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Arbitration Legal Systems in Malaysia and Saudi Arabia Research Paper


The 21st century is considered to be the age of globalization not only in economic and political matters but also in the matters of law. With numerous corporations becoming multinational and not strictly attached to a singular state legal system, disputes between such corporations are increasingly difficult to manage in the scope of a singular state legal institution. As it stands, international arbitration is considered the most efficient dispute settlement tool in the areas of international trade and foreign investments (Born, 2015).

Many countries have adopted different treaties and laws as well as established dedicated facilities and institutions in order to enable and enhance domestic and foreign arbitration. However, legal aspects of arbitration still differ from one country to another. In many states, such as Malaysia and Saudi Arabia, which did not participate in any international conventions at the time, the adoption of national arbitration acts was required. In the case of Malaysia, it was the Malaysian Arbitration Act of 2005, whereas Saudi Arabia established its own arbitration protocols in 2012. Consequently, both countries became members of several international conventions regarding arbitration (Born, 2015).

International arbitration is a complex and controversial matter, as some countries perceive the practice as an affront to national sovereignty, while certain businesses find the practice beneficial when trying to escape or avoid lawsuits based on domestic court proceedings. As such, almost every country has issues with enactment and enforcement of the decisions made by arbitrary courts. Malaysia and Saudi Arabia both are part of the New York Convention of Foreign Arbitral Awards of 1958 (Born, 2015). The purpose of this paper is to compare legal arbitral systems of Malaysia and Saudi Arabia, highlighting their similarities and differences, and providing examples of cases they had to deal with.

Arbitration Centers in Malaysia and Saudi Arabia

Both Malaysia and Saudi Arabia possess their own arbitration centers, which are used to house, process, and handle arbitration cases from various international entities. In Malaysia, arbitration cases are conducted in Kuala Lumpur Regional Center for Arbitration, which was established in 2003 (Nadkarni & Singh, 2016). It provides arbitration, conciliation, and mediation services in the fields of trade, commerce, and investment disputes. It is effectively one of the largest arbitration centers in the East-Pacific region. One of the reasons behind the creation of KLRCA is to provide the facilities for arbitration procedures and supervision of thereof under the rules of KLRCA for settling of disputes. The center provides fair, expeditious, and inexpensive services, and was created to abdicate the necessity to resort to arbitration institutions located outside the region.

Saudi Arabia established the SCCA (Saudi Center for Commercial Arbitration) in 2014, under the Cabinet Decree number 257 of 15 March 2014, which enabled the administration of arbitration procedures in civil and commercial disputes by the new authority (“Arbitration,” 2017). The center itself was opened in Riyadh in 2016, with the same purposes as its Malaysian counterpart. Saudi Arabia is a center of international trade, and as such seeks to become the leading center of arbitration in the Middle East by 2030 (“Arbitration,” 2017). The center offers services in arbitration, conciliation, and mediation in cases related to international commerce, investment, and trade. The SCCA does not have the authority to process disputes of personal status as well as cases of administrative or criminal nature.

Arbitration Acts in Malaysia and Saudi Arabia

As it was already mentioned, every country that possesses a center for international arbitration has a regulation act established in order to outline the rights and responsibilities of the arbitration institutions. In Malaysia, it is the Malaysian Arbitration Act of 2005, which is largely based on the UNCITRAL Model Law on International Commercial Arbitration, adopted in 1985 and amended in 2006 (Nadkarni & Singh, 2016). During the development and adoption of the legislation, Malaysia utilized the New Zealand Arbitration Act of 1996 as an example, due to regional similarities as well as similarities in domestic and international trade laws. The Malaysian Arbitration Act is currently utilized by the KLRCA, which is considered a very powerful and influential institution in the region, which testifies to its credibility and fairness.

The Saudi Arbitration Act of 2012 is similar in nature, as it was also modeled utilizing the UNCITRAL model law. It serves to replace the highly controversial arbitration law of 1983, which was known to discriminate against arbiters based on their nationality and gender (Quinlan, Al-Amr, Peters, & Alayoni, 2017). Unlike the Malaysian Arbitration Act, the Saudi law is more deeply enrooted in Sharia Law, which serves as a basis for many legal aspects in the Middle East. When compared to the act of 1983, it is possible to note that the UNCITRAL-based act is more liberal and independent. However, critics of the act note that the liberalization of the act also came at the price of reducing its ability to be enforced. The current Act is utilized by the SCCA and guides its decisions and procedures.

