Arbitration in Malaysia: ADR vs Court Litigation for Commercial Disputes

Arbitration has become an increasingly popular method of resolving commercial disputes in Malaysia. Governed by the Arbitration Act 2005 (which is based on the UNCITRAL Model Law), arbitration offers a private, flexible and internationally recognised alternative to court litigation. Malaysia is also a signatory to the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards, making Malaysian arbitral awards enforceable in over 160 countries. This guide explains the arbitration process in Malaysia, the advantages and disadvantages compared to court litigation and the practical considerations for parties choosing arbitration.

What Is Arbitration?

Arbitration is a form of alternative dispute resolution in which the parties submit their dispute to one or more arbitrators who make a binding decision (award). Unlike mediation, which results in a non-binding settlement, arbitration produces a final and enforceable award that is equivalent to a court judgment. Arbitration can be conducted under institutional rules (such as the Asian International Arbitration Centre or the Kuala Lumpur Regional Centre for Arbitration) or on an ad hoc basis agreed by the parties.

Advantages of Arbitration

Arbitration offers several advantages over court litigation in Malaysia:

• Privacy and confidentiality: Arbitration proceedings are private and the award is not published, protecting sensitive business information.
• Party autonomy: The parties can choose the arbitrator(s), the procedural rules, the language of the proceedings and the place of arbitration.
• Expertise: The parties can select an arbitrator with expertise in the relevant industry or area of law.
• Finality: Arbitral awards are generally final and binding, with very limited grounds for appeal, providing certainty and closure.
• International enforceability: Under the New York Convention, arbitral awards can be enforced in member countries without the need for a fresh trial.
• Flexibility: The arbitration process can be tailored to the specific needs of the dispute and the parties.

The Arbitration Process in Malaysia

The arbitration process under the Arbitration Act 2005 typically involves the following stages:

Stage 1: Commencement and Constitution of the Tribunal

Arbitration is commenced by a notice of arbitration served by the claimant on the respondent. The parties then appoint the arbitrator(s) in accordance with the arbitration agreement. If the parties cannot agree on the appointment, either party may apply to the High Court or the Director of the Asian International Arbitration Centre (AIAC) to appoint an arbitrator.

Stage 2: Pleadings and Directions

The parties exchange pleadings (statement of claim, defence and counterclaim) and the tribunal issues directions for the conduct of the arbitration, including timelines for disclosure of documents, exchange of witness statements and the hearing schedule.

Stage 3: Discovery and Evidence

The parties disclose relevant documents and exchange witness statements and expert reports. The tribunal has the power to order the production of documents and to direct the manner in which evidence is to be presented.

Stage 4: Hearing

The tribunal conducts a hearing at which the parties present their case through witness testimony, cross-examination and legal submissions. The hearing may be conducted in person, by video conference or on a documents-only basis, depending on the tribunal's directions.

Stage 5: Award

The tribunal issues a written award setting out its decision and the reasons for it. The award is final and binding on the parties. The tribunal may also make orders for costs, including the parties' legal costs and the arbitrator's fees.

Enforcement of Arbitral Awards

A domestic arbitral award can be enforced in Malaysia by applying to the High Court for leave to enforce the award as if it were a court judgment. The court's role is limited to verifying that the award meets the formal requirements and that none of the grounds for setting aside the award under Section 37 of the Arbitration Act apply. Foreign arbitral awards are enforceable under the Convention on the Recognition and Enforcement of Foreign Arbitral Awards Act 1985, which gives effect to the New York Convention in Malaysia.

When to Choose Arbitration Over Litigation

Arbitration is particularly suitable for the following types of disputes: international commercial disputes where cross-border enforceability is important, disputes involving technical or industry-specific issues that require expert adjudication, matters where the parties wish to maintain confidentiality and disputes where the parties want to avoid the delays and publicity of court proceedings. However, arbitration may not be appropriate for disputes involving multiple parties, disputes that require interim protective measures that only the court can grant effectively or cases where the parties need a binding precedent.

How Messrs S K Song Can Help

The corporate disputes team at Messrs S K Song represents clients in domestic and international arbitration proceedings, both as counsel and as arbitrators. We advise on the drafting of arbitration clauses, the appointment of arbitrators and the enforcement of arbitral awards. Contact our Johor Bahru office for a consultation.