Malaysia
In your jurisdiction, are there any formal ADR procedures available for resolving commercial disputes other than litigating (or arbitrating) to a final hearing?
Yes. ADR is utilized in various type of disputes, such as commercial disputes, construction and engineering disputes, matrimonial and family disputes, motor vehicle accident disputes, etc.
Malaysia has a statutory adjudication regime for construction payment disputes under the Construction Industry Payment and Adjudication Act 2012 (“CIPAA 2012”) which aims to resolve cash flow issues in the construction industry. Statutory adjudication applies to written construction contracts relating to construction work carried out in whole or in part in Malaysia. Adjudication decisions are “temporarily final” and may be enforced or set aside once delivered by an adjudicator. However, the dispute between the parties, which may not be limited to payment issues, may be subject to final resolution in Court or by arbitration.
Contractual mediation is often specified as the first step in multi-tiered dispute resolution clauses. In that sense, it is recognized as a formal ADR procedure as it is typically a condition precedent before parties can initiate an arbitration or court proceedings. Generally, contractual mediations in Malaysia are administered by the Asian International Arbitration Center or the Malaysian International Mediation Center. Whilst contractual mediations may not entirely resolve a dispute, it could assist to narrow down the issues in dispute in eventual court or arbitration proceedings.
In addition to the above, Court Annexed Mediation is also a recognized formal ADR procedure. The Court at its own discretion may direct that a civil suit proceeds to Court Annexed Mediation. Generally, the Judge presiding over the case does not act as the mediator. However, the parties may agree otherwise. The procedure to conduct Court Annexed Mediation is flexible and would be determined by the Mediator. Should the parties reach a settlement following Court Annexed Mediation, the parties may enter into a consent judgment before the mediator-Judge.
The Malaysian Central Bank (“BNM”) and the Securities Commission Malaysia (“SC”) launched in January 2025, a Financial Markets Ombudsman Services (“FMOS”). FMOS serves as a centralized dispute resolution center for financial consumers and investors in Malaysia. The FMOS accepts disputes in relation to banking products and services, insurance and takaful claims as well as capital market products and services. The FMOS provides independent and impartial mediation and adjudication services for such disputes. The monetary limit for disputes which are eligible to be referred to the FMOS is RM250,000.00.
Does engaging in ADR have any effect on potential or existing litigation or arbitration?
Engaging in ADR, depending on the nature of the ADR proceedings, may stop the clock for the computation of a limitation period.
In the context of statutory adjudication under CIPAA 2012, Section 7 of the CIPAA 2012 provides that disputes referred to adjudication are “subject to the Limitation Act Limitation Act 1953 [Act 254], Sabah Limitation Ordinance [Cap. 72] or Sarawak Limitation Ordinance [Cap. 49]”. Therefore, initiating statutory adjudication under the CIPAA 2012 regime would stop the clock for the computation of the limitation period.
Contractual mediation, especially in multi-tiered dispute resolution clauses, is also likely to stop the clock for the computation of the limitation period.
Further, engaging in ADR may have an impact on costs awarded at the end of existing litigation or arbitration, assuming that parties genuinely attempted to participate in ADR to entirely resolve a dispute or narrow down the issues in the dispute.
Whilst costs are generally awarded to successful parties, an Arbitral Tribunal has the discretion to apportion and consider the circumstances of the case, per Article 42(1) of the AIAC Arbitration Rules 2023. The Court may also consider such factors when awarding costs. When awarding costs in litigation, Order 59 rule 8(c) of the Rules of Court 2012 provides that the Court may consider “the conduct of the parties in relation to any attempt at resolving the dispute by mediation or any other means of dispute resolution”.
Is ADR compulsory and if so are there any consequences if a party fails to engage in ADR? If it is not compulsory are there any plans for this to change?
ADR is generally not compulsory. Mediation is generally voluntary and subject to the parties’ mutual agreement to pursue the same. Notwithstanding that, Court Annexed Mediation is mandatory if it is directed by the Court. Parties who fail to adhere to directions for Court Annexed Mediation could have their claim or counterclaim struck out and/or be penalized by costs.
Further, in cases where the arbitration agreement contains a multi-tiered dispute resolution clause, parties are bound by the ADR procedures in the clause and must strictly comply with them. The Federal Court in Juara Serata Sdn Bhd v Alpharich Sdn Bhd [2015] 6 MLJ 773 upheld the parties’ multi-tiered dispute resolution clause and held that “it would be wrong to allow the defendant to resile from the agreement and benefit from its own wrong or default in failing to refer the dispute on the decision of the architect to arbitration particularly under cll [clause] 16 and 17 of the agreement”. Non-compliance with the clause meant that the Arbitral Tribunal lacked jurisdiction to hear the dispute. The High Court in Usahasama SPNB-LTAT Sdn Bhd v Abi Construction Sdn Bhd [2016] 7 CLJ 275 further upheld a multi-tiered dispute resolution clause and stated that “every incentive should be given especially where parties have bargained to explore other alternative means of dispute resolution before Arbitration or Litigation, that those alternative means should be exhaustively explored”. The High Court held that the Arbitral Tribunal had no jurisdiction until the multi-tiered dispute resolution clause within the contract was complied with.
Can the parties agree, in advance of any potential dispute, to engage in ADR?
Yes. Parties are free to agree to any mode of ADR before proceeding to court or contractually stipulated arbitration. Parties are free to agree to voluntary mediation before proceeding to court or contractually stipulated arbitration. Voluntary mediation may entirely resolve the dispute between the parties or alternatively, reduce the issues in dispute between the parties when they proceed to court or arbitration.