Key Points of Malaysian and Saudi Arabian Arbitration Acts

Since both Acts reviewed in this paper have been based on the UNCITRAL Model Law, they both share a set of key principles, which enables international arbitration. These principles are as follows (Born, 2015):

  • Both Acts are based on a voluntary agreement to provide a private, non-government resolution process for trade entities and investors.
  • Both Acts require an enforceable agreement in order to commence arbitration.
  • The dispute inevitably results in an enforceable award.
  • Arbitration is a required component of due process procedures implemented in international disputes.
  • The procedures are cost-effective and offer reasonable expedience.
  • Both systems are built on the assumption of fairness and lack of interest by the arbitration court.

In addition, under the articles of both Malaysian and Saudi Arbitration Acts, the Tribunal is granted powers to conduct the arbitration in ways considered appropriate by the bilateral conventions and is expected to treat both parties equally, offer them the opportunity to present their cases, and ensure that the procedure takes place with due expedition (Born, 2015).

The Nature of International Arbitration as Defined by Malaysian and Saudi Arbitration Acts

There are two types of arbitration – domestic and international arbitration (Born, 2015). This paper is focused on international arbitration, as it is the primary method of solving disputes in the context of international investments and trade. The reasons for the increasing popularity of international arbitration is related to the increase in interstate trade, which bolsters the need for regulatory bodies in order to facilitate international dispute resolutions. International arbitration has many advantages over domestic arbitration, such as confidentiality and expediency of processes, expert assistance, and the ability to enforce awards in the scope of local legal systems.

The decisions made by arbitral tribunals are commonly referred to as “awards.” The term lacks a universal definition within the legal circles, which is why many Arbitration Acts have their own definitions of the term. Typically, the term “award” refers to the final decision that disposes of claims brought to the tribunal and any other decision that can be rendered on substance issues, competencies, or procedures (Born, 2015).

Malaysian and Saudi Arabian treat the issue of awards differently. According to section two of the Malaysian Arbitration Act of 2005, international awards are defined as decisions of the arbitration court involving parties whose businesses are located internationally, or when both parties have agreed that the issue brought to the arbitration court is related to a business in various states (Born, 2015). According to the act, the award includes final, interim, and partial decisions as well as costs, but does not include any interlocutory orders.

Saudi Arbitration Act of 2012 treats this matter differently. In Saudi Arabia, there is no exact definition in regards to international arbitration awards (Buchanan, 2017). Instead, the Act refers to international arbitration as a dispute process, which is related to international commerce and is considered international commerce when the heads of office for both businesses or parties exist in several states. The third article of the Saudi Arbitration Act of 2012 also specifies that in case of a lack of a place of business, the arbitration court would take the place of residence into consideration (Buchanan, 2017). In addition, should both parties originate from the same country, the Act treats any disputes as international only if the arbitration takes place outside of that country. Lastly, should both parties originate from the Kingdom of South Arabia, the Act permits them to resort to international arbitration only when the matter of dispute takes place outside of the country. Otherwise, both parties are subject to domestic means of settling trade disputes. As such, the decisions made by arbitration courts in the cases presented above, are referred to as international arbitration awards.

Recognition and Enforcement of Awards as Defined by Malaysian and Saudi Arabian Arbitration Acts

The arbitration tribunal typically does not have the authority to award enforcement of the decision it makes. The enforcement decisions have to be made by local courts, which double and supervise the arbitration processes. However, the award itself is capable of being legally enforced, as both parties have to give their consent to follow the decisions made by the tribunal, prior to presenting their cases. Typically, the local courts comply with the awards made by international tribunals, except for the cases where the arbitration procedures violate public policies or cause any procedural irregularities. Over 95% of all arbitral awards are typically approved by the courts (Born, 2015).

