WINNER: Malaysia, The Future Hub of Arbitration in Asia

by Lim Wei Jiet on 15 April 2015

Getting The Basics Right : Competitive Services & World Class Infrastructures

Geographically, Malaysia has been blessed in many ways. We are strategically located in Southeast Asia and Asia Pacific, the nexus of booming economic development – which translates to higher rates of disputes – in these recent decades. Further, we are also positioned between two of the world’s major trade sealanes, namely the Straits of Malacca and South China Sea, contributing to Malaysia’s “pull factor” of luring more shipping-related businesses for arbitration.

In terms of costs, Malaysia edges above the rest by charging one of the lowest fees for its arbitration services in the region. The KLRCA not only has transparent fee structures, but the Global Arbitration Review 2014 found that its costs is only about 60% of that in Singapore. Last year, the KLRCA’s rules were revised and its revised fees are generally 20% lower than the likes of the Singapore International Arbitration Centre (SIAC) and Hong Kong International Arbitration Centre (HKIAC). As compared to other cities across the globe, Kuala Lumpur offers top-class hospitality as well as significantly lower ancillary costs in food, accomodation and transportation, making the all-round arbitration experience in Malaysia an offer many parties simply cannot refuse.

With that said, it is the quality of arbitration services provided which makes Malaysia a formidable arbitration hub. One thing that Malaysia has done remarkably well in a short period of time is building the necessary infrastructures which can stand shoulder to shoulder with the greats of London, Paris & Switzerland. Under the leadership of Professor Datuk Sundra Rajoo, the Kuala Lumpur Regional Center for Arbitration (KLRCA) has erected world-class facilities and roped in top-notch arbitrators, putting Malaysia on the map.

In 2014, KLRCA welcomed its brand new facility at the Sulaiman Building – a 5 storey buidling with 19 hearing rooms, 22 breakout rooms, a business centre, a specialised ADR and construction law library, dining areas, a mini museum and an auditorium. It has also attracted 39 Essex Street, a long established barristers chambers based in London, to set up an office within the building. Besides accomodating a rising number of clientele, this Sulaiman Building also offers an unforgettably comprehensive & condusive atmosphere to parties throughout the dispute resolution process.

The statistics paint an even better picture for Malaysia. KLRCA proved its mettle by improving its record of handling 20 cases before 2011 to 156 cases in the year 2013 alone. Almost 20% of arbitration cases in 2013 were international in nature, a marked increase from previous years. As we reach the third quarter of year 2014, KLRCA has already notched 226 cases and an increased number of international disputes than ever before.

KLRCA has also signed the Corporate Integrity Pledge (CIP) along with 40 other multinational corporations, making a unilateral declaration that it will not tolerate corruption and that it will cooperate with its business partners, regulators and law enforcement agencies to create a corruption-free arbitration environment.

The Backbone of Arbitration : Our Supportive Legal Framework

Malaysia can also boast itself to be an English-speaking common-law country, catering to the many multi-national disputes that use the international lingua franca as the main medium of communication. Our common law legal system also acts as a framework of confidence and familiarity for parties who are considering Malaysia as a dispute resolution choice.

Beyond that, our legal system has also welcomed arbitration with open arms. We are a signatory to the United Nations Convention on the Recognition and Enforcement of Foreign Arbitral Awards – commonly known as the New York Convention – since 1985. This means that KLRCA’s arbitral awards are final, binding and enforceable in the multitude of signatory countries. The Malaysian government lived up to its reputation as being business-friendly by enacting the Arbitration Act 2005, modelled after the United Nations Commission on International Trade Law (UNCITRAL) Model Law.

Other members in the legal fraternity such as the Judiciary and the Malaysian Bar, has cooperated under the common understanding of the important role arbitration can position itself in the local legal system. Chief Justice Ariffin Zakaria, rather than perceiving arbitration as “competition” to the judicial system, highlighted the supportive role of courts whereby challenges to arbitration awards are generally heard within 3 months and disposed within 9 months from the date of registration.

There are several important features in the Arbitration Act 2005 which set the foundations to that of any world-class arbitration legislations.

