Transmenu powered by JoomlArt.com - Mambo Joomla Professional Templates Club

Disputes on the interpretation and applicability of the Arbitration Act 2005 leave a question mark over how an international arbitration award made in Malaysia is to be enforced in the event of non-compliance.

AS commercial parties become more sophisticated and aware of the pitfalls of litigation, arbitration is quickly developing as the preferred method of alternative dispute resolution.

This is because arbitration allows businesses to have a confidential, efficient and flexible method of resolving disputes, as opposed to potentially drawn out litigation in the civil courts that may be accompanied by undesirable media attention.

The Act is based on the United Nations Commission on International Trade Law model law, and was seen as a much desired change to the 1952 legislation which many arbitration practitioners viewed as outdated and plagued with inadequacies. It was also one of the steps taken to evidence Malaysia's pro-arbitration stance, in line with our goal of becoming one of the region's preferred venues for arbitration.

Despite its optimistic beginning, teething problems with the Act became apparent as disputes on the interpretation and applicability of the Act started unfolding.

A recent concern arose in the case of Aras Jalinan Sdn Bhd v Tipco Asphalt Public Company Ltd & Ors [2008] 5 CLJ 654, where the High Court interpreted the Act in such a manner as to strip the Malaysian court of its jurisdiction, whether inherent or otherwise, to grant any interim relief or order to aid arbitration proceedings where the seat of arbitration is outside Malaysia. This decision has since been confirmed by the Court of Appeal.

The High Court's rationale in that case was, among other things, that the express words of the Act have limited its applicability only to domestic and international arbitrations where the seat of arbitration is in Malaysia.

This decision indicates an unsettling departure from the previous judicial position which was to hold parties to their agreement to arbitrate, regardless of the chosen seat of arbitration.

It could also be said to be inconsistent with Malaysia's treaty obligations under the New York Convention 1958 (Convention on the Recognition and Enforcement of Foreign Arbitral Awards) that requires courts of contracting states to give effect to an agreement to arbitrate when seized of an action in a matter covered by an arbitration agreement.

The implication of this decision to commercial transacting parties is that parties who choose a seat of arbitration outside of Malaysia are no longer afforded the right to seek the assistance of the Malaysian courts to, for example, stay a civil action filed in Malaysia in breach of an agreement to arbitrate, or seek any interim relief.

What this essentially means is that arbitration clauses which provide for a seat of arbitration outside of Malaysia may be breached with minimal repercussion by a party who deliberately chooses to ignore an agreed upon method of dispute resolution.

While the Court in the Aras Jalinan case did hold that recourse could be available to the innocent party in the court of the country of the agreed seat of arbitration, whether such recourse would even be practicable, effective or enforceable is another issue.

The resulting situation is one where, in order to fully preserve their rights, foreign entities transacting with Malaysian entities may be “forced” to agree on the seat of arbitration being in Malaysia, although it may not be the desired seat for a variety of reasons. This can hardly be said to be conducive of Malaysia's stance as an international arbitration friendly country.

The Act also provides a mechanism for arbitral awards, upon an application in writing to the High Court, to be recognised and enforced in Malaysia as if they were a judgment obtained in terms of the award. In another peculiarity, the Act seems to confine this procedure only to awards made in respect of domestic arbitration, or awards from a foreign state.

There is no reference to international arbitration awards made in Malaysia in the Act's enforcement provisions. Under the Act, an “international arbitration” is where any one of the following criteria is met:

> One of the parties has a place of business outside of Malaysia;

> The seat of arbitration is outside Malaysia;

> A substantial part of the parties' commercial obligations is to be performed outside Malaysia;

> The subject matter of the dispute is most closely connected to a place outside Malaysia; and,

> Parties have agreed that the subject matter of the arbitration is outside Malaysia.

Pursuant to the Act's definition, an “international arbitration” could therefore include, for example, one which involves a foreign party and a Malaysian party, with an agreed seat of arbitration in Malaysia.

This leaves a question mark over how an international arbitration award made in Malaysia is to be enforced in the event of non-compliance.

In the worst case, the successful party may have to obtain judgment in the Malaysian court based on the award, and then seek to enforce that judgment. Needless to say, such an approach would be more tedious and time consuming than the mechanism provided for by the Act.

This situation is probably caused by an unintended omission by the drafters of the Act – and currently remains untested by case law.

Based on a strict interpretation of the Act, however, foreign parties dealing with Malay-sian parties may find themselves in a Catch-22 position: choose a seat of arbitration outside Malaysia and lose the right to seek relief from the Malaysian courts in aid of the foreign arbitration, or choose a seat of arbitration in Malaysia and face uncertainty in the manner of enforcement of the award.

If one thing can be said, it is that the current situation at least serves as a timely reminder of the importance of a well-thought-out arbitration clause.

Parties and their lawyers would do well to consider the practicality and possible implementation of a dispute resolution clause, having regard to the legislation and the judicial interpretation of the same, before putting pen to paper.

After all, everyone could use one less dispute to resolve.

> The writer is a member of the National Young Lawyers Committee of the Malaysian Bar Council. Putik Lada, or pepper buds in Malay, captures the spirit and intention of this column – a platform for young lawyers to articulate their views and aspirations about the law, justice and a civil society. For more information about the young lawyers, please visit www.malaysianbar.org.my/nylc.