Structural reforms at the Asian International Arbitration Centre – what do we already know and what can we expect to come?

Over the course of the last months, the Asian International Arbitration Centre (AIAC) has undergone significant changes. Malaysia’s leading arbitral institution appointed:

(i) its first-ever Board of Directors;
(ii) its first-ever CEO; and
(iii) a new Director.

These are some of the first steps the AIAC will undertake in structural reforms that will ultimately lead to the abolition of the position of Director, and the implementation of an entirely new structure composed of supervisory functions (Board of Directors), administration (led by the CEO) and case management (led by an Arbitration Court, which still has to be created). Unsurprisingly, it will – again – be supplemented by the issuance of new arbitration rules.

Although the full scope of future changes remains unclear, the various steps already taken as delineated in publicly available documents provide a solid understanding of what direction the AIAC will be heading to in the future.

In this write-up, which is Part 1 of a two-part series, the authors:

• provide some background of the history of the AIAC and highlight the initial structural changes at the AIAC (Phase 1);
• give an overview of the changes taking place at the AIAC at the moment; and
• share their observations on these changes.

Part 2 will follow once there is clarity on what the AIAC will look like going forward. This will be once it has published its new rules.

A tour d’horizon from the AIAC’s beginning in 1978 to the 2024 Supplementary Agreement dated 20 February 2024

The establishment of the AIAC

The AIAC was established in 1978 pursuant to a Host Country Agreement between the Asian-African Legal Consultative Organization (“AALCO”) and the Government of Malaysia (the “Host Country Agreement”).[1]

The AALCO’s activities, among others, include the establishment of international arbitration centres in selected member states. The AIAC, then still known as The Regional Centre for Arbitration, Kuala Lumpur (RCAKL), was established in 1978 and was the first such arbitration centre among the now six AALCO arbitration centres. It is also among the first arbitration centres in Southeast Asia.

The Host Country Agreement has been altered and renewed multiple times. Together with various supplementary agreements, it governs the role of the AIAC today.

The transformation of the AIAC over the years

Over the years, the RCAKL transformed into the KLRCA (Kuala Lumpur Regional Centre for Arbitration) and, in 2018, into the Asian International Arbitration Centre we know today.

Now, in 2024, the AIAC has already gone significant changes and is set to undergo, arguably, the most important structural governance transformation in its history. This is following the signing of a Supplementary Agreement between the AALCO and the Government of Malaysia in February 2024 (the “Supplementary Agreement 2024”):

The Supplementary Agreement to the Host Country Agreement between the Government of Malaysia and Asian-African Legal Consultative Organization relating to the Asian International Arbitration Centre (Malaysia) dated 20 February 2024 (the “Supplementary Agreement”) amends the Agreement to the Host Country Agreement between the Government of Malaysia and Asian-African Legal Consultative Organization relating to the Asian International Arbitration Centre (Malaysia) dated 15 March 2023 (the “Principal Agreement”). The Principal Agreement has a duration of five years.

When the AIAC announced the formalisation of the Supplementary Agreement on 22^nd February 2024, it was not clear what this meant in practice. The indication in the announcement that “[t]he initiatives will be implemented in phases involving the governance reforms within the Centre, the institutionalisation of the AIAC Advisory Board to AIAC Board of Directors, for the strategic development of the Centre and the introduction of the inaugural AIAC Court of Arbitration” could at best be qualified as a cryptic message.

The attentive reader of the AIAC’s Annual Reports, however, will have known what was to happen in the future. Already at the end of 2023, the AIAC’s then Director, Datuk Sundra Rajoo, made it clear in his Director’s Message of the 2023 AIAC Annual Report 2023 that upcoming changes were to be implemented in the near future. He among others pointed out that the position of the Director would be abolished and replaced with other structures, including the setting up of an Arbitration Court within the AIAC, the appointment of a Chief Executive Officer, a Registrar and an Executive Board.

While Datuk Sundra Rajoo understandably spoke of a “bittersweet moment that this report might mark the concluding chapter of position of the Director in the 46th year of the [AIAC’s] history in Malaysia,” only the end result of the structural changes was clear, not the path leading to the changes. With the Supplementary Agreement, this changed.

