Author : Dr Dheeraj Bhar
BRIJNANDAN SINGH BHAR & CO
An Overview of Arbitration procedures and practice in Malaysia
Brief historical facts about KLRCA:
The KLRCA was established in 1978 to provide a forum for settlement by arbitration of disputes concerning trade, commerce and investment in the Asia-Pacific region.
Prior to the formation of the Federation of Malaya on 31 January 1948 and the subsequent enactment of the 1952 Act, the Arbitration Ordinance XIII of 1809 of the Straits Settlements was British Malaya’s first piece of arbitral legislation. Thereafter, in 1950, the Arbitration Ordinance 1950 replaced the Arbitration Ordinance 1890 for all the states of the Federation of Malaya. The Arbitration Ordinance 1950 was based on the English Arbitration Act of 1889. In 1952, British North Borneo and Sarawak adopted the English Arbitration Act of 1950 as their respective legislation. Pursuant to North Borneo and Sarawak joining the Federation of Malaysia in 1963, Malaysia adopted the prevailing arbitration laws in Sabah and Sarawak on 1 November 1972 and it became known as the Arbitration Act 1952, which was based on the English Arbitration Act 1950.
The 2005 Legislation Act applied to arbitration, it effectively repealed the old and outdated Arbitration Act 1952 which had been based completely on the old English Arbitration Act 1950. The 2005 Act is closely modelled on the UNCITRAL Model Law, but with few Acts which are different from the Model Law.
On 1st July, 2011 by maintaining the main structure of 2005 Act the amendments were made to The Arbitration (Amendment) Act 2011 to minimize ambiguity and confusion relating to the provisions in the 2005 Act.
The Kuala Lumpur Regional Centre for Arbitration (KLRCA) in Malaysia has introduced a new set of arbitration rules from which foreign lawyers got permission to advice clients in the country without having a local office.
Parliament passed the first set of amendments to the Act, which specified new rules for allowing foreign firms to open a local base in the country – either as Qualified Foreign Law Firms (QFLF) or through joint law ventures with local outfits.
Safeguarding arbitrator’s integrity
KLRCA has stringent requirements for persons who wish to be empanelled as arbitrators. The arbitrators are bound by the KLRCA Code of Conduct for Arbitrators. This Code of Conduct for Arbitrators is the result of the collaborative efforts of KLRCA, Pemandu, MACC and the Bar Council.
KLRCA has also signed the Corporate Integrity Pledge which is a commitment to uphold the anti-corruption principles for organizations in Malaysia.
Apart from the above conditions following are the CHARACTERISTICS OF AN ARBITRATOR:
An arbitration agreement must be in writing (section 9(3)). It is deemed to be in writing where it is contained in:
In addition, an arbitration agreement is valid only if it relates to an existing dispute, and it will be incomplete until the appointment of an arbitrator.
An arbitration agreement can be in the form of an arbitration clause in an agreement or in the form of a separate agreement (Section 9(2)).
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 was such as to make that clause part of the agreement (Section 9(5)).
An arbitral award is generally only effective as against the parties to arbitration and persons claiming through or under them. There is no precedent for holding that a third party is bound by an arbitration award. However, English authorities, which are persuasive in the Malaysian jurisdiction, suggest that the exception to this general rule applies where third parties agree to be bound by the award, either through acquiescence or ratification. This may occur in situations where the contractual context gives rise to third party rights.
The composition of the arbitral tribunal is governed either by the arbitration agreement or the 2005 Act. Under the 2005 Act, The parties can freely determine the number of arbitrators (Section 12(1)); any body could be appointed as an arbitrator, and they can appoint a person of any nationality, unless the arbitration agreement specifies otherwise.
Failing an agreement or a specification between the parties on the number of arbitrators and the appointment procedure, the 2005 Act provides a default rule that is three for international arbitrations and one for domestic arbitrations.
Article 9 of the UNCITRAL Rules requires a prospective arbitrator to disclose all facts which may raise justifiable doubts about his impartiality or independence to all the parties of the arbitration (Section 14(1)).
This obligation continues throughout the arbitral proceedings (Section 14(2)).
If there are doubts in relation to the arbitrator’s impartiality or independence which arise during the arbitral proceedings, the arbitrator must immediately disclose them in writing. Failure to do so may invalidate his appointment as an arbitrator and the arbitral proceeding itself. The resulting award may also be held to be invalid and may be set aside.
Section 13 of the 2005 Act provides default rules in relation to the appointment of arbitrators. If the parties fail to agree on the appointment procedure, the following applies:
1. Where the arbitral tribunal consists of three arbitrators, each party appoints one arbitrator, and both arbitrators appoint a third arbitrator (Section 13(3).
