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Malaysia – Why Arbitrate At The Kuala Lumpur Regional Centre For Arbitration (“KLRCA”).

14 March, 2014


Legal News & Analysis – Asia Pacific – Malaysia – Dispute Resolution


Globalisation has caused rapid changes in the manner businesses are conducted today and disputes inevitably arise between international contracting parties who comprise of different nationalities and hail from diverse legal systems.


As a result, it is now a trend for such parties to commercial contracts to settle on arbitration as their preferred choice of dispute resolution mechanism since arbitrations are private and confidential, in contrast to conventional litigation in the courts which are open to the public and may be reported in the media. Further, parties are able to select the arbitral tribunal which is significant particularly when the dispute at hand is in a highly specialised area or technical in nature.


The KLRCA was established in 1978 under the auspices of the Asian-African Legal Consultative Organisation (AALCO) and was the first regional centre established by AALCO in Asia to provide institutional support as a neutral and independent venue for the conduct of domestic and international arbitration proceedings in Asia.


KLRCA is a non-profit non-governmental international arbitral institution and is administered by a Director under the supervision of the Secretary General of AALCO. While it is fully funded by the Government of Malaysia under a host country agreement with AALCO, the Centre has been accorded independent and certain privileges and immunities for the purposes of executing its functions as an international organisation. KLRCA adopts the UNCITRAL Arbitration Rules with modifications i.e. The Rules for Arbitration of the Kuala Lumpur Regional Centre for Arbitration (KLRCA Rules). KLRCA provides institutional support as a neutral and independent venue for the conduct of domestic and international arbitration proceedings in the Asia-Pacific region. Parties are able to select their arbitrator from the KLRCA’s panel of experienced domestic and international arbitrators from diverse fields of expertise.


Prior to 2010 and despite being the first regional arbitral institution to be established, the KLRCA was trailing behind the newer arbitral centres in Asia. Then the number of cases registered with the KLRCA was between 10 and 20 cases per year. Currently, the numbers have increased to more than 100 cases with the value of disputed amounts adding up to about RM4 billion.


In recent years, KLRCA has undergone an active growth period, where it recently won an international accolade from Global Arbitration Review Award for ‘Innovation by an Organisation or Individual’ for KLRCA i-Arbitration Rules in 2012. A closer look into the rebranding of KLRCA in 2010 has made it apparent that KLRCA is quick in gaining popularity as an ASEAN arbitration centre despite facing strong competition from other arbitration institutions in the region.


7 Reasons Why Parties Should Consider Arbitration At KLRCA


1. Malaysia Is An Arbitration-Friendly Country


In Malaysia, arbitration is governed by the Arbitration Act 2005 (Amended 2011), which came into force on 15 March 2006 and is based substantially on the United Nations Commission on International Trade Law (UNCITRAL) Model Law on International Commercial Arbitration. The Arbitration Act repealed the Arbitration Act 1952 which was extensively based on the English Arbitration Act 1950.


Arbitration in Malaysia is similarly endorsed by the judiciary and the legislature. Prior to the Arbitration Act 2005, the Malaysian courts had wide powers over the conduct of arbitration proceedings in Malaysia under the 1952 Act which allowed for judicial intervention in matters ranging from the appointment of arbitrators, determination of questions of law to setting aside arbitration awards. However, under section 8 of the Arbitration Act 2005, no court can intervene in any of the matters governed by the statute unless expressly provided.  The Director of KLRCA is granted with statutory authority to appoint arbitrators which is independent from the court as provided under section 13 of the Arbitration Act 2005.


On 26 March 2013, the government of Malaysia and AALCO has renewed a host country agreement, which was first signed in 1978. This agreement enables KLRCA to function in Kuala Lumpur as part of AALCO’s integrated disputes settlement system in the international economic and commercial field. The agreement further provides an arrangement whereby the government of Malaysia would make available, among others, premises and an annual grant to KLRCA and the centre is accorded independence as well as certain privileges and immunities to perform its functions as a neutral international organisation.


