ISSUE 2/2006 • JUNE 2006

CONTENTS

Articles

A Solution to Distressed Assets?

Showing the Liquidator theRed Card

Halal - The New Global MarketForce

Malaysia - U.S. FTA - Impacton Malaysian IP Laws

Recovering Pure EconomicLoss in Negligence: TheMalaysian Position?

Rough Guide to theArbitration Act 2005

Flirtations of the FaithlessFiduciaries

Fund Times - Will it Last?

The Worth of Unjust Dismissal

Case Commentaries

Sri Lanka Cricket v. WorldSport Nimbus Pte Ltd [2006] 3MLJ 117 - Hiccups inEnforcing Foreign ArbitralAwards

Baigent & Another v. RandomHouse Group Ltd [2006]EWHC 7777719 (Ch) - Da VinciCode Case: Storm in a Grail?

Ooi Kean Thong & Anor v.Public Prosecutor [2006] 3MLJ 389 - Lip Locking Rights

Announcements

Legislation Up-Date

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2006 SKRINE. ALL RIGHTS RESERVED. THIS NEWSLETTER IS ISSUED FOR INFORMATION ONLY AND ITS CONTENTS ARE OF A GENERAL NATURE. YOU ARE ADVISED TO SEEK SPECIFIC LEGAL ADVICE ON ANYTRANSACTION OR MATTER THAT MAY BE AFFECTED BY THIS NEWSLETTER. SHOULD FURTHER ANALYSIS OR EXPLANATION OF THE SUBJECT MATTER BE REQUIRED, PLEASE CONTACT THE PARTNERS LISTEDOR THE PERSON WHOM YOU NORMALLY CONSULT. AS THE LEGAL PROFESSION (PUBLICITY) RULES 2001 RESTRICTS THE CIRCULATION OF PUBLICATIONS BY ADVOCATES AND SOLICITORS TO CLIENTS ANDPERSONS WITH WHOM THE ADVOCATES AND SOLICITORS HAVE PROFESSIONAL DEALINGS, KINDLY DO NOT CIRCULATE THIS PUBLICATION TO PARTIES OTHER THAN PERSONS WITHIN YOUR ORGANISATION.

LEGAL INSIGHTSA SKRINE NEWSLETTERKDN No. PP 13699/1/2007

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MESSAGE FROM THEEDITOR-IN-CHIEFWELCOME TO THE SECOND ISSUE OF LEGAL INSIGHTS FOR 2006

The eagerly awaited FIFA World Cup Final matches are now upon us until 9.7.2006. I am sure that many ofyou are sacrificing precious sleep to follow the excitement, drama and fanfare of the game but I do hope thatdespite your “sacrifices”, you will take the time to read all the articles in this issue, which were written just foryou.

In this bumper issue, our writers have gone the extra mile to bring you nine articles and three casecommentaries that are truly insightful, from a legal perspective. I do hope that you will be pleased with ourendeavours.

Our Corporate Section has contributed four articles in this issue. In the first article, Kwan Kin Sum (at page 3),discusses Bank Negara Malaysia’s guidelines on the disposal of non-performing loans by banking institutions.Nurliza Ramli at pages 6 and 7 introduces the concept of Halal and outlines the initiatives taken to developMalaysia into an international Halal hub. In the sequel to “Good Times Fund Times?” which is aptly entitled“Fund Times - Will it Last?”, Cheah Meng Choo at pages 16 and 17, explains how Exchange Traded Funds arecreated, the main parties involved and the legislation regulating Exchange Traded Funds. The final article fromthe Corporate Section entitled “Flirtations of the Faithless Fiduciaries” (pages 14 and 15) by Kok CheeKheong discusses directors’ liability for diversion of corporate opportunity and information.

From the Litigation Unit, Lee Shih, at page 5, explores the grounds on which the ex-parte appointment of aprovisional liquidator may be set aside. The other contributor from the Litigation Unit, Lam Wai Loon,concludes the pure economic loss trilogy by considering the Malaysian position at the centre pages.

N. Pathmavathy and Kamraj Nagayam at page 12, share with us some pointers on drafting arbitration clauses,in light of the Arbitration Act 2005 where else, Siva Kumar Kanagasabai touches on two diametricallyopposite High Court decisions on the quantum available for unjust dismissal at page 18.

From the Intellectual Property front, we bring you Charmayne Ong’s deliberations on the impact of the freetrade agreement between Malaysia and U.S. on Malaysian IP laws at page 9. Meanwhile, Amelly Kok Sim Minat page 4, gives you an insight into the copyright infringement case on the hottest cinema topic in town – “TheDa Vinci Code”.

Jeremy Lee rationalises the recent Federal Court decision in Ooi Kean Thong v. Public Prosecutor [2006] 3 MLJ389 at page 8 on the controversy surrounding the summons issued by DBKL to a young couple for kissing andhugging in a public park. In the other commentary, at page 2, Azrina Mohd Isa examines the recent Court ofAppeal decision which appears to present a stumbling block to holders of foreign arbitral awards seekingenforcement in Malaysia.

We welcome your feedback/comments on improving our newsletter and in this regard request you to takesome time from your busy schedule to fill-up the accompanying questionnaire and return it to us by fax, postor e-mail at skrine@skrine.com.

Lee Tatt Boonltb@skrine.comEditor-In-Chief

INTRODUCTION

In the above captioned case, the respondent, World Sport Nimbus (“WSN”)secured an award in an arbitration against the appellant, Sri Lanka Cricket (“SLC”)held in Singapore. The High Court (“HC”) allowed WSN’s attempt to enforce theaward in Malaysia. However, upon appeal to the Court of Appeal (“CA”) the HC’sdecision was set-aside by reason of the fact that there was no Gazette Notificationdeclaring Singapore as party to the New York Convention (“the said Conven-tion”).

RATIONALE OF THE CA’S DECISION

The rationale of the CA’s decision was based on sec. 2(2) of the Convention on theRecognition and Enforcement of Foreign Arbitral Awards Act 1985 (“the Act”)which provides that:-

“The Yang Di Pertuan Agong (“the Agong”) may, by order in the Gazette, declare thatany State specified in the order is a party to the said Convention, and that order shall, while inforce, be conclusive evidence that that State is a party to the said Convention.”

The CA held that although the word “may” is used in the Act, the interpretationof it should be mandatory when read in the context of the said provision and thewhole Act. The CA held that if the Agong wishes to extend the benefit of thesummary method of enforcement provided by sec. 3(1) of the Act to a particularaward then it is logical that he must by Gazette Notification declare the country inwhich that award was made to be a party to the said Convention. If the Agongelects not to do so, then the benefit of the Act is not available to the party seekingenforcement.

The CA referred to the Indian case of Kali Pada Chowdury v. Union of IndiaAIR [1963] SC 134 and GP Singh’s Principles of Statutory Interpretation (9th

Ed) and held that the right to enforce a convention award pursuant to sec. 4(1) ofthe Act is therefore a benefit that WSN would not but for the Act have. Hence therequirement of gazetting a country as a party to the said Convention must havebeen intended by Parliament to be mandatory in effect.

IMPLICATIONS OF THE DECISION

In light of the decision, holders of foreign arbitral awards are clearly not soprivileged in Malaysia as was previously thought. Nevertheless, they are not utterlydeprived of remedies. It remains possible to register the award as a judgement inthe courts of the country where the award was made (in this case being Singapore)and then to seek to register and enforce that judgement under the ReciprocalEnforcement of Judgement Act 1958 (“REJA”) (provided that the countrywhere the award was made is mentioned in the Schedule to REJA), or to use theaward to found an action at common law in the Malaysian Courts.

The effect of the decision is further limited, as the Act has been repealed by sec.51(1) of the Arbitration Act 2005 (Act 646) which came into force on 15.3.2006,and it appears likely that the Act is not intended to apply to foreign arbitral awardsin respect of which applications to register are made after that date.