The effects of the Supplementary Agreement

The Supplementary Agreement lays out amendments to be executed to transform the governance structure of the AIAC. This is aimed at enhancing the check-and-balance mechanisms within the AIAC governance structure and establishing a clear separation of responsibilities therein. The changes thus concern both the executive and the judicial functions at the AIAC and will be carried out in two phases, Phase 1, and Phase 2.

Broadly speaking, it is possible to split the effects of these changes into two categories:

• the AIAC’s “executive function;” and
• the AIAC’s “judicial function.”

Recital D of the Supplementary Agreement provides a basic description. During Phase 1:

• a Board of Directors is to be implemented and the Advisory Board is to be abolished;
• the position of the Chief Executive Officer is to be introduced; and
• the position of the Director is reduced to merely judicial functions, i.e., the management of matters related to arbitration, mediation and adjudication.

These changes will be described in the following in greater detail by way of providing a separate description of Phase 1 and Phase

Phase 1 of the Supplementary Agreement

From Advisory Board to Board of Directors

According to Recital D(a) of the Supplementary Agreement, “the existing Advisory Board shall be replaced by a Board of Directors (BOD) which shall oversee the operation and business strategy of AIAC and ensure good corporate governance.”

Article IV of the Supplementary Agreement further specifies what this means in practice:

• Article IV(1) – the Board of Directors shall have the responsibility for the management of the Centre;
• Article IV(4) – the Board of Directors will set the strategic direction of the AIAC; and
• Article IV(5) – the Board of Directors has the power to “appoint and terminate the Chief Executive Officer,” who will in the future be in charge of all administrative matters at the AIAC.

Given the important changes that are taking place at the AIAC, the replacement of the Advisory Board appears to be the least significant change. However, when considering that the previous Advisory Board only exercised purely advisory functions – it is clear from the description of its functions alone that the newly established Board of Directors will be a real powerhouse in comparison.

Article IV of the Supplementary Agreement sets forth that the Board shall comprise at least five member and no more than seven and that it will be presided over by a Chairman, assisted by a Deputy Chairman. Both the Chairman and Deputy Chairman are appointed by the Government of Malaysia in consultation with the Secretary-General of the AALCO; all other Board Members are appointed directly by the Government.

The setting-up of the Board of Directors has already taken place, with the AIAC’s first-ever Board of Directors having been established on 4 April 2024. It comprises the following five individuals:

• Datuk Ahmad Terrirudin bin Mohd Salleh, the Attorney General of Malaysia (Chairman) - Mr. Terrirudin has since been appointed as a judge of the Federal Court;
• Datuk Shireen Ann Zaharah Muhiudeen, former Chairwoman of Bursa Malaysia Bhd (Deputy Chairman);
• Tuan Zamri bin Misman, Director General of the Legal Affairs Division of the Prime Minister’s Department (Board Member);
• Datuk Philip Chan Hon Keong, former legal practitioner (Board Member);
• Stephen Fietta, KC, International Arbitrator (Board Member); and
• Andrea Carlevaris, former Secretary General of the ICC International Court of Arbitration (Board Member).

It is noteworthy that the Chairman of the Board of Directors is very closely connected to the Government of Malaysia. In fact, the Attorney General, whose role, functions and responsibility are foreseen in the Malaysian Constitution, is considered “the principal legal adviser to the Government.”^[2] One may well question how this aligns with the principle of independence, which is one of the cornerstones of all AALCO Arbitration Centres and the authors will address this point in a follow-up to this write-up, once Phase 2 of the structural changes have been implemented.

The Chairman of the BOD is responsible for the management of the AIAC by setting out strategic direction while the CEO is only tasked with administering the Centre according to the strategic direction set by the BOD. This once again underlines the important role of the BOD.

