A. LEGISLATION AND RULES
A.1 Legislation
International arbitration in Malaysia continues to be governed by the Arbitration Act 2005, to which no legislative amendment has been made since the latest amendments in 2018.
A.2 Institutions, rules and infrastructure
The Asian International Arbitration Centre (AIAC) is Malaysia’s leading arbitration institution, with several key launches in 2021.
A.2.1 Launch of AIAC Arbitration Rules 2021
On 1 August 2021, the AIAC launched the latest revisions to its Arbitration Rules (“AIAC Rules 2021“), carefully designed to enhance efficiency and reflect the standards and practices in international arbitration. Some key changes to the AIAC Rules 2021 are summarized as follows:
A.2.1.1 Wider Applicability
Rule 1 of the AIAC Rules 2021 provides that where parties agree to refer their dispute to the AIAC or arbitrate in accordance with AIAC arbitration rules, this is taken to be an arbitration administrated by AIAC under the AIAC Rules. In addition, while third-party funding arrangements are still held to be illegal by Malaysian courts, the AIAC Rules 2021 recognize its applicability in certain circumstances.
A.2.1.2 Streamlined Rules
AIAC Rules 2021 now incorporates the UNCITRAL Rules into itself, making the Rules more comprehensive and cohesive. Furthermore, the AIAC Rules 2021 have also incorporated the Fast Track Procedure which was previously contained in a separate Fast Track Arbitration Rules 2018.
A.2.1.3 Commencement of Arbitration and Mandatory Response
According to rule 5.1, the commencement of arbitration takes effect when a notice of arbitration is received by a respondent as opposed to the previous position in 2018 which is when the arbitration is registered with the AIAC. Further, rule 5.3 also provides that parties can file a single notice of arbitration and pay a single registration fee where claims arise out of multiple contracts.
A.2.1.4 Summary Determination
Rule 19 provides the availability of a summary determination for parties to dismiss a claim, counterclaim or defense where they are manifestly without legal or factual merit, or where they fall outside the arbitral tribunal’s jurisdiction.
A.2.1.5 Arbitrator’s Powers
Under the AIAC Rules 2021, the tribunal’s power is broadened in the sense that arbitrators are now allowed to determine the applicable law where the agreement is silent[1], make inquiries on the existence of third-party funding arrangements[2], determine the language[3] and order the translation of a document or communication[4]. Additionally, the tribunal is also empowered to take measures in the event of any breaches of confidentiality[5].
A.2.1.6 Multiple parties and contracts – joinder and consolidation
Rule 21.1 introduced a new ground available for joinder, which is permitted where it is necessary for the efficient resolution of the dispute and the participation would “directly affect the outcome of the arbitral proceedings”. The test for approving or rejecting joinder or consolidation request has also changed from “any relevant circumstances” to “all relevant circumstances”[6], giving a much wider meaning when considering joinder requests.
A.2.1.7 Technical Review explained, possible publication of Awards
The AIAC Rules 2021 provides clarity regarding the process of the technical review of a final award draft. The Director will draw the arbitral tribunal’s attention to any perceived irregularity, though not one on the merits. However, it must be noted that this process does not apply to an emergency award[7], an interpretation of an award[8], or a correction of an award[9].
Rule 44.6 also provides that awards may be published by the AIAC with the express written consent of parties, subject to redaction of identifying information such as the parties’ names[10].
A.2.1.8 Updated and revamped definitions
Finally, there have also been some amendments made to revamp the definitions such as distinctions made between awards, final awards and consent awards for purpose of technical review: “international arbitration” includes those that are seated outside of Malaysia, where neither party has its place of business at that seat, “virtually” has a wider definition to include virtual proceedings and more clarity on the calculation of time limits for service by electronic emails and service or delivery of documents on multiple Parties, addresses or modes and recognition of e-signature for the AIAC and the director.
A.2.2 Launch of AIAC i-Arbitration Rules 2021
On 1 November 2021, the AIAC launched the AIAC i-Arbitration Rules 2021. The revised AIAC i-Arbitration Rules 2021 (“i-Rules 2021“) are aimed at meeting the standards and practices of international arbitration while remaining aligned with the Shariah principles and the expectations of the global Islamic finance sector and other commercial segments.
The key changes of the i-Rules 2021 are mostly similar to the changes in the conventional AIAC Rules 2021, however, there have been several changes to make the rules more robust and Shariah-compliant.