Instead of proceeding to court, parties may also agree to pursue ad hoc arbitration, provided that the subject matter of dispute is arbitrable. Section 4 of the Arbitration Act 2005 states that “any dispute which the parties have agreed to submit to arbitration under an arbitration agreement may be determined by arbitration unless the arbitration agreement is contrary to public policy or the subject matter of the dispute is not capable of settlement by arbitration under the laws of Malaysia”. Matters which are not arbitrable include bankruptcy and insolvency proceedings, matrimonial disputes, land disputes, criminal proceedings, etc.
When does ADR generally take place?
ADR generally takes place when a dispute arises between parties.
Is ADR subject to without prejudice privilege and/or confidential? If not, is there any other means to protect confidential information?
ADR is generally confidential.
Section 20 of the CIPAA 2012 provides that the adjudicator and the parties to the dispute “shall not disclose any statement, admission or document made or produced for the purposes of adjudication to another person except with the consent of the other party, to the extent that the information is already in the public domain, to the extent that disclosure is necessary for the purposes of the enforcement of the adjudication decision or any proceedings in arbitration or the court, or to the extent that disclosure is required for any purpose under this Act or otherwise required in written law”.
Mediation communication is confidential and is subject to without prejudice privilege. Section 3 of the Mediation Act 2012 defines mediation communication as “any oral or written statement made during a mediation, in relation to a mediation or for the purposes of considering, conducting, participating in, commencing, continuing, reconvening or concluding a mediation or retaining a mediator”. Section 15 of the Mediation Act 2012 provides that “no person shall disclose any mediation communication”. However, mediation communication may be disclosed if the disclosure is agreed by the parties, or unless the disclosure is required for any civil or criminal proceedings, or the disclosure is required to implement or enforce a settlement agreement resulting from mediation. Further, section 16 of the Mediation Act 2012 provides that “mediation communication is privileged and is not subject to discovery or be admissible in evidence in any proceedings”. However, mediation communication is not privileged if privilege is waived by the parties, or if it is a public document under the Evidence Act 1950, or if it a threat to inflict bodily injury or commit a crime, or if it is intended to be used to plan, or to attempt to commit or conceal a crime, or if it is sought order to prove or disprove a claim or complaint of misconduct or malpractice filed against a mediator or any party and their representative in mediation.
The dispute resolution proceedings under the FMOS are private and confidential.
Does the output from ADR create precedents?
No. The output of ADR does not create precedents. Further, the outcomes of disputes referred to ADR are confidential and not published to the public.
Who bears the costs of ADR?
In terms of statutory adjudication, section 18 of the CIPAA 2012 provides that the adjudicator, in making the adjudication decision in relation to the costs of the adjudication proceedings “shall order the costs to follow the event and shall fix the quantum of costs to be paid”. The adjudicator’s powers to decide on costs “shall prevail over any agreement made by the parties prior to commencement of the adjudication proceedings by which one party agrees to pay the other party’s costs or bear the adjudicator’s fees and expenses”.
Pursuant to section 17 of the Mediation Act 2012, costs of mediation “shall be borne equally by the parties”. However, the parties are free to agree on the amount of costs to be borne by each party.
Dispute resolution under the FMOS is free of charge for financial consumers and investors.
Is your jurisdiction subject to any specific rules for cross border ADR?
In terms of mediation, Malaysia is a signatory to the Singapore Convention on Mediation which recognizes cross border settlement agreements resulting from mediation. The Singapore Convention is not incorporated into local Malaysian legislation. However, by virtue of Malaysia being a signatory of the Singapore Convention, parties in Malaysia can enforce cross border settlement agreements resulting from mediation.
Are there any particularly unusual features of ADR in your jurisdiction that you are aware are different to other jurisdictions?
Malaysia’s approach on compliance with multi-tiered dispute resolution clauses differs from other jurisdictions such as Hong Kong, the United Kingdom and Singapore where non-compliance of multi-tiered dispute resolution clauses is an issue of admissibility, which can be determined by an Arbitral Tribunal and is not subject to appeal. Issues of jurisdiction pertain to whether the Arbitral Tribunal has the power to hear the case and render an award on its merits. Conversely, issues of admissibility pertain to whether the Arbitral Tribunal has the power to decide the case at a particular point in time, having regard to a possible defect within the claim. The primary difference between issues of jurisdiction and admissibility is whether it is reviewable by the courts. Issues of jurisdiction are reviewable by the courts, whereas issues of admissibility are not.
In Malaysia, non-compliance with a multi-tiered dispute resolution clause is an issue of jurisdiction of the Arbitral Tribunal per the Federal Court case of Juara Serata Sdn Bhd v Alpharich Sdn Bhd [2015] 6 MLJ 773 and the High Court case of Usahasama SPNB-LTAT Sdn Bhd v Abi Construction Sdn Bhd [2016] 7 CLJ 275. Issues pertaining to the jurisdiction of an Arbitral Tribunal would be determined in accordance with the procedure set out at section 18 of the Arbitration Act 2005. Section 18(1) of the Arbitration Act 2005 provides that an Arbitral Tribunal “may rule on its own jurisdiction, including any objections with respect to the existence or validity of the arbitration agreement”. However, section 18(8) of the Arbitration Act 2005 provides that “where the Arbitral Tribunal rules on such a plea as a preliminary question that it has jurisdiction, any party may, within thirty days after having received notice of that ruling appeal to the High Court to decide the matter”. While an appeal to the High Court is pending, the Arbitral Tribunal may continue the proceedings and render an award. The High Court’s decision on the jurisdictional issue is final and not appealable.
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