The key changes of the Arbitration (Amendment) Bill 2024

The Arbitration (Amendment) Bill 2024 (the “Bill”), which will amend the Malaysian Arbitration Act (the “Arbitration Act”) has passed the reading stage in both Houses of Parliament and is set to become law soon. Here is everything you need to know.

A President will head a – yet to be established – Court of Arbitration

We know from the latest agreements between the government of Malaysia and the Asian African Legal Consultative Organization that the AIAC’s structure will change significantly. One of these changes means that there will be a Court of Arbitration, which will be headed by the President of the Court of Arbitration, making such person the President of the Asian International Arbitration Centre Court of Arbitration. This will form quite an interesting acronym, AIACCA, which is maybe why the Arbitration Act only refers to such person as “President.”

The position of Director will no longer exist

The recently appointed Dato’ Mary Lim will likely be the last Director the AIAC will see as the position of Director will be abolished. In the future, there will be a CEO, handling administrative matters, and a President of the Court of Arbitration, who will take on most of the Director’s tasks in case administration. The AIAC must amend its arbitration rules and we can only see the full extent of all changes then.

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Those who carefully read the former AIAC Director’s message in the AIAC’s Annual Report 2023 already knew many months ago that the position of Director was going to be abolished (see here). The duties the AIAC’s Director had under the Arbitration Act, which regard the appointment of arbitrators, are now transferred upon the President of the Court of Arbitration, who will in turn become the default appointing authority under the Arbitration Act.

The Bill also makes clear that although the Director’s position ceases to exist, any appointment, decision or other act made, given or done by the Director before the Bill comes into force shall be deemed to have been made, given or done by the President of the Asian International Arbitration Centre Court of Arbitration.

Third-party funding will be regulated

Third-party funding has already existed in Malaysia, at least in international matters. Some argued that this was not allowed, while some even took the view that it went against public policy. Be that as it may, third-party funding will now be explicitly allowed for both domestic and international arbitration matters. It will be regulated, with clearer rules still to be issued. In the meantime, for details, see our alert.

The definition of arbitration agreement is expanded

Currently, a valid arbitration agreement exists when one party alleges its existence and the other party does not deny it in an exchange of Statement of Claim and Statement of Defence. Following the amendments to the Arbitration Act, the failure to deny the existence of an arbitration agreement in an exchange of “any other documents” will lead to the presumption that an arbitration agreement was concluded. Unrepresented companies with little experience in responding to demand letters and similar communications are now set to find themselves in arbitration agreements.

There is a default law applicable to the arbitration agreement

Currently, there may be a dispute within an arbitration over what law is applicable to the arbitration agreement. In the future, this will automatically be the law of the seat.

The law applicable to the arbitration agreement is an issue whose importance has been overlooked for a long time. This has led to uncertainty and lengthy disputes many times. The Bill wants to avoid such uncertainty by making it clear that when the law governing the arbitration agreement is not agreed, it will automatically be the law of the seat of the arbitration.

The Bill further makes it clear that the choice of substantive law of a contract does not constitute an agreement that an arbitration agreement contained in such contract shall be governed by the same law.

Finally, the Bill clarifies that the above-mentioned principles do not apply retrospectively; for any arbitration agreement entered into before the entry-into-force of the Bill, the law governing the arbitration agreement will thus still be determined in accordance with the current principles in Malaysia, if not chosen expressly by the parties.

No obligation to repeat proceedings in case of the replacement of an arbitrator

Currently, the Arbitration Act provides that when a wing arbitrator (i.e., anyone who is not the presiding arbitrator or the chairperson) is replaced, a repetition of the hearings is not necessary. Once the Bill has been passed, this will apply irrespective of the position of the arbitrator. Although this change is welcome, an opportunity to at least provide for an obligation to consult the parties before taking any decision has unfortunately been missed.

Arbitral awards may be signed digitally or electronically

Arbitrators may sign the award electronically, but doubts remain regarding enforcement outside of Malaysia.

The Bill expressly allows for arbitral awards to be signed digitally (as per the Digital Signature Act 1997) and electronically (as per the Electronic Commerce Act 2006). This will significantly accelerate the execution of arbitral awards, particularly in those matters where the arbitral tribunal is composed of persons who reside in different countries.

However, this seeming innovation may greatly backfire if an award signed electronically is to be enforced in a country where such signatures are not accepted. The authors therefore strongly recommend for the tribunal to first issue awards with electronic copies and in hardcopy thereafter.

Finally, the authors are conscious that the success of this amendment will depend on arbitrators. There is only a possibility – but not an obligation – to sign electronically and if an arbitrator insists on signing hardcopies, there is nothing the parties can do.

Automatic recognition of arbitral awards

Currently, arbitral awards are only recognised as binding upon an application to the High Court. The Bill removes this requirement to make the recognition automatic. This applies both to arbitral awards, where the seat of arbitration was in Malaysia and arbitral award from other countries.