As opposed to its 1952 predecessor, the 2005 Act allows arbitral tribunals in Malaysia to determine its own jurisdiction according to the concept of Kompetenz-Kompetenz, by virtue of section 18. This includes matters relating to the validity of the arbitration agreement itself, as reflected in Standard Chartered Bank Malaysia Bhd v City Properties Sdn Bhd & Anor and CMS Energy Sdn Bhd v Poscon Corp. Section 18 also explains in detail the procedures and time limits for raising objections to the tribunal’s jurisdictions, as well as the provision for appeal to the Courts for a final say. Furthermore, section 21(1) of the 2005 Act allows parties the wide discretion to determine their own procedures in a dispute. This practice of flexibility would be attractive to parties which may intend to depart from possibly archaic, unsuitable, costly and draggy procedures.

The Arbitration Act underwent further liberalisation pursuant to the Arbitration (Amendment) Act 2011.

The first important amendment is the accentuation of the limited powers of statutory intervention by the Court. Before the 2011 amendment, Malaysia Courts had much liberty to invoke its jurisdiction over arbitral proceedings on grounds of “patent injustice” or when the court seeks to exercise its “inherent jurisdiction”. However, the 2011 amendment to section 8 reads : “No court shall intervene in matters governed by this Act, except where so provided in this Act”, with an objective to statutorily restrict curial intervention in arbitration. Since then, cases like Sabah Medical Centre Sdn Bhd v Syarikat Neptune Enterprise Sdn Bhd & Anor has restricted itself to the statutory court intervention in making interim orders. Subsequent case law such as The Government of India v Cairn Energy India Pty Ltd & Anor held that it is not the Court’s liberty to scrutinise decisions made by arbitrators with respect to questions of law, save where there is an “error on the face of the award” or where the award was “tainted with some sort of illegality”. This makes our Arbitration Act in line with its analogous provision of Article 5 in the UNCITRAL Model Law, thereby reinforcing the “resulting certainty of the parties and the arbitrators about the instances in which court supervision or assistance is to be expected”.

Secondly, the new amendments to section 10 narrowed the instances which the High Court can invoke to deny a stay of judicial proceedings. Previously, Courts could deny a stay of judicial proceedings when “there is in fact no dispute between the parties with regard to the matters to be referred”. Scholars considered that this condition was unnecessary because parties would not be present before the court if there was no dispute and this is an exception which is unavailable in the UNCITRAL Model Law. Now, it is mandatory for Courts to grant a stay, unless a party can prove that “the arbitration agreement is null and void, inoperative or incapable of being performed”. In Chut Nyak Hisham Nyak Ariff v Malaysian Technology Development Corporation Sdn Bhd, the Court took the occasion to restate the desire of the legislature to “give primacy to arbitral proceedings over court proceedings in circumstances where parties have agreed to resolve their disputes by arbitration”.

Thirdly, section 11 (3) of the 2005 Act now empowers the court to make orders for any interim measures even if the seat of arbitration is outside Malaysia – in conformity with international arbitration practices. Previously, as pointed out by Badariah Sahamid J in Aras Jalinan Sdn Bhd v Tipco Asphalt Public Company Ltd & 2 Ors: “the Act [2005 Act] is silent on a third category, viz in respect of an international arbitration where the seat of arbitration is outside Malaysia”. This clarification in law will be of particular interest to parties involved in disputes relating to assets in Malaysia, but which are being arbitrated in other jurisdictions, such as Singapore.

Fourthly, amendments to section 39 liberalises Malaysian Court’s recognition and enforcement of foreign arbitral awards. The reference to “Malaysia” in Section 39(1)(a)(ii) was replaced with the words “the State where the award was made”. This effectively gives way to the laws of the State where the award was made, instead of Malaysian laws, in determining the validity of an arbitration agreement. In Food Ingredients LLC v Pacific Inter-Link Sdn Bhd and another application, the High Court refused to enforce an award since the arbitration agreement is not valid under the laws of the state where the award was made. Moreover, the traditional ground for not enforcing a foreign arbitral award – in contrary to our country’s public policy – has waned considerably in lieu of recent judicial decisions. In Infineon Technologies (M) Sdn Bhd v Orisoft Technology Sdn Bhd (previously known as Orisoft Technology Bhd) and another application, the Court held that the concept of public policy must be interpreted restrictively – only where the basic notions of morality are offended would the courts then apply such concept to set aside a foreign arbitral award. This was heralded as a pro-arbitration stance reflecting the spirit of the New York Convention.

