Federal Court provides guidance on identifying places of arbitration in Malaysia for the purpose of determining the supervisory court of the arbitration

In Masenang Sdn Bhd v Sabanilam Enterprise Sdn Bhd (Civil Federal Court Civil Appeal No.: 02(i)-20-03/2020(S)), the Federal Court held that the courts of first instance of the place specified as the seat of arbitration in Malaysia has exclusive supervisory jurisdiction over arbitrations seated in that place, including any award arising from such proceedings. In this respect, a court of a state in Malaysia which is not the court of the place specified as seat of arbitration will have no supervisory jurisdiction over that arbitration or its award. As a result, parties seeking to have their arbitrations seated in Malaysia will need specifically identify a local state or city in Malaysia as the seat of arbitration.

Background

Sabanilam Enterprise Sdn Bhd (Sabanilam) appointed Masenang Sdn Bhd (Masenang) as its main contractor to construct a technology and commercial centre in the district of Penampang, located in the state of Sabah. Claims arose between the parties which were submitted to arbitration in the Kuala Lumpur Regional Centre for Arbitration (now Asian International Arbitration Centre (AIAC)) in accordance with the Arbitration Rules of the Malaysian Institute of Architects (the Arbitration).  The arbitration clause provided for the seat of arbitration as Kuala Lumpur, Malaysia. The Tribunal dismissed Sabanilam’s claims and allowed Masenang’s counterclaims against Sabanilam in the sum of RM23,432,463.54 (the Award). Masenang commenced enforcement proceedings at the Kuala Lumpur High Court (KLHC), while Sabanilam initiated an action at the Kota Kinabalu High Court in Sabah (KKHC) to set aside the Award.

The issue was whether the KLHC (being the court of the place named as the seat of the Arbitration) or KKHC (being the court of the place where the cause of action underlying the dispute arose) had exclusive supervisory jurisdiction over the Arbitration and the Award. Under section 23 of the Courts of Judicature Act 1964 (CJA), a local court possesses jurisdiction to try civil proceedings arising from a cause of action which arises within the local territorial jurisdiction of that court.

The KKHC, noting that the concept of a seat of arbitration was relevant in Malaysian domestic arbitrations, held that the KLHC – and not the KKHC – possessed jurisdiction as the supervisory court of the Arbitration to vary or set aside the Award. This was by virtue of the KLHC being the court of the place named as seat of arbitration. As a result, the KKHC struck out Sabanilam’s application to set aside the Award. The KLHC then allowed the Award to be recognised and enforced in Malaysia.

On an appeal by Sabanilam against both decisions of the High Courts, the Court of Appeal remitted Sabanilam’s application to set aside the Award to the KKHC for determination, and set aside the enforcement of the Award ordered by the KLHC. The Court of Appeal had disagreed with the analysis of the KKHC, concluding that the concept of a seat of arbitration was not relevant to domestic arbitrations in Malaysia. It found that a Malaysian court can validly exercise jurisdiction over the supervision of a domestic arbitration and its award by reference to the criteria in section 23 of the CJA. In this regard, the Court of Appeal held that while the curial law of any arbitration seated in Malaysia will be the Arbitration Act 2005 (AA), the determination of the supervisory court of a domestic arbitration would be determined by reference to the CJA.

Dissatisfied with the Court of Appeal’s decision, Masenang appealed to the Federal Court.

Federal Court

The Federal Court allowed the appeal and reinstated the orders of the KKHC and KLHC. The Federal Court held that the designation of a place within Malaysia as the seat of arbitration will determine the identity of the local court which has exclusive supervisory jurisdiction over the arbitration and its award. As such, by agreeing to a place named as the seat of arbitration, parties shall be deemed to have agreed that any court proceedings relating to the arbitration and any award arising thereunder shall only be brought in the local court of the place designated as the seat. Alternatively, where no designation of a seat is made in the arbitration agreement, the arbitral tribunal is empowered under section 22 of the AA to determine the seat of arbitration having regard to the circumstances of the case, including the convenience of the parties. In either case, the court of the place designated as the seat of arbitration would have exclusive supervisory jurisdiction over that arbitration to the exclusion of the court of first instance of any other place within Malaysia. As such, section 23 of the CJA has no application in determining which court in Malaysia has supervisory jurisdiction over an arbitration or award.