Nevertheless, the CA’s decision represents a possible inconvenience to holders offoreign arbitral awards registered under the Act, and to those whose applications toregister awards are presently pending disposal. As such, the recent decision of theFederal Court to allow WSN leave to appeal against the decision of the CA, and toallow the Government of Malaysia to appear as amicus curiae keeps open thepossibility that this inconvenience will be temporary.

AZRINA MOHD ISA (ami@skrine.com)

HICCUPS IN ENFORCINGFOREIGN ARBITRAL AWARDS

LEGAL INSIGHTSA SKRINE NEWSLETTER

ANNOUNCEMENTSWe are pleased to announce that as of 1.1.2006,Ezane Chong Ing Tze has been promoted to theposition of Senior Legal Assistant. We congratu-late her on her promotion.

To provide better service to our clients, we havere-designed our website. Please visit us atwww.skrine.com for more information aboutus, our lawyers and practice areas.

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The following came into force recently :-

LEGISLATION UP-DATE

Loan (Local) Act 1957 [Act 648] (Revised)c.i.f : 30.3.2006

Loan (Local) Act 1961 [Act 650] (Revised)c.i.f : 30.3.2006

Patents (Amendment) Act 2003 [ActA1196]c.i.f : 20.4.2006 [P.U.(B) 120/2006])

Private Healthcare Facilities and Services Act1998 [Act 586]c.i.f : 1.5.2006 [P.U.(B) 93/2006]

Road Transport (Amendment) Act 2006[Act A1262]c.i.f : 6.3.2006 [P.U.(B) 57/2006])

Audit (Amendment of First Schedule) Order2006c.i.f : 1.1.2005 [P.U.(A) 128/2006]

National Sports Council of Malaysia (Modifica-tion) Order 2006c.i.f : 10.3.2006 [P.U.(A) 89/2006]

Optical (Amendment of First Schedule) Order2006c.i.f : 28.4.2006 [P.U.(A) 158/2006]

Optical (Amendment of Second Schedule)Order 2006c.i.f : 28.4.2006 [P.U.(A) 159/2006]

Subsidiary Legislation

StatutesAnimals Act 1953 [Act 647] (Revised)c.i.f : 16.3.2006

Banking and Financial Institutions Amend-ment Act 2005 [Act A1256]c.i.f : 1.4.2006 [P.U.(B) 90/2006]

Government Loans (Notice of Trusts)Act 1947 [Act 649] (Revised)c.i.f : 30.3.2006

Islamic Banking (Amendment) Act 2005[Act A1255]c.i.f : 1.4.2006 [P.U.(B) 89/2006]

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Sri Lanka Cricket v. World Sport Nimbus Pte Ltd[2006] 3 MLJ 117

In an increasingly competitive operating environment, banking insti-tutions come under greater pressure to clean the house of accumulat-ing bad debts. To enable banking institutions to focus their effortson strengthening their business potential rather than managingdistressed assets, Bank Negara Malaysia (“BNM”) had on 28.12.2005issued the Guidelines on the Disposal/Purchase of Non-Perform-ing Loans by Banking Institutions (“the Guidelines”). The Guide-lines enable banking institutions to make outright sales of theirNon-Performing Loans (“NPLs”) to eligible third parties or purchaseNPLs from other banking institutions.

ELIGIBLE BUYERSThe eligible buyers of NPLs under the Guidelines are domesticbanking institutions or locally incorporated foreign banking institu-tions (collectively “licensed banks”), domestic investors and foreigninvestors.A licensed bank may acquire NPLs directly or through a Malaysianincorporated special purpose vehicle (“SPV”). The SPV may bewholly-owned by the licensed bank or a joint venture with otherdomestic or foreign investors, subject to foreign equity participationbeing limited to 49%. Where a licensed bank is a locally incorporatedforeign banking institution, its shareholdng in the SPV is disregardedfor the purpose of determining whether the 49% foreignshareholding limit has been complied with. A licensed bank whichseeks to establish or acquire an SPV as its subsidiary to purchase NPLsmust obtain BNM’s written consent under sec. 29 of the Bankingand Financial Institutions Act 1989 (“the Act”) before it establishesor acquires the SPV.In the case where the eligible buyers are domestic investors or foreigninvestors, the Guidelines stipulate that the purchase must be effectedthrough a Malaysian incorporated SPV which must be a resident fortax purposes. In both cases, the maximum foreign equity participa-tion in the SPV is limited to 49%. It is submitted that the distinctionmade in the Guidelines between eligible buyers who are domesticinvestors and foreign investors is illusory.A buyer which is an SPV is deemed to carry on factoring business,namely the business of acquiring book debts, which is a “scheduledbusiness” under the Act. It must comply with sec. 19 of the Act bysubmitting the prescribed documents to BNM and paying theprescribed fees and obtaining written confirmation of such compli-ance from BNM before it commences such business.

ELIGIBLE NPLSNo restrictions are imposed on the types of NPLs that may be soldand banking institutions are given the discretion to determine thetypes of loans which they wish to dispose provided that theyhighlight to BNM any NPLs extended to corporations involved inprojects of strategic importance to the country. The Guidelines donot provide any guidance as to the types of projects which fall withinthis criterion.

BASIS OF SALEThe Guidelines require that NPLs be sold on a non-recourse basisexcept in the case where the buyer is an SPV which is a member of theseller’s group of companies. In such event, the sale can be with or

without recourse. All risks of the NPLs are to be transferred to thebuyers. Even if the buyer is an SPV within the seller’s group ofcompanies, the directors of the seller are required under the Guide-lines to ensure that the sale is undertaken on an arm’s length basis.

REGULATORY APPROVALThe sale of NPLs is regarded as a disposal, sale or transfer of part ofthe business of a licensed institution and requires the approval of theMinister of Finance under sec. 49(1)(b) of the Act. An approval maybe given unconditionally or subject to conditions. Although sec. 49precludes parties from entering into any arrangement or agreementbefore the Minister’s approval is obtained, the Guidelines permitbanking institutions to commence initial negotiations with potentialbuyers of NPLs without such approval. However, once the needarises to disclose information relating to the borrowers, such as tofacilitate the due diligence process, BNM’s approval must be ob-tained. The Guidelines further stipulate that prior approval of theMinister must be obtained under sec. 49 before the scheme isimplemented. It should be noted that sec. 49(1)(c) of the Actprohibits the Minister from approving the sale of any part of itsbusiness to any institution which is not a licensed institution, unlessthat part so disposed of is not a business that requires a licence underthe Act.

METHOD OF TRANSFERThe Guidelines do not impose any specific method of transfer of theNPLs but require banking institutions to adopt the method that ismost appropriate and poses minimal risks to themselves. Oneoption is for the parties to submit a joint application to the HighCourt under sec. 50 of the Act for an order that vests all the rights andliabilities connected with the NPLs to the buyer. Where the transac-tion involves a large portfolio of NPLs, this is likely to be a moreexpeditious means of effecting the transfer rather than to executespecific documents, such as assignments and transfer of land charges,with respect to each NPL.

OTHER REQUIREMENTSCompliance Requirements

Banking institutions are required to comply with the relevant provi-sions of the Act and any other regulations and requirements issuedby BNM that relates to any part of the NPL sale scheme.

Disclosure of Information

The banking institution is required to obtain BNM’s consent undersec. 99(1) of the Act before it discloses information on the NPLs to aprospective buyer save where such consent has been given in the loandocuments.

Borrowers’ Consent and Notification

Unless the loan documents pertaining to the NPLs expressly permitthe banking institution to sell or transfer the loan, the seller shouldobtain the consent of such borrowers before doing so. The Guide-lines require banking institutions to notify the borrowers of the sale,even in cases where the latter have given their prior consent for the saleand transfer.

A SOLUTION TO DISTRESSED ASSETS?

Kwan Kin Sum reviews the Guidelines on the Disposal/Purchase of Non-Performing Loans byBanking Institutions.