On 24 September 2013, the Malaysian Parliament passed amendments to the Legal Profession Act 1976. Via the new Section 37A, the Legal Profession (Amendment) Act 2013 introduced an exception to the “fly-in fly-out” prohibition which allows a foreign lawyer advising on non-Malaysian law to enter Malaysia for up to 60 days in a calendar year, subject to immigration approval.


Consequent to the recent amendments above, both foreign Arbitrators and foreign lawyers are now permitted to enter Malaysia to participate in arbitral proceedings and are exempted from the “fly-in fly-out” prohibition. They will not be subject to the previous restriction of 60 days and would not require immigration approval to enter Malaysia to conduct arbitral proceedings.


2. KLRCA Arbitration Rules 


The KLRCA Arbitration Rules are constantly updated and upgraded by KLRCA to ensure that it is abreast with the rapidly changing global economy, market demands and technological innovations.


Latest Updates To The KLRCA Arbitration Rules


The KLRCA Arbitration Rules now makes available a procedure for reference to an emergency arbitrator where parties require urgent interim and conservatory relief. This innovative provision enables parties to seek the preservation of status quo prior to the constitution of the arbitral tribunal. Parties are now able to obtain the full breadth of commercial remedies within the auspices of their KLRCA administered arbitration proceedings.


Rule 1(1)(ii) makes it clear that in default of parties’ agreement the seat of arbitration is Malaysia, and where the seat is Malaysia, section 41, 42, 43 and 46 of the Arbitration Act 2005 shall not apply. This effectively removes the procedure for reference on preliminary points of law and appeal to court on questions of law arising out of an arbitration award. It applies to both domestic and international arbitration and is in line with the spirits of international commercial arbitration projected by the UNCITRAL Model Law.  With regard to consolidation of proceedings and concurrent hearings, Rule 8 has stipulated that the tribunal would only be empowered consolidate or order for concurrent hearings with parties’ agreement.


Arbitration legislations usually do not expressly provide for the grant of pre-award interest and in most common law countries the arbitrator makes reference to case laws to justify the grant of pre-award interest. Where the arbitration is administered under the KLRCA Arbitration Rules, the arbitrator may now, subject to the agreement of parties, rely on the provisions of Rule 11(8) to make a determination in respect of pre-award interest and the rate of interest.


Whilst confidentiality is a major concern for parties to arbitration, there is a recent trend in a number of arbitral institutions for the publication of redacted awards. KLRCA will not be following in their stead in the spirit of ensuring that confidentiality is maintained to the strictest sense. To this end, Rule 15 of the KLRCA Arbitration Rules impose confidentiality requirements upon parties, the arbitral tribunal and witnesses except where disclosure is necessitated for the purposes of implementation  and enforcement.


Previously, the rules provide for equal contribution of deposits from parties and the quantum was derived from the total amount of the dispute. Now however, where counterclaims are made by respondents, the Director may fix separate deposits on costs for the claims and counterclaims.


KLRCA i-Arbitration Rules


In 2012, KLRCA received international recognition when it won the Award for Global Arbitration Review Award for ‘Innovation by an Organisation or Individual’ for the KLRCA i-Arbitration Rules. The Global Arbitration Review is a London-based arbitration journal that is recognised as the leading publication for the global arbitration community. The voter-based Award was given for the KLRCA i-Arbitration Rules which were launched on 20th September 2012.


The KLRCA i-Arbitration Rules is the first set of Islamic arbitration rules in the world for the resolution of disputes arising from commercial contracts containing Shariah issues. It adopts the United Nations Commission on International Trade Law (UNCITRAL) Arbitration Rules that ensures international enforceability. Recently, a significant amendment was made to the KLRCA i-Arbitration Rules, specifically Rule 11 which is the provision in respect of referral to a Shariah (Islamic law) expert. This modification broadens the referral procedure to accommodate international parties and a wide range of schools of Islamic jurisprudence with no reference to a particular jurisdiction. The revision further enables the tribunal to proceed on a determination of the issues should the Shariah expert fail to provide its decision within the required time limits. This is to encourage time efficiency and smooth progression of the arbitral proceedings to its finality.


