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Refining the Landscape of Alternative Dispute Resolution in Malaysia

04 September 2024

The Arbitration (Amendment) Bill 2024 (“Arbitration Bill”) and Construction Industry Payment and Adjudication (Amendment) Bill 2024 (“CIPAA Bill”) were passed by the Dewan Rakyat (House of Representatives) and the Dewan Negara (Senate) on 16 and 24 July 2024 respectively. The Arbitration Bill amends the Arbitration Act 2005 (“AA 2005”) whilst the CIPAA Bill amends the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”).
 
The question that is foremost on the minds of the stakeholders in the alternative dispute resolution (“ADR”) community is how much change these Bills will bring to the landscape of ADR in Malaysia.
 
Part I – The Arbitration Bill
 
The Minister in the Prime Minister’s Department (Law and Institutional Reforms), Dato’ Sri Azalina Othman Said (“Law Minister”), in her address for the Second Reading of the Arbitration Bill had emphasised that the Arbitration Bill is introduced with the intent to, among others:
  1. formalise the restructuring of the Asian International Arbitration Centre (Malaysia) (“AIAC”) in line with the Supplementary Agreement dated 20 February 2024 to the Host Country Agreement between the Government of Malaysia and the Asian-African Legal Consultative Organisation (“AALCO”) (“Supplementary Agreement”). This will be dealt with below under the “Restructuring of AIAC”;
  2. realign the AA 2005 in accordance with the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law and the best practices of international arbitration to fortify Malaysia’s position as a preferred seat for arbitration. This will be dealt with under “Realigning the AA 2005”; and
  3. legalise and regulate third party funding in Malaysia. This will be dealt with under “Third Party Funding”. 
Restructuring of AIAC
 
The restructuring of the AIAC under the Supplementary Agreement provides for, among others, the following:
  1. the AIAC is to be administered by a Board of Directors (“Board”) which consists of five to seven members;
  2. the Board shall be presided over by a Chairman who is responsible for the management of the AIAC;
  3. the Chairman, Deputy Chairman and other members of the Board are to be appointed by the Government in consultation with the Secretary-General of AALCO;
  4. the administration of the AIAC is to be carried out by the Chief Executive Officer according to the strategic direction set by the Board;
  5. the Board shall possess the power to appoint and terminate the appointment of the Chief Executive Officer;
  6. the Government of Malaysia is to provide necessary support to the AIAC for its functioning as and when necessary; and
  7. the Director of the AIAC shall perform the functions relating to the appointment of arbitrators, mediators and adjudicators with the independent assistance from the Secretariat of the AIAC. 
Based on the Supplementary Agreement, it is also understood that there would be a Phase 2 of the Supplementary Agreement (“Phase 2”) which is intended to reflect, among others, the formation of the AIAC Court of Arbitration and the replacement of the position of the Director with the President of the AIAC Court of Arbitration. This will then allow the appointment of arbitrators, mediators and adjudicators to be made by the President in consultation with the members of the Court of Arbitration.
 
In line with the abovementioned Supplementary Agreement and the anticipated Phase 2, the Arbitration Bill introduces the following amendments to the AA 2005:  
1. Introduction of the “President”  
Clause 2 of the Arbitration Bill: This Clause amends Section 2 of the AA 2005 to introduce the term “President” to mean the President of the AIAC Court of Arbitration.
2. “President” to replace “Director” as Appointing Authority 
Clause 6 of the Arbitration Bill: Following from the introduction of the term “President”, the role of the “Director” in the AA 2005 will be assumed by the “President”. In this regard, Sections 13(4) to 13(9) of the AA 2005 will be amended by replacing the word “Director” with the word “President”. This amendment will enable the President to take over the current role of the Director as the appointing authority under the AA 2005.
 
These amendments will pave the way for the establishment of the AIAC Court of Arbitration. This concept of a court of arbitration, which is new to the AA 2005, is in fact a time-tested mechanism used by various leading arbitral institutions. This mechanism makes the appointment process more transparent by having checks and balances within the process.
3. The Removal of the reference to “Director” 
Clause 11 of the Arbitration Bill: The term “Director” will be removed from Section 48 of the AA 2005, which provides for the immunity of arbitral institutions. The provision is now amended to provide immunity to “any person” or institution designated or requested by the parties to appoint or nominate an arbitrator, unless the act or omission is shown to have been in bad faith. While there is no actual impact from this amendment, it appears that the amendment is intended to remove the reference to the Director of AIAC from AA 2005 entirely.
4. Acts previously done by the Director deemed to have been done by the President
Clause 12(1) of the Arbitration Bill: For completeness, this clause preserves the validity of all appointments, decisions or other acts made, given or done by the Director of AIAC before the date of coming into force of the Arbitration Bill by deeming the same to be made, given or done by the President of the AIAC Court of Arbitration. These appointments, decisions or other acts shall continue to remain in force unless revoked, amended, repealed, rescinded or replaced by the President of the AIAC Court of Arbitration.
 