CORPORATE

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INTRODUCTION

The legal significance of this decision is miniscule by comparisonwith the publicity which it has generated. Nevertheless, the case isillustrative of the dynamic tension which lies at the heart ofcopyright law: the striking of a balance between the protectionwhich should be afforded against plagiarism and the fear ofstifling free expression of thought. Copyright protection is basedon the principle that a person is not at liberty to benefit fromanother’s skill and labour. It is trite law that copyright protection isafforded to expressions of ideas and not ideas per se. Neverthe-less, the level of abstraction of an idea which is expressed in aliterary work needs to be examined to see if indeed that expressionis capable of copyright protection. The key task for the Judge in theabovecaptioned case was to decide where this distinction betweenideas and expressions arose in relation to the facts before him.

BRIEF FACTS

The claimants in this case claimed that the novel “The Da VinciCode” (“DVC”) was an infringement of the copyright subsistingin their book “The Holy Blood and The Holy Grail” (“HBHG”).The claimants’ main contention was that the “Central Theme” asexpressed in HBHG, consisting of 15 points, had been copied bythe author of DVC. As a consequence, the claimants bore theardous task of proving that the Central Theme, as expressed inHBHG, was capable of protection as literary work and that it wascopied substantially.

The defence was essentially that no Central Theme was expressedor readily found in HBHG and that in fact it was nothing morethan an artificial creation by the claimants. The Central Themepoints were merely general ideas or facts which were not copyrightprotectable. Further, copying of HBHG was denied and if therewere to be any similarities in HBHG and DVC, no inference ofcopying or that DVC reproduced a substantial part of HBHGcould be made.

DECISION OF THE HIGH COURT IN ENGLAND

Peter Smith J. found that HBHG did not have a Central Theme ascontended. The Central Theme was not genuine but was anartificial creation for the purposes of the litigation working backfrom the DVC. The Central Theme consisted of a series ofgeneralised ideas, assertions or facts. Such ideas and facts bythemselves could not be protected as opposed to the architecture,structure or way in which they were presented. There was no sucharchitecture or design in HBHG and the chronological order washeld to be a lame attempt to find an architectural structure toprotect something which was otherwise not protectable.

Therefore, copying of any points within the Central Theme wouldnot amount to infringement of copyright as they were too generalor of a low level of abstraction to be capable of protection bycopyright law. Further, the Central Theme did not amount to asubstantial part of HBHG as there was more to HBHG.

COMMENTARY

It is pertinent to note that high reliance was placed by the claimantsupon the Central Theme and the claim was moulded to reflect suchreliance. Two distinct and opposing observations materialized by

such attempt. On the one hand, the claimants may have viewed suchendeavour to be helpful in illustrating the similarities betweenHBHG and DVC, i.e. the Central Theme being the ‘bridge’. On theother hand, the claimants were then burdened with the need to provethe existence of such a Central Theme, which would determine theultimate outcome of their suit. The learned judge found that theCentral Theme as asserted by the claimants could not be discernedfrom the pages of HBHG and held that the Central Theme was infact an artificial creation for the purpose of the litigation by using theDVC as the starting point and working backwards.

Hence, it leads us to the point that forming of a Central Theme andplacing high reliance upon it are not necessarily effective in a claim ofliterary infringement. It is further not effective in proving ‘substanti-ality’. Nevertheless, the claimants were driven to deploy a CentralTheme in their claim, possibly for the reason that it may be effective inasserting that the Central Theme was an ‘expression of an idea’ indeference to the general principle that there is no copyright in an idea,but the way the idea is expressed. The Central Theme of HBHG asalleged, was the merging of the bloodline of Jesus Christ with thatof the Merovingian royalty and was broken into 15 points. Thelearned judge acknowledged that the theory was in itself, an originalidea, but it was too general in its abstraction to be capable ofprotection.

Hence, 15 Central Theme points were advanced as the ‘expression’ ofHBHG’s original idea. This would be a good move, if the claimantscould show any real ‘structure’ in the Central Theme points, whichthey failed to do. They further failed to reveal how they came to theiridea (the Central Theme), the degree of labour, skill or judgementexpended in producing it. This led to the conclusion rightly drawn bythe learned judge that these points were merely a series of generalisedideas, assertions and facts which were not capable of protection.

SIGNIFICANCE

Despite the subject matter of the novel which earned the wrath ofChristian scholars, the decision in the DVC case is certainly not legallycontroversial. It merely reaffirms the general principle which isstatutorily enshrined in sec. 7(2A) of our Copyright Act of 1987 thatthere is no copyright in an idea.

It appears that if a Court were to find that a Central Theme, thecomponents of which can be clearly identified, had been reproducedsubsequently and forming a substantial part of the original publica-tion, then arguably, copyright infringement might arise. Thus thedecision does not close the door to such arguments.

To date, the Malaysian courts have not had the opportunity toexamine a factual scenario in which the idea/expression dichotomy ina claim for literary infringement arose, and certainly, not a caseinvolving the copying of a Central Theme. Ultimately, a Malaysianjudge adjudicating a similar case would have to strike the samedelicate balance between the need for copyright protection and theneed to avoid suppressing artistic/creative endeavours by consideringthe facts and evidence presented. As illustrated above, the “mere”application of unchallenged legal principles to the facts of a case mayprove no easy task.

AMELLY KOK SIM MIN (ksm@skrine.com)

This article was co-written with K. Uma Devi, the editor of Legal Insights.

DA VINCI CODE CASE : STORM IN A GRAIL?

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LEGAL INSIGHTSA SKRINE NEWSLETTER

Case Commentary on Baigent & Another v. Random House Group Ltd [2006] EWHC719 (Ch)

CASE COMMENTARY

SHOWING THE LIQUIDATOR THE RED CARD

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The blitzkrieg ex parte appointment of a provisional liquidator over acompany allows the provisional liquidator to show up at thedoorstep of the company’s office, the Order of appointment inhand, and proceed to lock up the office and seize control of alldocuments, assets and property of the company.

The Court has an unfettered discretionary power to appoint aprovisional liquidator under sec. 231 of the Companies Act 1965(“the Act”) and Rule 35 of the Companies (Winding Up) Rules 1972(“the Rules”) at any time after the presentation of a winding uppetition and before the making of a winding up order.

The ex parte appointment is normally based on the justification thatthe assets and affairs of the respondent company are in jeopardy.Such appointment is made to ensure that the assets and property ofthe respondent are under the control of the provisional liquidatoruntil the determination of the winding up petition. Hence, any noticegiven to the respondent might result in a dissipation of the assetsbefore the provisional liquidator is appointed.

The ex parte appointment of the provisional liquidator lasts until thedisposal of the winding up petition and even then there is noautomatic right to an inter partes hearing. Hence it is crucial for therespondent to quickly apply to set aside this ex parte appointment orthe respondent will continue to be paralyzed.

There are several grounds the respondent can rely on, namely:

Failure to Show a Good Prima Facie Case for Winding Up

As held in the case of Kok Fook Sang v. Juta Vila (M) Sdn Bhd[1996] 2 MLJ 666, a court will only appoint a provisional liquidatorupon the presentation of a winding-up petition when there is goodprima facie evidence that the company will be wound up because thecompany is obviously insolvent, or its assets are in jeopardy or thereare other circumstances which make it imperative for the court tointervene.

It was further held that the primary facts set out in the petition ifassumed to be true and the uncontested evidence taken as a wholemust add up to the conclusion that it is imperative that the winding-up order be made. Therefore, the respondent in applying to set asidethe ex parte appointment must demonstrate that there is no goodprima facie case for winding up, and that the allegations in the windingup petition do not support a winding up order. This is illustrated inthe case of Re Lo Siong Fong [1994] 2 MLJ 72.

