Procedures & Laws Governing Arbitration in Malaysia

At the moment there are, two Arbitration Acts being used in Malaysia, being the Arbitration Act 1952 which is based on the English Arbitration Act of 1889 together with the 2005 Arbitration Act which is largely based on the Model Law and the New Zealand Arbitration Act of 1969. The 1952 Act applies to arbitrations which were commenced prior to the 15th of March 2006 and the 2005 Act applies to arbitrations which commenced after the 15th of March 2006.

The 1952 Act was amended on the 1st of February 1980, to incorporate a new section, whereby the jurisdiction of the Malaysian Courts was excluded in respect of arbitrations held under the Convention on the Settlement of Investment Disputes between States and Nationals of other States 1965 (ICSID) and the United Nations Commission on International Trade Law (UNCITRAL) and the Rules of Arbitration for the Kuala Lumpur Regional Centre for Arbitration (KLRCA Rules).

The Malaysian Courts have interpreted that the 1952 Act excludes the requirement for interim relief such as security for costs despite the wording KLRCA Rules which allows for such interim measures or relief. The position in respect of interim relief has been clarified by the Court of Appeal in the case of Thye Hin Enterprises Sdn Bhd v. DaimlerChrysler Malaysia Sdn Bhd where the court stated that interim relief can be granted despite the contents of section 34 of the 1952 Act as the provisions of the Act, were specifically to cater for international arbitrations. However, it should be noted that the Malaysian Courts have interpreted section 34 of the 1952 Act to apply to domestic arbitrations as well.

The current 2005 Act applies to both domestic and international arbitrations. The Act itself is divided into four sections:

Section 1 comprised the definition section, including important definitions relating to international arbitration and domestic arbitration.

Sections 1, 2 and 4 apply to both International and domestic arbitrations.

Section 3 contains the provisions for appeals in respect of arbitration awards on points of law and applies only to domestic arbitrations unless the parties to the arbitration opt out. Equally it does not apply to international arbitrations unless the parties opt in.

Malaysia was and still is a signatory to the New York Convention. The 2005 Act repealed the New York Convention Act but has replaced it with Sections 38 and 39 of the Act. These sections set out the requirements that a party needs to comply with when seeking an arbitration award to be recognized as binding and enforceable by entry as a judgment in terms of the award together with the grounds for refusing recognition or enforcement of the same. Malaysia is also a signatory to the Convention on the Settlement of Investment Disputes and has enacted the Convention on Settlement of Investment Disputes Act 1966 to give effect to the Convention.

Both the 1952 and 2005 Acts apply only when there is a written agreement existing between the parties. There are however important differences in the definition of the phrase “written agreement” in the two Acts.

The 1952 Act, requires that a written agreement is required to submit present and future disputes to arbitration, whether an arbitrator is named or not. Neither of the two Acts provide or require an actual form of arbitration clause. The writing requirement maybe satisfied where the document recognises, incorporates or confirms the existence of an agreement to arbitrate between the parties.

The 2005 Act defines an arbitration agreement to mean an agreement in writing by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between parties in respect of a defined legal relationship whether contractual or otherwise. (Based on the Model Law) The Act again requires that an agreement be in writing where there is an exchange of letters, telex, facsimile or other forms of electronic communication. Alternatively an exchange of pleadings in which the existence of an arbitration agreement is acknowledged, may be deemed constitute an arbitration clause between the parties.

The Malaysian Courts follow the common law principle that the termination of an agreement or contract does not by itself put an end to any arbitration clause contained in the agreement or contract. The position it takes is that the arbitration clause is separable from the agreement or contract and it is not affected by termination. However, if the agreement or contract is void then the arbitration clause will not survive.

Both the 1952 Act and 2005 Act recognize the principle of party autonomy. Usually, one or three arbitrators are appointed.

The 1952 Act allows the parties to agree on the qualifications of the arbitrators. The arbitration agreement will normally specify the number of arbitrators the parties have agreed upon. When the parties are unable to agree on the appointment of an arbitrator, they have to request the High Court to appoint an arbitrator and the selection of an arbitrator is left to the sole discretion of the High Court judge. In practice it is common for both parties to file an affidavit suggesting names of suitable arbitrators or alternatively, bring to the attention of the court the nature of the dispute so that a suitable and appropriate arbitrator may be appointed.

The 2005 Act adopts a two level approach to grant the parties autonomy in determining the procedure for appointment of arbitrators followed by a default mechanism if none has been agreed. The Act does not impose limits on who may be appointed as arbitrator. The parties are free to choose their arbitral tribunal.

