Arbitration Act amendments strengthening regime passed by Parliament

30 July 2024

On 24 July 2024, the Senate (Dewan Negara) passed the Arbitration (Amendment) Bill 2024 (“AA Bill”) and the Construction Industry Payment and Adjudication (Amendment) Bill 2024 (“CIPAA Bill”) (collectively, “Bills”). The House of Representatives (Dewan Rakyat) passed the Bills on 16 July 2024. The Bills will be presented for Royal Assent and become law upon their publication in the Federal Gazette of Malaysia.

This Alert sets out the key changes introduced by the Bills.

Overview

The Arbitration (Amendment) Bill proposes certain amendments to the Arbitration Act 2005, including:

• Form of arbitration agreement;
• Applicable law to arbitration agreement;
• Joint appointment of arbitrators for multiple parties;
• Introduction of the post “President of the AIAC Court of Arbitration”;
• Digital and electronic signatures;
• Recognition and enforcement of an award; and
• Third party funding

The Construction Industry Payment and Adjudication (Amendment) Bill 2024 sets out amendments to the Construction Industry Payment and Adjudication Act 2012 stemming from the proposed changes to the arbitration regime.

Arbitration (Amendment) Bill

The AA Bill was drafted to strengthen Malaysia’s position in the international arbitration sector by way of improvements to the organisational structure of the Asian International Arbitration Centre (“AIAC”) in line with the execution of the “Supplementary Agreement between the Government of Malaysia and the Asian-African Legal Consultative Organization relating to the Asian International Arbitration Centre in Kuala Lumpur” on 20 February 2024 (“Supplementary Agreement”), as well as to align the legislative framework of the Arbitration Act 2005 (“AA”) with global best practices. The key amendments proposed in the AA Bill are discussed below.

Form of arbitration agreement (Section 9, AA)

Section 9 of the AA sets out the definition of an arbitration agreement and the form it is able to take, including that such an agreement must be in writing. The AA currently provides that an arbitration agreement is in writing where it is contained in the vehicles set out in section 9(4). The AA Bill clarifies that this list is not exhaustive with the proposed addition of the phrase “and any other documents”.

Applicable law to arbitration agreement (Section 9A, AA)

The AA Bill introduces a new section 9A which expressly provides for the parties’ freedom to agree on the law applicable to their arbitration agreement. If parties are unable to come to an agreement, the law applicable will be the law of the seat of arbitration. Section 9A stipulates that the fact the parties agreed on the law applicable to the wider agreement (of which the arbitration clause is a part) does not constitute an express agreement that the same law should then apply to the agreement to arbitrate.

Joint appointment of arbitrators for multiple parties (Section 13, AA)

Section 13 of the AA is amended by the insertion of subsection (3A) on the appointment of arbitrators where there are multiple claimants and respondents. The claimants are to jointly appoint one arbitrator and the respondents another. However, the amendments are silent on the procedure to be employed where the respective joint parties fail to agree on their respective appointments.

Introduction of the post “President of the AIAC Court of Arbitration” (Section 13, AA)

Reference to “Director of the Asian International Arbitration Centre (Malaysia)” is replaced with “President” in section 13 of the AA. This amendment reflects the restructuring undertaken in respect of the AIAC, which includes the formation of the AIAC Court of Arbitration and the replacement of the position of “Director” with the position of “President of the AIAC Court of Arbitration”.

Digital and electronic signatures (Section 33, AA)

In an effort to remain aligned with the global trend towards borderless transactions, the AA Bill seeks to allow arbitrators to utilise digital signatures (as defined under the Digital Signature Act 1997) and electronic signatures (as defined in the Electronic Commerce Act 2006) on arbitral awards.

Recognition and enforcement of an award (Section 38(1), AA)

In order to be better aligned with the United Nations Commission on International Trade Law (UNCITRAL) Model Law, the AA Bill seeks to substitute the current subsection 38(1) on the recognition and enforcement of an arbitration award to stipulate that where the seat of arbitration is in Malaysia, or with regard to an award from a foreign State, the award is automatically recognised as binding and, upon application to the High Court, shall be enforced subject to section 39 of the Act which sets out grounds for the refusal of recognition or enforcement.

With this amendment, the award made in respect of the arbitration need not go through the existing procedure necessitating an application to the High Court to recognise an award.

Third party funding (Part 3, AA)

The AA Bill seeks to enhance provisions on third party funding, where all or part of the costs of the arbitration can be funded by a third party. The funding needs to be communicated to the arbitral tribunal or court upon commencement of the proceedings or within 15 days of the third party funding agreement being made. This amendment will apply prospectively and not retrospectively.

The amendment also sets out a code of practice with which third party funders are expected to comply. These may include:

• requirements relating to promotion of third party funding;
• requirements in relation to provisions in a third party funding agreement, such as:
• the degree of control that a third party funder will have in relation to an arbitration;
• liability of a funded party; and
• termination of a third party funding agreement;
• criteria for a third party funder including the minimum amount of capital required;
• procedures for addressing potential, actual, or perceived conflicts of interest; and
• procedures for enhancing the protection of the funded party.

Non-compliance with the code of practice will not, in itself, render a third party funder liable to any legal action but will be taken into account by the arbitral tribunal or court should they be relevant to any question being decided by the arbitral tribunal or court.

Construction Industry Payment and Adjudication (Amendment) Bill 2024

The CIPAA Bill is in line with restructuring initiatives by the AIAC under the Supplementary Agreement.

The key amendments to the CIPAA Bill include:

• References to “Kuala Lumpur Regional Centre for Arbitration” (“KLRCA”) to be amended to “Asian International Arbitration Centre” to reflect the centre’s name change;
• Introduction of the post “President of the AIAC Court of Arbitration”; references to the “Director of KLRCA” to be replaced with “President of AIAC Court of Arbitration”.

The proposed amendments will see the AIAC or the President of the AIAC Court of Arbitration assume the functions of the Director of KLRCA under the CIPAA, such as requiring an adjudicator to serve a copy of the adjudication decision to the AIAC and requiring the adjudicated amount pursuant to an adjudication decision or part of it to be deposited with the AIAC.

Further information

This Alert has been prepared with the assistance of Principal Abd Azim bin Abd Razak.