Failure to Make a Full and Frank Disclosure of Material Facts

The respondent can challenge the appointment of a provisionalliquidator on the ground that there has been material non-disclosureduring the ex parte hearing. Malaysian cases like Re Lo Siong Fong[1994] 2 MLJ 72 and Kong Long Huat Chemicals Sdn Bhd v.Raylee Industries Sdn Bhd [1998] 6 MLJ 330, and the Singaporecase of Pac Asian Services Pte Ltd v. European Asian Bank AG[1989] 3 MLJ 385 involve material non-disclosures of facts during theex parte hearing that led to the setting aside of the appointment ofthe provisional liquidator.

In the English case of Siporex Trade v. Comdel [1986] 2 Lloyd’sRep 428 the Court held that the applicant must identify the crucialpoints for and against the application, and not merely rely on generalstatements and the exhibiting of numerous documents.

Lee Shih examines the grounds on which the ex-parte appointment of a provisionalliquidator may be set aside

This duty of disclosing material facts also extends to the oral hearingof the application itself. In the English case of MemoryCorporation Plc v. Sidhu (No. 2) [2000] 1 WLR 1443, the Courtmade a general statement regarding urgent without notice hearings;that there is a high duty on the advocate to make full and frankdisclosure and that extends to the oral hearing of the applicationitself. The advocate must draw the court’s attention to the unusualfeatures of the evidence and to the applicable law.

Balance of Convenience

The onus is on the petitioner to establish the urgency and need forthe appointment of a provisional liquidator and the Court musthave regards to the balance of convenience due to the devastatingeffect on the company.

Further as held in the Australian case of Zempilas & Ors v. J NTaylor Holdings Ltd & Ors (1990) 3 ACSR 518, the appointmentof a provisional liquidator is not to be contemplated if othermeasures would be adequate to preserve the status quo. Hence,alternative measures in preserving the status quo would shift thebalance of convenience to justify the setting aside of theappointment of the provisional liquidator.

Failure to Give Undertaking for Damages?

Even if the Petitioner had failed to give an undertaking for damagesin its ex parte application for a provisional liquidator, it appears thatthis is not a ground to support a setting aside application.

In the case of Pui Chiau Tien v. Foi Chaw Leong & Anor [2004] 5CLJ 145, the Court considered the contrasting decisions in EvereadyManufacturing (Pte) Ltd v. Explast Industries Sdn Bhd [1998] 5CLJ 212 and Kong Long Huat Chemicals Sdn Bhd v. RayleeIndustries Sdn Bhd [1998] 6 MLJ 330 and clarified that theundertaking in damages by the applicant is not mandatory in an exparte application for the appointment of a provisional liquidator butit is customary and in accord with general practice. Sec. 231 of the Actand Rule 35(1) of the Rules do not lay down the requirement thatthere must be an undertaking as to damages before the appointmentof a provisional liquidator. It is entirely up to the court’s discretionand the absence of such an order for undertaking as to damages doesnot in any way invalidate the Order.

Although the above factors justify the setting aside of the ex parteappointment of a provisional liquidator, it may take a long time toachieve this. Thus, the setting aside may well represent a hollowvictory as the respondent company may already have sufferedirreparable damage to its business i.e. its business would besuspended and bank accounts frozen during that period. The truesecurity of companies against the ill-effects of the unjustified ex parteappointment of a provisional liquidator thus resides in the vigilanceof the Courts in determining whether the grounds in support of theex parte application truly warrant the appointment of a provisionalliquidator.

LEE SHIH (ls@skrine.com)

LITIGATION

... the setting aside may well representa hollow victory ...

LEGAL INSIGHTSA SKRINE NEWSLETTER

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The concept Halal warrants an exposé of its origins and the impactit has made on the ever-growing global economy paving its way tobeing the new global market force.

The purpose of this article is not to advocate on religion, but toavail the reader to a better understanding of the concept Halalirrespective of race, religion or creed and how Halal applies to notjust Muslims but to everyone who wishes to have a good and highquality of life in every aspect.

This article is divided into two parts. Part one will introduce theconcept Halal and elucidate the development of the Halal industryin Malaysia whilst part two will discuss the relevant Malaysianlegislation and the Halal certification procedure and standardsmentioned in part one.

HALAL DEFINED

Islam is a systematic way of life and as with any religion, Islamcomes with comprehensive standards and guidelines to be ad-hered to by Muslims. One of these standards is the concept ofHalal. The Arabic word Halal means lawful or permitted forMuslims. Halal refers to that which is permitted by Syariah (Syariahis the Arabic meaning for the code of life or law which regulates all aspectsof a Muslim life) and Halal applies to every activity carried out byman. When used in relation to the economy, it refers to businessconducted in a manner deemed permissible in Islam. When usedin relation to food, it refers to food which is in compliance with thelaws of Islam.

In the Quran (Quran is the holy book of Islam, the exact words of God[revelations]), Allah (God) commands Muslims to eat all that isHalal. One of the many verses in the Quran which convey thiscommand is as follows:-

“O Mankind Eat of that which is halal (lawful) and tayyib (wholesome andpure) in the earth, and follow not the footsteps of the devil Lo! He is an openenemy for you” (2:168)

Examples of Halal food including its products and derivatives aremilk (from cows, sheep, camels, and goats), honey, fish, plantswhich are not intoxicant, fresh or naturally frozen vegetables, freshor dried fruits, legumes and nuts, and grains such as wheat and rice.

Animals such as cows, sheep, goats, deer, moose, chicken, ducksand game birds are Halal. However, such animals need to beslaughtered according to Islamic rites for them to be suitable forconsumption by Muslims.

The definition of Halal is not complete without Haram beingmentioned. Haram, the opposite of Halal, means unlawful orforbidden. Examples of Haram food including its products andderivatives are pigs, boars, dogs, monkeys, blood, carnivorousanimals with claws and fangs, almost all reptiles and insects, thebodies of dead animals, birds of prey with claws, pests such asrats, Halal animals which are not slaughtered according to theIslamic rites, and wine, ethyl alcohol and spirits.

Both concepts of Halal and Haram form the objectives of Syariah i.e.to preserve religion, life, property and progeny. Halal is not just aboutthe slaughtering of animals, it is about standards and processes. It isabout safety, reliability and quality assurance. Halal is about looking atthe subject matter from all angles especially in the economic andscientific sense.

DEVELOPMENT OF THE HALAL INDUSTRY IN MALAYSIA

The Malaysian Government has long recognised the importance ofHalal and has established mechanisms to secure the confidence ofMuslim consumers in certifying products, food producers, abattoirs/slaughterhouses and food premises Halal with several legislation inplace for the protection of consumers of Halal products.

In 1982, the Malaysian Government established a “Committee onEvaluation of Food, Drinks and Goods utilised by Muslims”(“Committee”) under the Islamic Affairs Division under the PrimeMinister’s Department (“Division”) (now known as the Departmentof Islamic Development Malaysia (“JAKIM”)). The main task of theCommittee was to check and instil Halal awareness amongst foodproducers, distributors and importers and the Division was respon-sible for the issuance of Halal certificates.

In 2003, the Malaysian Government set up the “Technical Committeeon Developing Malaysia as the Regional Hub For Halal Products”chaired by the Ministry of International Trade and Industry(“MITI”) to stimulate the growth of the Halal food industry and tomake Malaysia a Halal hub by year 2010.

The Malaysian Industrial Development Authority (“MIDA”), a gov-ernment agency under the purview of MITI, issued the Guidelinesfor Application of Incentives for Production of Halal Food. Underthese guidelines, companies that produce Halal food are givenInvestment Tax Allowance of 100% of qualifying capital expenditureincurred within a period of 15 years. Such allowance may be set-offagainst 100% of the statutory income in each year of assessment.Companies that are eligible for such incentives are new companiesundertaking Halal food production, existing companies diversifyinginto Halal food production and existing Halal food companiesundertaking upgrading/expansion of existing plants.

