The Outlook of Arbitration in Malaysia: a Hidden Gem?
Rinat Gareev
Legal Consultant, Attorney-at-law, New York
Tatiana Polevshchikova,
Lawyer, International Arbitration Practitioner,
ex Deputy Head of Legal at the AIAC (Malaysia)
The last several decades have evidenced a marked increase in foreign investment and cross-border transactions in Southeast Asia, that has been accompanied by not only a meteoric rise in the number of international commercial and investment arbitrations in the region, but also raise of the regional jurisdictions as attractive arbitral seats.
Strategically located in the heart of Southeast Asia, Malaysia is a vibrant multi-ethnic, multi-cultural state, one of the wealthiest and most economically developed countries in the region.[1] Economic growth of Malaysia and legislative reforms advancing the use of alternative dispute resolution naturally transformed this jurisdiction into one of go-to places for international arbitration. Situated closely to the well-established global hubs of arbitration – Singapore and Hong Kong, all chasing a slice of an increasingly competitive market, Malaysia has never wavered in entering the competition with major strongholds. According the latest annual report of the Asian
International Arbitration Centre (the AIAC), a well-known Malaysia’s arbitral institution, it received 172 new arbitration matters in 2021, 13 of which were international cases with participation of foreign parties from France, Singapore, China, Russia and Australia.[2]
The increased confidence in Malaysia as a seat of arbitration among foreign parties could not be possible without arbitration-friendly legislative framework and strong tradition of the rule of law and a policy of non-intervention in arbitral awards employed by the judiciary. Being a signatory member of the 1958 New York Convention since 1985, Malaysia created a strong platform for its judiciary, legal and arbitration practitioners to gain sufficient expertise in the recognition and enforcement proceedings of domestic and foreign arbitral awards. Further, regular reviews of the Malaysian Arbitration Act 2005,[3] as well as developments introduced by the AIAC to the set of its arbitration rules, timely contribute to the competitiveness of Malaysia as an attractive arbitral seat.
In this brief note, the authors discuss how Malaysia is evolving into a more sophisticated and modern seat and analyze whether its judiciary in fact maintains the pro-arbitration stance by reviewing the recent developments relating to international arbitration law and practice in Malaysia.
A general introduction to the arbitration framework in Malaysia
Malaysia has a unique legal system: although its laws are historically based on English law, it also preserves Shariah laws by providing two separate court systems running in parallel with each other. While the Malaysian civil courts regard decisions by the Commonwealth courts as highly persuasive (including those on commercial matters and matters related to the recognition and enforcement of arbitral awards), the Malaysian Shariah courts apply Shariah law and have limited jurisdiction.
English is the main language of both law and business in Malaysia, and predominant number of arbitrations are conducted in English. At the same time, Malaysian arbitral institutions have a capacity to appoint arbitrators from Civil law jurisdictions. For instance, in 2021, the AIAC’s panel comprised 1346 arbitrators from all over the world.[4]
The entry into force of the Malaysian Arbitration (Amendment) Act 2018 (the “2018 Amendment Act”) has been overall positively received by domestic and international business and legal communities. In addition, the higher courts in Malaysia appear to have come to terms with the philosophical transition introduced by the legislation: recent decisions demonstrate a strong commitment to the principle of minimal curial intervention.[5]
Further, the Malaysian judiciary consistently interprets arbitration agreements narrowly, i.e. it usually gives effect to the written arbitration agreements unless there exist strong reasons to the contrary.[6] For instance, the Federal Court has affirmed that courts should lean more towards granting a stay pending arbitration, even if there are some doubts as to the validity of an arbitration clause or whether the subject matter of a dispute falls within the ambit of an arbitration agreement predicated upon the Kompetenz-Kompetenz doctrine.[7] Finally, the “one-stop shop” presumption that the parties are likely to have intended “any dispute arising out of the relationship into which they have entered” to be decided by the same tribunal also represents the law in Malaysia.[8]
With growing international commercial trade and agreements, the disputes became more complex and required providers of arbitration services to quickly address the changing needs of the parties. In the last decade, Malaysia demonstrated its ability to adapt to the new challenges and advance its arbitration services to the new level. The establishment of a number of specialized alternative dispute resolution centers facilitated the ongoing growth of use of alternative dispute resolution services. For instance, the Palm Oil Refiners Association of Malaysia (the “PORAM”) has its own Rules of Arbitration and Appeal tailored for the industry players.[9] In 2011, the Securities Commission of Malaysia established the Securities Industry Dispute Resolution Centre (the “SIDREC”) aimed at the resolution of capital market disputes by way of mediation and adjudication. Further, starting from March 1, 2016 aviation industry players may refer their disputes to the Malaysian Aviation Commission (the “MAVCOM”), which administers dispute resolution mechanisms prescribed under the Malaysian Aviation Commission Act 2015 [Act 771].[10]
Therefore, taking into account the existing legislative framework, available specialized alternative dispute resolution services and supportive educational initiatives, it is reasonable to conclude that Malaysia offers “à la carte” arbitration services complimented by mediation and adjudication when required.