The restructuring of the AIAC is clearly carried out to enhance AIAC's governance with the separation of powers between the administrative aspect (CEO’s role) and the legal aspect (Director/President’s role). This restructuring appears to be carefully crafted with visible check and balance mechanisms within AIAC's administrative system, with transparency and efficiency being the cornerstone.
 
Realigning the AA 2005
 
Several key amendments are introduced in an effort to realign the AA 2005 with the UNCITRAL Model Law and the best practices of international arbitration so as to fortify Malaysia’s position as a preferred seat for arbitration.
1. Formation of Arbitration Agreement in any other documents exchanged 
Clause 4 of the Arbitration Bill: To clarify the requirement in Section 9(3) of the AA 2005 that an arbitration agreement must be in writing, the words “or any other documents” will be inserted into Section 9(4)(b) of the AA 2005. The amendment makes it clear that the requirement in Section 9(3) will be satisfied if the arbitration agreement is embodied in any other documents exchanged between parties, not just the statement of claim and statement of defence as it currently is.
2. Default Law Applicable to the Arbitration Agreement
Clause 5 of the Arbitration Bill: The new Section 9A(1) preserves parties’ right to agree on the law applicable to the arbitration agreement. It is supplemented by a new Section 9A(2) which provides that the law applicable to the arbitration agreement shall be the law of the seat of the arbitration if parties fail to agree on the same. The default position under the new Section 9A(2) will save time and cost for the parties, the tribunal and even the Courts.
 
Clause 12(2) of the Arbitration Bill: This provision clarifies that the amendments under Clause 5 of the Arbitration Bill (as discussed above) apply only to arbitration agreements made after the coming into force of the Arbitration Bill. For arbitration agreements made prior to this, the law applicable to an arbitration agreement as it currently stands will prevail as if the AA 2005 had not been amended.
3. Joint Appointment of Arbitrator in Multi-Party Arbitration
Clause 6(a) of the Arbitration Bill: A new Section 13(3A) will provide that where there are multiple claimants and/or multiple respondents, the claimants shall jointly appoint one arbitrator, and the respondents shall jointly appoint one arbitrator. This amendment clarifies the process for appointing a panel of three arbitrators in a situation involving multiple claimants and/or multiple respondents.
4. New Tribunal’s Discretion to Repeat Hearings (or not to)
Clause 7 of the Arbitration Bill: A new Section 17(2) provides discretion to a newly constituted arbitral tribunal to determine whether the hearings previously held should be repeated where the arbitrator, including the presiding arbitrator, is replaced. This displaces the present provision which mandates the repeat of hearings in the event a sole arbitrator or a presiding arbitrator is replaced. This amendment will enhance cost and time savings in arbitrations, especially when the new tribunal finds that there are sufficient records of the previous hearing before them. In this modern age, videos and transcripts of previous hearings are commonly available as a matter of the arbitration record.
5. Recognition of Digital and Electronic Signatures for Awards
Clause 8 of the Arbitration Bill: This Clause amends Section 33 of the AA 2005 to recognise digital signatures1 and electronic signatures2 for the purposes of issuance of the award in arbitral proceedings with more than one arbitrator. With this, there is no need for the exchange of physically signed awards, saving time and cost while enhancing the efficiency of the arbitral process.
6. Arbitral Awards are binding Instantly
Clause 9 of the Arbitration Bill: This Clause replaces Section 38(1) of AA 2005 and provides that an arbitral award delivered in an arbitration where the seat of arbitration is in Malaysia or a ‘foreign State’3 is binding instantly or automatically, without the need for an enforcement application. In contrast, the existing Section 38(1) requires an application to be made to the High Court to recognise an award as binding and be enforced by entry as a judgement. This shift brings Section 38(1) of the AA 2005 closer to Article 35(1) of the UNCITRAL Model Law, as it provides the much-needed realignment in the spirit of ADR and concept of arbitrations.
 
