Alternative Dispute Resolution in Malaysia
Alternative Dispute Resolution is an alternative method of resolving construction disputes within the Malaysian construction industry than going to court.
It is far less costly than litigation, less damaging to the reputation of parties involved, and is usually a more civil way for parties to resolve misunderstandings.
In this article, we will try to explain what is Alternative Dispute Resolution, its different forms, and why it is slowly becoming the preferred method of conflict resolution.
What is Alternative Dispute Resolution?
Alternative Dispute Resolution is a collective term referring to the process of settling disputes out of court.
When two parties disagree about something, one might seek help from the local courts to resolve the matter.
Parties have to engage in litigation – the court system’s mechanism for resolving disputes between two parties. Litigation can sometimes take an awful amount of time to settle, costly, and even give negative publicity. This is why most parties prefer resolving their disputes through Alternative Dispute Resolution, as it is faster and is less financially draining.
Alternative Dispute Resolution originated in the United States in the early 1980s. This was born out of the frustration parties had with the time and cost associated with the traditional litigation process.
Alternative Dispute Resolution only started to become more prevalent during the early ’90s. Because it can resolve disputes more quickly and has a lower cost associated with it, the method is now customary in many countries, including Malaysia.
In Malaysia, there are two commonly used types of Alternative Dispute Resolution.
An adjudication is a third option, but it is a relatively new one introduced by the Construction Industry Payment and Adjudication Act 2012 (CIPAA).
Within the Malaysian construction industry, the use of Alternative Dispute Resolution mainly revolves around arbitration.
But with the evolution of standard construction contracts and revisions to the Adjudication and Payment Act and the Mediation Act, the use of other Alternative Dispute Resolution options is slowly on the rise.
Different Alternative Dispute Resolution methods explained
Mediation is a commonly accepted dispute resolution method in the construction industry and slowly gains acceptance in Malaysia.
The Technology and Construction Court Guide is crucial in guiding the litigation process in the construction industry. And the guide states that a court should encourage aggrieved parties to leverage alternative forms of dispute resolution – with mediation as the prefered process.
The Pre-Action Protocol for Construction and Engineering Disputes requires parties involved in a dispute to come together at least once before a litigation process begins..This is for both parties to find a way to employ Alternative Dispute Resolution, meditation, particularly to resolve their dispute.
Benefits of using Mediation
Since mediators are independent by nature, their primary purpose is to get parties to agree on a solution to their dispute. Mediators are experienced in resolving construction disputes outside of court, though some might be court judges themselves.
It can help patch business and personal relationships between parties involved.
Resolution can sometimes be relatively quick, with some disputes resolved in just a couple of days.
The costs are significantly less than a standard litigation process.
All of the presentations, discussions, and decisions made in the mediation process are confidential.
Mediators will typically find solutions that are beneficial for both parties.
Disadvantages of Mediation
Though the information presented during the mediation process are supposed to be confidential, there is the concern that one party might use some of that privileged information if mediation does not work and parties having to go to trial.
If both parties cannot resolve their dispute, then the mediation process’s money is wasted.
As mentioned earlier, Mediation is not as widely used when settling disputes within Malaysia; and these are some of the reasons.
The mindset that disputes can be resolved through direct negotiation with the other party involved – as many see the involvement of a third party- will resolve disputes more complicated.
Though this is a common practice in other countries, it is a relatively new approach in Malaysia.
Not many are exposed to the said option since many prefer using other Alternative Dispute Resolution methods when settling disputes.
Arbitration revolves around the concept that parties involved in a dispute agree to refer the dispute’s resolution to a third party – which is the arbitrator.
An arbitration process resolves disputes using relevant principles of law, presented documents, and material evidence. They are an appropriate undertaking that is supposed to be quick, cost-effective, and use civil and friendly language to each party involved.
Typically, arbitration is common in resolving international construction disputes and resolving local conflicts in Malaysia construction projects.
In Malaysia, arbitration is governed by the Arbitration Act 2005 – repealing and replacing the Arbitration Act of 1952. The act applies to all arbitration proceedings made after 15 March 2006.
Benefits of using Arbitration
Everything that is presented, talked about, and agreed on during the mediation process is confidential.
Parties are the ones who pick the arbitrator – thus making the proceedings fair.
It is a rapid process in comparison to litigation.
The approach is highly flexible in contrast to litigation.
Disadvantages of using Arbitration
Parties involved shoulder the cost of paying the arbitrator’s fee and the venue where the arbitration proceedings will take place.