On 16.8.2004, the Malaysian Prime Minister Datuk Seri AbdullahAhmad Badawi launched the ‘Halal Food: Production, Prepara-tion, Handling and Storage – General Guidelines (MS1500:2004)’ (“MS 1500:2004”) which was developed under theMalaysian Standard Development System by the Department ofStandards Malaysia of the Ministry of Science, Technology andInnovation with the involvement and co-operation of JAKIM,relevant government agencies, non-governmental organisations, uni-versities and industries.

HALAL - THE NEW GLOBAL MARKET FORCE

CORPORATE

In the first of a two-part article, Nurliza Ramli explains the meaning of Halal and outlines the initiatives

The Arabic word Halal means lawful orpermitted for Muslims ... and ... applies to

every activity carried out by man

... companies that produce Halal foodare given Investment Tax Allowance of100% of qualifying capital expenditure

incurred within a period of 15 years

CORPORATE

7

MS 1500:2004 incorporates compliance with international standards ofGood Manufacturing Practices and Good Hygiene Practices andprescribes practical guidelines for the food industry on the prepara-tion and handling of Halal food (including nutrient supplements)based on quality, sanitary and safety considerations and serves as abasic requirement for food products and food trade or business inMalaysia.

In line with being the government agency responsible for the issuanceof Halal certificates, JAKIM published the Manual Procedure ofHalal Certification Malaysia (“Manual”) and Guidelines on the Ap-pointment of Foreign Islamic Organisation as Halal CertificationBody for Products to be Exported to Malaysia. The Manual is aguideline to co-ordinate the implementation of Halal certificationactivities in Malaysia at JAKIM’s federal level and the State Depart-ment/Council of Islamic Affairs level (“JAIN”/”MAIN”).

The Manual provides the basic principles to be adopted by every Halalcertificate holder in Malaysia and covers application procedure, inspec-tion, monitoring and enforcement.

The Manual is a complementary document to MS 1500:2004 and anyissuance of Halal certificate by JAKIM/JAIN/MAIN is subject tocompliance with MS 1500:2004 and the Manual.

The Malaysian Government had in its Budget 2005 allocated RM10million specifically for purposes of promoting Malaysia as the worldproducer of Halal products and services.

Recognising the need to prepare Malaysia for this new global marketforce, the Malaysian government proposes to establish a HalalIndustry Development Board under the Ninth Malaysia Plan(“9MP”) for 2006 – 2010 to develop the Halal industry in a holisticand orderly manner. Further, the 9MP provides for the setting up ofa specific fund for the Halal products industry and the developmentof Halal food parks to support the Halal industry.

“The 9MP will drive the sector’s growth in making Malaysia an internationalhub for Halal products and services” said the Malaysian Prime Ministerwhen tabling the 9MP on 31.3.2006.

The Malaysian government has since announced the establishmentof the Halal Industry Development Corporation (“HIDC”) to spurahead the development of the Halal industry in Malaysia and theinternational market. HIDC will lead the development of Halalstandards as well as audit and verification procedures, in order toprotect the integrity of Halal besides directing and co-ordinating thedevelopment of Malaysia’s Halal industry among all stakeholders.

On 7.3.2006 the Malaysian Prime Minister announced that all stategovernments in Malaysia are to use the standard Halal logo issued byJAKIM thus making the logo the national Halal logo of Malaysia.Previously, state governments in Malaysia were allowed to use theirown “Halal” logo.

Islamic banking and finance is the natural partner to the Halal marketas both have the same market, values and principles. Malaysia beingthe market leader of Islamic banking and finance is in the idealposition to push the Halal market to a higher level.

In May 2006, a leading investment bank in Malaysia announced that itwill allocate RM500 million in the form of loans to Halal food playersby the second half of this year. It is the world’s first special Halalpackage which offers good opportunities to businesses as theyprovide more depth and opportunities in the Halal industry (TheStarBiz, 10.5.2006).

The Halal industry in Malaysia has been given a further boost by arecent announcement that an international hypermarket chain hasmade a commitment to purchase RM1 billion Malaysian Halalproducts for sale in Britain over the next 5 years (The StarBiz,20.5.2006).

MALAYSIA AND THE GLOBAL HALAL MARKET

Halal has now become a universal concept. Halal stands for just andfair business transactions, caring for animals and the environment,social justice and welfare. It is no longer a concept confined orrestricted to the slaughtering of animals for the consumption of aMuslim but encompasses products and services of the highestquality to meet the ever increasing awareness and needs of consumersin a demanding global market.

The Malaysian Prime Minister in his address to the Developing Eight(D8) member countries in Bali, Indonesia recently said that “based onsimple calculation and by looking at the per capita expenditure on food amongthe Muslim population around the world, we estimate that the Halal foodmarket is worth at least US$580 billion a year”.

He further said that the amount did not include the likes of logisticsand other non-food aspects of the Halal industry. (BERNAMA,Malaysian National News Agency, 13.5.2006). Based on that estima-tion, the global Halal market is huge.

The Halal market comprises all segments of society with the non-Muslims countries playing a major part in the production of Halalfood such as Australia, Brazil and India in producing Halal meatproducts. The emerging and significant Halal food markets develop-ing in the United Kingdom, Europe and the United States ofAmerica prove that the Halal market has an international appeal.

The Halal market encompasses the entire value chain – from produc-tion and manufacturing to shipping, logistics, export and retail. Evenbranding and advertising can be developed to spur the developmentof the global Halal market said the Malaysian Prime Minister in hisspeech at the opening of the 3rd Malaysia International Halal Show-case held in Kuala Lumpur recently (BERNAMA, 11.5.2006).

The Halal market is developing at a rapid pace and Malaysia is in aunique position to benefit from it as a result of the various initiativestaken by the government and the private sector to accelerate anddevelop Malaysia as an international Halal hub.

NURLIZA RAMLI (nr@skrine.com)

The 9MP will drive the sector’s growth inmaking Malaysia an international hub for

Halal products and services ...

taken to develop Malaysia as an international Halal hub

8

LEGAL INSIGHTSA SKRINE NEWSLETTER

LIP LOCKING RIGHTS

Case Commentary on Ooi Kean Thong and Anor v. Public Prosecutor [2006] 3 MLJ 389

The Federal Court’s (“FC”) decision in the above case earlier this yeargenerated much public interest. This was due primarily to the publichaving erroneously interpreted the decision as endorsing theauthorities’ right to regulate the private affairs of society at large;specifically, public expressions of love. Many viewed it as being atodds with our present day values and sensibilities.

The legal issue before the FC, however, was not whether hugging andkissing was permitted. Quite the contrary, the question before the FCwas whether

“sec. 8(1) of the Parks (Federal Territory) By-Laws 1981 (“the By-Laws”) isultra vires sec. 102 of the Local Government Act 1976 (“the enabling Act”)and the effect is that the applicants have been deprived of their constitutionalright of freedom and whether the charge against them is contrary to Article5(1) of the Federal Constitution (“the Constituition”).”

Sec. 8 of the By-Laws makes it an offence to behave in a disorderlymanner in any park. One would immediately notice that there is nosuggestion whatsoever of any indecency. The applicants, contendedthat sec. 8 of the By-Laws is ultra vires sec. 102 of the enabling Act asnowhere in the same does it provide for the power to make any by-lawrelating to ‘indecent’ behaviour, thus contravening Articles 5 and 8 ofthe Constitution since they are denied of their freedom to live the waythey want. They further contended that Malaysia is a multiracialcountry and thus hugging and kissing in public places should not bedeemed as indecent acts and that such expression of love should beencouraged.

At the outset it is patent to observe the manner in which the questionfor determination by the FC was framed. First, a blanket“constitutional right of freedom” does not exist in Malaysia. There areonly Fundamental Liberties as enshrined under Part II of theConstitution. Secondly, the applicants’ complaint is that the chargeagainst them is contrary to Article 5 (1) of the Constitution. Article 5(1) provides that

“no person shall be deprived of his life or personal liberty save in accordance withthe law.”

