Malaysia – Alternative Dispute Resolution: Arbitration.
Introduction
In recent years, the Asian International Arbitration Centre (AIAC) has experienced a notable increase in its caseload. For instance, in 2023, AIAC handled a total of 873 matters, both registered and pre-registered, compared to 810 matters in 2022. This upward trend highlights the growing reliance on arbitration for dispute resolution.
What is arbitration?
Arbitration is a form of alternative dispute resolution where the parties involved agree to submit their conflict before one or more arbitrators, who then make a binding decision on the matter. This method allows disputes to be resolved outside of the court system, lessening the burden on courts. Arbitration typically stems from an agreement between the parties, either as a clause within a contract or as a separate agreement formed after a dispute arises.
What is arbitration usually for?
In Malaysia, arbitration is frequently used to resolve disputes related to construction contracts. According to the AIAC Annual Report 2023, construction-related arbitrations comprise 57.28% of the cases referred to the AIAC. Following these, disputes related to shareholders’ agreements and service agreements account for 13.59% and 12.62% of the cases, respectively.
Arbitration Bodies in Malaysia
There are a few arbitration bodies in Malaysia, namely:
- Asian International Arbitration Centre (AIAC): The AIAC, formerly known as the Kuala Lumpur Regional Centre for Arbitration (KLRCA), is a leading institution in Malaysia that provides comprehensive arbitration services, including facilities, administrative support, and a panel of experienced arbitrators to ensure efficient and fair dispute resolution.
- Borneo International Centre for Arbitration and Mediation (BICAM): BICAM is a key arbitration institution based in Borneo, offering specialized services in arbitration and mediation to resolve disputes, particularly those arising from regional and international business transactions, with a focus on promoting amicable settlements and fostering business relationships.
- Arbitrations are also administered by professional bodies, such as:
- the Malaysian Institute of Architects;
- the Institute of Engineers Malaysia;
- the Institution of Surveyors Malaysia;
- the Malaysian International Chambers of Commerce; and
- the Kuala Lumpur and Selangor Chinese Chambers of Commerce.
Requirements for Arbitration
Substantive or formal requirements
Section 9(1) of the Arbitration Act provides that:
An arbitration agreement can be in the form of:
- An arbitration clause in an agreement.
- A separate agreement.
Under s 9(3), an arbitration agreement must be in writing. Such an agreement is in writing where it is contained in:
- A document signed by the parties.
- An exchange of letters, telex, facsimile or other means of communication which provide a record of the agreement.
- An exchange of statement of claim and defence in which the existence of an agreement to arbitrate is alleged by one party and not denied by the other.
Under s 9(5) of the Arbitration Act, a reference in an agreement to a document containing an arbitration clause should also be sufficient, provided that the agreement is in writing and the reference is such as to make that clause part of the agreement.
An arbitration agreement is independent of the other terms of the contract (s 18(2) of the Arbitration Act). A decision by the arbitral tribunal that the agreement is itself null and void does not by itself mean an arbitration clause is invalid. This is also known as the doctrine of separability.
An arbitration clause or agreement should lay down clear reference to arbitration, the seat of arbitration, the scope of dispute, the language of the arbitral tribunal, and the law that will govern the substantive and procedural aspects of arbitration. The seat of arbitration refers to the legal jurisdiction governing the arbitration process, while the venue of arbitration is the physical location where the arbitration hearings are conducted. For example, in an arbitration agreement where the seat of arbitration is Malaysia, the arbitration proceeding will be governed by Malaysian law, while the venue of arbitration could be the AIAC (Asian International Arbitration Centre) in Kuala Lumpur, where the arbitration hearings will take place.
AIAC and UNCITRAL Model law
AIAC Arbitration rules are generally adopted and refer to the UNCITRAL Model Law. However, a marked departure from the 2021 Rules is the re-separation of the AIAC Arbitration Rules (now in Part I) and the UNCITRAL Arbitration Rules (now in Part II). References to Rules relate to Part I whereas references to Articles relate to Part II. In the event of a conflict between Part I and Part II, the provisions of Part I shall prevail.
With the separation, the AIAC is reverting to a more straightforward set of rules, supplemented with the more detailed UNCITRAL Arbitration Rules, as was done in the AIAC Arbitration Rules 2018. This allows for the adoption of the UNCITRAL Arbitration Rules in its entirety as opposed to what was done in the 2021 Rules where only certain provisions of the UNCITRAL Arbitration Rules were incorporated by the AIAC.
What happens if the arbitration clause is unclear?
When an arbitration clause is unclear, it can lead to significant challenges in the arbitration process. For instance, the absence of a specified seat can create ambiguity, allowing parties to file challenges to arbitral awards in various courts. This situation can result in conflicting judgments and unnecessary litigation, as highlighted in the Federal Court case of Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd [2021] 6 MLJ 255.
However, courts strive to uphold the intention of the parties to arbitrate, even when faced with ambiguous clauses. The principle established by the House of Lords in Fiona Trust & Holding Corporation & Ors v Privalov & Ors [2007] 4 All ER 951 (‘Fiona Trust’) emphasises that arbitration clauses should be interpreted broadly, considering the express terms, the parties’ intentions, and the commercial context of the agreement.