The 2005 Act states that in the case of international arbitrations three arbitrators shall be appointed and in the case of domestic arbitration a single arbitrator, in the event the parties fail to determine the number of arbitrators. In general, parties normally designate an uneven number of arbitrators. Under the Act parties are free to agree on a procedure for appointing the presiding arbitrator and the parties are also generally given a free hand to agree on the procedure for the appointment of an arbitrator or arbitrators. If the parties fail to make provision for the appointment of an arbitrator or arbitrators in the arbitration agreement or if there is disagreement or if they refuse to exercise their right to appoint a member of the arbitral tribunal, then the Director of the KLRCA is given the power to appoint the arbitrator or arbitrators and the Director has to do so within 30 days, failing which the parties can apply to court for the appointment. There is guidance as to how the Director should exercise his discretion in making any appointment and there is no right of appeal from the decision of the Director in respect of the appointments made.

There are no specific qualifications required of arbitrators under either Act. The 2005 Act provides that no person shall be precluded by reason of nationality from being appoint or acting as an arbitrator unless there is an agreement to the contrary. Arbitrators also do not need any legal training; however, the parties may agree that arbitrators shall have specific qualifications in the arbitration agreement.

It goes without stating that an arbitrator must be independent and impartial. The impartiality and independence of the arbitrator comes into prominence in circumstances where the arbitrator has an interest in the outcome of the dispute.

The 1952 Act does not contain any requirements for disclosure but it is wise for arbitrators acting under the 1952 Act to disclose circumstances which could bring their impartiality or independence into question. The Court can exercise its statutory authority to remove an arbitrator if the arbitrator is deemed impartial.

The 2005 Act provides that an arbitrator must be independent and impartial. Circumstances which will raise issues as to impartiality and independence include a personal, business or professional relationship with one party to a dispute or an interest in the outcome of the dispute. The Act further requires that an arbitrator is to disclose any circumstances which may give rise to justifiable doubts as to his impartiality. This is a continuing duty from the time of appointment to the rendering of the award.

Where the impartiality or independence of an arbitrator is challenged or brought into question, there is no equivalent provision in the 1952 Act. The procedures for challenge would need to be drafted in the rules under which the parties have agreed to arbitrate. A party should exhaust those procedures before challenging the appointment of an arbitrator on grounds of the arbitrator’s impartiality or independence in court. The normal grounds on which challenges are mounted are usually bias and conflict of interest. The test for bias being “real danger of bias.”

The parties to arbitration are free to agree on the applicable procedures in arbitration. They may choose institutional arbitration rules or ad-hoc arbitration. The Evidence Act 1950 does not apply to arbitration proceedings. The arbitral tribunal normally decides issues of relevancy, admissibility and the weight to be attached to the evidence submitted by the parties at the hearing.

The 1952 Act is silent on the issue of who should determine the procedures to be applied in any arbitration. Nevertheless, it is recommended that the parties follow well-recognized arbitration rules.

Sections 20 to 29 (inclusive) of the 2005 Act cover the arbitration procedures. Subject to there being any agreements to the contrary the procedures are a matter for the arbitrator to decide. The Act prescribes the procedure to be adopted in identifying the issues which are in dispute in a formal manner. There is provision for each party to state the facts supporting their claims or defence, and also to submit documents and other references to be the evidence relied upon later. There are also provisions allowing for the parties to amend their pleadings. Generally, arbitrators in Malaysia follow the provisions of the Act for parties to file Points of Claim followed by Points of Defence and Counterclaim and then other written pleadings.

The arbitrator is given the power to order interim measures. Arbitrators are empowered to order discovery of documents within the possession and control of the parties to the arbitration. The arbitral tribunal is also given various powers to ensure the proper conduct and regulation of the process. It is often expressly conferred with powers to make orders or give directions regarding security for costs, the recording of evidence by affidavit, and maintaining interim measures to ensure that any award eventually handed down by the arbitral tribunal is not rendered ineffectual by the dissipation of assets. The arbitral tribunal has the power to order interim injunctions and other interim measures of relief. The parties may seek the assistance of the court in the course of the arbitration, to have the court issue subpoena to a witness. In practice, hearings are held orally in respect of arbitrations unless parties agree to a documents-only arbitration. Under the 2005 Act the tribunal has the discretion to hold an oral hearing or conduct the arbitration on the basis of documents. The tribunal must however hold an oral hearing if required by either party. The tribunal can terminate proceedings under the Act if a claimant, without sufficient cause, fails to deliver its pleading within the time agreed to by the parties or determined by the tribunal. In the event the respondent fails to deliver a defence or if a party fails to appear at the hearing or produce documents, the tribunal may alternatively proceed with the arbitration and hand down an Award.