It is indeed strange that the applicants placed tremendous reliance ona provision which, as observed by Suffian LP in Government ofMalaysia & Ors v. Loh Wai Kong [1979] 2 MLJ 33, “speaks ofpersonal liberty, not of liberty simpliciter.” ‘Personal liberty’ means libertyrelating to or concerning the person or body of the individual, andpersonal liberty in this sense is the antithesis of physical restraint orcoercion; of not being subjected to any form of physical restraint orcoercion that constitutes the essence of personal liberty.

It will be observed that since there was no question of deprivation ofrights, life or personal liberty, there cannot be by any extension ofreason or logic be surmised that forbidding a person from behavingin a disorderly manner is equivalent to depriving a person of his life orpersonal liberty, much less within the meaning of Article 5.

Further, the assertion that the applicants are at liberty to act as theychoose in a public park has nothing to do with the constitutionalityof sec. 8 of the By-Laws, the very question that was designed tomove the FC.

The applicants also attempted to invoke Article 8 of the Constitutionon the grounds that DBKL had been unfair to them. Article 8provides, by way of sub-article (1) and (2), that

“all persons are equal before the law and entitled to the equal protection of thelaw” and that “except as expressly authorized by this Constitution, thereshall be no discrimination against citizens on the ground only of religion, race,descent, place of birth or gender in any law or in the appointment to any officeor employment under a public authority or in the administration of any lawrelating to the acquisition, holding or disposition of property or theestablishing or carrying on of any trade, business, profession, vocation oremployment.”

As the FC observed, there is no merit in attempting to place relianceon Article 8 as there had been no assertion of unequal treatment onthe part of DBKL in relation to the applicants. There were, further,no allegation that irrelevant consideration was taken into accountwhen DBKL decided to issue the summons.

This brings us to the third argument mounted in favour of theapplicants i.e. that sec. 8 of the By-Laws is ultra vires the enabling Act.The main thrust of the applicants’ argument was premised upon theabsence of specific words as to the by-laws on the indecent act,including the words hugging and kissing. The FC quite rightlyobserved that this line of argument smacks of simplicity which wasaugmented by not having in mind the Interpretation Acts of 1948and 1967. The FC held that it was clear that the Mayor of KualaLumpur did indeed have the power to legislate upon the regulationof, in this instance, a public park. This is because there are two parts tosec. 102. The first part is general in nature whereas the second relatesto the Mayor’s specific powers. The FC opined that the generalpowers enumerated in the first part of sec. 102 of the enabling Actwas wide enough to cover matters as dealt with in the impugned By-Laws. Additionally, DBKL did not allege that the applicants wereindecent. They merely alleged that they were behaving in a disorderlymanner by hugging and kissing in a public park.

The applicants may have intended to champion the cause of freedomof expression but instead have only succeeded in engaging in anexercise in futility.

One issue remains outstanding. What amounts to behaving in adisorderly manner? The FC did not rule on that issue but was atpains to intimate in no uncertain terms that it is a matter of fact to bedetermined by the trial judge. Many will, however, remember thewidely reported comments of the Chief Justice which were madeduring the hearing. Datuk Param Cumaraswamy in his article on4.5.2006 in The Sun newspaper opined that at most those remarksshould be construed as an expression of his personal opinion orbeliefs and no more, albeit from the highest judicial officer in thecountry. Nevertheless, one must always bear in mind that theboundaries of decency are, and always will be, subject to the moralityand culture of the majority of society. Moreover, the right to privacy,contrary to popular belief, does not exist in Malaysia.

JEREMY LEE PHENG YAU (jl@skrine.com)

... (we cannot surmise) that forbidding a person frombehaving in a disorderly manner is equivalent todepriving a person of his life or personal liberty ...

CASE COMMENTARY

9

INTELLECTUAL PROPERTY

A plethora of newspaper reports on the coming free trade discus-sions between Malaysia and the United States yield little informationas to what Malaysia can expect from the Free Trade Agreement(“FTA”) between the two countries. Trade benefits would of coursebe the main draw for Malaysia in the race for foreign investmentbetween the countries in Asia and the FTA is expected to raiseMalaysia’s competitiveness in this region. Due to the US TradePromotion Authority’s timelines, the draft provisions of the Malay-sia-United States Free Trade Agreement (“MUSFTA”) should beexpected soon. Nonetheless, it is likely that the MUSFTA will becomparable to other FTAs as the format of the FTAs with theUnited States worldwide seem similar with minimal changes. It isevident from an overall review of the intellectual property provisionsof some of these FTAs that the United States requires complianceeither with US laws or with international laws and standards.

If so, the question then is, how would the FTA affect Malaysia’sintellectual property (“IP”) laws presently in place? In order to answerthis, we need to have recourse to some of the existing FTAs in place,specifically, Singapore (“SGUSFTA”) and Australia (“AUSFTA”),with the expectation that our MUSFTA will be similar and thus tohighlight some of the areas which may require amendment.

International Conventions: One of the first requirements in the IPchapter of these FTAS is the requirement for accession to variousinternational treaties and conventions. Malaysia is currently only acontracting state to the WIPO Convention, Berne Convention andParis Conventions and is in the process of acceding to the PatentCooperation Treaty. Accession to international IP conventions andtreaties is, of course, commendable and in line with Malaysia’scommitment to comply with international IP standards and enforce-ment. However, looking at the issues faced by Malaysia in theimplementation of TRIPS not so long ago, new accessions areexpected to cause similar problems if not properly deliberated andthe timelines given are short.

Trade Marks: It is interesting to see that both the SGUSFTA andAUSFTA provide for ‘scent marks’ or marks that are not visuallyperceptible, which although accepted by the USPTO in the UnitedStates as trade marks, are not necessarily internationally acceptedpractice. Malaysia has so far not followed such trends. Thus, the lawas it currently stands, does not allow for scent, sound and othermarks that are non-visually perceptible. In view of the proposedMUSFTA, the laws regarding types of registrable marks may nowdiffer and its implementation may cause difficulties to the MyIPOand members of the public in addition to having to defend aninfringement based on such non-visual marks.

Patents: The patent provisions in the SGUSFTA and AUSFTA setout the US demand for levels of patent and pharmaceutical protec-tion beyond that of TRIPS. Delays in the patent granting process is acommon problem faced by Malaysia and other countries. To dealwith this, the FTAs provide for adjustment of patent terms. Thisrequirement is likely to be part of the MUSFTA talks. As regards theway in which such a provision addressing delays in the issuance ofpatents might be drafted, or what amounts to an ‘unreasonable’delay, the SGUSFTA and AUSFTA provide some idea of whatwould be expected. Similarly, Malaysian patent laws also may have toprovide for unreasonable delays by lengthening rights over patent-able inventions for longer periods than those set internationally.

Another expected requirement at the MUSFTA would be thestreamlining of patent exclusions to the definition found in TRIPS.Parties to the FTA may only exclude inventions from patentability asdefined in Articles 27.2 and 27.3(a) of the TRIPS agreement. In viewof the said definition, it appears arguable whether Malaysia may stillbe able to continue having a list of specific excluded subject-matteras currently provided for in the Patents Act 1977.

Pharmaceuticals: The AUSFTA and SGUSFTA deal separatelywith marketing approvals for new pharmaceuticals andagrochemichal products. The SGUSFTA essentially provides thatthe contracting party to the FTA shall not permit third parties frommarketing the same or a similar product as another person, on thebasis of prior marketing approval obtained by the other person. TheAUSFTA provides the same as above, but further stipulates thatthird parties shall not be permitted from marketing a similar producton the basis of previous data disclosed by another in relation to theproduct’s safety, efficacy and quality. Malaysia at present requires anyperson seeking approval for his product to submit his own test dataregarding that product’s quality, safety and efficacy and not rely solelyon prior approvals granted to another person.

Notwithstanding the present practice, it may be that the MUSFTAnegotiations may eventually require Malaysia to provide for moremeaningful protection of proprietary trade secret data against unfaircommercial use, while minimising delays in obtaining marketingapproval. Given the current lack of local legislation specificallyaddressing the issue of trade secrets and unfair commercial usearising out of disclosure of such information, the MUSFTA talksmay require additional provisions to be drafted into existinglegislation regulating drug and chemical products.