Malaysia and Saudi Arabia Arbitration Acts both consider the arbitral award to be final after it has been rendered such following the enclosure of the dispute. However, there are specific regional differences. In Malaysia, the award has to be doubled by the court where the arbitration took place. If it is set aside or suspended by the court, it may not be legally acknowledged. The losing side would be required to provide proof that the arbitrage court decision was wrongful, should they try to oppose the award in court where the arbitration took place (Born, 2015). The winning party, on the other hand, should they want to ensure the enforcement of the award, would need to contact one of local courts.

The situation is different in Saudi Arabia. The Saudi Arbitration Act of 2012 does not explicitly addresses the matter of refusal of recognition and enforcement of the award, nor does it issue the regulations for certification of the authority or court where the proceedings and the decisions took place. Instead, the local arbitration authorities refer to the ICSID Convention, which states that the award is considered final after being certified by the general secretariat of the ICSID (Ghazwi, Masum, & Yaacob, 2014). The convention declares the award binding for all parties, meaning that the losing party must comply with the award, whereas the losing party has the right to demand such.

Comparative Analysis of Laws, Regulations, and Competencies of Malaysian and Saudi Arbitrary Systems

Despite having been developed in different regions, Malaysian and Saudi Arbitrary Acts have much in common. They were both established using the UNCITRAL model law framework, which means that the core competencies of both systems remain roughly the same. Additionally, Malaysia and Saudi Arabia have signed the New York Convention on the Recognition and Enforcement of Foreign Arbitral Awards of 1958, which regulates the process of enforcement of awards in both systems (Ghazwi et al., 2016). The requirements established in the two countries address these concerns, as, without effective mechanisms of enforcement, the majority of stakeholders would not see arbitrages as effective in settling an international dispute. At the same time, both acts have marked differences from the ICSID Convention regarding the requirements for recognition and enforcement of international arbitrage awards (Ghazwi et al., 2016).

Another remarkable similarity between the two acts is that both the Malaysian and the Saudi Arbitrage Acts acknowledge the Sharia Law as a framework upon which arbitrage could be conducted (Guzeloglu, 2016). However, while the Saudi Arbitrage incorporates Sharia Law more extensively, Malaysian Arbitrage Tribunal utilizes Sharia Law only in cases pertaining Islamic banking practices, which are popular in the Middle East and some portions of Asia. The reasons for such a difference is simple – in Saudi Arabia, Sharia Law serves as a basis for public policy (Guzeloglu, 2016). Therefore, any decisions made by international arbitrages that do not comply with public policies are subject to being repealed. Malaysian Arbitrage, on the other hand, does not have the same restrictions and is able to utilize Sharia Law only in cases specifically pertaining the use of the framework.

Malaysian arbitrary tribunal is widely recognized as one of the most open and fair tribunals in the world, whereas the Saudi Arbitration Act of 2012 has no such reputation. Although it is considerably more liberal in terms of appointing arbiters when compared to the Arbitration Act of 1983, it still suffers from association with the Saudi government as well as with various restrictions pertaining the Sharia Law (Guzeloglu, 2016). For instance, The Saudi Arbitration Act requires arbiters to possess a degree in Sharia Law or being a Bachelor of Laws in order to be admitted to the committee. Demands towards arbiters in 1983 were even stricter, as all members of the committee had to be Muslim, and women were not allowed to participate as arbiters. Additionally, according to the article number 50 of the Saudi Arbitration Act of 2012, the court tasked with the administration of the award does not have the legal authority to review the facts of the case. Its purpose is to ensure that the award conforms to Sharia law, as well as the Kingdom’s public policy.

The last major difference between Malaysian and Saudi Arbitration Acts is that the latter does not enforce any decisions regarding interest as a form of financial compensation (Ghazwi et al., 2016). According to Sharia Law, Reba (or interest) is prohibited under the Islamic Law, therefore violating Saudi Arabia’s public policy. This, the court in charge of the administration of the award does not have the legal possibility to enforce such a decision (Guzeloglu, 2016). Although Saudi Arbitration Act of 2012 is compatible with arbitration laws in all of the GCC countries and is substantially more liberal than the act previously in place, it has significant issues that prevent it from being utilized outside of the region due to incompatibilities of legal and economic systems.