Judicial Assistance and Intervention: Current Status of Affairs
Minimum judicial intervention and utmost judicial support in arbitration is a hallmark and a well-recognized principle to ensure the robust development of an arbitration industry in the country, an essential requirement for the development of a safe seat of arbitration. The 2018 Amendment Act adheres to the principle of minimal judicial intervention with respect to arbitral proceedings. The introduced amendments, namely, the deletion of Sections 42 and 43 of the act, reinforced the principles of minimum court intervention. This has brought Malaysia alongside with other jurisdictions which have subscribed to UNCITRAL Model Law in favor of internationality and uniformity to commercial arbitration practice.
According to the recent survey, close to 69% of the participants considered the courts in Malaysia to be generally effective in enforcing international arbitral awards and supporting arbitral proceedings.[11] Almost 52% of the participants felt that Malaysian courts completely steered away from a re-examination of the merits of awards. Through the years, domestic courts, especially the higher courts, in Malaysia has taken an arbitration-friendly stance regarding enforcement of the foreign arbitral awards too.
The court can only refuse enforcement and recognition of an arbitration award on grounds set out under section 39 of the Arbitration Act 2005 [Act 646]. In the recent case of Tune Talk Sdn Bhd v Padda Gurtai Singh [2020] 3 MLJ 184, the Court of Appeal held that sections 38 and 39 of the Arbitration Act are mandatory and exhaustive, with no room for any other substantive requirement to be fulfilled for the recognition and enforcement of an arbitration award.
In yet another recent case of Master Mulia Sdn Bhd v Sigur Rus Sdn Bhd [2020] 12 MLJ 198, the Federal Court set out the following guiding principles on the exercise of the court's discretion to set aside an arbitral award on the grounds the award is in conflict with the public policy of Malaysia for breach of natural justice:
- the court must consider which rule of natural justice was breached, how it was breached, and in what way the breach was connected to the making of the award;
- the court must consider the seriousness of the breach (that is, whether the breach was material to the outcome of the arbitral proceeding);
- if the breach is relatively immaterial or was not likely to have affected the outcome, discretion will be refused;
- even if the court finds that there is a serious breach, if the fact of the breach would not have any real impact on the result and that the arbitral tribunal would not have reached a different conclusion, the court can refuse to set aside the award;
- where the breach is significant and might have affected the outcome, the award can be set aside;
- in some instances, the significance of the breach may be so great that the setting aside of the award is practically automatic, regardless of the effect on the outcome of the award;
Therefore, this case sets out important principles for the setting aside of an arbitral award on the ground of breach of natural justice in Malaysia. The enforcement court has a wide discretion dependent on the nature of the breach and its impact: the materiality of the breach and the possible effect on the outcome are relevant factors for consideration by the court, and while materiality and causative factors must be established, prejudice is not a pre-requisite or requirement to set aside an award for breach of the rules of natural justice. In other words, the enforcement court must consider whether the breach was significant to the outcome of the arbitration proceedings at hand.
Recent judgements
The past few years have seen a number of significant decisions from the Malaysian civil courts, that have been kept busy in dealing with various challenges and had opportunity to formulate their position on several pressing issues in international arbitration.
An increasing number of anti-arbitration injunction applications have come before the Malaysian civil courts within the last two years. Below we are citing two cases with fairly similar background facts, in which judgments had been rendered only two days apart, whilst the judgments show the contrasting approach taken by the courts.
In the first case of Felda Investment Corporation Sdn Bhd v. Synergy Promenade Sdn Bhd,[12] a party to an arbitration sought an anti-arbitration injunction. The court held that a higher threshold was required: the petitioner has to demonstrate that the continuance of the arbitration would be “oppressive, vexatious, unconscionable or an abuse of process”. The applicant was unable to prove how the arbitration proceedings would be oppressive to it. Thus, the court dismissed the application for an anti-arbitration injunction.