The requirement for adjustment of patent terms for pharmaceuti-cals products due to delays in marketing approval also does notspecifically relate back to the adjustment to patent terms due to suchdelays in the patent approval process. Contracting parties are furtherrequired to inform the patent owner of the identity of any thirdparty requesting marketing approval during the term of the patentand if these provisions are found in the draft MUSFTA, Malaysiamay face some administrative/implementation issues if there is alack of synchronization between the government agencies i.e.MyIPO and agencies within the Ministry of Health.

Encrypted Satellite Signals: There is no legislation currently inforce in Malaysia regulating encrypted programme-carrying signalstransmitted by satellite. The Communications and Multimedia Act1998 deal with licensing requirements for satellite transmission, andthe Communications and Multimedia (Spectrum) Regulations 2000deal with the offence of intercepting spectrum signals. However,neither specifically address the issue of encrypted satellite signals.

This article only highlights some of the IP changes that are antici-pated in the draft MUSFTA and there will in all likelihood besignificant amendments to IP areas. However, the question oneverybody’s lips is the extent to which Malaysia is ready for thepossible changes and implementation issues that may arise.

CHARMAYNE ONG POH YIN (co@skrine.com)

This article was co-written with Gwendoline Choy, a pupil in chambers atSkrine.

MALAYSIA - U.S. FTA - IMPACT ON MALAYSIAN IPLAWSCharmayne Ong Poh Yin considers the Malaysia - United States Free Trade Talks from anIP perspective

10

LEGAL INSIGHTSA SKRINE NEWSLETTER

The first installment of this three-part article considered the develop-ment of the law in the tort of negligence in England, fromDonoghue v. Stevenson [1932] AC 562, which created the principlesof negligence, to the unanimous decision of the House of Lords inMurphy v. Brentwood District Council [1991] 1 AC 398, whichplaced strict limits on the recovery of pure economic loss.

The second installment of this three-part article examined thepositions adopted by the Courts in other commonwealth jurisdic-tions, in particular Canada, Australia, New Zealand and Singapore. Itwas seen that all these commonwealth nations have declined tofollow the decision in Murphy, and had either adopted the Annstwo-staged test, or formulated their own test to suit their perceivedneeds of their individual societies.

This third and concluding installment of the article will deal with thedevelopment in Malaysia of this difficult and complex area of law. Ashas been previously noted, this has been a prolonged and sometimesdifficult process. The High Court (“HC”) delivered a series ofjudgments, showing no consensus as to whether or not Murphyshould be applied. The Court of Appeal (“CA”) has delivered twojudgments, both agreeing that Murphy should not apply, but givingwidely differing grounds. The Federal Court (“FC”) has recentlydeclined to follow Murphy, and has given some indication of theapproach to be taken.

The Malaysian approach must be seen in light of the statutoryreception of English common law in Malaysia via sec. 3 of the CivilLaw Act 1956 (“CLA”), which reads:-

“(1)

(a)

It would appear that, in keeping with many other Common Lawjurisdictions, the Malaysian Courts have not, in general, felt them-selves bound to apply the law as laid down by the English Courts.

HIGH COURT DECISIONS

In Kerajaan Malaysia v. Chuah Fong Shiew [1993] 2 MLJ 439 theplaintiff commenced an action in negligence against the defendantson the ground that they had been negligent in superintending andsupervising the plaintiffs’ buildings, causing substantial losses to theplaintiff. The third defendant applied to strike out the plaintiff ’saction on grounds, inter alia, that the plaintiff could not claim undertort because the loss suffered by him was pure economic loss. TheSenior Assistant Registrar (“SAR”) allowed the application andstruck out the plaintiff ’s action. On appeal the learned judge upheldthe SAR’s decision.

2 years later, in the case of Nepline Sdn Bhd v. Jones Lang Wootton[1995] 1 CLJ 865 the plaintiff (tenant) filed an action in the SessionsCourt against the defendant, a firm of registered real estate agentsand chartered valuers, for damages in the tort of negligence for failure

to inform the plaintiff that the premises were subject to foreclosureproceedings. The Sessions Court dismissed the plaintiff ’s case. Onappeal to the HC, the learned HC judge recognised that the claim wasfor pure economic loss, but he nevertheless allowed the plaintiff ’sappeal.

In approaching the issue of duty of care in the context of pureeconomic loss in negligence, the learned judge took the view that theCourt should first determine what was the common law of Englandon 7.4.1956 and then, whether “local circumstances” permit its applica-tion as such, and if not, formulate Malaysia’s own common law. Indoing so, the Court is at liberty to look at any source of law, local orotherwise. The learned judge held that the defendant owed a duty ofcare not to cause pure economic loss to the plaintiff in thosecircumstances. It appears from the aforesaid approach that there is nodefinite test formulated in dealing with the issue of duty of care inclaims for pure economic loss in negligence, but rather it would bedealt with on a case by case basis considering the “local circumstances”criteria.

In Teh Khem On & Anor v. Yeoh & Wu Development Sdn BhdOrs [1996] 2 CLJ 1105, an action was brought by a group ofpurchasers, (the plaintiffs), against the builder/developer (the firstdefendant) in contract for defective works in the construction of thehouse purchased by the plaintiffs, as well as against the architects (thesecond defendant), the engineers (the third defendant) and the localauthority of Batu Gajah for damages in negligence. Peh Swee ChinFCJ allowed the plaintiff ’s claim against the first defendant incontract, but dismissed the plaintiff ’s claims against the second, thirdand fourth defendants, as being pure economic loss.

In Dr. Abdul Hamid Abdul Rashid & Anor v. Jurusan MalaysiaConsultants (sued as a firm) & Ors [1997] 3 MLJ 546, the plaintiffsconstructed a double storey house on the land. About 3½ years afterthe house was constructed, it began to collapse due to landslide, andthe plaintiffs were forced to evacuate. They then brought an action intort against, amongst others, the engineering consultants, the localauthority and the contractor engaged in erecting a house on theneighbouring land.

At trial, counsel for the engineering consultants objected to theplaintiffs’ claim on the basis that the claim was for pure economicloss, namely the collapsed house, and therefore could not be enter-tained. Dato’ James Foong J (now JCA) held that this was indeedpure economic loss, but nevertheless allowed the plaintiff ’s claims,stating

“This legal principle for accepting a claim for economic loss is obviously notonly confined to defective buildings and structures. It has far greater impact onall situations by analogy and if limited by the limitations imposed as inMurphy and D & F Estates, it would be grossly inequitable with justice notbeing served.”

The same reasoning was reiterated by the Court in Steven PhoaCheng Loon & Ors v. Highland Properties Sdn Bhd & Ors [2000]4 MLJ 200. The facts of the case are this : there were three towerblocks that stood in a residential area known as Taman Hillview,respectively known as Blocks 1, 2 and 3. The plaintiffs were theowners of Blocks 2 and 3. As a result of the collapse of Block 1, theplaintiff ’s apartments in Blocks 2 and 3 had become worthless. Theplaintiffs then brought an action against 10 defendants, amongst

Save so far as other provision has been made or may hereafter be made byany written law in force in Malaysia, the Court shall

in West Malaysia or any part thereof, apply common law of Englandand the rules of equity as administered in England on 7.4.1956;

Provided always that the said common law, rules of equity and statutesof general application shall be applied so far only as thecircumstances of the States of Malaysia and their respec-tive inhabitants permit and subject to such qualificationsas local circumstances render necessary.” [Emphasis Added]

RECOVERING PURE ECONOMIC LOSSIn this final instalment , Lam Wai Loon examines

11

LITIGATION

others, the developer of the three blocks of apartments, MajlisPerbandaran Ampang Jaya, the engineer, the owner of the of landdirectly behind the towers (the Arab Land), and the owner of theland situated on top of Arab Land. The plaintiffs based their causeof action principally in negligence and nuisance.

