Understanding arbitration clauses

by Chan Kheng Hoe, Head of Construction Law, Chong + Kheng Hoe

It is commonplace for construction disputes to be referred to arbitration. Although much can be said about the efficacy of arbitration these days in light of the growing sophistication of the construction courts, nevertheless arbitration remains the go-to mechanism for ultimate dispute resolution for the foreseeable future. 

The arbitration regime in Malaysia is governed under the Arbitration Act 2005 (“AA 2005”). S 9(1) in AA 2005 defines an arbitration agreement as “an agreement by the parties to submit all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not”.  

Two points can be observed from s 9(1) AA 2005.  

Firstly, there must be an agreement between parties to refer to arbitration. In other words, arbitration is party-driven, or in legal parlance it is said that there is party autonomy in arbitration. Parties determine whether arbitration applies, the scope of arbitration, how to appoint arbitrators, the rules applicable, timeline, allocation of costs, etc. 

At this juncture, we need to pause to recognise the fact that most parties have not even given thought to the process. Usually, contracting parties are not very concerned with the “dispute resolution” clause which would contain the arbitration agreement. A typical arbitration clause would oftentimes stipulate that all disputes arising under the contract shall be referred to arbitration, and stipulate the manner in which the arbitrator is appointed. Sometimes, the rules of arbitration will be referred to. 

Where rules of arbitration are referred to, such rules would then bind parties because parties are deemed to have agreed on the rules when agreeing to the dispute resolution clause. Parties therefore should be at least aware of this implication, because the rules may restrict the rights of parties or impose obligations beyond what the party envisages. 

Secondly, the scope of arbitration is determined by parties. Usually, the arbitration clause would simply state that “all disputes” will be referred to arbitration. However, the arbitration clause can also be limited in referring only selected disputes to arbitration. For example, there are provisions in the PAM form to state that if parties do not dispute the Final Account within a certain period of time, then the Final Account is deemed accepted. Is it fair then for an employer who has failed to dispute the Final Account within time to refer the Final Account to arbitration? There is some sense in limiting the scope of the arbitration clause. 

It is critical that the arbitration clause must be drafted clearly. Any inconsistency or ambiguity in the arbitration clause would result in lengthy litigation only to determine whether the arbitration clause is valid, or the precise meaning of the clause. For example, in Innotec Asia Pacific Sdn Bhd v Innotec GmBH, parties had to litigate only to determine the meaning of the term “SIHK” because there was dispute as to which organisation “SIHK” in fact refers to.  

An arbitration agreement can also be incorporated by reference. This would be a situation whereby the contract between the parties do not in fact contain an arbitration clause, but the contract refers to and incorporates the terms of another document which does contain an arbitration clause. Disputes have been litigated over the effect of such reference – whether the incorporation only refers to the substantive terms of the other document or to the actual arbitration clause itself. At the end of the day, this would be determined by the court interpreting the actual terms of the contract (Best Re (L) Ltd v ACE Jerneh Insurance Berhad [2015] 5 MLJ 513 CA). 

When a dispute arises, it may be too late then to try and sort out the “rules of the game” governing the arbitration, so to speak. Therefore, it would be best practice for parties to consider these issues upfront. The issues that parties may want to give some thought to include: 

• whether parties in fact wish to resort to arbitration as opposed to relying on the construction courts which have demonstrated that they are not only capable of dealing with complex technicalities, but also that the processes are faster and cheaper.
• where should the arbitration take place, and under the administration of which arbitral body – these decisions may affect the law governing the arbitration process.
• choice of law to govern the arbitration proceedings, and the rules to govern the actual process.
• how would arbitrators be appointed and avenue for objecting to any intended appointment.
• qualifications of arbitrators to be appointed.
• whether to seat a 1-person or 3-person panel – although the author has come across an arbitration agreement that proposes a 2-person panel, such clauses would be rare and may not be practicable.
• how to replace arbitrators and what happens to the process in the event a vacancy arises (for instance, if the chosen arbitrator falls ill on a long-term basis).
• language to be employed.
• how to preserve the confidentiality of the proceedings.

Whilst such issues may seem tedious or petty at the start of a contract, they loom large when a full-blown dispute takes place. The “rules of the game” set by the arbitration clause may well turn out to be crucial in determining the end results.