An overview of the reasons for arbitrations popularity in Malaysia

This will be the first of a series of articles dealing with the legal regime governing arbitration as a means of dispute resolution in Malaysia

 

It is hoped that this will be the first of a series of articles dealing with arbitration in Malaysia. As such, this article hopes to serve as an overview of:

 

  • the reasons for arbitration’s popularity;
  • the applicable legal regime governing arbitration;
  • potential drawbacks of arbitration.

with a view to expanding on these areas in subsequent issues of Legal Insights.

 

Arbitration is becoming an increasingly popular mode of dispute resolution in Malaysia, notably in connection with construction contracts, where its use in preference to litigation has been long established.

 

A recurring theme of this series of articles will be that the drawbacks of arbitration are largely potential or perceived.

 

  • potential drawbacks are those that may arise, but which can be avoided with proper foresight; and
  • perceived drawbacks are those which are commonly seen as drawbacks, but are in fact not so.

As such, the major stumbling block to the use of arbitration as a means of dispute resolution is not any inherent drawback, but that there remain many people who persist in perceiving arbitration as some arcane rite perpetuated by professionals connected with the construction industry, rather than a means of dispute resolution which offers a tempting blend of flexibility and finality. It is the inherently consensual nature of arbitration which gives it this characteristic of flexibility. This is because parties are at liberty to set the terms of the reference to arbitration. They are in a position to at least agree to the means by which the dispute will be resolved, (if not the actual resolution of that dispute) and to hold each other to that agreement.

 

It does not fall within the scope of this article to consider the exact mechanisms for dispute resolution which the parties may specify in any individual case, but it is suggested that the proper stage at which the parties to any agreement to arbitrate should consider such mechanisms is that of making such an agreement. The unsatisfactory alternative is wait until a dispute arises before addressing how it will be resolved. In this context, it is to be noted that a simple statement to the effect that “disputes shall be resolved by arbitration” does not constitute such an exact mechanism, although it may well suffice to ensure a practical and enforceable means of dispute resolution.

 

 

Reasons for Arbitration’s Popularity

Arbitration is generally thought of as offering a set of advantages over litigation in the courts. This “traditional” view of arbitration, i.e. one which fixes the identity of arbitration by reference to the court system, may well have to be revised in the near future, as other forms of Alternative Dispute Resolution become familiar, notably mediation.

 

However, as compared to litigation, arbitration is generally perceived to offer the following advantages:

 

  • Arbitration hearings are confidential unlike court hearings and judgments which are public.
  • Arbitral rules are flexible in terms of procedure, hearings, time frame, and places of hearings whereas courts are bound by their rules of procedure.
  • Depending on the willingness of the parties involved, arbitration can be much faster than litigation.
  • The majority of arbitral awards are not subject to appeal and may be challenged in the courts only on limited grounds. The awards for international arbitration are enforceable internationally, as Malaysia is a signatory of the New York Convention of 1958 on the Recognition and Enforcement of Foreign Arbitral Awards.
  • Arbitration allows the parties to select the language, procedural rules, nationality of arbitrators, legal representation and place of arbitration.
  • In arbitration, the parties are able to select arbitrators who are highly specialized in the areas of dispute.

 

As compared to mediation, arbitration offers the advantages of certainty. An arbitration award is binding on the parties, and may be enforced on a non-compliant party through the courts.

 

 

Applicable Legal Regime Governing Arbitrations

This is essentially comprised in the Arbitration Act 1952. The insertion of sec. 34 created a sub-species of arbitrations, which are sufficiently important to warrant quoting the section, even in an overview:-

 

 

Section 34 Act not to apply to certain arbitrations

(1) Notwithstanding anything to the contrary in this Act or in any other written law but subject to subsection (2) in so far as it relates to the enforcement of an award, the provisions of this Act or other written law shall not apply to any arbitration held under the Convention on the Settlement of Investment Disputes Between States and Nationals of Other States 1965 or under the United Nations Commission on International Trade Law Arbitration Rules 1976 and the Rules of the Regional Centre for Arbitration at Kuala Lumpur.

(2) Where an award made in an arbitration held in conformity with the Convention or the Rules specified in subsection (1) is sought to be enforced in Malaysia, the enforcement proceedings in respect thereof shall be taken in accordance with the provisions of the Convention specified in subsection (1) or the Convention on the Recognition and Enforcement of Foreign Arbitral Awards 1958, as may be appropriate.

(3) The competent court for the purpose of such enforcement shall be the High Court.

