Special Report
An Insight Into Arbitration In Malaysia.

With the rapid rise of foreign investment throughout Southeast Asia, Kuala Lumpur Regional Centre for Arbitration (KLRCA) has emerged as a credible arbitration hub for dispute resolution in Asia. To underline this success, KLRCA will be hosting the inaugural Kuala Lumpur International Arbitration Week in May 2015.

 

We had the opportunity to speak to Thayananthan Baskaran, partner at Zul Rafique & Partners to talk about the developments in arbitration in Malaysia and the advantages of arbitrating at the KLRCA.

 

Conventus Law:  The last revision to the KLRCA rules was in 2013. Do you anticipate any amendments to the rules or proposed amendments to the rules in the near future? If yes, what revisions or proposed revisions do we expect to see?

 

 

 

Thayananthan Baskaran: The KLRCA Arbitration Rules were last revised on 24.10.2013, a little over a year ago. The KLRCA was the first centre in the world to adopt the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules 2010. In the past year, the KLRCA has considered revisions based on their experience in administering the KLRCA Arbitration Rules. As the last revision was relatively recent, no specific amendments have yet been put forward by the KLRCA.

 

CL: CIPAA 2012 came into effect on April 15, 2014 with the primary objective of addressing cash flow problems in the construction industry in Malaysia, and it has appointed the KLRCA to be its official adjudication authority. Has CIPAA been warmly welcomed by the construction industry?

 

 

TB: CIPAA has been warmly welcomed by the construction industry. The initial uncertainty as to the retrospective application of CIPAA, was recently clarified by the judgment of the High Court in UDA Holdings Sdn Bhd v. Bisraya Construction Sdn Bhd & Anor [2014] 1 LNS 1584. The High Court held that CIPAA does apply retrospectively to all construction contracts regardless of when they were entered into. This judgment is currently pending appeal to the Court of Appeal.

 

After the clarification provided by the High Court, there has been an increase in the number of adjudication proceedings commenced. Based on the records of the KLRCA, to date, there have been 82 adjudication proceedings commenced and 16 adjudication decisions delivered.

 

CL: While CIPAA is in its infancy and the results may be difficult to assess, do you feel it has thus far achieved its primary goal?

 

 

TB: The primary goal of CIPAA is stated in its long title, which reads “An Act to facilitate regular and timely payment, to provide a mechanism for speedy dispute resolution through adjudication, to provide remedies for the recovery of payment in the construction industry and to provide for connected and incidental matters”.

 

Although it is early days, I am of the view that CIPAA has achieved its primary objective of facilitating regular and timely payments in the construction industry. This objective has been achieved through several factors that have combined to make CIPAA a success.

 

Firstly, CIPAA is of wide application. Section 2 of CIPAA provides that it applies to every construction contract for works to be carried out in Malaysia. This includes construction contracts entered into with the Government, although there are certain exceptions with regards to national security and minor works contracts. The recent judgment in UDA Holdings has also confirmed that CIPAA applies to all construction contracts regardless of when they were entered into.

 

Secondly, the provisions in CIPAA on adjudication are simple and clearly drafted. Furthermore, the KLRCA has provided forms that may be used at every stage of the adjudication proceedings from the payment claim to the adjudication decision. This makes CIPAA accessible to everyone. Even the smallest subcontractor is able to enforce his statutory rights by simply filling in a form. Based on anecdotal evidence, this actually happens quite frequently.

 

Thirdly, adjudication proceedings under CIPAA are relatively inexpensive. The registration fee under the KLRCA Adjudication Rules is RM250 and the administration fee is 10% of the adjudicator’s fees. The adjudicator’s fees are based on a sliding scale set out in a Schedule to the KLRCA Adjudication Regulations, with the maximum fee being RM50,000.00. As adjudication proceedings are relatively short, often do not involve a hearing and as solicitors are not on occasion engaged at the initial stages, legal fees are also kept to a minimum.

 

Fourthly, but perhaps most importantly, adjudication proceedings in Kuala Lumpur are extremely efficiently managed by the KLRCA. A dedicated Case Counsel administers each case and ensures that the tight timelines under CIPAA are met. Furthermore, insofar as there are any challenges to any adjudication decisions or the need for clarity on any provision of CIPAA, this is expeditiously resolved by the Construction Court in Kuala Lumpur.

 

CL: There are many choices for arbitration centres in Asia, such as ICC, HKIAC, SIAC and the like. Why should parties agree to submit their disputes to the KLRCA? / Are there advantages that the KLRCA offers over the others making it a more attractive choice?