In the second case, the High Court granted the anti-arbitration injunction on the application brought by a non-party based on a lower threshold for non-parties to the arbitration agreement than that for parties to the arbitration agreement. The decision in Federal Land Development Authority v Tan Sri Haji Mohd Isa & Ors[13] illustrates the breadth of the issue: the court held that a non-party must satisfy the lower three-stage test for interim injunctions generally from the classic case of American Cyanamid: there are serious issues to be tried, the balance of convenience lies in favor of granting the injunction, and damages would not be an adequate remedy.[14]
Another case that rose to prominence recently also merits our attention. In the case of Government of Malaysia v Nurhima Kiram Fornan & Ors’,[15] the High Court allowed an anti-arbitration injunction to restrain the defendants in the suit from taking further steps in ad hoc arbitration proceedings commenced in Spain arising out of a grant by the Sultan of Sulu of Territories and Lands on the mainland of the Island of Borneo in 1878. The underlying dispute concerns a historic territorial claim by the current heirs of Jamalul Kiram II, the last formally recognized Sultan of Sulu, over the territory of Sabah, a small oil-rich archipelago, the northern tip of Borneo. The Sultan had made a deal with a British trading company in 1878 to allow exploration of resources in the territory. After gaining independence from Britain, Malaysia took over the deal, whilst the dispute evolved when the payments to the heirs were terminated in 2013, with Malaysia claiming that the disputed territory belonged to it. In 2022, an ad hoc arbitrator, Gonzalo Stampa, ruled in favour of the Sultan’s heirs and found that Malaysia, which inherited the obligations of the 1878 agreement upon securing independence from Britain in 1963, must pay them $14.9 billion in compensation.
Following the arbitration proceedings, the Malaysian court granted the anti-arbitration injunction ruling there was no valid and enforceable arbitration agreement established in the deed of cession. A further point of interest is that the anti-arbitration injunction was also granted as the plaintiff, the Sovereign State of Malaysia, had immunity from judicial and arbitration proceedings. Interestingly, a French commercial court initially ordered to enforce a $14.9 billion arbitration award,[16] whilst the Paris Court of Appeal on July 12, 2022 had stayed the ruling, after finding that enforcement of the award could infringe the country’s sovereignty.[17]
In overall, it is fair to say that Malaysian judiciary takes a balanced approach in interpreting lex arbitri in light of the latest amendments, and working a way towards allaying the concerns of foreign parties. Certain lower courts decisions might send mixed signals to the users and even create uncertainty, whilst the higher courts filter and are take active steps to eliminate any divergencies typical to the emerging arbitration jurisdictions.
The Asian International Arbitration Centre: Recent Developments
The well-known Malaysia’s arbitral institution - the AIAC has also worked on several important developments in the last three years: in addition to the official launch of the AIAC Arbitration Rules 2021[18] and AIAC i-Arbitration Rules 2021,[19] the centre also released a number of documents aimed at the enhancement of arbitral proceedings.[20]
The work on the most recent revision of the AIAC Arbitration Rules 2021 began in 2019, and the new edition of the rules came into effect on August 1, 2021. The newest version includes significant changes into the appointment proceedings, arbitrator’s powers, joinder and consolidation. To improve efficiency of the AIAC-administered arbitrations, a summary determination[21] and fast track procedure[22] were introduced. In addition to that, the AIAC made certain structural changes into its arbitration rules, clarified a number procedural nuances and definitions. Another important innovation is publication of awards when the parties have expressly agreed in writing and provided that the award is redacted.[23]
Despite having a vast experience in administering mainly construction and commercial arbitration matters, the AIAC continues to develop very unique arbitration services aimed at the parties to the disputes where Shariah law applies. The 2021 version of the AIAC i-Arbitration Rules demonstrates the centre’s continued efforts and work, which allow the AIAC to remain the only provider of arbitration services based on the Shariah laws in the Southeast Asia.
On a separate note, it is worth mentioning that the AIAC made a significant shift toward the enhancement of arbitration services by issuing a number of protocols and recommendations. For instance, the AIAC’s Protocol on Virtual Arbitration Proceedings accompanied with the Guide to it,[24] allowed many tribunals and parties to ensure the continuity of their work during the COVID-19 pandemic. Further, the AIAC’s recommended good practices for the conduct of arbitration proceedings and drafting of awards under the 2018[25] and 2021[26] versions of the rules, seem to be a timely measure in light of the increasing number of administered disputes.
The table below confirms competitiveness of the AIAC’s services from a cost standpoint:
|
|
Administrative Fee (minimum) |
Time limit for Final Award |
|
AIAC |
2,050 USD |
180 days from Procedural Order No. 1 |
|
HKIAC |
Approx. 2,522 USD |
|
|
SIAC |
Approx. 2,733 USD |
|
|
KCAB International |
Minimum approx. 4,488 USD |
45 days from the date on which final submissions are made or the hearings are closed whichever is later |
With a wealth of experience in providing ADR services to the Malaysian and international parties, the AIAC continues to flourish as one of the institutional leaders in the region and gains significant experience catering to the needs of the global market.