The Malaysian government also recently passed amendments to the Legal Profession (Amendment) Act 2013, together with the Legal Profession (Licensing Of International Partnerships And Qualified Foreign Law Firms And Registration Of Foreign Lawyers) Rules 2014. This ultimately permits foreign legal experts to appear in arbitral proceedings in Malaysia, and further exempts foreign arbitrators from paying withholding tax on the fees earned. This injects much needed confidence to parties who might feel more comfortable to be represented by a lawyer of their choice. Today, foreign law firms can now advise clients in Malaysia on a “fly-in / fly-out” basis and even open legal bases in Malaysia, providing parties with a wide and deep array of lawyers to represent them in arbitral proceedings.

Malaysia’s Big Break : Islamic Finance Arbitration

Malaysia, by no exaggeration, is a giant in the Islamic Finance world. At the end of May 2014, we posses RM 434 billion worth of Islamic banking assets, representing 21% of the country’s total banking assets. At the end of 2013, Malaysia was responsible for 11.53% of global takaful contributions and 69% of total global sukuk issued. The launch of the Malaysia International Financial Centre, aiming to cement Malaysia as the “World’s Islamic Finance Marketplace”, signals a move to develop Islamic finance in Malaysia beyond the economic realm.

The KLRCA Rules for Islamic Banking and Financial Services Arbitration 2007 was a trailblazer in arbitration circles, turning KLRCA to be possibly the first centre in the world to have Syariah Law adherent rules as well as the New York Convention. On 20 September 2012, Malaysia bolstered its lead in Islamic Finance arbitration by launching the KLRCA i-Arbitration Rules.

The conundrum with many countries is that they do not standardise their Islamic financial services and this has led to some form of ambiguity. In the English Court of Appeal case of Beximco Pharmaceuticals v Shamil Bank of Bahrain EC, the issue at hand was whether ijarah facilities were legitimate or took the place of a simple interest bearing loan facility. The Court ultimately dismissed the appeal, declining to classify ‘Syariah principles’ as an applicable system of law. The parties’ own expert witnesses acknowledged the uncertainty of Islamic jurisprudence on the subject of banking, and the divergent interpretations that were possible not just from country to country but from bank to bank. The impact of the above is to highlight the uncertainty that parties may encounter when enforcing Syariah principles.

The clear solution is to regulate specific provisions by agreeing on a given system of Syariah body. Malaysia’s Islamic Finance arbitration realm is often praised because its rules make it compulsory for arbitrators to refer Syariah issues to a council of experts, dubbed the Syariah Advisory Council (SAC). Section 56 of the Central Bank of Malaysia Act 2009 makes it compulsory for arbitrators to refer any Syariah issue to the already published resolutions of the SAC on the matter (if any), or refer the issue to the SAC itself for its ascertainment, where its ruling is binding by virtue of section 57. This Malaysian law of placing the SAC as the final arbiter – which no other jurisdiction in the world can offer – promulgates absolute certainity and predictability with regard to Syariah issues.

However, there must remain a degree of flexibility on which SAC to refer, depending on the subject matter. That is why the new edition of Rule 11 of the i-Arbitration Rules removed the reference of SAC to any particular jurisdiction, thereby broadening the referral procedure to accomodate international parties and a wide range of schools of Islamic jurisprudence. For example, a transaction regilated by Malaysian legislation would refer to the relevant SAC, whereas a transaction with Egyptian Islamic Bank may come under the bank’s own Syariah Board. The i-Arbitration Rules are now able to accomodate virtually any contractual agreements by offering a method of obtaining the correct and most appropriate authority for any Syariah issues that may arise.

With such progressive rules, the future is bright for Islamic Finance arbitration in Malaysia. The crowning jewel of Malaysia’s progress in this booming sector came at the 3rd Annual GAR Awards in Bogota, Colombia, where the KLRCA’s i-Arbitration rules won the prestigious Global Arbitration Review Award for “Innovation by An Individual or Organisation in 2012”. In September 2014, CIArb and INCEIF – the Global University of Islamic Finance – signed an agreement declaring their commitment to deliver courses on alternative dispute resolution (ADR) in Islamic finance and banking, getting the ball rolling on creating world-class Islamic finance arbitrators.