The changes to the i- Rules 2021 which are similar to the AIAC Rules 2021 are as follows:
- Merging of part I and part II of the AIAC i-Arbitration Rules 2018 to ensure a harmonious and coherent set of procedural rules that are modeled on the UNCITRAL Model Law.
- Incorporation of a Fast Track Procedure to provide for expedited arbitrations and minimize the need for a standalone set of AIAC Fast Track Arbitration Rules (rule 8). Nevertheless, rule 8.13 provides that the operation of the Fast Track Procedure shall not preclude reference to the Shariah Council.
- Revisions to the process of appointing the arbitral tribunal, including a new provision on multi-party appointments (rule 9).
- New provision for Shariah guided third-party funding to facilitate the financing of a party’s share of the costs in arbitration (rules 1.4 and 13.5(e)).
- Revisions to the Emergency Arbitration provisions to enhance clarity (rules 17 and 18).
- New provision on summary determination for the early dismissal of claims (rule 19).
- A party’s request for summary determination shall not prevent a reference to the Shariah Council (rule 19.10).
- Revisions to the joinder and consolidation provisions, including a new provision for the Consolidation of multi-contract disputes (rules 21 and 22).
- Substantive revisions to the provisions on the closure and termination of proceedings, the technical review process, and the release, correction and interpretation of awards to enhance clarity (rules 33 – 40).
- Revisions to the provisions relating to costs and deposits to enhance clarity (rules 41 and 42).
- Revisions to the confidentiality provision to reflect best practices (rule 45).
Changes in respect of Shariah principles:
- Implementation of Shariah governance in arbitration
The i-Rules 2021 introduce several new provisions for more effective Shariah-governed arbitration. Firstly, according to rules 5.2(d) and 6.2(e), parties can specify any preference on the application of Shariah principles in the conduct of the proceedings in the notice of arbitration and response to the notice of arbitration. Secondly, the i-Rules 2021 also enhance the requirements for arbitration registration where a party is required to include in its registration request any relevant Shariah certification or the resolution of the contract[11].
- Definitions of a Shariah Council and Shariah Expert
Under rule 2.4 of the i-Rules 2021, the definition of a Shariah Council means any “established and recognized” council of accepted Islamic scholars or experts qualified to issue Shariah rulings. The addition of the word “established and recognized” provides that the Shariah Council must be a person who is competent to issue a ruling. In a way, this addition will enhance the integrity and boost the public’s confidence in the authorized Shariah Councils.
To supplement this point, the AIAC has also issued a Circular on the Empanelment Standards of i-Arbitrator and Shariah Experts,[12] highlighting AIAC’s standard requirements for i-Arbitrators which include possessing a minimum of five years of professional experience in Islamic Finance & Banking or related areas and possessing an academic degree, diploma or related professional certification in the areas of Islamic Finance & Banking or related subjects.
- Imposition of Ta’widh and Gharamah
Rule 13(o) provides that the Arbitral Tribunal is now empowered to award Ta’widh and Gharamah as a form of compensation and penalty for late payment charges.
- Enhanced Reference Mechanism
Revision on the provision relating to reference to a Shariah Council. Rule 29 provides that where the arbitral tribunal has to decide on a matter relating to Shariah principle, the arbitral tribunal may at any time during the course of the arbitral proceedings refer to such matter to a relevant Shariah Council.
- Reference to Shariah Expert by the Arbitral Tribunal
Under the previous rules, there were no provisions relating to reference to Shariah Councils or Shariah Experts, hence, pursuant to Section 56 of the Central Bank of Malaysia Act 2009, an arbitrator was to consider all published rulings of the Shariah Advisory Council. However, under the new rules, the tribunal may first refer the Shariah-related matter to a Shariah Council appointed by the parties and if the parties fail to agree within 30 days, the tribunal may then refer the matter to a Shariah Expert in accordance with rule 30.11. The new reference procedure ensures that party autonomy is protected and is supplemented with practical default mechanism in the instance parties fail to agree on the appointment of the Shariah Council.
