Overview of Malaysia’s foreign investor protection regime
According to the 2015 World Investment Report, Malaysia recorded RM35 billion net foreign direct investment inflows in 2014. With the view to attracting and increasing foreign investments, Malaysia has taken a series of measures with regard to promoting and protecting foreign investments, including the signing of seventy-one bilateral investment treaties (BITs).
BITs are agreements between two States for the reciprocal encouragement, promotion and protection of investments in each other’s territories by companies based in either State. By signing BITs, States establish the terms and conditions for investments by nationals and companies of one State in the jurisdiction of another. The nature of protection provided pursuant to a BIT between State A and State B is such that if an investor from State A makes an investment in State B, State B guarantees, pursuant to the BIT, certain levels of protection. This is typically accomplished through a combination of national treatment, fair-and-equitable treatment, and most-favored nation treatment.
Although each investment treaty is unique, a BIT will typically:
- define investment;
- set up grounds for admission to each country;
- determine the appropriate form of compensation, should any investments be expropriated;
- require national treatment, most-favoured-nation treatment, and fair-and-equitable treatment;
- provide for free transfer of funds; and
- set up dispute settlement mechanisms (for both individuals and States).
BITs signed by Malaysia contain, in most cases, the above-mentioned elements.
In addition to its numerous bilateral arrangements, Malaysia played a major
role in the negotiation of the Comprehensive Investment Agreement that was signed by the members of the Association of Southeast Asian Nations in 2009 (the “2009 ASEAN Agreement”). The objective of the 2009 ASEAN Agreement is to further intensify the economic cooperation between and among the Members States. The agreement’s provisions on investment protection are in line with those included in Malaysia’s BITs. These include the assurances of national treatment, most-favoured-nation treatment, fair and equitable treatment, full protection and security, provision in respect of expropriation and compensation, and dispute settlement provisions.
Provisions that ensure efficient dispute settlement
In case a dispute arises between Malaysia and foreign investors about a matter falling under a BIT, parties can resort to dispute settlement. Most BITs create a multi-facetted system of dispute settlement, which includes, inter alia, consultations and international arbitration. This pattern is followed by the 2009 ASEAN Agreement.
BITs signed by Malaysia prescribe consultations before allowing international arbitration. In order to oblige both parties to participate in such consultations, such provisions usually prescribe a minimum period of often six months during which parties need to negotiate in order to settle their dispute. Parties are often also free to rely on services of good will or conciliation by third parties. Enabling settlement of the dispute before resorting to arbitration is important, as it can result in an amicable settlement. If consultations do not lead to agreement, both the capital exporting State and the investors themselves can start legal procedures against the capital receiving State.
Most BITs contain an extensive set of rules for the international settlement of investment disputes. These provisions specify the bodies that will be called upon to settle the dispute and indicate the applicable law governing the dispute.
BITs often contain a list of potential tribunals that may be entrusted with the settlement of an investment dispute. The most popular forum in Malaysia’s BITs is the International Centre for the Settlement of Investment Disputes (“ICSID”) in Washington. Another option is ad hoc arbitration – most commonly under the rules developed by United Nations Commission on International Trade Law (the “UNCITRAL Rules”) – which means that both parties will appoint a number of arbitrators who will form an ad hoc tribunal.
The Kuala Lumpur Regional Centre for Arbitration (KLRCA): an independent arbitral institution for the administration of investor-State disputes
The KLRCA is a longstanding partner of ICSID. ICSID is the world’s leading institution devoted to international investment dispute settlement. It has extensive experience in this field, having administered the majority of all international investment cases. States have agreed on ICSID as a forum for investor-State dispute settlement in most international investment treaties and in numerous investment laws and contracts.
Cognisant of the importance of dispute settlement under BITs, the KLRCA signed its first collaboration agreement with ICSID in 1979. The two institutions decided to further strengthen their collaboration by signing a new agreement in 2014. In addition to fostering cooperation between the KLRCA and ICSID, the 2014 agreement provides that the KLRCA can be used as an alternative hearing venue for ICSID cases, should the parties to proceedings conducted under the auspices of ICSID desire to conduct proceedings at the seat of the KLRCA.
Should parties to a dispute decide to resolve their investment dispute by referring the case to an ad hoc tribunal under the UNCITRAL Rules, the KLRCA has the experience to administer such a case. It should be recalled that the KLRCA Arbitration Rules, as has always been the case, draw extensively on the UNCITRAL Rules by including the UNCITRAL text in its entirety.
With regards to the 2009 ASEAN Agreement, it is worth mentioning that section B of the said agreement provides for the resolution of investment disputes between an investor and a member State. In particular, article 33 the same section allows for such disputes to be referred, inter alia, to the KLRCA.
An effective administration of an investment arbitration matters to both foreign investors and States. The KLRCA, being an independent international body established under the auspices of the Asian African Legal Consultative Organisation, can cover all needs of the parties involved in investor-State arbitrations and is ready to assume its role in the resolution of investment disputes in the region.
Datuk Professor Sundra Rajoo
Director of the KLRCA