Trends for the Future : Securing Malaysia As Asia’s Next Big Thing

Unless Malaysia radically transforms its strategy to lure international arbitration, we will always play second fiddle to financial hubs like Singapore, Hong Kong and London. While we should try our best to secure our grip on Islamic Finance arbitration, there is no harm in branching ourselves into a diverse sphere of untapped sectors.

For one, KLRCA was successful in its bid to officially host an alternative hearing for the Court of Arbitration for Sport. In line with even more ambitious international recognition, Professor Datuk Sundra Rajoo hopes to bring the Permanent Court for Arbitration in Hague to be based in KLRCA as an alternate venue for their proceedings.

The one thing Malaysia can promote itself is to be the primary dispute resolution centre for small and medium sized disputes. The arbitration landscape is no longer an exclusive club for multi-national corporations infamous for its mega and long-drawn disputes. Many small and medium enterprises (SMEs) are incorporating arbitration clauses in cross-country agreements. These SMEs have different needs when it comes to dispute resolution, in the sense that they require a process which is much cheaper and faster, a template which is alien to a one-size-fits-all model adopted by almost all arbitration centres.

In this regard, Malaysia is different and has huge potential to tap into this economic lacuna. KLRCA has adopted its Fast Track Rules 2010, in collaboration with the Malaysian Institute of Arbitrators, which has several appealing features. For instance, the Fast Track Rules allows arbitration to proceed on a documents-only basis where the disputed sum is US $ 75,000 or less for international arbitrations or RM 150,000 or less for domestic arbitrations. Moreover, the final award for documents-only arbitration must be handed down within 90 days of commencement, whereas the dateline is 160 days for arbitration involving substantive oral hearing. Furthermore, although parties may agree to nominate three arbitrators at the outset, a consensual award of the two arbitrators nominated by each party is binding, and the third arbitrator is only appointed if the two original arbitrators cannot agree. This effectively reduces arbitrators’ fees by a third. These are revolutionary rules in the region that target smaller and medium sized disputes, which even big companies encounter occasionally.

The second recommendation is grounded on Malaysia’s unique position as a strong and trusted regional member off ASEAN. As ASEAN continue to see an increase in intra-ASEAN and foreign trade, the rise of private trade and investment disputes would be inevitable. The current problem with this trend is that private parties might be in a weaker legal position to dispute with States. Studies show that particularly in the developing ASEAN countries, national courts are perceived to refuse private claims against the State when such claims are associated with acts of that State as a sovereign as distinguished from purely commercial acts. Foreign or ASEAN companies end up being wary of the uncertain and biased legal regime within their other ASEAN counterparts.

On that note, a scholar has recommended that formal dispute resolution mechanism for ASEAN as a whole, instead of through national courts respectively, would go a long way in providing the desired contractual equilibrium. This is largely due to perceived neutrality of a tribunal that is not part of the government structure of any particular State, as well as the perceived efficiency and relative inexpensiveness when compared with litigation in national courts. KLRCA should seize this opportunity to be the first arbitration hub dedicated to intra-ASEAN dispute resolution. The fact is that not many ASEAN countries have their own arbitration centers to meet the growning economic expansion in the region – thus the demand is in abundance. Morever, the KLRCA may prove to be the most neutral and unobjectionable arbitration centre in ASEAN, given that it is established under the auspices of the Asian-African Legal Consultative Committee, whereby all ASEAN countries except Brunei, are members.

Conclusion

“The pie is growing, and this isn’t going to slow down. This is the golden age for arbitration in Asia.”

Whether Malaysia gets a large slice or mere scraps from Asia’s exponential economic boom depends on our ability to continuously offer top-notch services at the lowest rates possible. Our legal framework must also be ever ready to evolve according to financial trends. And at times, we have to be bold in spearheading innovative legal frameworks for market niches, just like we did for Islamic finance arbitration. While the future may be more competitive than ever, Malaysia has an array of legal ventures it can exploit in ASEAN and beyond. The journey to become Asia’s next big arbitration hub has begun.