Comment

The choice of seat of arbitration has always been important in international arbitration. For arbitrations seated in Malaysia (whether international or domestic), parties will need to designate a city or state within Malaysia as its seat of arbitration, given that the Malaysian courts have a number of branches in each of Malaysia’s 13 constituent states and three federal territories.

The choice of a place within Malaysia as the seat of an arbitration will have practical consequences to the conduct of both domestic and international arbitrations. For example:

  • Access to party representation is limited in the states of Sabah and Sarawak by virtue of the Federal Court’s decision in Samsuri Bin Baharuddin & 813 Others v Mohamed Azahari Bin Matiasin (heard together with GBB Nandy @ Gannesh v Mohamed Azahari Bin Matiasin) (Civil Appeal Nos.: 02(f)-34-04/2014(S) and 02-35-04/2014(S)) which held that only individuals admitted to legal practice in Sabah have exclusive right to represent parties in arbitration proceedings held or seated in Sabah. This limitation on party representation is also likely to apply to arbitrations held or seated in the state of Sarawak by virtue similar local legislation.
  • Malaysia’s specialist commercial courts which determine disputes in various commercial sectors including commerce and banking, markets and exchanges, maritime, insurance, oil and gas, insolvency, intellectual property and information technology, construction, competition, Islamic banking and commercial disputes, as well as the recognition and enforcement of arbitration awards, are predominantly located in Kuala Lumpur. The AIAC and its hearing centre in Bangunan Sulaiman are also located in Kuala Lumpur.

 

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Michele Yee, Associate or your usual Herbert Smith Freehills contact.

Disclaimer
Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Michele Yee
Michele Yee
Associate, Kuala Lumpur
+60 3-2777 5159

Launch of AIAC Arbitration Rules 2021

By Peter Godwin, Nicholas Hoh, Daniel Chua, Lim Tse Wei, Rebecca Pang, Michele Yee and Loi Kin-Hoe

The Asian International Arbitration Centre has launched the latest revisions to its Arbitration Rules, following their last update in 2018. Upon coming into effect on 1 August 2021, the AIAC Arbitration Rules 2021 will apply to all AIAC arbitrations commenced after this date unless parties agree otherwise. The 2021 revisions come following an extensive study by an international External Advisory Committee for the Revision of the AIAC Arbitration Rules (including Peter Godwin, Partner, HSF Kuala Lumpur) and a public consultation of the draft rules.

The revision includes significant changes to existing Malaysian arbitral practice and extends the AIAC’s various efforts to improve the efficiency of arbitration. It also responds to the growing calls for enhanced cost and time savings and transparency in arbitration by introducing new procedures for summary determination, expedited procedure and the publication of AIAC arbitral awards. No doubt, the 2021 Rules demonstrate the AIAC’s focus on modernising its rules in line with international best practices. We set out below the key features of the 2021 Rules.

NOTABLE AMENDMENTS IN THE 2021 AIAC RULES

New streamlined structure

The 2021 Rules consolidate into its main body the UNCITRAL Arbitration Rules 2013 and the institution’s standalone expedited arbitration procedure (Fast Track Arbitration Rules). This provides a more streamlined document for users, and dispenses with the AIAC’s previous practice of referring to the UNCITRAL Arbitration Rules (previously Part II) or requiring a separate submission to the Fast Track Arbitration Rules.

Summary determination procedure

A significant update is new Rule 19, which introduces a summary determination mechanism into AIAC arbitrations. This brings the 2021 Rules into line with the new practices of leading arbitration institutions, such as LCIA, ACICA, HKIAC and SIAC, and provides the potential for considerable cost and time savings to users.

The new Rule 19 expressly empowers arbitrators to dismiss a claim, counterclaim or defence that is manifestly outside the jurisdiction of the tribunal, is inadmissible, or is manifestly without merit. This closely mirrors the equivalent provisions under the SIAC and LCIA Arbitration Rules.

The summary determination procedure can be engaged upon a request by an arbitral party. Such requests must be filed within 30 days from the filing of the statement of defence and counterclaim. Notably, it is common for further submissions to be filed after the statement of defence and counterclaim, as the AIAC’s new fast track procedure acknowledges in the new Rule 8.8(i). However, the wording of Rule 19.2 would mean that, in practice, parties will have to ensure that their factual and legal positions are sufficiently developed in early submissions to avoid challenge under the summary determination procedure.