Example Cases

Sebiro Holdings v. the Government of Malaysia

This arbitrage case is cited under the civil appeal no. Q-01-338-10/2013, and has been resolved on 17 March 2015 (“Arbitration case law,” 2015). The appeal concerned the appointment of a first respondent in order to arbitrate the case between Sebiro Holdings and the Government of Malaysia. The appellant claimed that the arbitrator was appointed unilaterally by the KLRCA without proper agreement and consultation between two parties. The Director of KLRCA claimed that the arbitrator was previously agreed upon due to the knowledge of location and familiarity with the case. Upon investigation, Sebiro Holdings failed to provide proof of unfair treatment by KLRCA, as the burden of proof in this situation was placed upon them. It was decided that the arbitrator for the case would remain as it were and that the arbitrage would continue under their supervision (“Arbitration case law,” 2015).

The decision in this case scenario addresses some of the issues under the Malaysian Arbitrage Act of 2005, namely the affirmation of the principle of procedural fairness between both parties (“Arbitration case law,” 2015). According to the Act, the parties may conduct the arbitrage in any convenient way they wish, upon mutual agreement. The decision, in this case, is a reminder that every aspect of the arbitrage process must be considered during the draft phase of the arbitrage contract. This contract cannot be undone without a mutual agreement to do so. Since Sebiro Holdings had initially agreed with the appointment of the arbiter, it did not have the legal right to remand their withdrawal later.

Greek Telecommunications Company Award of 2011

This case involves the enforcement of an 18.5 million dollar award issued in London in 2011, regarding a UAE subsidiary of a Greek telecommunications company in arbitration with an unnamed Saudi communication services provider (Quinlan & Al-Amr, 2016). After the introduction of two new laws in 2012, Riyadh enforcement court had confirmed the right to enforce the decision upon the provider, by the local courts and authorities.

This is one of the first cases of successful enforcement of a foreign arbitration decision under the scope of a new Arbitration Act adopted in 2012. Historically, Saudi Arabia had been a very difficult place to enforce arbitration awards due to the deficiencies and intricacies of the local enforcement laws (Quinlan & Al-Amr, 2016). However, the adoption of UNCITRAL guidelines by the SCCA streamlined and simplified the procedure of award enforcement in the country. The decision reaffirms one of the primary principles of the Saudi Arbitration Act of 2012 – the ability to result in an enforceable award, which was nearly impossible under the Arbitration Act of 1983.

Conclusions

Malaysian and Saudi Arbitration Acts are now closer than they used to be roughly a decade ago. Both of them share the same model law framework and have similar procedures on the variety of issues. The case studies presented in this paper represent how these systems work. In the case of Saudi Arabia, the most significant factor demonstrated in the example case law is the ability to enforce arbitral awards, as it is the central element for successful arbitration. Without it, parties will not perceive arbitration as an alternative to state court decisions, unless these decisions are enforced with the same amount of certainty and rigor.

Still, an objective comparison shows that the Malaysian arbitrage system is superior to Saudi Act, as it maintains its secular nature, whereas the system implemented by Saudi Arabia is still heavily-rooted in Sharia Law, which places certain restrictions upon the award enforcement process that are not acknowledged anywhere else in the world. As such, it must be concluded that unless Saudi Arabia changes its public policy and abolishes the Sharia Law, which is unlikely to happen, it will continue to remain a regional center of arbitrage for the countries of GCC, while the rest of the world would not view it as acceptable in accordance to the international standards. Nevertheless, the Saudi Arbitration Act is a step in the right direction and is likely to improve the country’s image for international businesses.

References

(2017). Web.

Arbitration case law: Developments in Malaysia & the international front. (2015). Web.

Born, G. B. (2015). International arbitration: Cases and materials (2nd ed.). Melbourne, CA: Wolters Kluwer.

Buchanan, K. (2017).Web.

Ghazwi, M. F., Masum, A., & Yaacob, N. B. (2014). Recognition and enforcement of international arbitration awards: A case study of Malaysia and Saudi Arabia. International Journal of Accounting and Financial Reporting, 4(2), 541-548.

Guzeloglu, A. (2016). Web.

Nadkarni, D. N., & Singh, D. (2016). Web.

Quinlan, H., & Al-Amr, A. A. (2016). Landmark enforcement decision in the Kingdom of Saudi Arabia. Web.

Quinlan, H., Al-Amr, A. A., Peters, A., & Alayoni, A. (2017). Web.

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