This principle was adopted in Malaysia in KNM Process Systems Sdn Bhd v Mission Biofuels Sdn Bhd [2012] MLJU 839, where the court recognised that rational businessmen are presumed to intend for the same forum to resolve disputes related to the same broad subject matter, unless explicitly stated otherwise. Therefore, the principle in Fiona Trust should be the starting point for any consideration of the principles of stay of proceeding, in relation to widely-drafted arbitration clauses.
In a similar vein, the Federal Court in Tindak Murni Sdn Bhd v Juang Setia Sdn Bhd and another appeal [2020] 3 MLJ 545 decided that a judgment in default in court cannot be sustained when the parties are already bound by a valid arbitration agreement or clause and the opposing party had already raised disputes to be ventilated via arbitration pursuant to the arbitration agreement or clause.
Stay of Proceedings Pending Arbitration
It is mandatory for the court to stay any court proceedings that are the subject of an arbitration agreement in favour of arbitration, unless it finds that the agreement is null and void, inoperative or incapable of being performed (s 10(1) of the Arbitration Act). Malaysian courts take a strict approach to parties that disregard an arbitration agreement and litigate in court. The courts permit court proceedings to continue only where the exceptions to s 10(1) of the Arbitration Act apply.
Where the jurisdiction of the arbitral tribunal is questioned, the Competence-Competence doctrine also known as the “Kompetenz-Kompetenz” doctrine may be referred to. It lays down that an arbitral tribunal has jurisdiction to consider and decide any disputes regarding its own jurisdiction, subject to, in certain circumstances, subsequent judicial review.
In the Federal Court case of Press Metal Sarawak Sdn Bhd v Etiqa Takaful Bhd [2016] 9 CLJ 1, Ramly Ali FCJ held as follows:
The clear effect of the present s 10(1) of the Arbitration Act 2005 is to render a stay mandatory if the court finds that all the relevant requirements have been fulfilled; while under s 6 of the repealed Arbitration Act 1952, the court had a discretion whether to order a stay or otherwise.
What the court needs to consider in determining whether to grant a stay order under the present s 10(1) (after the 2011 Amendment) is whether there is in existence a binding arbitration agreement or clause between the parties, which agreement is not null and void, inoperative or incapable of being performed.
Jurisdictional Applicability of Arbitration Decisions
Malaysia is a signatory to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards (‘the New York Convention’).
The New York Convention is one of the key instruments in international arbitration. It applies to the recognition and enforcement of foreign arbitral awards and the referral by a court to arbitration. The Convention’s principal aim is that foreign and non-domestic arbitral awards will not be discriminated against and it obliges parties to ensure such awards are recognised and generally capable of enforcement in their jurisdiction in the same way as domestic awards.
Article I of the New York Convention outlines the scope of the Convention, stating that it applies to the recognition and enforcement of arbitral awards made in a country other than the one where enforcement is sought. It also covers awards that are not considered domestic in the enforcement country.
The New York Convention plays a crucial role in ensuring that arbitration decisions are respected and enforced across different jurisdictions, thus promoting the reliability and effectiveness of international arbitration as a method of dispute resolution.
In Malaysia, foreign arbitral awards are recognized and enforced in Malaysia through a structured legal framework. According to s 38 of the Arbitration Act, an award made in Malaysia or from a foreign state can be recognized as binding and enforced by entry as a judgment in terms of the award or by action, upon a written application to the High Court. The Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985 (‘CREFA’) plays a significant role in this process.
In Lombard Commodities v Alami Vegetable Oil Products Sdn Bhd [2010] 2 MLJ 23, the Federal Court held that a gazette notification by the YDPA that any state specified in the order is a party to the New York Convention is not mandatory before a foreign award from a state that is a party to the New York Convention can be considered a convention award. This interpretation aims to treat convention awards as domestic awards for enforcement purposes in Malaysia, as outlined in s 3(1) of the CREFA, Article III of the New York Convention, and s 27 of the Arbitration Act 1952. Additionally, in Murray & Roberts Australia Pty Ltd v Earth Support Company (Sea) Sdn Bhd [2015] MLJU 2319, the court clarified that there is no requirement for an Australian arbitral award to be registered or enforced in Australia before filing for enforcement in Malaysia. Order 69 r 9 of the Rules of Court 2012 states that if an arbitral award from a country outside Malaysia has become enforceable as a judgment in that place, a party may apply to enforce the award under O 69 r 8. This ensures that foreign arbitral awards can be effectively enforced in Malaysia through proper legal channels.
Conclusion
In conclusion, the rising caseload at the Asian International Arbitration Centre (AIAC) highlights the increasing reliance on arbitration as a preferred method for dispute resolution. Arbitration offers numerous benefits, including a streamlined and efficient process that alleviates the burden on courts, the flexibility to tailor proceedings to the specific needs of the parties, and the ability to select expert arbitrators in specialized fields. Additionally, the enforceability of arbitral awards across jurisdictions, supported by international frameworks like the New York Convention, makes arbitration a powerful tool for resolving both domestic and international disputes. As Malaysia continues to strengthen its legal infrastructure for arbitration, it solidifies its position as a key player in global dispute resolution.