Third Party Funding
 
After decades of debate, third party funding (“TPF”) will finally be introduced in Malaysia in relation to arbitration proceedings vide a new Chapter 2 of Part 3 (“TPF Chapter”) to be introduced into the AA 2005 under the Amendment Bill.
 
Arising from this, a number of questions naturally arise. These questions, together with the crucial provisions in the Arbitration Bill in relation to TPF, will be discussed below.
1. What is TPF? 
The above question has been helpfully answered in Clause 10 of the Arbitration Bill via the new Section 46A which provides for the interpretation of the terminology in relation to TPF.
 
TPF is defined as a funding by a third party funder of all or part of the costs and expenses of the arbitration of the funded party made under a third party funding agreement. As consideration, the third party funder would receive a financial benefit only if the arbitration is successful within the meaning of the third party funding agreement.
 
A “third party funding agreement” is defined as an agreement in writing for a third party funding between a funded party and a third party funder.
 
A “third party funder” is a party who provides the third party funding and does not have an interest recognised by law in the arbitration, other than under the third party funding agreement, whilst a “funded party” is a person who was or is a party, or is likely to be a party to an arbitration and is a party to a third party funding agreement.
2. Is TPF Legal in Malaysia?
For the longest time, TPF was perceived as being contrary to public policy in Malaysia as it breaches the common law rule against maintenance and champerty due to concerns that a funder may be tempted to interfere with the course of justice for personal gain.
 
However, the new Section 46C clearly spells out that the rule of common law against maintenance and champerty shall cease to apply in relation to TPF and such agreements shall not be treated as contrary to public policy.
3. What is TPF applicable to?
A new Section 3(3A) to be introduced into the AA 2005 will provide that the provisions in the TPF Chapter apply not only to domestic and international arbitrations, where the seat of arbitration is in Malaysia, but also to international arbitrations where any of the services in relation to such arbitration are provided in Malaysia, even if the seat of arbitration is not in Malaysia or when there is no seat. The Parliament’s intention on TPF is abundantly clear: recourse to TPF is available across the board, irrespective of the nature of the arbitration.
 
However, it is to be noted that a new Section 46B provides that the TPF Chapter will not apply to any TPF arrangements made prior to the date of commencement of the TPF Chapter.
4. How will TPF be regulated?
The new Section 46D provides that the Minister may issue a code of practice setting out the practices and standards relating to TPF which third party funders are ordinarily expected to comply with. The code of practice may provide for, among others:
  1. the requirements on promotion of the third party funding;
  2. the requirements for a third party funding agreement, including the degree of control that a third party funder will have in relation to an arbitration, liability of a funded party and termination of a third party funding agreement;
  3. the criteria on a third party funder, including the sufficient minimum amount of capital to be satisfied by third party funder;
  4. procedures for addressing potential, actual or perceived conflicts of interest by a third party funder; and
  5. the procedures for enhancing the protection of a funded party. 
The code of practice may be revoked, varied, revised or amended in whole or in part by the Minister. The same is also admissible as evidence in proceedings before any court or arbitral tribunal.
5. What is the consequences of the non-compliance with the code of practice?
The new Section 46E provides that any non-compliance with the code of practice does not in itself render the third party funder liable to any action or legal proceedings. On the contrary, such non-compliance may be taken into account by any arbitral tribunal or court if it is relevant to a question being decided.
6. Is there a duty to disclose TPF?
It is mandatory under the new Section 46G for a funded party to disclose or communicate to the other party to the arbitration and the arbitral tribunal or the court before which proceedings are brought in respect of the arbitration, the fact that a third party funding agreement has been made and the name of the third party funder.
 
This disclosure of the existence of a third party funding agreement is to be made:
  1. where the third party funding agreement is made on or before the commencement of the arbitration or court proceedings in respect of the arbitration, upon commencement of the arbitration or court proceedings; or
  2. where the third party funding agreement is made after the commencement of the arbitration or court proceedings in respect of the arbitration, within 15 days after the third party funding agreement is made. If there is no arbitral tribunal appointed at this juncture, the disclosure or communication shall be made immediately after the arbitral tribunal is appointed. 
Apart from the above, a new Section 46H also imposes an obligation on the funded party to disclose or communicate the termination or coming to an end of the third party funding agreement and the date of the same, to the other party in the arbitration and the arbitral tribunal or court.
7. Can a party disclose information on the arbitration to procure TPF?
Parties to an arbitration are allowed to disclose information relating to the arbitral proceedings or award for the purposes of seeking or securing TPF in accordance with the new Section 46F(1).
 