The arbitrator has limited powers to sanction a party that fails to adhere to directions the arbitrator has set.
Arbitration has limited appeal right.
Some arbitration proceedings can be as costly as court proceedings.
These are some of the issues that could force a party to seek arbitration against another.
Termination of a contract
Contractor or sub-contractor ceasing work on a project without any legitimate reason or prior notice to the project owner.
The failure of a party to fulfil his or her responsibilities under a contract.
A party cannot pay claims, progress payment claims, an extension of time claims, liquidated and ascertained charges against a contractor or sub-contractor, or failing to validate or certificate the final account.
Changes in design
Poor quality of workmanship
Delay and extension of time due to local requirements.
Adjudication is a process for alternative dispute resolution in which a third-party arbitrator resolves a construction dispute.
Adjudication is sometimes referred to as a ‘pay first, argue later’ dispute resolution method.
The winning entity in adjudication can approach a judicial court and ask it to enforce the adjudicator’. The decision of an adjudicator is binding until an arbitration or litigation proceeding decides to overturn it.
Benefits of using Adjudication
An adjudicator is typically not involved or familiar with parties involved in the dispute, nor he/she is privy to the operation of the construction – thus making him/her a neutral entity.
It is a swift process that ensures the flow of money between parties during the construction process.
In most cases, parties involved in a dispute do not end up seeking litigation.
Adjudication as a process is cost-effective compared to litigation.
Disadvantages of using Adjudication
How adjudication works
Once a dispute arises, the claimant to the dispute kickstarts the proceedings by serving an adjudication notice to the defendant.
Upon acceptance of the notice, the claimant and defendant will select and agree on an adjudicator. Suppose the person picked for the role is not a certified adjudicator. In that case, the claimant must write and request authorisation from the Adjudication Control Authority (ACA) before allowing said individual to act as adjudicator. If the ACA does not grant authority to said individual, or if both parties cannot agree on an adjudicator, the claimant can then request the ACA to appoint one. The ACA is required to respond to the said request within seven working days after receiving said application.
Once an adjudicator has been picked or assigned, he/she is required to send a written notice to both parties that he/she will play the role of adjudicator. Included in that notice are the terms of appointment and fees, declaration that he/she is taking the adjudicator’s position without any conflict of interest.
The claimant and the defendant must meet upon the notice of the adjudicator to resolve their dispute amicably.
The adjudicator will then have to serve an acceptance notice within five working days after sending the notice to the parties involved. This is to confirm his/her appointment as adjudicator formally. He/She then will advise both parties to deposit a security fee (which serves as his/her adjudication fee) with the ACA.
The claimant then needs to present both adjudicator and respondent documents about his argument to the dispute within ten working days. An extension is allowed if the other party agrees to it.
The respondent shall then serve on the adjudicator and the claimant a written adjudication
response within ten working days from the adjudication claim’s receipt. An extension is allowed if the other party agrees to it.
The claimant shall then serve on the adjudicator, and the respondent, a written reply within five working days from the receipt of the adjudication response.
At this stage, the adjudicator will start establishing adjudication procedures like limiting the number of submissions and deadlines for submitting documents. The adjudicator also has the power to appoint independent experts to study the documents, set meetings, conduct hearings, do site inspections, or check materials related to the construction project. Plus, the adjudicator also has the power to revise any certifications, decisions, instructions, opinions, or valuation.
The adjudicator must present a decision in writing within forty-two working days after receiving the adjudication response.
The adjudicator’s decision should be in writing and include reasons for the decision. The decision will also have the amount that one party needs to pay the other and the parties’ rights and obligations to resolve the dispute. Keep in mind that the adjudication can request payment from the ACA even before a decision is released.
Expert Determination is a fourth Alternative Dispute Resolution process, although it is not widely used or accepted in Malaysia as mediation, arbitration, and adjudication.
Expert Determination is an informal dispute resolution process for specific disputes like in construction – especially conflicts on the valuation.
If parties involved in a dispute decide to go with Expert Determination, both must sign a contract that they will agree with the decision of the process and that said decision is binding.
Advantages of using Expert Determination
Disadvantages of using Expert Determination
And that’s it for this article.
Yes, it was a long one, but mind you, that’s just the tip of the iceberg when it comes to alternative dispute resolution.
If you want a more in-depth explanation or clarify specific sections of the process, feel free to send us an email or give us a call.
We are more than happy to answer any of your questions or concerns.