2. If a party fails to appoint an arbitrator within 30 days of receiving a request in writing to do so from the other party, or the two arbitrators fail to agree on the third arbitrator within 30 days of their appointment or an extended period agreed by the parties, either party can apply to the Director of the KLRCA to make an appointment.
3. Where the arbitral tribunal consist of one arbitrator and the parties fail to agree on the appointment, either party can apply to the Director of the KLRCA to make an appointment (Section 13(5)).
Section 15 of the 2005 Act sets out the procedure for challenging the appointment of an arbitrator before the Arbitral Tribunal. If the challenging party is unsuccessful, it can appeal to the High Court as a last resort to challenge the appointment without waiting for the award to be made. Section 16 of the 2005 Act sets out Arbitrator’s legal or physical inability to perform his functions as grounds for revoking his authority.
The 2005 Act refers to the termination of arbitrator’s mandate, rather than the removal of arbitrator. Unless otherwise agreed by the parties, a substitute arbitrator must be appointed where a member of the arbitral tribunal loses his mandate or has his mandate terminated in any other manner (Section 17(1)). Section 17(2) regulates the arbitral proceedings where the arbitral tribunal has been reconstituted.
On the 27th of February, 2012, The KLRCA Fast Track Rules were revised and improved after its 2010 predecessor.
The 2005 Act was due for its own amendment namely the Arbitration (Amendment) Act 2011 and the introduction of the Construction Industry Payment and Adjudication Bill 2011. Similar to the KLRCA Arbitration Rules, the KLRCA Fast Track Rules have been modified with the adoption of the articles of the revised UNCITRAL Arbitration Rules.
Why Arbitrate?
The general advantages of arbitration proceedings compared to court litigation are as follows:
Businesses need cost-effective and timely solutions in resolving contractual disputes, especially when it involves payment issues such as money owed, goods sold or services rendered. This is where arbitration plays its role, providing these advantages:
Choice: Liberty to select one or three arbitrators who specialize in their own areas of expertise. For example, parties can choose a technical person as arbitrator if the dispute is of a technical nature so that the evidence will be more readily understood.
Convenient: Arbitration can usually be heard sooner than it takes for court proceedings to be heard. The arbitration hearing is briefer, and the preparation work less demanding compared to conventional litigation.
Confidential: Arbitration hearings are private meetings in which the media and public are not allowed to attend. Final decisions are not published and this is pertinent in cases where confidentiality is essential.
Cost-Effective: Arbitration involves lower costs compared to litigation.
Enforceability: Due to the provisions of the New York Convention 1958, in cross border cases, enforcement of arbitration award in other countries is generally easier than a court’s judgment.
Procedure of Arbitration:
Arbitral proceedings are considered to commence on the date on which a request in writing for that dispute to be referred to arbitration is received by the respondent (Section 23).
The parties enjoy the freedom to choose the procedural rules to be applied by the arbitral tribunal (Section 2(1)). The procedural rules can be ad hoc or institutional. If parties fail to determine the procedural rules, the arbitral tribunal can conduct the proceedings in the manner it considers appropriate (Section 21(2)). The arbitrators must, observe the rules of natural justice in conducting arbitrations.
The arbitral tribunal can decide which documents or classes of documents must be disclosed, and at what stage. The tribunal has no authority to order third party disclosure. However, the arbitral tribunal may draw an adverse inference in respect of a witness who refuses to produce a relevant document.
The arbitral tribunal has no power to enforce procedural decisions relating to the taking of evidence, which can range from the calling of a witness to the production of documents under the mutual discovery process.
The arbitral tribunal cannot compel attendance of a witness even if that witness is under the control of one of the parties. However, the arbitrator may draw adverse inference against the party under whose control the witness is. The arbitral tribunal can appoint one or more experts to report to it on specific issues or require a party to give the expert any relevant information (Section 28).
The 2005 Act is silent on the confidentiality matter. Rule 10 of the Arbitration Rules of the KLRCA states that unless the parties agree otherwise, the parties must keep confidential all matters relating to the arbitration proceedings. Confidentiality extends to the award, except where disclosure is necessary for the purposes of implementation and enforcement. No court can intervene in any of the matters governed by the 2005 Act (Section 8). Therefore, court intervention is minimal.
However, the court may offer its assistance in matters such as security for costs, discovery, preservation of property and interim injunctions (Section 11).
The High Court can also be requested to determine preliminary points of law where the parties have agreed to the application of Part III of the 2005 Act (Section 41). In addition, the High Court can provide assistance in taking evidence by securing the attendance of witnesses to give evidence before the arbitral tribunal on oath or affirmation (subpoena and testificandum) or the production of documents (subpoena duces tecum) Section 29.
Only the parties, with the approval of the arbitral tribunal, are permitted to make an application directly to the court for assistance.