Conclusion: many positives, but several missed opportunities

Most of the amendments are positive. They will enhance Malaysia’s reputation as a popular seat of arbitration.

The main goal of the Bill was to successfully regulate third party funding in Malaysia and as the approach the lawmaker took was to do so via an amendment of the Arbitration Act, they seized the opportunity to fine-tune a few additional points. The results are mainly positive.

The following changes are very welcome:

• The introduction of automatic recognition for arbitral awards is a positive step towards aligning with the Model Law, ensuring greater consistency and clarity in arbitration practices;

• The possibility to sign awards digitally/electronically will make the issuance of awards easier (with our cautionary note above);

• Removing the obligation to repeat hearings is also most welcome, although certain standards which should be applied in taking the decision would have been very helpful;

• The regulation of third party funding will likely make third party funding more popular in Malaysia. However, several questions remain open for now (see our note);

• The expansion of the definition of arbitration agreement will likely see more matters go to arbitration. Some dangers for smaller companies remain; and

• Setting the default law applicable to the arbitration agreement will remove uncertainly should this question arise.

Despite several positive points, there are several shortcomings also:

No proper involvement of stakeholders

The changes to the Arbitration Act were implemented quickly, and while the effort to make improvements is appreciated, a more inclusive approach would have been beneficial. The experience in amending the arbitration laws in other countries teaches us considerable time should to taken to obtain the views of all concerned stakeholders. Unfortunately, this never happened with the Bill as there was not even an online public consultation process.

Although there was a consultation session attended by around 30 Malaysian arbitration practitioners, including one of the authors, the discussion was brief, lasting less than half a day. As a result, while they made specific suggestions and requests as to possible changes, there was limited opportunity for an in-depth dialogue.  It appears that many of the valuable insights shared during this session were not incorporated into the final legislation.

Moving forward

Because of the hasty amendments, we can only see patchwork changes rather than the result of a comprehensive review, aimed at making Malaysia a more preferred seat of arbitration. The authors appreciate that the main intention was to introduce the regulation of third party funding to Malaysia, which is a step in the right direction.  

In that sense, there is hope that further amendments to the Malaysian Arbitration Act can be seen in the not so distant future. To position itself as a leading arbitration hub in the region amidst fierce competition, Malaysia can consider implementing the following changes:

• speedier proceedings: presently, there is no possibility under the Arbitration Act to appoint an emergency arbitrator and summary proceedings are not foreseen either. Adding according provisions would allow arbitration to keep one of its promises, the speedy resolution of disputes;  

• a more arbitration-friendly system when it comes to arbitration-related better support by the courts in arbitration-related court proceedings. The courts in Malaysia are generally very supportive of arbitration, but the overall system can still be improved by a fair bit. For instance:
  • in Malaysia, there are up to three instances in setting-aside proceedings, whereas this is reduced to one single instance in other countries (e.g. Switzerland);
  • recently, both in the region (e.g. Japan and Korea) and in other parts of othe world (e.g. Germany), English is relied on more and more as the language of court proceedings in international arbitration matters. This is to allow the parties to save costs, particularly on translation. While English is already regularly used for oral hearings and in some written documents, Malaysia would become more attractive as a seat of arbitration if English were the sole language in arbitration-related court proceedings, in line with other Arbitration-friendly jurisdictions in the region; and
  • court proceedings are to be heard otherwise than in an open court, but unlike other countries, there is nothing that safeguard’s a party’s confidentiality when it comes to the publication of the judgment.

The President of the Arbitration Court replaced the Director default as the appointing authority

A notable challenge has been the delayed appointment of key personnel at the AIAC. For example, between June and August 2024, the AIAC was without a Director – a position essential for specific actions under both the Arbitration Act and the Construction Industry Payment and Adjudication Act 2012. Unfortunately, this was not the first time in recent years and during the periods of vacancy, hundreds of cases came to a halt/could not be commenced in the first place.  

Since there is not going to be any AIAC Director in the future, the Arbitration Act needed to be amended and but carefully thought-through Bill would have made the AIAC – rather than a specific person – the default appointing authority. This would ensure continuity irrespective of vacancies at the AIAC. The Hong Kong Arbitration Ordinance follows this approach by making the HKIAC the default appointing authority.  

Concluding, the authors therefore hope that in the future, a comprehensive stakeholder consultation to broadly identify improvements will take place. This would allow making several fundamental changes to the Arbitration Act, going beyond third party funding, which would enable Malaysia to propel itself as one of the leading nations regarding arbitration in the region.  

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This article was written by Prof. Dr. Harald Sippel (Senior Foreign Advisor), and our partners Raja Nadhil Aqran and Vishnu Vijandran. It only contains general information and does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such.

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For further information, contact us at info@aqranvijandran.com.

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