Key Amendments to the Malaysian Arbitration Act

 

On 16 July 2024, the Arbitration (Amendment) Bill 2024 (“Bill”) was passed by the Malaysian House of Representatives (Dewan Rakyat) to amend the Arbitration Act 2005 (“2005 Act”). Subsequently, on 24 July 2024, the Bill was passed by the Malaysian Senate (Dewan Negara). On 1 November 2024, the Arbitration (Amendment) Act 2024 (“Amendment Act”) was gazetted. The Amendment Act will come into operation on a date to be determined by the Minister, by notification in the Federal Gazette.

 

YB Dato’ Sri Azalina Binti Othman Said, Minister in the Prime Minister’s Department (Law and Institutional Reforms), stated that the Bill and the proposed reforms aims to strengthen Malaysia’s position as an international arbitration hub. The reforms aim to reflect the restructuring of the Asian International Arbitration Centre (“AIAC”) in line with the Supplementary Agreement between the Malaysian Government and the Asian-African Legal Consultative Organization (AALCO) regarding the AIAC on 20 February 2024. The amendments would align the Malaysian arbitration regime with international best practices.

 

Form of Arbitration Agreement

The category of recognised documents which can contain an arbitration agreement in writing is expanded with the addition of the words “and any other documents”. An arbitration agreement is in writing if it is contained in an exchange of any other documents, and not just in an exchange of statement of claim and statement of defence.

 

Law Applicable to Arbitration Agreement

 

A new section 9A will be introduced into the 2005 Act. In the event that the law of the arbitration agreement is not specifically stated and the parties are unable to agree on it, the law of the arbitration agreement shall be the law of the seat of the arbitration. This brings certainty to a point of law which has been the subject of much debate in recent jurisprudence in certain jurisdictions.

 

The doctrine of severability provides that the main contract and the arbitration agreement are two separate agreements. Where there is ambiguity, there could be situations where the law of the arbitration agreement is found to be not the same as the law governing the contract.

 

Such was the case in the infamous Kabab-ji vs Kout Food saga wherein the English Courts and French Courts delivered inconsistent decisions on the enforceability and recognition of an arbitral award. Here, the seat of the arbitration was Paris. The parties chose English law as the law governing the contract. The contract did not specify the law applicable to the arbitration agreement.

 

The United Kingdom Supreme Court held that the law applicable to the arbitration agreement was English law as English law was the law governing the contract. Under English law, Kout Food was not a party to the arbitration agreement and therefore the arbitration agreement was not valid. Subsequently, the United Kingdom Supreme Court declined to recognise and enforce the award.

 

Across the Channel, the French Court of Cassation affirmed the Paris Court of Appeal’s decision and held that the law of the arbitration agreement was the law of the seat of arbitration i.e., French Law. Under French law, the arbitration agreement extended to Kout Food due to its heavy involvement in the performance of the contract. Consequently, the French Court declined to annul the arbitral award.

 

Whilst the position on the law of the arbitration agreement has always been certain and is well established by its apex court in Malaysia. The new section 9A of the 2005 Act essentially codifies the principle in Thai-Lao Lignite Co Ltd & Anor, making the default law of the arbitration agreements as the law of the seat of the arbitration, unless the parties stipulate otherwise.

 

The Federal Court in Thai-Lao Lignite Co Ltd & Anor v Government of The Lao People’s Democratic Republic [2017] MLJU 1196 held that under the conflict of laws rules, the law with the closest and most real connection to the arbitration agreement is the law of the arbitration agreement. Usually, the law of the seat has the closest and most real connection to the arbitration agreement. Unless it is shown to the contrary, the stipulation that Malaysia is the seat of the arbitration is tacit agreement that the law applicable to the arbitration agreement is the law of Malaysia.

 

AIAC Court of Arbitration and the AIAC Board of Directors

 

The amended section 13 of the 2005 Act will substitute the term “Director of the Asian International Arbitration Centre” with the term “President” (of the AIAC Court of Arbitration). The President will be the appointing authority for arbitrators. 

This amendment reflects the restructuring of the AIAC. It is highlighted that this change has also been introduced in the statutory adjudication regime by the Construction Industry Payment and Adjudication (Amendment) Bill 2024 (“CIPAA (Amendments) Bill”). Subsequently, the AIAC Arbitration Rules will also have to be updated to reflect this change.

 

It is understood that the AIAC Court of Arbitration will undertake a quasi-judicial role to deal with procedural issues in arbitrations. The appointment of arbitrators, mediators and adjudicators will be made by the President in consultation with members of the AIAC Court of Arbitration. The Registrar and Secretariat of the AIAC Court of Arbitration will be tasked with the case management and case administration. The AIAC Board of Directors will be overseeing the AIAC’s marketing, management and corporate governance.