Fast Track Procedure

Under the previous versions of the AIAC Arbitration Rules, the Fast Track Arbitration Rules existed as a standalone set of rules, alongside the main AIAC Arbitration Rules.

The new Rule 8 under the 2021 Rules introduces an expedited procedure for all AIAC arbitrations, known as the Fast Track Procedure, which repurposes and revitalises the Fast Track Arbitration Rules by incorporating it into the 2021 Rules itself. The new Fast Track Procedure will be applicable where:

  • the parties have agreed to adopt the Fast Track Procedure (i.e. by expressly agreeing to this in the arbitration clause or subsequently by way of a submission agreement – the 2021 Rules provides a model clause which the parties can insert into their arbitration agreement or submission agreement), or where the parties have adopted any edition of the Fast Track Arbitration Rules (Rule 8.2(a));
  • the amount in dispute, at the time of the commencement of the arbitration pursuant to Rule 7, is quantified at less than USD500,000.00 for an international arbitration or less than RM2,000,000.00 for a domestic arbitration (Rule 8.2(b)); or
  • there is exceptional urgency (Rule 8.2(c)).

Two observations arise:

  • First, apart from arbitrations where the parties have expressly agreed to adopt the Fast Track Procedure or any previous edition of the Fast Track Arbitration Rules (i.e. as per Rule 8.2(a)), please note that the Fast Track Procedure may also apply to arbitrations where the parties have not expressly adopted it but the amount in dispute is below the specified threshold or if there is exceptional urgency (Rule 8.2(b) and Rule 8.2(c)). In such circumstances, a Fast Track Request submitted under these limbs would be determined by the Director of the AIAC, having regard to all circumstances considered appropriate (Rule 8.3).
  • Second, the Fast Track Procedure appears to be available to all proceedings relating to arbitration agreements concluded before the effective date of the 2021 Rules. It will be interesting to see if Malaysian courts have any concerns when enforcing arbitral awards issued under the Fast Track Procedure. Enforcement of such awards may be given different treatment depending on jurisdiction (see here and here).

Where the Fast Track Procedure is adopted, the arbitration will have the following key features:

  • The determination of disputes by a sole arbitrator unless parties agree otherwise.
  • By default, the arbitration will proceed on a documents-only basis, with there being no oral hearing. The tribunal may, however, convene an oral hearing upon consulting the parties, but any such hearing cannot exceed five days.
  • Significantly truncated timelines for the arbitration. Most notably, the tribunal is required to declare proceedings closed no later than 90 days from its delivery of the first Procedural Order; and thereafter the tribunal is required to submit its draft Final Award for the AIAC’s technical review within 90 days from the date the proceedings were declared closed.

Enhanced transparency

New Rule 44.6 allows the AIAC to now publish the whole, excerpts or summaries of arbitration awards, with the written consent of the parties. Published awards will be redacted to remove all references to the parties’ names and other identifying information. This marks a fundamental shift from current Malaysian arbitration practice and is a welcome response to calls for institutions to improve transparency in arbitration and facilitate the development of commercial jurisprudence in Malaysia.

Further transparency measures are inserted by new Rule 44.4. Parties will now be required to obtain undertakings of confidentiality from “all those that they involve in the arbitration”. This includes a wide range of participants, including “any authorised representative, witness of fact, expert or service provider”, which may extend to providers of transcription, electronic discovery and virtual hearing hosting services. This will be an additional step that users will need to actively comply with in AIAC arbitrations going forward.

Consolidating multi-contract disputes

The revisions will now allow a claimant to file a single notice of arbitration in respect of claims arising from multiple contracts between the same parties together with a consolidation request (new Rule 22.4). This is a departure from the previous requirement that a claimant issue multiple arbitration requests even where the disputes could be consolidated.

The AIAC has also given further guidance on the factors to be considered for a consolidation request. Unlike previous iterations, the 2021 Rules require parties seeking consolidation to consider:

  • whether the disputes under each arbitration concern the same legal relationship;
  • whether the rights or reliefs claimed are in respect of, or arise out of, the same transaction or a series of related transactions; and
  • the compatibility of the arbitration agreements.