 

 

TB: The KLRCA offers many advantages as an arbitration centre in Asia. As it is not possible to consider all these advantages here, perhaps, I should focus on the four principal advantages of the KLRCA.

 

Firstly, Malaysia is part of the Commonwealth and has an established body of case law that is based on the common law system. In particular, there is settled precedent on most aspects of arbitration law. For example, it is settled that civil proceedings must be stayed where there is an arbitration agreement between the parties. It is also settled that an arbitral tribunal has the authority to determine its own jurisdiction. Therefore, a party may chose Kuala Lumpur as the seat of arbitration with the assurance that there will be no uncertainty in the law governing the arbitration proceedings.

 

Secondly, Malaysia is a Model Law jurisdiction. The 1985 UNCITRAL Model Law on International Commercial Arbitration was adopted in Malaysia by the Arbitration Act 2005. The Arbitration Act 2005 was amended in 2011 to bring it even closer to the Model Law. As the Arbitration Act 2005 has been in force for nearly 10 years, the principles of the Model Law have become entrenched in Malaysia. The Courts of Malaysia are familiar with the arbitration friendly provisions of the Arbitration Act 2005 and its roots in the Model Law. The Courts accordingly lean in favour of enforcing arbitral awards save for the limited grounds for intervention provided. The Courts are also reluctant to interfere in arbitral proceedings except where such intervention may be required for the purposes of preserving the integrity of the arbitral proceedings or an award that may be rendered.

 

Thirdly, the KLRCA has a long history and therefore the experience and settled procedure that comes with such a history. It was established in 1978, more than thirty five years ago, under the auspices of the Asian-African Legal Consultative Organisation (AALCO). The KLRCA was the first regional centre established by AALCO in Asia to provide institutional support as a neutral and independent venue for the conduct of domestic and international arbitration proceedings in the region.

 

Fourthly, and again perhaps most importantly for the present financial times, the KLRCA is the least expensive of the established arbitration centres in Asia. Arbitrator’s fees are based on a sliding scale in Schedule 1 of the KLRCA Arbitration Rules, with a maximum for international arbitration at USD2 million. The administrative costs of the KLRCA are also based on a sliding scale and is capped at USD41,900.00 for international arbitration. Hotels are available close to the KLRCA, in fact there is a hotel across the road, which are available at a fraction of the rates payable in Hong Kong or Singapore. Travel, food and room rentals at the KLRCA are all relatively inexpensive.

 

CL: In addition to commercial arbitration, the KLRCA also offers i-Arbitration, a novel innovation for an arbitration centre, for commercial disputes within the Islamic community. How does i-Arbitration differ from standard commercial arbitration?

 

TB: As Shariah does not have a codified set of laws, the law applicable to any particular issue can at times be uncertain. The KLRCA i-Arbitration Rules provide for this uncertainty by allowing the arbitral tribunal to refer any Shariah issue to a council or expert. This is the principal difference between the KLRCA i-Arbitration Rules and the KLRCA Arbitration Rules.

 

 

The novel provision in Rule 11 of the KLRCA i-Arbitration Rules provides that whenever the arbitral tribunal has to “form an opinion on a point related to Shariah principles; and decide on a dispute arising from the Shariah aspect of the contract, the arbitral tribunal may refer the matter to the relevant Council or Shariah expert for its ruling”. The relevant council or Shariah expert shall be the Shariah council under whose purview the Shariah aspect to be decided falls, where there is one.

 

It is to be noted that there are two Shariah Advisory Councils in Malaysia. One council is established by section 51 of the Central Bank of Malaysia Act 2009 and is the authority for ascertainment of Islamic law for the purposes of Islamic financial business. The other council is established by the Securities Commission under section 316A of the Capital Markets and Services Act 2007 and is the authority for the ascertainment of the applicable Shariah principles for the purposes of Islamic capital market business or transactions.

 

CL: What if the dispute is not regulated by a specific Shariah council?

 

TB: According to the Guide in Part IV of the KLRCA i-Arbitration Rules (the KLRCA Guide), as not all countries will have legal regimes regulating the Islamic banking industry, it is therefore of paramount importance for parties to be clear as to the law that will apply to any Shariah issues, given the many interpretations and schools of thought available. Selecting the right council or expert is an effective way of specifying the Shariah law governing a party’s agreement.