Concluding remarks
Malaysia continues its consistent development toward becoming one of the leading hubs for international arbitration. A number of factors contribute to Malaysia’s appeal: a coherent modern legislative framework supportive of the norms and general principles of international arbitration, complemented by the domestic courts’ adherence to the principle of minimal curial intervention.
Malaysia has also garnered increasing international respect for the variety of available arbitration services provided by its institutions, legal and arbitration practitioners. The existing arbitration infrastructure and innovative approaches adopted by the members of the Malaysian arbitration community certainly promote the country as a cost-efficient seat which is able to address the needs of the parties to cross-border disputes.
[1] https://www.worldbank.org/en/country/malaysia/overview.
[2] The AIAC’s Annual Report 2021, p. 12 (available here: https://admin.aiac.world/uploads/ckupload/ckupload_20220729062318_34.pdf).
[3] The Malaysian Arbitration (Amendment) Act 2018, which came into force on May 8, 2018, signifies the most recent revisions to the Arbitration Act 2005.
[4] The AIAC’s Annual Report 2021, p. 22 (available here: https://admin.aiac.world/uploads/ckupload/ckupload_20220729062318_34.pdf).
[5] The policy of minimal judicial intervention has been recently reiterated by the Federal court in Master Mulia Sdn Bhd v. Sigur Rus Sdn Bhd [2020] 12 MLJ 198.[6] Examples of what would amount to strong reasons have been identified in the case of Tan Kok Cheng & Sons Realty Co Sdn Bhd v Lim Ah Pat 9 [1995] 3 MLJ 273 namely “those involving fraud or where there is, on a proper construction of the arbitration clause, no dispute that falls within its purview or where third party procedure under the rules of court will most probably be resorted to.”
[7] Press Metal Sarawak Sdn Bhd v. Etiqa Takaful Bhd Press Metal Sarawak Sdn Bhd v. Etiqa Takaful Bhd [2016] 5 MLJ 417.
[8] Press Metal Sarawak v Etiqa Takaful Bhd [2016] MLJU 404.
[9] The PORAM Rules of Arbitration and Appeal are effective from January 1, 2012; available here: https://poram.org.my/arbitration/poram-rules-of-arbitration-and-appeal/.
[10] Malaysian Aviation Commission Act 2015 [Act 771]; available here: https://www.mot.gov.my/en/Documents/MAC-Act-2015-English.pdf.
[11] Inside Arbitration: Perspectives on Cross-Border Disputes, Issue 14. // Herbert Smith Freehills (27 July 2018).
[12] [2020] MLJU 1465 (HC).
[13] [2020] MLJU 1586 (HC); [2020] MLJU 1587 (HC).
[14] American Cyanamid Co v Ethicon Ltd [1975] AC 396 (UKHL); Keet Gerald Francis Noel John v Mohd Noor bin Abdullah & Ors [1995] 1 MLJ 193 (CA).
[15] [2020] MLJU 425.
[16] https://jusmundi.com/en/document/decision/en-nurhima-kiram-fornan-fuad-a-kiram-sheramar-t-kiram-permaisuli-kiram-guerzon-taj-mahal-kiram-tarsum-nuqui-ahmad-narzad-kiram-sampang-jenny-ka-sampang-and-widz-raunda-kiram-sampang-v-malaysia-final-award-monday-28th-february-2022#decision_20674.
[17] Fornan et al v Malaysia (Sultan of Jolo v Malaysia) - Cour d'appel de Paris no RG 22-04007 - Ordonnance Sur Incident Devant Le Magistrat Chargé de la Mise en État - French - 12 July 2022.
[18] Available here: https://admin.aiac.world/uploads/ckupload/ckupload_20211008044336_77.pdf.
[19] Available here: https://admin.aiac.world/uploads/ckupload/ckupload_20211101035047_27.pdf.
[20] Editor’s note: See more on the AIAC I-Arbitration Rules in Sundra Rajoo, “Islamic arbitration in Malaysia: the Asian International Arbitration Centre (AIAC) i‑Arbitration Rules 2018”, Arbitration.ru, №4 (28) July-August 2021, 28-31.
[21] Rule 19 Rule of the AIAC Arbitration Rules 2021.
[22] Rule 8 Rule of the AIAC Arbitration Rules 2021.
[23] Rule 44.6 of the AIAC Arbitration Rules 2021.
[24] Available here: https://admin.aiac.world/uploads/ckupload/ckupload_20211025025343_33.pdf.
[25] Available here: https://admin.aiac.world/uploads/ckupload/ckupload_20210907104313_57.pdf.
[26] Available here: https://admin.aiac.world/uploads/ckupload/ckupload_20210907104327_21.pdf.
