Section 2 of the Malaysian Arbitration Act 2005 (“Act”) gives a general definition of what is an arbitration agreement. Under the Act, an arbitration agreement is an agreement to submit to arbitration all or certain disputes which have arisen or which may arise between parties in respect of a defined legal relationship, whether contractual or not.
An arbitration agreement or clause should not be viewed as merely “boilerplate”, as there can be many practical and legal repercussions from a badly drafted arbitration agreement. Although the Act does not detail what amounts to an effective arbitration agreement, here are key points to consider when drafting an arbitration agreement.
Intention to Arbitrate
The agreement must clearly and unambiguously reflect the parties’ intention to submit to arbitration disputes which have arisen or may arise between them. A lack of clarity in this respect can give rise to ambiguity whether parties intended to preclude recourse to litigation and instead refer their disputes exclusively to arbitration.
Pre-conditions / Multi-Tier
Multi-tier clauses or clauses with preconditions are those where certain actions or criteria must be met before a party can refer a dispute to arbitration. This could include requiring parties to negotiate or mediate the dispute first, to allow an opportunity to resolve any dispute before it is escalated into arbitration.
Seat of Arbitration
The seat of arbitration differs from the geographical venue of the hearing. Rather, the seat of the arbitration determines the judicial home of the arbitration award and the procedural laws governing the arbitration, including any challenges to the award.
The seat of the arbitration therefore also determines the enforcement court and process, as well as the interim measures and default positions in the absence of express agreement.
It is recommended to specifically use the phrase “seat of arbitration” (eg: “the seat of arbitration is in…”) rather than saying “the arbitration is in…” as this could cause confusion and disputes as to what is the intended seat of arbitration and whether the arbitration agreement was referring to a geographical venue of the hearing instead.
Geographical Venue
Unless specifically stated in the arbitration agreement, there is no requirement that the geographical venue for the hearing must be the same as the seat of arbitration. For example, it may be possible to have a seat of arbitration in Malaysia, but for the hearing to be conducted in the United Kingdom due to the locality of the arbitrator and the witnesses.
Arbitrators and parties generally have a wide power to determine the venue of the hearing. See, for example, Rule 14.3 of the Asian International Arbitration Centre (AIAC) Rules which provides that parties are free to agree to the place or venue for hearings.
Therefore, if parties intend for the hearing of the arbitration to be conducted in a specific location (eg: for cost purposes or for practicality), this should be stated upfront in the arbitration agreement.
Language of Arbitration
The arbitration agreement should specify the language of the arbitration, especially where the arbitration agreement involves parties from different countries. The language of the arbitration may also affect other practical aspects of the arbitration such as the selection of arbitrator and/or the need for a translator or interpreter.
It is not safe to assume that parties will always want the arbitration to be conducted in English. For example, if there is an arbitration agreement between a Japanese company and a French company, it would not be out of the ordinary for each party to expect the arbitration to be conducted in their national language.
Institutional or ad hoc arbitration
Institutional arbitration means that the arbitration is administered by a specific arbitral institution through its institutional rules. Institutional arbitration is usually more expensive because of the administration fees payable to the arbitral institution.
Ad-hoc arbitration is where the arbitration procedure is determined by parties themselves, since it is not administered by any arbitral institution. An ad-hoc arbitration is likely to be less costly, but its efficiency depends on how cooperative parties are with each other regarding the arbitration procedure.
There are other distinct advantages and disadvantages of choosing one type of arbitration over the other; parties who are not familiar with arbitration should obtain legal advice before determining which method is best for their set of circumstances and the nature of their potential disputes.
The arbitrator(s)
The arbitration agreement should also include the procedure for appointment or the arbitration, the number and the relevant qualification. This is usually already provided for in the rules of arbitration for institutional arbitration, or in arbitration legislation itself.
However, if parties have any specific requirements to appoint the arbitrator(s), this should be set in the arbitration agreement. For example, parties may want to set minimum qualifications and experience for the arbitrator, depending on the nature and complexity of the subject matter.
Key Takeaways
Parties that are not familiar with drafting arbitration clauses can consider adopting model clauses proposed by arbitration institutes. For example, the Asian International Arbitration Centre (“AIAC”) has the following “model clause” for parties who wish to have their disputes referred to an AIAC administered arbitration:
“Any dispute, controversy or claim arising out of or relating to this contract, or the breach, termination or invalidity thereof shall be settled by arbitration in accordance with the AIAC Arbitration Rules.”
Recommended additions:
- The seat of arbitration shall be […].
- The language to be used in the arbitral proceedings shall be […].
- This contract shall be governed by the substantive law of […].
- Before referring the dispute to arbitration, the parties shall seek an amicable settlement of that dispute by mediation in accordance with the AIAC Mediation Rules as in force on the date of the commencement of mediation.
While model clauses are a useful start, parties should ensure that whatever arbitration agreement used correctly reflects their intentions and that appropriate edits are made. If there are any doubts, legal advice should always be sought since the arbitration agreement will determine how disputes will be handled.
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This article was written by Lim Zi-Han (Senior Associate) from Donovan & Ho’s employment law practice.
Donovan & Ho is a law firm in Malaysia, and our employment practice group has built a reputation for providing strategic employment advice to local and global organisations. Our team of employment lawyers provide advice on employment law and industrial relations including review of employment contracts, policies and handbooks, advising on workforce reductions, and managing dismissals of employees for poor performance or misconduct. We also represent clients in unfair dismissal claims and employment-related litigation. Have a question? Please contact us.