Replacement of the Director with a Chief Executive Officer as regards the administration of the AIAC

According to Recital D(b), of the Supplementary Agreement, “the position of Chief Executive Officer (CEO) shall be introduced to manage the day-to-day operations of AIAC.” Article IV(4) of the Supplementary Agreement further clarifies that the CEO is in charge of the administration of the AIAC, but must carry it out, as we already highlighted above, “according to the strategic direction set by the Board of Directors.”

It is not clear from the Supplementary Agreement or the Principal Agreement what specifically “managing the day-to-day operations” means in practice. The only two items further specified regard the CEO’s duty to submit:

• annual reports of the AIAC’s activities to the Secretary-General of the AALCO and the Legal Affairs Division of the Prime Minister’s Department of Malaysia (the “Legal Affairs Division”); and
• annual audited financial reports of the AIAC to the Legal Affairs Division.

However, it is clear from the Supplementary Agreement that the role of the CEO shall be limited to administrative matters, i.e., matters which regard the executive function of the AIAC, but not its judicial functions. It must therefore be assumed that Datuk Almalena Sharmila Johan, who was appointed as the AIAC’s first-ever CEO on 7 August 2024, will oversee the AIAC’s Operations, Business Development and Finance Departments.

Maintaining the status quo for the judicial function: the Director remains in charge of case management matters till Phase 2

The Supplementary Agreement does not elaborate on the position of the Director in detail. Indeed, the Supplementary Agreement only mentions the term “Director” three times. As regards Phase 1:

• according to Recital D(c), “the Director shall manage matters related to arbitration, mediation, and adjudication including the appointment of arbitrators, mediators and adjudicators under the relevant laws of Malaysia;” and
• according to Article IV(8), “[t]he Director shall be a citizen of Malaysia and shall be appointed by the Host Government in consultation with the Secretary-General to perform the functions as stipulated under the national laws in force in Malaysia relating to the appointment of arbitrators, mediators and adjudicators with the independent assistance from the Secretariat of the Centre.”

The Supplementary Agreement thus makes it very clear that the role of the Director is strictly limited to case management matters. This is necessary because of the important role that is given to the Director under the various AIAC Rules.^[3]

Additional developments in relation to the structural changes at the AIAC

As highlighted above, this write-up only deals with Phase 1 of the changes foreseen in the Supplementary Agreement. This Phase appears to be completed as Recital D of the Supplementary Agreement foresaw the following steps:

• a Board of Directors is to be implemented and the Advisory Board is to be abolished (step completed as of 4 April 2024);
• the position of the Chief Executive Officer is to be introduced (step completed as of 7 August 2024); and
• the position of the Director is reduced to merely judicial functions, i.e., the management of matters related to arbitration, mediation and adjudication (step completed as of 7 August 2024 with the appointment of the CEO).

That being said, significant additional developments have taken place in parallel. In chronological order:

• a committee to establish the Court of Arbitration was set up;
• Malaysia passed amendments to its Arbitration Act; and
• the AIAC appointed a new Director.

The AIAC announced the establishment of a pro tempore committee tasked with “establishing the AIAC Court, including streamlining the mechanism, protocol and operational framework of the AIAC Court for its effective functioning in the future” on 1 June 2024 (the “Committee”). The 16 Committee Members and the Committee’s Chairperson were appointed directly by Dato’ Sri Azalina Othman Said, Minister in the Prime Minister’s Department (Law and Institutional Reform) and comprise former judges, academics, arbitrators and legal practitioners from Africa (Kenya), Asia (Hong Kong, India, Malaysia, Saudi Arabia and Singapore) and Europe (Spain and United Kingdom).

In July 2024, Malaysia passed several changes to its Arbitration Act through the Arbitration (Amendment) Bill 2024. It would go beyond the scope of this write-up to discuss the changes in detail; the background to the changes, their discussion and additional observations can be found here.

Finally, following a period of absence, the AIAC appointed a new Director, the well-known former judge of the Malaysian Federal Court, Dato’ Mary Lim Thiam Suan, on 5 August 2024. According to the announcement by the AIAC, Justice Lim’s appointment as Director “shall remain effective until the establishment of the AIAC Court of Arbitration, which is contingent on the date of entry into force of the Arbitration (Amendment) Bill 2024 and the Construction Industry Payment and Adjudication (Amendment) Bill 2024."