The arbitral tribunal has the power to determine its own jurisdiction under the 2005 Act. The arbitral tribunal has no equivalent powers under the 1952 Act. The KLRCA Rules provides that an arbitrator can rule on his own jurisdiction. The challenging party may raise two types of plea under the 2005 Act; Firstly, is the non-existence of the arbitral tribunal’s jurisdiction; Secondly, the arbitral tribunal either as a preliminary question or in an award on the merits. There are time-limits given in the 2005 Act for the raising of such objections and the Act makes it clear that the doctrine of Kompetenz- Kompetenz is now part of Malaysian law.

The 1952 Act, did not allow the arbitrator to determine his own jurisdiction unless the parties gave him that power, and therefore his decisions on jurisdiction would not have been binding on the parties.

The 2005 Act provides that the arbitrator can determine his own jurisdiction and his decision on the issue of jurisdiction can be challenged by way of an appeal to the High Court but such challenge shall not delay the arbitration proceedings.

The Malaysian High Court has held that arbitration proceedings do not come within the purview of the Legal Profession Act 1976 and therefore, the parties may be represented by foreign lawyers who need not be members of the Malaysian Bar Council. There is also no requirement that the parties need to be represented by legally qualified persons. The Courts have however held that foreign lawyers including West Malaysian lawyers who are not advocates within the meaning of the Advocates Ordinance 1953 (Sabah Cap 2) are prohibited by the same from representing parties to arbitration proceedings in Sabah. Interestingly the High Court has held that even though arbitration proceedings do not come within the purview of the Legal Profession Act 1976, an advocate or solicitor owes the same duty to his client or former client whether or not he is before the court or arbitration.

The 1952 Act does not define an award to be given by an arbitrator. An award has been defined in the Malaysian Courts as a decision made by an arbitrator on a controversy submitted to him. Since the award must be on the controversy submitted for arbitration, the decision must be one that decides on all the issues involved in the controversy. The Courts have further held there is nothing, which prohibits an interim award from being made by an arbitrator unless a contrary intention is expressed in the arbitration agreement.

The 2005 Act defines an award as a decision of the arbitral tribunal on the substance of the dispute and includes interim, additional, agreed and final award. The reference to interlocutory awards in the definition must necessarily mean that it includes interlocutory awards, which protect the interest of the parties or regulate the proper conduct of the arbitration prior to the determination of the merits in respect of the dispute. Therefore, interlocutory orders which do not include the merits such as security for costs and discovery made by the tribunal in the course of arbitration can be enforced with leave of the Court.

The 1952 Act, does not prescribed any form for an award. It need not even be given in writing but if it is not written, it would give rise to problems of enforcement. In practice arbitral awards even under the 1952 Act are in writing but they need not contain reasons unless the parties have agreed that the arbitrator is to hand down a reasoned award. A Court will only order an arbitrator to provide reasons in respect of an award if it was one of the terms specified in his appointment. It goes without saying that the award should be dated and should state the place of arbitration.

The 2005 Act, requires that the any award should be in writing and it should be signed by the arbitrator or arbitrator(s). If there were three arbitrators, the signature of the majority of the members of the arbitral tribunal would be sufficient provided the reason for the omitted signature is stated in the award. All awards should state the reasons for the award unless the parties have stated otherwise or if the award is made on agreed terms. The award should also be dated and state the place of arbitration.

The award should be unambiguous and certain and should clearly spell out, the substantive relief, and deal with all matters in dispute.

In the event that the parties reach settlement or agree to settle the dispute during the course of the arbitration proceedings, the arbitral tribunal may record a settlement and hand it down as an arbitral award on agreed terms. Any such award would have the same status and effect as an arbitral award made by the arbitrator on the merits or the arguments of the parties.

The 2005 Act, states that a party may request that the arbitrator correct any errors in computation, clerical or typographical errors or any errors of a similar nature provided such request is made within thirty days of the award date. The arbitrator may also correct errors on his own initiative. Under the 1952 Act, the arbitrator only has the power to correct clerical mistakes and errors arising from an accidental slip or omission.

