Arbitration, is a non-court alternative method of dispute resolution, where an arbitrator or panel of arbitrators (“arbitral tribunal”) is appointed by the parties to make a binding decision, from which there are very limited grounds of challenge. Unlike court proceedings, the parties can only resort to arbitration if both parties have expressly and/or contractually agreed to have their disputes resolved via arbitration. An arbitration clause or arbitration agreement will determine the arbitration jurisdiction and the applicable rules. Below are some pros and cons to bear in mind when considering whether to include an arbitration clause in your commercial contract:
| Advantages | Disadvantages |
| Confidentiality Unlike court proceedings, arbitration is a private process that only involves the named parties. The confidentiality of arbitration is reinforced by the Malaysian Arbitration Act 2005, which provides that unless otherwise agreed by the parties, no party may publish, disclose or communicate any information relating to the arbitration proceedings and/or the arbitral award. | Lack of precedent As arbitration proceedings and the awards are confidential, they do not give rise to any binding precedent on other parties in other matters. As such, if the dispute requires a binding ruling on a point of law, litigation will be a better option. |
| Finality in outcome An arbitral award is final and binding on the parties concerned, thus the parties are less likely to become caught up in lengthy appeals. An arbitration award (obtained in Malaysia or overseas) can be enforced as a court judgment once registered with the High Court. A arbitral award obtained in Malaysia can also be enforced in any of the 148 countries which are signatories to the New York Convention. | Limited grounds for appeals Given that an arbitral award is final, an unsatisfactory decision cannot be easily overturned even if the party may feel that the outcome is unfair or biased. |
| Ability to appoint arbitrators The parties are free to nominate and appoint their desired arbitrators. The ability to choose your own arbitrators is particularly useful when the disputes involve technical issues which require expert determination. The recent amendments to the Legal Profession Act 1976 allow both foreign arbitrators and foreign lawyers to enter Malaysia to participate in arbitral proceedings. | Multiparty disputes Given that the right to arbitrate must come from an arbitration agreement, an arbitral tribunal generally cannot compel a third party who is not named in the arbitration agreement to participate in the arbitration. This rule may risk inconsistent findings and unduly prejudice a party. |
| Faster and cheaper than court litigation Arbitration can be faster, more efficient and cheaper than court litigation as the parties achieve procedural efficiencies by agreement. | Delays and Costs The parties need to pay the arbitrators fees as well as the administrative costs (usually on hourly rate). These costs can be substantial if the issues were complex thus require longer time for preparation and hearings. The parties may also incur significant costs if there are persistent delays in complying with the procedural deadlines. |
In light of the above, when negotiating a dispute resolution clause in a contract, the parties should always consider whether litigation or arbitration would be more appropriate. Given the complexities involved in drafting arbitration clauses and the potential ramifications, it will be prudent to consult a lawyer before agreeing to any arbitration agreement.
