This content is from: Local Insights

The Arbitration Act 2005

After more than 50 years, steps were finally taken to revise the law in relation to arbitration in Malaysia. The introduction of the Arbitration Act 2005 was seen as a unique opportunity to address the problems that have plagued the arbitration process in Malaysia. The problem that needed to be addressed mainly revolved around delays and increasing judicial interference in the arbitration process.

Dual regime

One of the main differences between the 2005 Act and the earlier legislation (the 1952 Act) is that the 2005 Act draws a distinction between an international and domestic arbitration. An arbitration is defined as international when:

  1. One of the parties has its place of business outside Malaysia;
  2. The seat of arbitration is outside Malaysia;
  3. A substantial portion of the commercial obligations are performed outside Malaysia; or,
  4. The parties had agreed that the subject-matter of the arbitration agreement does not relate to Malaysia.

By drawing a distinction between a domestic and international arbitration, the legislature has taken specific steps to encourage international arbitration in Malaysia. It gives the parties the opportunity of deciding whether they want an award to be subject to review by the Malaysian courts. In an international arbitration, Malaysian courts are automatically excluded from reviewing the arbitrator's decision and there are limited grounds for challenging an arbitration award. The only ground for challenging an arbitration award from an international arbitration is set out in section 37 of the 2005 Act.

Challenging an award

In a domestic arbitration, an award may be challenged on various grounds apart from that set out in Section 37 of the 2005 Act. Section 41 provides that any party may apply to the High Court to determine a preliminary issue of law and Section 42 provides that any party may refer to the High Court any question of law arising out of an award.

As such, in the case of a domestic arbitration the award may be challenged pursuant to Section 37 or Section 42. Further, a party may apply to the High Court to determine a preliminary issue of law pursuant to Section 41. As stated above, in an international arbitration only Section 37 will apply. It should be noted that while the above describes "the default portion" as set out in Section 3, Section 3(4) provides flexibility and gives parties the opportunity to decide whether to adopt or exclude Part III (which contains Sections 41 and 42).

Enforcement of an award

In relation to enforcement, the 2005 Act has also sought to streamline the process and various legislations that previously applied. Section 38 sets out the formal requirements that a party needs to comply with when seeking an arbitration award to be recognised as binding and enforceable by entry as a judgment in terms of the award. Section 39 sets forth the grounds for refusing recognition or enforcement. The grounds are similar to the New York Convention. Given that the 2005 Act now contains the relevant provision for the enforcement of awards from Convention States, this has resulted in the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985 being repealed.

However, it appears that the recognition and enforcement provisions set out in Section 38 and Section 39 only apply to domestic arbitration and an award from a foreign state. There is no specific reference to an international arbitration in Section 38. This gives rise to an issue of whether an award from an international arbitration that is made in Malaysia can be enforced in Malaysia.

Based on the criteria as set out in paragraph three above, it would appear possible that an international arbitration could by definition include a Malaysian party. So if the losing party in an international arbitration is based in Malaysia, it could be argued that as there is no specific reference to international arbitration in Section 38, it is not possible to apply using the provisions of Section 38 and 39 if the 2005 Act for the award is recognised as binding and enforceable. In these circumstances, there may be a need to apply to enforce the award by a writ action in the Malaysian courts.

Setting aside the award

It is also interesting to note that in Section 37 the legislature has found it necessary to specifically provide that an award may be set aside where the making of the award was induced or affected by fraud or corruption, or where there has been a breach of natural justice during the arbitral proceedings or in connection with the making of the award. In relation to an allegation of fraud or corruption, the burden of proof will naturally be beyond a reasonable doubt giving the criminal nature of such an allegation.

However, more interesting are the challenges that will arise based on an allegation of a breach of natural justice. The standard applicable as to what constitutes a breach of natural justice varies from jurisdiction to jurisdiction. That being the case and given international elements of arbitration it will be interesting to note how the Malaysian courts handle such a challenge and which laws and applicable standards they apply.

Reducing delays and possible problems

As stated above, one of the considerations that the legislature took into account to ensure that the arbitration process is not derailed was to ensure that parties did not use the court mechanism to delay the arbitration process. An example of this is reflected in Section 10. It provides that an action that is filed in court despite there being an arbitration agreement may be stayed by the courts. However, interestingly, Section 10(3) provides that the arbitration process may be commenced and continued despite the fact that there is an appeal pending against the decision to allow a stay of proceedings pending arbitration.

Apart from the above, which are statutory provisions introduced to advance arbitration, the legislature also revised and improved the provisions in the 1952 Act. For example Section 11, which provides that parties may apply to the High Court for orders such as security for courts and other interim relief, also provides that a finding of fact made by the arbitration tribunal should be treated as conclusive. This will prevent the High Court when considering an application under Section 11 from reviewing the finding of fact or reaching a different conclusion from the arbitral tribunal.

Teething problems

As with any new legislation, problems will arise and despite its relative infancy, the 2005 Act has already had its share of problems. In Putrajaya Holdings Sdn Bhd v Digital Green Sdn Bhd, an issue arose as to whether the 2005 Act or the 1952 Act applies to the arbitration proceedings. The arbitration agreement was entered into before the introduction of the 2005 Act but the High Court was of the view that given that the Bahasa Malaysia (the official language in Malaysia) version of the statute and the English version of the statute are different, the High Court ruled that where the arbitration agreements were entered into before the 2005 Act came into force (March 15 2006) the 1952 Act will apply to these arbitrations.

This decision is a major setback to the 2005 Act as it was hoped that it would apply to all arbitrations that began after March 15 2006 irrespective of when the arbitration agreement was entered into. We understand that steps are being taken to address this problem and it is hoped that this and other problems are dealt with promptly by the legislature to promote and improve the law and practice of arbitration in Malaysia.

Sanjay Mohanasundaram

Instant access to all of our content. Membership Options | One Week Trial