 

Thus, in effect there are two separate arbitration regimes, one governed by the provisions of the Arbitration Act and the other not.

 

In practice, this means that arbitrations within the meaning of sec. 34 of the Arbitration Act are not subject to supervision by the courts, both during the course of the arbitration and as regards the final award that is handed down. Equally, it has been held that the ordinary processes of the courts have no relevance to such arbitrations, except insofar as they relate to the enforcement of an award emanating from such an arbitration.

 

This has obvious consequences for the obtaining of ex parte interlocutory injunctive relief, which could otherwise be sought from the courts, notwithstanding that the principal issues fall to be decided in arbitration. There is authority to the effect that such interlocutory relief is not available to a party to an arbitration agreement under sec. 34 of the Arbitration Act.

 

 

Potential and Perceived Drawbacks of Arbitration

  • Arbitration is perceived as being more expensive than litigation because the arbitrator’s fees must be met by the parties;
  • There is in some quarters a perception that arbitration is a slower process than litigation;
  • Arbitration is sometimes perceived to be a less effective remedy than the courts for resolving disputes when one party does not intend to resolve that dispute in good faith;
  • Arbitration is inherently less flexible than litigation in situations which involve more than one party.

This article will attempt to address, in outline, some of these so-called drawbacks. It is suggested that most of these drawbacks either do not exist, or can be avoided with proper care and foresight.

 

As far as time is concerned, it is suggested that arbitration, if used properly, is almost inevitably faster than litigation. The parties are not compelled to follow the courts’ timetable, and are therefore  free to set their own timetable. Also, arbitrators tend to be able to devote more time to a matter than judges can, given that a judge is almost inevitably tasked with handling more than one dispute at a time. Although arbitrators in general do not deal with only one arbitration at a time, the parties will generally be aware of any arbitrator’s commitments, and of course are not compelled to appoint an arbitrator who is already so busy as to be unable to hear their case within a reasonable timeframe.

 

As to the perception that arbitration can consume a lot of time as opposed to litigation, it is suggested that one reason why this perception has arisen is that the more wide-ranging contractual disputes, often concerning ‘building contracts’, are generally disposed of by way of arbitration. Thus, not only do such disputes take longer to resolve, but the very fact that they are resolved by way of arbitration removes the possibility of comparing the time it would take to resolve the dispute by way of litigation.

 

As arbitration tends to produce a speedier resolution, it will tend to be more cost effective than litigation, notwithstanding that it may involve a greater initial expenditure. In addition, the parties to the dispute are free to agree on the measures designed to reduce the cost of arbitration, such as a reference to a single arbitrator.

 

It should also be noted that arbitrators are allowed to give interim awards in respect of parts of a dispute, which can speed up the disposal of proceedings.

 

One area where litigation retains an appreciable advantage is in the courts’ powers to grant summary judgment in situations where there is no dispute. However, given that the absence of a dispute will generally preclude a reference to arbitration, it will be seen that this is in reality a power that complements the arbitral process, by allowing parties to opt for summary judgment over arbitration in a proper case.

 

Arbitrators are also vested with sufficient powers relating to the control and conduct of proceedings before them, to deal with parties who are unwilling to take the necessary steps to resolve the dispute in good faith, or who simply fail to comply with the arbitrator’s directions. In essence, the ultimate sanction would be the threat that such conduct will jeopardise that party’s prospects of success in the arbitration, a situation that does not radically differ from that of obtaining in litigation. As with litigation, the precise implementation of these powers is a matter for the tribunal’s discretion.

 

As to the potential difficulties of multi-partite arbitrations, it cannot be denied that, because arbitration is in essence a consensual arrangement between two or more parties, it is impossible to compel a party which is not privy to the agreement to arbitrate to take part in that arbitration. Equally, because arbitrations take place pursuant to agreement, it is often possible to anticipate that more than two parties will be involved in any dispute, and to cater for this possibility at the stage when the agreement to arbitrate is created.

 

 

Summation

It is hoped that this necessarily brief overview has highlighted some of the issues that will later be addressed in more depth. Throughout the arbitral process, from its very inception, the emphasis should be on using the advantages conferred by arbitration to fashion a system of dispute resolution appropriate to the matter at hand. Thus, it is suggested, a working familiarity with arbitration, as well as other modes of Alternate Dispute Resolution, will soon be a vital part of every lawyer’s skill-set.

 

 

By Kamraj Nayagam ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it ) and
N. Pathmavathy ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 

 
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