 

Rule 11 of the KLRCA i-Arbitration Rules also provides that if the Shariah issue referred to by the arbitral tribunal is beyond the purview of the Shariah council, then a Shariah council or expert is to be agreed by the parties. In the event parties fail to agree to such a Shariah council or expert, then the provisions relating to experts appointed by the arbitral tribunal under Article 29 of the UNCITRAL Arbitration Rules will apply.

 

It is further provided under Rule 11 that the arbitral tribunal shall adjourn the arbitration proceedings if a reference to the relevant council or Shariah expert has been made until the ruling is made, or shall proceed in the meantime to deliberate on other areas of the dispute (if any) which are independent of the Shariah issues in the reference. The relevant council or Shariah expert, shall then deliberate and make its ruling on the issue or question so submitted within 60 days from the date the reference is made, failing which the arbitral tribunal may proceed to determine the dispute and give its award based on the submissions it has before it. The validity of an award given pursuant to Rule 11 shall not be affected in any way by the unavailability of the relevant council or Shariah expert’s ruling.

 

To protect the jurisdiction of the arbitrator in other areas of the disputes, it is expressly stated in Rule 11 that “For the avoidance of doubt, the ruling of the relevant Council or the Shariah expert may only relate to the issue or question so submitted by the arbitral tribunal and the relevant Council or the Shariah expert shall not have any jurisdiction in making discovery of facts or in applying the ruling or formulating any decision relating to any facts of the matter which is solely for the arbitral tribunal to determine.”

 

CL: Since its inception, how has it been received by the arbitral community?

 

TB: The KLRCA i-Arbitration Rules have been warmly received by the international arbitral community as an innovative means of resolving Shariah disputes within the framework of the UNCITRAL Arbitration Rules. This was recognised by the Global Arbitration Review, which gave the Innovation Award of 2012 to the KLRCA i-Arbitration Rules.

 

CL: With the rapid rise of foreign investment throughout Southeast Asia, can a foreign investor who is interested in investing in Malaysia feel confident that he will have a reliable method of redress in the event of a dispute? (i.e. are there any BITs that protect foreign investors both from other ASEAN countries and non-ASEAN countries, etc.)

 

 

TB: A foreigner investing in Malaysia can be assured of redress in the event of an investment dispute. In the event the foreign investor is from a member state of the Association of Southeast Asian Nations (ASEAN), he may seek redress under the ASEAN Comprehensive Investment Agreement entered into on 26.2.2009. This is a multilateral investment treaty (MIT) between all member states of ASEAN, which comprises Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore and Thailand. Section B of the ASEAN Comprehensive Investment Agreement provides for the resolution of investment disputes between an investor and a member state.

 

In particular, Article 33 of Section B of the ASEAN Comprehensive Investment Agreement, allows for such disputes to be referred to: the courts or other administrative tribunals of a member state; the International Centre for the Settlement of Investment Disputes (ICSID) established under the 1965 Convention on the Settlement of Investment Disputes between States and Nationals of other States (ICSID Convention); the ICSID Additional Facility Rules; the UNCITRAL Arbitration Rules; the KLRCA or any other regional centre for arbitration in ASEAN; or any other arbitration institution agreed upon by the parties to the dispute.

 

If the foreign investor is from a state that is not a member of ASEAN, he may remain confident of securing redress for any dispute that may arise from his investment in Malaysia. This is because Malaysia has bilateral investment treaties (BITs) with several countries. This includes Austria, the Czech Republic, Denmark, Egypt, Ethiopia, Finland, Germany, Ghana, Hungary, Indonesia, Jordan, Kazakhstan, Kyrgyz Republic, Lebanon, Mongolia, Netherlands, Norway, Saudi Arabia, South Korea, Sweden, Turkey, the United Arab Emirates, the United Kingdom and Vietnam.

 

All of these BITs provide for the resolution of disputes between a foreign investor from the contracting party to the BIT and Malaysia to be referred to ICSID save for the BITs with Germany and Vietnam. The BIT between Germany and Malaysia does not provide for disputes to be referred to ICSID. However, the free trade agreement presently being negotiated between the European Union and Malaysia is expected to include comprehensive provisions for the settlement of investment disputes. The BIT between Vietnam and Malaysia allows for investment disputes to be resolved in accordance with the UNCITRAL Arbitration Rules.

 

 

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For further information, please contact:

 

Thayananthan Baskaran, Partner, Zul Rafique & Partners

thaya@zulrafique.com.my