A.2.3 AIAC Protocols on Virtual Arbitration Proceedings and Virtual Mediation Proceedings
In October 2021, the AIAC announced the release of its Protocol on Virtual Arbitration Proceedings (“VAP Protocol“) and the Protocol on Virtual Mediation Proceedings (“VMP Protocol“) which seek to facilitate users and equip them with the know-how in navigating through the conduct of virtual hearings in their arbitrations and mediations[13]. There are two parts under both protocols whereby Part 1 governs the conduct of virtual hearings and part 2 contains the Guide to the Protocol, including points for the Parties and the Arbitral Tribunal or Mediator to consider when a virtual hearing is being conducted.
Some of the key features of the AIAC VAP and VMP include comprehensive definitions of key terms commonly used in virtual hearings, detailed provisions on the platform and technology to be used to ensure equal accessibility and fairness to all Parties, extensive guidelines on full virtual hearings and hybrid hearings, provisions on the taking of evidence in virtual hearings, detailed guidance to address problems that may arise in virtual hearings, virtual hearing etiquette for all parties involved and guidelines on the process and procedure of virtual hearings, from the initial booking to test runs and the actual virtual hearings[14].
The introduction of the virtual hearing protocols by the AIAC is a timely release due to the challenges prompted by the COVID-19 pandemic which necessitated a significant increase in remote and virtual hearings.
B. CASES
B.1 Setting aside an arbitral award
In the Federal Court case of Pancaran Prima Sdn. Bhd. (“Appellant”) v Iswarabena Sdn. Bhd. (“Respondent”)[15], the Federal Court reaffirmed that arbitrators have the power to draw on their own knowledge and expertise in appropriate cases.
The Respondent had appointed the Appellant as its subcontractor and had terminated it pursuant to clause 12 of the contract that the works were delayed “more than 20% financially“. The Appellant argued that termination was unlawful.
A professional engineer and chartered arbitrator was appointed to hear the case.
The arbitrator eventually found that termination was unlawful as the percentage of delay stipulated in clause 12 had not been exceeded, and ordered payment of loss of profit owing to the wrongful termination.
The Appellant applied to the High Court to enforce the award whereas the Respondent applied to set aside/ vary the award. The High Court set aside the award on the basis that the subcontract had been lawfully terminated and the arbitrator had erroneously considered the physical progress delay instead of the financial progress delay.
On appeal, the Court of Appeal reversed the High Court’s decision. The original finding by the arbitrator that the subcontract was lawfully terminated was restored. However, the court found that the arbitrator had breached the rules of natural justice because the arbitrator had “invented” extraneous evidence with a factual basis pertaining to loss of profit that was not tendered in evidence nor submitted by the parties.
In allowing the appeals and overturning the decisions of the lower courts, the Federal Court held that:
- The Arbitrator in question was competent to draw on his own knowledge and expertise on the existence of profit normal in the Malaysian construction industry without giving parties the opportunity to respond. This should be of no surprise to the parties.
- In any event, this was based on the evidence before him and was based purely on a factual finding without any questions of law.
This case illustrates the prevailing judicial philosophy to take an extremely restrictive approach to permitting setting aside applications. The court had noted that the arbitrator was a subject matter expert in the industry and, practically, an arbitrator who is appointed for his special knowledge, skill or expertise, should be entitled to draw those sources for the purpose of determining the dispute – within boundaries and without significant surprise to the parties.
B.2 Interim Measures Pending Arbitration
The case of MCC Overseas (M) Sdn. Bhd. (“Plaintiff”) v Damai City Sdn. Bhd. (“Defendant”)[16] has provided guidance on interim measures pending arbitration.
The Defendant had terminated the contract with the Plaintiff. Upon termination, and pending arbitration, the Defendant’s security personnel re-possessed and took control of the site, blocking the Plaintiff from entering the site other than for inspection of work. A few months later, the Defendant through the architect had informed the Plaintiff that it wished to retain some of the equipment on-site and instructed the Plaintiff to remove other items which are not listed on the list.
The Plaintiff sought an injunction to restrain the Defendant from taking possession, using, or disposing of all the machinery at the site which was hired by the Plaintiff, and a mandatory injunction to compel the Defendant to allow access to the Plaintiff into the site to take possession, demobilize, and remove the actual assets on site. Ownership of the assets was disputed.
The High Court held that any preservatory interim measures pending arbitration would be to maintain the existing state of affairs and any injunctive orders made would be prohibitory in nature – unless exceptional circumstances dictate or the parties agree otherwise.
Where there is a bona fide dispute as to ownership, the main contractor cannot take possession, demobilize and/or remove assets on-site post-termination nor prevent the employer and/or replacement main contractor from continuing to use construction assets on-site post-termination.
