Disclaimer
This article is for general informational purposes only and does not constitute legal advice. Dispute resolution strategy is highly fact-specific, may vary depending on the circumstances of each case, and readers involved in an actual or potential dispute should obtain appropriate professional advice based on the specific facts and circumstances of their matter.A dispute resolution clause sets out how to deal with disagreements between two parties who enter into a commercial contract that cannot be resolved.
Too often, it is included as a default clause without much thought, but depending on the type of contract, a different dispute resolution method may be more suitable than a default one.
This article explains the three main options available in Malaysia as well as why choosing the right one(s) matters.
Why a dispute resolution clause matters
A dispute resolution clause may be one of the less prominent provisions in a contract but can have a significant impact if the relationship later breaks down.
Without such a clause, parties are far more likely to end up disputing the resolution process itself on top of the original disagreement, adding to the cost and the time it takes to resolve.
Choosing the right mechanism at the drafting stage can help avoid unnecessary disputes over procedure, cost and jurisdiction when the parties are already in conflict. Last but not least, as a contractual term, parties can generally depart from it at any time before or after a dispute arises, provided there is mutually written agreement.
Primary dispute resolution options
Disputes are often resolved informally through negotiation, and accordingly, many contracts require parties to first attempt negotiation before proceeding to the three main formal dispute resolution methods available in Malaysia:
- Litigation
- Arbitration, and
- Mediation
A contract may provide for one method or combine them in stages, often requiring negotiation or mediation before formal proceedings begin. There is no one-size-fits-all approach, so the choice should be considered when the contract is entered into rather than left until a dispute arises.
Litigation
Litigation means resolving a dispute through the Malaysian courts. A judge hears the matter and decides the outcome, and court proceedings and judgments are public record.
Arbitration
Arbitration is a private process where parties agree to have their dispute decided by one or more appointed arbitrators instead of a judge. The resulting decision, known as an award, can only be challenged on limited grounds, and where a contract contains a valid arbitration agreement, a party generally cannot bypass it by going to court.
If court proceedings are started, the other party can apply under section 10 of the Arbitration Act 2005 to stay them, and the court will refer the dispute to arbitration unless the agreement is null and void, inoperative or incapable of being performed. That said, under section 11, a party may still apply to the High Court for interim relief, such as an injunction, before or during the arbitration.
Mediation
Mediation is a facilitated negotiation where a mediator helps the parties work towards their own settlement rather than deciding the outcome for them. It is not binding unless the parties record their settlement in writing.
Litigation vs arbitration vs mediation
A contract may provide for one method or combine them in stages, often requiring negotiation or mediation before formal proceedings begin.
| Litigation | Arbitration | Mediation | |
| Who decides | A judge | Appointed arbitrator(s) | The parties themselves |
| Binding Effect | Yes, subject to applicable rights of appeal or challenge | Yes, generally final | Only if settled in writing |
| Common contract types | Contracts without a specified alternative resolution dispute (ADR) clause; straightforward commercial disputes | Cross-border, construction, shareholders’ agreements, high-value commercial contracts | Joint ventures, shareholder arrangements, ongoing supply or distribution agreements, often a first step before arbitration or litigation |
| Commonly administered via | Malaysian courts | AIAC | Court-assisted, AIAC, or MIMC-accredited mediators |
| Pros | enforceable judgment right of appeal interim remedies such as injunctions are available | confidential choice of an arbitrator with relevant expertise generally capable of international enforcement under applicable conventions | confidential preserves the business relationship parties retain control over the outcome |
| Cons | public process can be lengthy with appeals procedural rules governed by the applicable court rules and procedures should be followed | parties bear the arbitrator’s and institutional fees directly limited grounds to challenge an unfavourable award | not binding unless a settlement is reached depends on both parties’ willingness to compromise |
| Cost | court fees are comparatively lower legal fees over a longer, appeal-prone timeline usually drive the overall cost | not automatically cheaper parties pay the arbitrator’s and AIAC’s fees directly, which can exceed court costs for smaller claims | often less costly than full litigation or arbitration |
The appropriate dispute resolution method depends on factors such as cost, confidentiality, speed, whether the parties are based in different jurisdictions, and the importance of preserving the business relationship.
Let ELP draft your business contracts
From commercial agreements and investments to joint ventures, shareholder arrangements and business restructurings, our corporate and commercial team works with businesses to structure transactions, manage legal risks and put the right agreements in place. If you are considering a new transaction or need advice on an existing commercial arrangement, contact us for an initial consultation.
