June 13, 2018

Malaysia | changing of the guard

Malaysia saw a historic regime change on 9 May 2018, when the opposition coalition Pakatan Harapan, led by the former Prime Minister Dr. Mahathir Mohamad (aged 92), defeated the Barisan Nasional coalition, which had formed the government in Malaysia for almost six decades.

Perhaps, the most significant commercial impact from this regime change has been Prime Minister Dr. Mahathir's announcement on 28 May 2018 that the Malaysian Government will be reviewing and possibly renegotiating Malaysia's multi-billion mega projects. The Prime Minister announced on the same day that the USD 17 billion High Speed Rail ("HSR") Project with Singapore will be cancelled. In an interview on 11 June 2018, the Prime Minister clarified that the HSR Project is delayed.

As of 2 June 2018, the Singapore government had not been formally notified of any decision to cancel the HSR Project and issued a note seeking clarification from the Malaysian Government. The issued note states that Singapore is continuing to incur costs on the HSR Project and will study the implications and exercise its rights, including any right to compensation, in accordance with the terms of the HSR Bilateral Agreement. There have been no reports in the media as to whether the Singapore Government has received clarification from the Malaysian Government.

Tenders for the HSR Project have been extended until December 2018. Bidders from all over the world, including China, Japan, Singapore, South Korea and Europe have expressed their interest in the project.

Another significant project at risk is the USD 14 billion East Coast Rail Link. It was reported that approximately RM 20 billion of the China Exim bank loan had been drawn down and paid to the contractor, China Communications and Construction Co.

The new Government has indicated that it is re-assessing the high value contracts entered by the previous regime to determine among others the financial viability of the project itself as well as to look into any irregularities in the execution of the same. At the same time, they are also mindful of the contractual obligations and the penalties which are attached to any unilateral termination of such agreements. However the effects of any such termination(s) will of course reverberate further down the line resulting in contractors, sub-contractors, suppliers, vendors and commercial stakeholders being exposed to serious risks of potential defaults across the spectrum of involvement in the these agreements and Projects.

It may now be opportune to re-assess risks and strategise a viable risk management plan from a credit risk and insurance perspective. Commercial entities facing losses may also consider their options from the dispute resolution perspective, especially if these entities are from states which have entered into Bilateral Investment Treaties ("BITs") and multi-lateral investment treaties with Malaysia. There could be claims based on direct expropriation, especially for commercial parties holding exclusive contractual rights that could be regarded as a form of proprietary interest, or indirect expropriation, which involves situations where a State interfered with contractual rights or deprived the value of an investment.[1]

Malaysia is a party to several BITs and its BIT with China protects investments defined to include claims to "any performance having a financial value". Any measure of expropriation is disallowed under the BIT, except if the "measures are taken for a public purpose and in accordance with the legal procedure" of the contracting party taking the expropriatory measures, and if they are non-discriminatory and are "accompanied by provisions of fair and reasonable compensation".

For commercial parties who suffer losses for a cancelled project that is  similar to project which is  not cancelled, claims based on unfair and inequitable treatment under the relevant BITs may be available.

On a positive note, for commercial entities facing potential losses who may have to litigate their disputes in Malaysian courts, the new government has very clearly indicated that it is very committed to reinstating the ‘rule of law’. This includes re-establishing a strong and independent judiciary. The very recent appointment of a respected lawyer from private practice as the new Attorney General is a sign that progress is being made on that front.  

The final decision of the Malaysian Government on its review of the mega projects remains to be seen. For the time being, given the monetary repercussions, there is already an acknowledgement from the Malaysian government that any decision to cancel project would not be an easy one. The Chief Executive Officer of MyHSR Corp, Mr Mohd Nur Ismal Mohamed Kamal has commented that the penalty that Malaysia will have to suffer for aborting the HSR Project would "run into billions".[2]

 

[1] CME v Czech Republic, UNCITRAL, Partial Award 13 September 2001, and Robert Azinian and Others v United Mexican States ICSID Case No ARB (AF)/97/2.

[2] "Wasted opportunity" if KL-Singapore high-speed rail is cancelled: MyHSR CEO", 3 May 2018, Channelnewsasia.