 

The Malaysian government is actively involved in implementing the reforms to the AIAC. On 1 June 2024, the AIAC announced the constitution of the Protem Committee for the AIAC Court of Arbitration. The Protem Committee’s mandate is to implement and establish the AIAC Court of Arbitration by streamlining the mechanisms, protocols and operational framework of the AIAC Court of Arbitration.

 

The AIAC has already taken steps to reflect its restructuring by the recent appointments of Datuk Almalena Sharmila Johan as the Chief Executive Officer (“CEO”) of the AIAC and YBhg. Tan Sri Ahmad Terrirudin bin Mohd Salleh as Chairman of the AIAC Board of Directors. The CEO will oversee the administration of the AIAC according to the strategic direction set by the AIAC Board of Directors. The AIAC Board of Directors will act as a check and balance in the governance structure, administration and management of the AIAC. Further, former Federal Court Judge Datuk Mary Lim Thiam Suan was appointed as the Interim Director of the AIAC.

 

In the meantime, the Director of the AIAC still plays a significant role until the Amendment Act and the CIPAA (Amendments) Bill comes into force. The current AIAC Arbitration Rules 2023 (“Rules”) designates the Director as the party who appoints the arbitral tribunal. The Director of the AIAC is also the party who decides on consolidation of proceedings and more under the Rules.

 

Multiparty Arbitrations

 

Previously, the 2005 Act was silent on multiparty arbitrations i.e., where there are multiple claimants and/or multiple respondents. A new section 13(3A) is inserted in the 2005 Act to provide for multiparty arbitrations, whereby all claimants will jointly appoint one arbitrator, and all respondents will jointly appoint one arbitrator. The two party-appointed arbitrators will then appoint the presiding arbitrator. This amendment will facilitate arbitrations based on contracts with multiple parties.

 

 

Digital and Electronic Signatures

 

Arbitrators are now allowed to sign off arbitral awards with digital and electronic signatures. Digital signatures, as defined by the Digital Signature Act 1997, are “a transformation of a message using an asymmetric cryptosystem” which is verified by a public key listed in a valid certificate issued by a licensed certification authority. In contrast, electronic signatures, as defined by the Electronic Commerce Act 2006, is “any letter, character, number, sound or any other symbol or any combination thereof created in an electronic form adopted by a person as a signature”.

This amendment is welcomed as digital and electronic signatures have become common commercial practice. It helps to facilitate the arbitral process, particularly in international arbitrations which involve several international arbitrators.

 

Automatic Recognition of Arbitration Awards

 

Arbitration awards would now be automatically recognised. Following this amendment, parties who obtain an arbitral award in their favour (whether the seat of arbitration is in Malaysia or a foreign state under the New York Convention) would have an expedited procedure to the High Court for its recognition. This amendment is welcomed as it adopts the position under UNCITRAL Model Law. Further, parties would be able to save costs and resources.

Notwithstanding that, the introduction of automatic recognition would likely require a further amendment to Order 69 of the Rules of Court 2012 to set out the procedure to give effect to the amendment made by Section 9 of the 2024 Act.

 

Third-Party Funding

 

Previously, third-party funding (“TPF”) arrangements were viewed as contrary to public policy due to the doctrine against champerty and maintenance. TPF arrangements were prohibited due to the risk of abuse of process. There were concerns regarding litigation funders influencing the conduct of proceedings for financial gains.

Notwithstanding that, Clause 10 seeks to accommodate and regulate TPF arrangements for arbitration in Malaysia. The Clause recognises that funding is a potential obstacle to seeking redress by arbitration. TPF would promote access to justice by arbitration as this would allow parties with limited financial resources to pursue their claims.

Now, TPF arrangements are permissible, so long as parties disclose the TPF arrangement before or upon commencement of arbitration or court proceedings in relation to arbitration. Where the relevant proceedings have already begun, parties may disclose the TPF arrangement within 15 days after the TPF arrangement is made.

Further, Clause 10 empowers the Minister to issue a code of practice which third party funders will have to adhere to. The code of practice may address the following issues:

• Requirements on promotion of TPF;

• Requirements for a TPF agreement, including the degree of control that a third-party funder will have in relation to the arbitration, liability of a funded party and termination of a TPF agreement;

• Criteria for third party funders, including sufficient minimum capital;

• Procedures for addressing potential, actual or perceived conflicts of interest by a third-party funder; and

• Procedures to enhance the protection of a funded party.

It is highlighted that non-compliance with the code of practice does not render a third-party funder liable to any action or legal proceedings. However, any non-compliance may be taken into account by any arbitral tribunal or the Court if the non-compliance or compliance is relevant to a question to be decided by the arbitral tribunal or the Court.

 

Conclusion

 

The reforms to the Malaysian arbitration regime are long overdue and welcomed. The amendments would inspire trust in Malaysia as a preferred seat of arbitration to both domestic and international parties. Further, the amendments would bolster AIAC’s position as a trusted arbitral institution by introducing checks and balances and accountability.