Determination of the Law Governing the Arbitration Agreement in Malaysia: Commentary on the Decision in Thai-Lao LigniteMay 2019
Determination of the Law Governing the Arbitration Agreement in Malaysia:
Commentary on the Decision in Thai-Lao Lignite[i]
By: Abdullah Abdul Rahman[ii]
- The Federal Court has established the general principle that where the seat of arbitration is Malaysia, the law applicable to the arbitration agreement is the law of Malaysia. This is the position in the absence of an express agreement or other contrary indications.
- This was decided in Thai-Lao Lignite Co Ltd & Anor v Government of The Lao People’s Democratic Republic  9 CLJ 273.
The background principles
- There are at least four potential legal systems which will be applicable in an arbitration as follows:
3.1.The law, or the relevant legal rules, governing the substantive issues in dispute;
Generally, this is described as the ‘applicable law’, the ‘governing law’, 'the proper law' or the 'substantive law of the contract.'
3.2.The law governing the arbitration proceedings and the award and the powers of the national court having supervisory jurisdiction over the proceedings, including on the setting aside of the award;
Generally, this is described as the lex arbitri or the curial law. It is usual for this law to follow the seat of arbitration.
3.3.The law governing the arbitration agreement;
The arbitration agreement is regarded as a separate agreement from the main agreement giving rise to the dispute [governed by the substantive law under 3.1 above] notwithstanding that the arbitration agreement may consist of a clause within the main agreement.
3.4.The law governing the recognition and enforcement of the award;
This may, in practice, prove to be not one law, but two or more, if recognition and enforcement is sought in more than one country in which the losing party has, or is thought to have, assets.
- The legal system governing all the above aspects may well be the same legal system, especially in a domestic arbitration. However, in an international arbitration, it is common for different legal systems to be applicable, whether by agreement or by arbitral and/or judicial determination.
- In Thai-Lao Lignite, the substantive law of the contract [item 3.1 above] was the New York law. The seat and the curial law [item 3.2] were Malaysia. But the agreement was silent on the law of the arbitration agreement [item 3.3].
- The general principle is that the law of the arbitration agreement should be determined by (i) express choice of the parties; (ii) failing which, by the implied choice of the parties and (iii) failing which, by the system of law having the closest and most real connection with the arbitration agreement. See, Sul America 2 All ER (Comm) 795.
- The issue was whether the law governing the arbitration agreement should be the same as the substantive law (New York law) or the law of the seat or the curial law (Malaysian law).
- This decision favours the determination of the law of the arbitration agreement based on the seat. This is contrary to the general position under the English law. There, the natural inference, in the absence of an express choice, is that the parties intended the proper law chosen to govern the substantive contract to also govern the arbitration agreement. This is on the basis that the parties are presumed to intend that the whole of their relationship, including the agreement to arbitrate, be governed by the same system of law. See Sul America 2 All ER (Comm) 795 and Channel Tunnel Group  1 All ER 664.
- This decision has heightened the importance of specifying the law governing the arbitration agreement for international arbitration seated in Malaysia.
[i] This commentary was first published under a different title in LinkedIn on 16 November 2017.