Nonetheless, further to the architect’s instruction and by consent of the parties, the High Court granted an order that the main contractor was to be allowed to inspect and remove only those assets on-site which are either no longer in dispute or consented to by the employer.
This case illustrates the court’s approach to applying interim measures pending or during arbitration proceedings to aid arbitration proceedings and preserve the status quo. In certain occasions, the courts have been known to wield their powers under sections 11 and 19 of the AA 2005 widely and pursuant to their civil jurisdiction under the Courts of Judicature Act 1967. In Jana DCS Sdn Bhd v TAR PH Family Entertainment Sdn Bhd and other cases [2021] MLJU 1275, the High Court granted a Mareva freezing injunction pending the disposal of arbitral proceedings. The High Court held that the ability to grant an interim measure to “provide a means of preserving assets” is not confined only to the admiralty jurisdiction of the court (as referred to in section 11(1)(c) of the AA 2005).
B.3 Relief in respect of a Foreign Award
In the case of Danieli & C Officine Mecchaniche SpA (“Plaintiff”) v Southern HRC Sdn Bhd (“Defendant“)[17], Danieli is an Italian company that built a plant in Penang for HRC, a Malaysian company. The Plaintiff had entered into a contract with the Defendant whereby the Plaintiff would erect a plant in Prai for the Defendant to produce hot-rolled coils. A dispute arose and the arbitration took place in Singapore.
The Tribunal decided that Danieli had to pay damages to HRC whereas HRC had to transfer the title of the plant to Danieli. Danieli wanted to have access to the plant for inspection, but HRC refused to provide access until and unless payment was made to HRC.
Due to the impasse between parties, Danieli filed a court action in Malaysia seeking declarations to allow access for it to inspect the plant. HRC challenged the jurisdiction of the court to determine the matter given that it was a foreign award.
The High Court refused to grant Danieli relief, relying on Section 8 of the Arbitration Act 2005 which provides that, “no court shall intervene in matters governed by this Act, except where so provided in this Act.” Essentially, the court’s sole power in respect of a foreign award is limited to recognition and enforcement. The award itself cannot give rise to any cause of action and the court is unable to grant any other relief.
B.4 Seat of Arbitration in context of Peninsular Malaysia, Sabah or Sarawak
In Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd[18], the Federal Court had to decide on the seat of arbitration where there was a dispute as to which High Court applied. This is important in Malaysia as there are two different High Courts with different sources of jurisdiction i.e., the High Court of Malaya (for Peninsular Malaysia) or the High Court of Sabah and Sarawak (for Sabah or Sarawak). The seat of arbitration determines the court with the exclusive jurisdiction to exercise supervisory or regulatory powers. That would include the court with the power to set aside an award.
In Masenang, the construction project was in Kota Kinabalu, Sabah. The seat of arbitration was stipulated as Kuala Lumpur. The enforcement application was filed by the appellant in the Kuala Lumpur High Court, whereas the setting aside application was filed by the Respondent in Sabah.
The Federal Court ultimately ruled that the Kuala Lumpur High Court was the appropriate supervisory court. Hence, all of the enforcement or setting aside applications should have been filed in Kuala Lumpur.
This decision shows the importance of the arbitration agreement itself stating that the seat of arbitration to avoid uncertainty and unnecessary issues.
[1] Rule 13.5(a) of AIAC Rules 2021
[2] Rule 13.5(e) of AIAC Rules 2021
[3] Rule 13.5(b) of AIAC Rules 2021
[4] Rule 15 of AIAC Rules 2021
[5] Rule 44.5 of AIAC Rules 2021
[6] Rule 21.6 of AIAC Rules 2021
[7] Rule 18 of AIAC Rules 2021
[8] Rule 37 of AIAC Rules 2021
[9] Rule 38 of AIAC Rules 2021
[10] Rule 44.6 of AIAC Rules 2021
[11] Rule 7.2(c) of the i-Rules 2021
[12] AIAC | Circular on the Empanelment Standards of i-Arbitrator and Shariah Experts
[13] AIAC | AIAC Protocols on Virtual Arbitration Proceedings (VAP Protocol) and Virtual Mediation Proceedings (VMP Protocol)
[15] [2021] 1 MLJ 1
[16] [2021] MLJU 135
[17] [2021] 10 MLJ 48
[18] [2021] 6 MLJ 255