Clarifying multi-party appointments

New Rule 9.7 streamlines the default mode of appointment of arbitrators in multi-party arbitrations. Where an even-numbered tribunal is used, all claimants and respondents will nominate half the required number of arbitrators. For odd-numbered tribunals, all claimants and respondents will nominate an equal number of arbitrators who shall thereafter nominate a presiding arbitrator. If joint nomination fails, the entire Arbitral Tribunal shall be constituted by the Director. In this case, any nominated arbitrators shall be excluded from consideration and any appointed arbitrators shall be released,n unless the parties agree to retain such nominations or appointments.

Further, the 2021 Rules insert a new requirement for prospective arbitrators to ensure their capacity to determine the case in a prompt and efficient manner (new Rule 10.4). This mirrors the diligence duty under the initial draft of ICSID’s Code of Conduct for Adjudicators in Investor-State Dispute Settlement.

Emergency arbitrators’ powers

The 2021 Rules maintain the AIAC’s existing emergency arbitration mechanism, which allows users to seek urgent temporary relief from an emergency arbitrator prior to the formation of the arbitral tribunal that will determine the main dispute. New Rules 17 and 18 insert helpful clarification on the authority of emergency arbitrators, including:

  • confirming that emergency arbitration proceedings can be conducted virtually or on a documents-only basis (new Rule 18.4).
  • clarifying that emergency arbitrators may proceed with the arbitration in the absence of a non-participating party (new Rule 18.5).
  • expressly empowering emergency arbitrators to rule on their own jurisdiction (new Rule 18.6).
  • confirming that emergency arbitrators may make any order or award that the main arbitral tribunal can make. This includes adjourning all or any part of the claim for emergency interim measures for determination by the main arbitral tribunal (new Rule 18.7).

Other notable changes in the 2021 Rules include:

  1. substantive revisions to the provisions on the closure and termination of proceedings, the technical review process, and the release, correction and interpretation of awards to enhance clarity (new Rules 32 – 39).
  2. revisions to the provisions relating to costs and deposits to enhance clarity (new Rules 40 and 41).

If you have any questions about the 2021 Rules or how they might affect you, please reach out to the contacts below.

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Nicholas Hoh
Nicholas Hoh
Senior Associate, Kuala Lumpur
+60 3 2777 5106
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Tse Wei Lim
Tse Wei Lim
Associate, Kuala Lumpur
+60 3 2777 5135
Rebecca Pang
Rebecca Pang
Associate, Kuala Lumpur
+60 3 2777 5111
Michele Yee
Michele Yee
Associate, Kuala Lumpur
+60 3-2777 5159
Kin Hoe Loi
Kin Hoe Loi
Associate, Kuala Lumpur
+60 3 2777 5158

Asian International Arbitration Centre launches new arbitration rules for public consultation

On Sunday, 20 June 2021, the Asian International Arbitration Centre (AIAC) launched its new International Arbitration Rules for public comment following extensive consultations with an international External Advisory Committee for the Revision of the AIAC Arbitration Rules (including Peter Godwin, Partner, HSF Kuala Lumpur). A copy of the draft rules can be found here.

The draft marks a significant departure from the existing arbitral practice in Malaysia and demonstrates the AIAC’s focus on modernising its arbitration rules and widening its appeal to a truly international market. The new rules incorporate the UNCITRAL Arbitration Rules and the AIAC’s standalone expedited arbitration procedure (dispensing with the need for the AIAC to maintain its current practice of referring to the UNCITRAL Arbitration Rules or maintaining its standalone Fast Track Arbitration Rules). The draft rules also introduce a new summary determination procedure, rules for appointment of the tribunal in multi-party situations, ability to commence a single arbitration under multiple contracts by submitting in parallel an application to consolidate, and provisions on third party funding. In addition, the rules contained refined provisions relating to emergency arbitrators, appointment, challenge and replacement of an arbitrator, the tribunal’s powers in the conduct of proceedings, and the scope of technical reviews of draft final awards.

The AIAC welcomes comments on the draft rules until 30 June 2021 here.

For further information, please contact Peter Godwin, Partner, Daniel Chua, Associate, Rebecca Pang, Associate or your usual Herbert Smith Freehills contact.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.

Peter Godwin
Peter Godwin
Managing Partner, Kuala Lumpur
+60 3-2777 5104
Daniel Chua
Daniel Chua
Associate, Kuala Lumpur
+60 3 2777 5101
Rebecca Pang
Rebecca Pang
Associate, Kuala Lumpur
+60 3 2777 5111