Further, the KLRCA i-Arbitration Rules now contains an optional mechanism in Rule 12 which allows the tribunal to award compensation to parties for late payment of an award in a Shariah related dispute. This is based on principles of ta’widh and gharamah, where ta’widh refers to compensation on actual loss and gharamah refers to penalty for late payment.


 KLRCA Fast Track Arbitration Rules


The KLRCA Fast Track Arbitration Rules have also seen important amendments. The rules also provides for opting out of Section 41, 42, 43 and 46 of the Arbitration Act 2005 where the seat of arbitration is Malaysia. There are revisions to stipulated timelines in enhancing expediency in procedure as well as in the completion of substantive oral hearings. Further the applicable rules for the appointment of a sole arbitrator and presiding arbitrator have been improved to encourage the smooth progression of the arbitration.


Most of the improvements made to the KLRCA Arbitration Rules in relation to payment of fees and costs and collection of deposits were similarly applied to the Fast Track Rules.


3. Enforceability Of Arbitral Awards


Malaysia is a signatory to the 1958 New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards which enables KLRCA’s arbitral awards to be enforceable in countries which are also signatories to the New York Convention. Parties to arbitration can be rest assured that an award made by the arbitral tribunal is final and binding and parties may apply to KLRCA to assist in the enforcement of arbitral awards.


The Malaysian courts have made vast improvements in recent years to ensure that arbitration related cases are disposed off expeditiously. The provisions for enforcement and setting aside of awards in the New York Convention are incorporated into the Arbitration Act 2005 under sections 38 and 39. Section 38 of the Arbitration Act closely followed the UNCITRAL Model Law in applying a uniform procedure for the recognition and enforcement of arbitral awards whether foreign or domestic. On the other hand, section 39 corresponds with Article 36 (1st Limb) of the UNCITRAL Model Law and sets out the grounds on which recognition or enforcement of awards shall be refused.


4. Cost-Effectiveness


The cost of arbitration fees under KLRCA is competitive and reflects that it is a cost-effective arbitration institution. It is also undeniable that the cost of arbitration proceedings in KLRCA is comparatively lower than arbitration in other arbitral institutions in the region considering the state-of-the-art facilities that KLRCA provides. Arbitrators’ fees are fixed as prescribed under the KLRCA fee schedule. KLRCA has also revised the schedule of fees and administrative costs maintaining the Centre’s cost competitiveness under the KLRCA Arbitration Rules. Parties are assured that the fees and costs of a matter administered under the auspices of KLRCA is 20% lesser than other established institutions in the region.


5. Stable economic growth and business


Malaysia is ranked as the 6th out of 189 countries in the recent World Bank’s Ease of Doing Business Report 2014. This is an elevation compared to the previous years’ ranks as a result of initiatives taken by the government to ensure that more entities opt for Malaysia as a place of business. Among the efforts taken up by the government to promote ease of doing business in Malaysia is providing that starting of business easier by merging company, tax, social security and employment fund registrations at the one-stop shop and providing same-day registration in 2012 and made starting a business less costly by reducing the company registration fees.


6. Diverse Pool Of Talents


KLRCA has separate panels of experienced domestic and international arbitrators from diverse fields of expertise.


7. KLRCA Initiatives


To date, KLRCA is the only arbitration centre in the world to sign a Corporate Integrity Pledge (CIP) which was signed on 8 June 2013. This is pursuant to KLRCA declaring a war against corruption practices in arbitration. This endeavour by KLRCA has set another important milestone in the history of KLRCA. KLRCA has pledged, among others, that it will “conduct business free from corruption and in accordance with the Anti-Corruption Principles for Corporations in Malaysia is to ultimately act in the best interests of KLRCA and its shareholders, as corruption destroys shareholder value, undermines the confidence of investors and is the antithesis of sustainable growth”. KLRCA pushed its commitment even further by inserting anti-corruption provisions into the Code of Conduct (COC) that it introduced last year in keeping with the Government Transformation Programme.


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For further information, please contact:


Ariff Rozhan, Partner, ZICOlaw

[email protected]


Dispute Resolution Law Firms in Malaysia

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