Observations by the authors

American businessman Jeff Weiner once said: “You have to maintain a culture of transformation and stay true to your values.” The governance change at the AIAC is certainly in line with this maxim. While the AIAC will move from being centred on the position of its Director to a broader governance structure, it is this very change that will ensure that its core values, neutrality and independence will continue to exist. This point will be addressed in greater detail in our follow-up article on the AIAC’s structural changes.

The appointment of the Attorney General, the principal advisor to the Malaysian Government, as the Chairman of the Board of Directors may raise eyebrows. One could take the position that an arbitration centre cannot be independent when its ultimate “captain” is the principal advisor to the Government of the country in which that arbitration centre is located.

While that criticism appears justified prima vista, a more nuanced view is required in light of all circumstances. First of all, the independence of the AIAC continues to exist in Article V of the Principal Agreement, entitled “Independence of the Centre.” Article V(2) of the Principal Agreement makes any intervention by the Government of Malaysia impossible in principle.[4] This disallows the Chairman of the Board – or for that matter any other person from the Malaysian Government of Malaysia – to interfere with matters of the AIAC insofar as they are not foreseen in the Principal Agreement or the Supplementary Agreement. Disregarding this obligation would not only amount to a breach of contract; given the nature of the Principal Agreement and the Supplementary Agreement, but it would also amount to a breach of public international law. This leads the author to conclude that the Government of Malaysian would think twice before overstepping its role.

Further, it must be remembered here that if the Government of Malaysia truly wanted to exert its influence over the AIAC, there would be simpler ways. As such, it could have simply installed a “Puppet Director” who would then act as the Government deems fit. Exerting influence through a body in which only two of six members are from the government and two of whom are foreigners is certainly not the right approach if one’s main goal was to exert influence.

Crucially, the role of the Chairman of the Board must be understood in full context. It is very clear from the Supplementary Agreement that what both Parties wanted to achieve through the Supplementary Agreement was stability:

• after Datuk Sundra Rajoo resigned from his position as Director in late 2018 when his first stint as the AIAC’s Director came to an end, the AIAC has seen four Directors (and will hopefully soon see its first President of the Court). This is, on average, a period of less than 1.5 years for each Director;
• since March 2019, there have also been extensive periods without any Director:
  1. in 2019, for around eight months;
  2. between December 2022 and March 2023; and
  3. for over five weeks between July and August 2024.

Given that the position of the Director is crucial under the AIAC Arbitration Rules (as well as in mediation and adjudication matters, which the AIAC also administers), during all periods of absence, new matters could not start and pending matters could not end.[5] Some decisions taken in the AIAC during the periods of absence of a Director raised doubts as to their validity.[6]

It should be clear from the above that given the recent history of the AIAC, stability is necessary and will allow the AIAC to benefit and gain back trust that it has lost over the last few years when there existed an absence of constancy in the AIAC’s most important position.

Finally, one must have in mind that it is one of the core duties of the Board of Directors to “ensure good corporate governance,” the appointment of YBhg. Datuk Ahmad Terrirudin bin Mohd Salleh should therefore be seen as the Government of Malaysia’s intention for there to be stability at the AIAC. In any event, Mr. Terrirudin is no longer in his position as Attorney General as he was appointed as a Justice of the Federal Court, Malaysia's apex court, in November 2024.

In the authors’ view, there would have been benefits associated with a more diverse Board of Directors:

• Currently, there is only one woman (albeit the Deputy Chairman), meaning that not even 20% of the Board of Directors is composed of women. Any international organisation should aim for a considerably higher quota, but even leaving that aside, various studies have shown that having women on boards improves companies' strategic decision-making and has numerous other benefits.
• The addition of nationals from other Southeast Asian or at least East Asian countries, ideally those Malaysia’s most important trade partners, would allow the AIAC to position itself better in the competitive world of international arbitration.