After the implementation of the 2005 Act, the risk is lower of local court intervention to frustrate the arbitration process. Section 10 makes it mandatory for the court to stay legal proceedings if a matter which is brought before it is the subject of an arbitration agreement, provided that it is a bona fide dispute between the parties.
The Malaysian courts have accepted that under the 2005 Act that “there is unmistakable intention of the legislature that the court should lean towards arbitration proceedings”. Arbitral proceedings can be commenced or continued and an award made whilst the issue is still pending in court.
Section 10 (1) ensures the continuity of the arbitration proceedings and avoids the arbitral proceedings being protracted.
If there is a valid court jurisdiction clause, an application can be made at the High Court for a court injunction to stop the other party from commencing arbitration (section 10). The general principle is that the local courts have the power and jurisdiction to grant an anti-suit injunction whenever the interests of justice demand it. In a recent case a local court has laid out five elements to be considered when granting an anti-suit injunction.
1. Whether the respondent is amenable to the jurisdiction of the local courts.
2. The natural forum for the resolution of the dispute.
3. Any alleged vexation or oppression to the claimant if the foreign proceedings are allowed to continue.
4. Any alleged injustice to the respondent.
5. Whether the forum of foreign proceedings is in breach of any agreement between the parties.
The party denying that the tribunal has jurisdiction to determine the dispute(s) must raise a plea and challenge the arbitrator’s jurisdiction. This can either be a partial or total challenge:
A partial challenge arises when it is submitted that certain claims or counterclaims do not fall within the jurisdiction of the arbitrator.
A total challenge occurs when it is contended that the arbitrator has no jurisdiction to determine any of the claims or counterclaims which have been submitted to it.
There are two different time limits for raising the pleas (Sections 18(3) and (5)). The doctrine of kompetenz-kompetenz is recognized, that is, the arbitrators can decide on their jurisdiction without support from the court (Section 18(1)). Once the appeal is heard and the High Court comes to a decision, there can be no further appeal against the decision of the High Court (Section 18(10)). The High Court cannot make a decision on the tribunal’s jurisdiction unless an arbitral tribunal has made a ruling on its jurisdiction first.
Remedies:
The arbitral tribunal can order interim measures that it deems necessary (Section 19). A party can apply to the arbitral tribunal to make an order for security for costs (Section 19(1) (a)).
In addition, an arbitral tribunal can make an order for:
Appeals:
Technically, there is no right of appeal against an arbitral award. However, the following principles must be considered.
An arbitral award can be set aside on various grounds by an application to the High Court (Section 37(1)). The following grounds can be invoked (the onus of proof is on the party making the application):
Any incapacity of a party to the arbitration agreement;
The invalidity of the arbitration agreement;
A defect relating to the issue of notice of the appointment of arbitrator or of the arbitral proceedings;
The award deals with matters not within the terms of the arbitration agreement. The procedural rules agreed by the parties violate the mandatory provisions of the 2005 Act.
The High Court can set aside an arbitration award ex officio if either, the subject matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia or the award conflicts with the public policy of Malaysia. Awards induced or affected by fraud or corruption and awards made in breach of the rules of natural justice are deemed to be contrary to public policy.
In addition, a party can refer to the High Court any question of law arising out of an award 42(1). Any decision made by the High Court under Section 42 can be appealed to the Court of Appeal (Section 43).
Costs:
Fees are not fixed by law and are regulated by the procedural rules chosen by the parties. The fees vary in accordance with the amount in dispute. This is in addition to rental fees if the parties use the KLRCA premises for the arbitration proceedings.
Unless otherwise agreed by the parties, an award of costs and expenses is at the discretion of the arbitral tribunal Section 44(1). The normal rule is that the award of costs follows the event so that the successful party is awarded his costs, and if the tribunal is to depart from this rule, it should clearly set out its reasons for doing so.
Where a tribunal refuses to deliver its award before the payment of its fees, the High Court may order the tribunal to deliver the award on such conditions as it considers fit (Section 44(4)).
Enforcement:
On application in writing to the High Court, an award made in Malaysia is recognized as binding and enforceable by an entry as a judgment or by action Section 38(1).
The application must be accompanied by the duly authenticated original award or a duly certified copy of the award, the original arbitration agreement or a duly certified copy of it. Where the award or the agreement is in a language other than the national language or the English language, the applicant must provide a duly certified translation of the award or agreement into English.
Proceedings in the local court generally take about one to three months. To expedite the procedure, the party seeking enforcement can file a certificate of urgency. However, there must be good and valid ground for the urgency before the local courts would allow this application.
An award can be set aside in the High Court. In general, however, and taking into account the local courts’ attitude towards arbitration agreements, the parties would face little difficulty in registering and enforcing an arbitral award made in Malaysia as a judgment of the local courts. Malaysia has acceded to the New York Convention and therefore awards made in Malaysia are prima facie enforceable in other countries that are party to this Convention.