The new Section 46F(2) imposes an obligation of confidentiality by barring any party to whom any information relating to the arbitration or award is disclosed for the purposes of seeking or securing TPF, from further disclosing or communicating such information, unless such further disclosure or communication:
  1. is made to protect or pursue a legal right or interest of the person;
  2. is made to any government body, regulatory body, court or tribunal and the person is obliged by law to make the disclosure or communication; or
  3. is made to a professional or any other advisers for the purposes of obtaining advice relating to the TPF. In this regard, the professional or advisor who receives such information relating to the arbitration or award, is also precluded from disclosing or communicating the information, except in accordance with the new Section 46F(2).
8. What are the consequences of non-disclosure of a TPF or its termination and/or non-compliance with the aforementioned obligation of confidentiality?
Similar to Section 46E discussed above, the new Section 46I provides that any non-compliance with the new Sections 46F, 46G and 46H does not in itself render the third party funder liable to any action or legal proceedings. However, such non-compliance may be taken into account by any arbitral tribunal or court if it is relevant to a question being decided.
9. What is the final take on TPF? 
Like any change in the law, there will always be pros and cons. However, it is now time to move on from the debate on the pros and cons of TPF and focus on how best to regulate TPF to extract the benefits while minimising or eradicating the potential risks or adverse consequences.
 
Part II – The CIPAA Bill
 
While it is understood that the Task Force responsible for preparing the CIPAA Bill had organised Legislative Consultation session(s) with stakeholders to obtain feedback on the substantive reforms needed for the decade old CIPAA 2012, the amendments under the CIPAA Bill appear to be formal in nature.
 
These formal amendments include:
  1. introducing the role of the President, similar to that in the Arbitration Bill discussed above;
  2. deleting the definition of KLRCA (the previous name of AIAC) and replacing that term with “AIAC” throughout CIPAA 2012;
  3. replacing the term “Director of KLRCA” with “AIAC” in respect of service of a copy of the adjudication decision by the adjudicator in Section 12(6), depositing sums for conditional stay of adjudication decision in Section 16(2) and in respect of contribution and deposit of Adjudicator’s fees and expenses in Sections 19(4) to 19(6) of CIPAA 2012;
  4. substituting the role of the “Director of KLRCA” with “President” throughout CIPAA 2012; and
  5. introducing a saving provision to preserve all appointments made by the Director of KLRCA before coming into operation of the CIPAA Bill, which shall continue to remain in force and have effect until revoked by the President. 
As seen from the foregoing, the amendments under the CIPAA Bill are formal in nature and seek to align the provisions of the CIPAA 2012 with the structural changes in the AIAC arising from the Supplementary Agreement and the amendments under the Arbitration Bill. It is hoped that the much-needed substantive reform of CIPAA 2012 will be tabled soon in order to keep up with the various court decisions which have interpreted CIPAA 2012 over the past decade.
 
Conclusion
 
The Arbitration Bill brings significant changes to the landscape of ADR in Malaysia, especially with the establishment of the AIAC Court of Arbitration and introduction of TPF. In essence, the Arbitration Bill will provide more efficiency and effectiveness in the arbitration process. With these measures in place, it is hoped that arbitrations seated in Malaysia can now conclude more swiftly. These measures are crucial to further promote Malaysia as the preferred seat of arbitration.
 
In contrast, the CIPAA Bill appears to be a stopgap measure to align the requirements of the CIPAA Act with the structural changes to the AIAC.
 
It would not be an exaggeration to say that stakeholders are waiting eagerly for the amendments under the Arbitration Bill to become law and come into operation. Similarly, the arbitral community will also be looking forward to the code of practice for TPF to be issued by the Minister to facilitate the introduction of the game-changing TPF.
 
Article by Kalaiarasan Rasadurai (Senior Associate) of the Construction Litigation, Arbitration and Adjudication Practice of Skrine.
 
 
 
1 Meaning assigned in the Digital Signature Act 1997
2 Meaning assigned in the Electronic Commerce Act 2006
3 A “foreign State” is a State which is a party to the Convention on the Recognition and Enforcement of Foreign Arbitral Awards adopted by the United Nations Conference on International Commercial Arbitration in 1958 (commonly referred to as the New York Convention).

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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