The authors hope that steps in this direction can be undertaken in the future given that the Board of Directors can consist of up to seven members and that its composition will likely change over time.

Going forward, the authors also hope for clear communication as to the next steps. Although the attentive reader of the AIAC’s Annual Reports will have expected the governance changes to happen around March 2024, to the vast majority, these changes came as a surprise. When stability is needed, even good surprises are not the best course of action.

Given the lack of clarity from the Supplementary Agreement and the absence of any communication from the AIAC, it is unclear when and how Phase 2 of the Supplementary Agreement will play out. In an ideal world, such uncertainties would not exist with better communication and at least having clear timelines should be given so that the users of arbitration can properly anticipate the upcoming changes.

However, these suggestions for greater clarity and certainty should not give the impression that the authors do not welcome the changes at the AIAC. With a total of 873 matters in 2023,[7] the AIAC is one of the largest institutions in the field of alternative dispute resolution in Southeast Asia and beyond – and this number could potentially have been even larger had there been a Director throughout the year 2023, which was not the case.

As the author experienced himself when acting as Head of Legal Services of the Asian International Arbitration Centre several years ago, the work that fell upon the Director as the AIAC’s “principal case manager”[8] as well as administrative head of the AIAC can be overwhelming. The exigencies of this role will now be split among the CEO (administration) and thus allow the Director – and in the future the President of the Court of Arbitration – to exclusively focus on case management-related tasks. This will likely lead to better decision-making.

The authors thus look expectantly into the future, which they believe looks bright for the AIAC.

As indicated in the introduction to this write-up, Part 2 will highlight the changes of Phase 2 in a follow-up. They will then also comment on what Phase 2 will mean for the AIAC.

Prof. Dr. Harald Sippel, MBA regularly acts as arbitrator and counsel in international arbitration proceedings. He is a Senior Foreign Advisor at Aqran Vijandran and was in charge of the AIAC’s case management as its Head of Legal Services in 2018/2019.

Vishnu Vijandran has successfully assisted in several arbitration proceedings, both international and domestic. He regularly acts as junior counsel or tribunal secretary in arbitration proceedings. He is currently a partner in Aqran Vijandran.

[1]              The AALCO is an international governmental organisation formed in 1956. Initially set up by seven states to serve as an advisory board to member states on matters on international law, the AALCO has taken on additional roles over the years and comprises 48 members in Africa and Asia as of 2024. For details, see here.

[2]              For further details, see Official Portal of Attorney General’s Chamber Malaysia, The Attorney General of Malaysia, available at www.agc.gov.my/agcportal/frontend/web/index.php?r=portal%2Fleft-accordian&menu=aDJlZDdxQ1Y3WUw5K0ZJR2hJWkpxQT09 [last accessed on 2024-05-05].

[3]              By way of example, the AIAC Arbitration Rules 2023 mention the term “Director” 53 times and the AIAC Arbitration Rules 2021 mention the term “Director” 97 times. Additionally, under the AIAC Arbitration Rules 2021, when the Director cannot act, there is no one who can replace him/her. This led to significant problems in the past.

[4]              Article V(2) reads as follows: “The Host Government shall respect the independent functioning of the Centre.”

[5]              This is because among others, under the relevant arbitration rules, only the Director can confirm the appointment of arbitrators/conduct the technical review/confirm the costs of the arbitration – all of which are needed for matters to properly start and conclude.

[6]              For instance, the authors understand that the AIAC “allowed” Parties to agree to exclude the Technical Review of arbitral awards, which according to the various AIAC Arbitration Rules must be undertaken by the Director. Arguably, an organization without a leader – no one was formally tasked with replacing the Director – may not take any decisions and in particular not one which has the potential to substantially affect it (it is, of course, in the AIAC’s interest that awards are scrutinized as foreseen under its rules as this is a core principle in ensuring that the AIAC’s awards are of a certain standard and quality).

[7]               For details, see the AIAC’s Annual Report for 2023, which is available here.

[8]              Contrary to the arbitral rules of other arbitral institutions, the role of the Director has always been extensive under the AIAC Arbitration Rules.