The 2005 Act gives power for the determination of a point of law subject to the consent of the parties. The Act also enables the court to refer questions of law. There is a duty and obligation to state the question of law arising from the award in a clear manner, and state the grounds on which the question of law is sought. In addition, the facts leading to grounds must also be stated failing which the relief will not be granted. The rights to determine a point of law are optional and they apply to domestic arbitrations unless the parties opt out. In the case of international arbitrations, these sections would only apply if the parties specifically opt in. There is no appeals procedure against an award made in Malaysia under the 2005 Act. The only option available is to set aside the award. An application to set aside an arbitration award has to be made within three months of the receipt of the award. The grounds for setting aside such an award would include circumstances such as that the award is contrary to the public policy of Malaysia, fraud or a breach of the rules of natural justice.

There is no procedure for an appeal of an award. The award may be set aside under the 1952 Act on the grounds that there has been misconduct on the part of the arbitrator subject to the court being satisfied that there was misconduct. Misconduct is not defined under the 1952 Act. It normally would involve objections of actual or possible unfairness. It is important to note that it is not misconduct for an arbitrator to arrive at an erroneous decision whether his error is one of fact or law. An award may also be set aside when there is some defect or error on the face of the award; for instance, not considering all the issues that have arisen, or a mistake has been corrected, or new evidence is available, which could not with reasonable diligence, have been discovered, or if the dispute has not been fully adjudicated and where the arbitrator has exceeded his jurisdiction.

Arbitral awards may with the leave of the Malaysian High Court be enforced as a judgment of the High Court. The 1952 Act does not stipulate the grounds for refusing enforcement. However, the grounds for refusing enforcement would include grounds such as misconduct on the part of the arbitrator, ambiguity and uncertainty of the award, incompleteness and where an arbitrator has exceeded their jurisdiction. When a party is not able to resort to summary procedure under the party has the option to enforce it by way of an action on the award.

The 2005 Act provides the grounds for the recognition and enforcement of foreign arbitral awards and the grounds for refusing recognition or enforcement of the same. The content generally applies equally to enforcement in Malaysia of both domestic and foreign awards. It is clear from the content and wording of the 2005 Act that the principle of giving recognition to all foreign awards is not accepted by limiting the term “foreign state” to “convention countries”. Thus, an arbitral award made in an international arbitration where the seat is Malaysia would not be covered. This appears to be an oversight of the draftsman and it is understood that steps will being taken to amend this section within the Act. For example, an ICC arbitration held in Kuala Lumpur between a Malaysian party and a foreign party cannot currently be enforced under the provisions of the 2005 Act.

The grounds for refusal of recognition are exhaustive and if none of these grounds are present, the award must be recognized. The area in which a dispute may arise is the question of public policy. The issue would be what interpretation the Malaysian courts gave in respect to of public policy which is a very general and all-encompassing term.

The 1952 Act gives the court power to stay civil proceedings pending arbitration. This power is discretionary. There has been some controversy over whether a conditional appearance or an unconditional appearance is required for a stay.

In respect of the 1952 Act there remains doubt as to whether the High Court has the power to supervise the conduct of arbitration by an arbitrator. The High Court has the following powers, namely, security for costs, discovery of documents and interrogatories, the giving of evidence by affidavit, examination on oath of any witness, the preservation, interim custody or sale of any goods which are the subject matter of the reference, securing the amount in dispute in the reference, the detention, preservation or inspection of any property or thing which is the subject of the reference or as to which any question may arise therein, and authorizing for any of the purposes aforesaid any persons to enter upon or into any land or building in the possession of any party to the reference or authorizing any samples to be taken or any observation to be made or experiment to be tried which may be necessary or expedient for the purpose of obtaining full information or evidence and interim injunctions and the appointment of a receiver. The High Court has also the jurisdiction to order an arbitrator to state a special case on any question of law arising in the course of the defence. This power may also be exercised by the arbitrator on his own motion or at the request of a party. The High Court may also remit an award to the arbitrator for reconsideration.

The 2005 Act generally provides for non-interference by the court, unless there are express provisions for allowing it to do so. The High Court does have the power to grant interim measures in respect of security for costs, discovery of documents and interrogatories, giving of evidence by affidavit, securing the amount in dispute, preservation, interim custody and sale of any property which is the subject matter of a dispute and ensuring that any award which may be made in the arbitral proceedings is not rendered ineffectual by the dissipation of assets and interim injunctions. The arbitral tribunal is also given almost similar powers, except that there is no power to grant an injunction or appoint receivers. The reason for this could be that with regard to the granting of injunctions and in particular Mareva injunctions, the power of the court is required for purposes of enforcement. The rationale for this appears to be to provide the parties with a choice in view of the concurrent nature of the powers set 2005 Act. It is doubtful if a court has the power to also grant a Mareva injunction in respect of an international arbitration held elsewhere, where there are assets located in Malaysia

MALCONLAW