract may incorporate the contract, or that clause of it, in the award ... But the question whether a contract, or a clause in a contract, is incorporated in the award is a question of construction of the award ... the test is put as conveniently as it can be in the words of Denning LJ ... from Blaiber & Co Ltd v Leopold Newborne (London) Ltd [1953] 2 Lloyd's Rep. At p 429: 'As I read the cases, if the arbitrator says: "On the wording of this clause I hold" so and so, then that clause is impliedly incorporated into the award because he invites the reading of it.'... in the present case ... the award... 'l hereby award that buyers have failed to declare the final port of destination by (a certain date)' .... is a finding of fact, and there is nothing about any clause of the contract there. Then he goes on to state the consequences of that finding - 'and therefore the contract is void.' There is no reference to any specific provision of the contract from which that consequence flows . It is quite impossible to say, reading those words, that he has incorporated the contract in the award, in the sense that he has invited those reading the award to read the contract ... The principle of reading contracts or other documents into the award is not... one to be encouraged or extended, and, ... we are not entitled in this court, on an award where there is a purely general reference to 'the contract'- and a reference only in that part of the award which deals with the consequences of the finding of fact - to look at the contract and search it in order to see whether there is an error of law.

The argument that Clause 19.1.1 was not objectively construed must necessarily fail.
The second argument is that one should apply the golden rule that the words of a contract should be construed in their grammatical and ordinary sense, except to the extent some modification is necessary in order to avoid absurdity, inconsistency or repugnancy. Several cases were cited. The submission took a discourse on grammar and the meaning of words and made reference to clauses which did not appear in the award to strengthen its argument that the arbitrator had wrongly construed the words in Clause 19.1.1 to award "damages" instead of "compensation". With respect the submission is clearly argumentative and certainly does not show that what is argued is patent on the face of the award and I cannot see any error on the face of the award.
There is also the submission that the construction placed on Clause 19.1.1 by the arbitrator is not reasonable and one must choose between rival constructions in favour of a construction that produces a reasonable result and that for MCIS to pay future commissions not yet earned at the time of the payment of commission is contrary to the practice of the insurance industry and that Clause 19.1.1 of the agreement prohibits the respondent from being entitled to future commissions.
The submission has no merit whatsoever and the arguments have gone outside the four corners of the award in regard to what the practice of the insurance industry is.
The next argument is the reliance on the ejusdem generis rule. The submission was that MCIS and Associated Cover had included the word "... whatsoever ..." to highlight their intention expressed in Clause 19.1.1 that other than "... monies payable under the terms of this agreement prior to the termination of the Agency herein created and to commission earned and ..." Associated Cover is not entitled to any other payments whether past present or future; in other words the use of the word "... whatsoever ..." was meant to signal that the ejusdem generis rule was not to apply.

With respect I do not see how this argument can succeed; it has nothing to do with an error on the face of the award.
Then there is the submission that Associated Cover had presumably argued before the arbitrator that in the absence of an express term to that effect, it is an implied term of the said agreement that in computing compensation future commissions have to be projected and then discounted for lapses and interest to arrive at a global figure. MCIS has submitted that the argument of Associated Cover cannot hold since Clause 19.1.1 expressly stipulates that neither party shall be entitled to future commissions with the qualification of commissions earned meaning that the commission must first be earned and reference is made to a clause which excludes implied promises, terms, conditions or obligations. Again this court cannot go beyond what appears in the award; that argument and the reference to the clause is not mentioned in the award.
As for the complaint that the damages awarded are too remote there is nothing to support the complaint.
The quantum award is a decision of the arbitrator chosen by the parties, MCIS and Associated Cover. The arbitrator was entrusted with power to decide the issue of quantum of damages and the award cannot be challenged merely because one party thinks it is erroneous. Though the award may be set aside if it is shown that there in an error of law on the face of the award, I do not see any error of law in this case.
I now come to the ground that the arbitrator "had misconducted himself (in the technical sense) and/or proceedings on that in construing the terms the arbitrator did not confine himself to the four corners of the said agreement and in not giving reasons for the award".

Before I go further let us be reminded that -

[there] is no reason why an arbitrator who has not been asked to state an award in the form of a special case should on the face of his award give reasons for any part thereof...

(Heaven & Kestenton Ltd v Sven Widaeus A/B [1958] 1 WLR 248 at 252): Russell on Arbitration, 18th Edn, p 366.

It is not as though the arbitrator did not give reasons for his award. The complaint is that he did advance the reasons why he construed Clause 19 as he did but our instant case is not a case stated under s 22 of the Arbitration Act 1952 and the non-giving of reason for construing the effect of Clause 19 as he did cannot be said to be misconduct on his part in making the award. As for the arbitrator not confining himself to the four corners of the said agreement, that has not been shown at all.
In the result the application to set aside the quantum award is dismissed with costs.

Cases

Champsey Bhara Co v The Jivraj Balloo Spinning & Weaving Co Ltd AIR [1923] PC 66; Giacomo Costa Fu Andrea v British Italia Trading [1963] 1 QB 201; Hartela Contractors Ltd v Hartecon JV Sdn Bhd [1999] 2 AMR 2501; Hodgkinson v Fernie [1857] 3CB (NS) 189; IRC v Raphael [1935] AC 96; Union of India v Rallia Ram AIR [1963] SC 1685.

Legislations

Arbitration Act 1952: s.22

Representation

Joginder Singh & CT Annathurai (Hamzah, Sulaiman & Partners) for Applicant

Christie Soosay & S Ragu (Christie Soosay Nathan & Associates) for Respondent

Notes:-

This decision is also reported at [2002] 1 AMR 75.

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