One of the issues to be decided was whether the plaintiffs couldmaintain their claims for pure economic loss in negligence, i.e. thetwo blocks of apartment being the defective product. Applying thesame reasoning in the earlier decision in Dr. Abdul Hamid case, HisLordship, Dato’ James Foong J allowed the recovery of pureeconomic loss.

DECISIONS OF THE COURT OF APPEAL

The CA has had occasion to consider the issue at hand in relation toDr. Abdul Hamid and Steven Phoa (both decisions of Dato’ JamesFoong J). His rulings in both cases were overruled by the CA inSteven Phoa Cheng Loon & Ors v. Highland Properties SdnBhd [2003] 1 MLJ 567, which nevertheless allowed the plaintiffs torecover pure economic loss on different principles of law. Gopal SriRam JCA stated the law as follows :-

“Under the Atkinian doctrine, loss of any type or description is recoverable,provided that it is reasonably foreseeable…it is our judgment, that it is not thenature of the damage in itself, whether physical or pure financial loss, that isdeterminative of remoteness. The critical question is whether the scope of theduty of care in the circumstances of the case is such as to embrace damage ofthe kind which, a plaintiff claims to have sustained, whether it be pureeconomic loss or injury to persons or property.

Here the trial judge had to ask himself the question whether pure economic lossto the plaintiffs was reasonably foreseeable by the fifth defendant, or indeed,any of the other defendants before us? But he did not himself ask thatquestion. He held that as a matter of policy he could not award pure economicloss. With respect we cannot agree. It is not the function of the court below orof this court to alter well established law.”

From the decision of the CA, it appears: Firstly, the ‘neighbour’principle enunciated in Donoghue v. Stevenson is applicable to bothclaims for physical damage and pure economic loss. Secondly, pureeconomic loss is recoverable in negligence so long as it is a kind ofloss which is reasonably foreseeable. Finally, policy considerationsplay no part in negating or limiting the scope of the duty of care innegligence.

About 3 years after the CA overruled Dato’ James Foong J’sdecisions in Steven Phoa and Dr. Abdul Hamid on the recovery ofpure economic loss in negligence, the CA in Lim Teck Kong v. Dr.Abdul Hamid Abd. Rashid & Anor [2006] 3 MLJ 213 expressedfull agreement with his Lordship’s view in both decisions. Neverthe-less, it has to be noted that the majority decisions in regards to thelaw on pure economic loss were merely obiter, as their Lordshipstook the view that the loss in question, i.e. the collapsed building,was physical damage and not pure economic loss.

The reasoning in the four decisions, namely, of the HC in Dr. AbdulHamid and Steven Phoa, the CA in Steven Phoa and the CA in Dr.Abdul Hamid are not easy to reconcile. The trial judge in Dr. AbdulHamid and Steven Phoa were of the view that claims for pureeconomic loss should not be treated differently from claims forphysical damage in an action for negligence as it would otherwise lead

to justice not being served (which the CA in Steven Phoa described asa policy decision). In the CA of Steven Phoa, their Lordships tookthe view that pure economic loss was recoverable under the wellestablished principle as enunciated in Donoghue v. Stevenson solong as it is a kind of damage which is reasonably foreseeable. Andlastly, although their Lordships in the CA of Dr. Abdul Hamidagreed with the trial judge’s reasoning on the recoverability of pureeconomic loss, their Lordships found that the loss in question wasphysical damage, and not pure economic loss.

It is shown from these decisions that not only has judicial opinionvaried as to principles to be applied in approaching claims for pureeconomic loss in negligence, but also as to what is pure economic loss.

THE DECISION OF THE FEDERAL COURT

One of the appellants (Majlis Perbandaran Ampang Jaya [“MPAJ”])brought an appeal to the FC against the decision of the CA in StevenPhoa, reported as Majlis Perbandaran Ampang Jaya v. StevenPhoa Cheng Loon & Ors [2006] 2 MLJ 389. The respondents cross-appealed.

Although, the factual matrix relating to the case in Steven Phoa hasbeen briefly stated herein before, more has to be said regarding thedecisions of the HC and the CA concerning MPAJ in order to have abetter understanding of the issues in the appeals before the FC.

In the HC, MPAJ were found 15% liable for negligence in respect ofacts and omissions prior to, and after the collapse of Block 1. Inrelation to pre-collapse liability, MPAJ were found negligent for failureto use reasonable care, skill and diligence to ensure that the hillslopeand the drainage thereon were properly accomodated before approv-ing building or other related plans and during construction stage, tocomply with and to ensure the implementation of the drainagesystem. Although the learned judge held that MPAJ to be negligent,his Lordship took the view that they were immune from liability byvirtue of sec. 95(2) of the Street, Drainage & Building Act 1974(“SDBA”).

In relation to post-collapse liability, the trial judge found MPAJ to benegligent for failure to implement a master drainage system for theaffected area on the hill slope after the collapse of Block 1 so as toensure the stability and safety of the adjacent Blocks 2 and 3 occupiedby the plaintiffs. This had resulted in damages to the plaintiffs whohad to evacuate their apartments in Blocks 1 and 2. Unlike the pre-collapse liability, the trial judge held that sec. 95(2) of SDBA did notexempt MPAJ from liability. On appeal to the CA, these decisions ofthe trial judge in respect of the “pre-collapse” and “post-collapse”

continued on page 19

... the critical question was not the nature of thedamage itself, whether physical or pecuniary, but

whether the scope of the duty of care in thecircumstances of the case was such as to

embrace damage of the kind which the plaintiffsclaimed to have sustained...

IN NEGLIGENCE : THE MALAYSIAN POSITION?the Malaysian position on pure economic loss

12

LEGAL INSIGHTSA SKRINE NEWSLETTER

ROUGH GUIDE TO THE ARBITRATION ACT 2005

N. Pathmavathy and Kamraj Nayagam provide some pointers on drafting arbitration clauses

INTRODUCTION

The new Malaysian Arbitration Act 2005 (“the Act”) which hasrecently come into force, substantially alters the legislative foundationfor arbitration in Malaysia, and familiarity with its provisions isessential not only for those conducting arbitrations but also for thosedrafting contracts containing arbitration clauses. The Act is based onthe provisions of the UNCITRAL Model Law and incorporates thesalient provisions of the New York Convention 1958 with regard tothe enforcement of arbitral awards, which has been ratified byMalaysia. The Act provides for two distinct arbitral regimes, i.e.international arbitrations with minimal domestic court interferenceand domestic arbitrations with a greater degree of Court reviewprocedures. An important feature of the new legislation is the“opting in” and “opting out” provisions, essentially enabling partiesto a domestic arbitration to opt for the international regime and viceversa. In addition, the Act gives parties the right to alter the “default”positions as set out in the Act. In essence, the Act recognises the rightof contracting parties to define their chosen mode of disputeresolution, which in turn makes it advisable that such parties be wellaware of their options.

The Act is divided into four parts. The provisions in Parts I, II andIV are mandatory provisions which apply to all arbitrations where theseat is in Malaysia except where the parties are permitted to agreeotherwise in the text of the individual sections. The provisions inPart III are non-mandatory provisions which would apply to do-mestic arbitrations unless opted out of by parties and which do notapply to international arbitrations unless there is an opting in byparties. The Act thus makes it incumbent on those drafting contractscontaining arbitration clauses to be aware of the parties’ intentionsand to use the opt-in and opt-out provisions to reflect thoseintentions.

It will be appreciated that this Checklist is not intended to be anexhaustive statement of the manner in which an arbitration clause isto be drafted under the Act, but instead as an indication of some ofthe potential issues to be considered when doing so, and hopefully asan aide memoire for swift reference. Professional advice should besought in any situation of uncertainty.

CHECK-LIST OF MATTERS TO CONSIDER WHENENTERING INTO AN AGREEMENT TO ARBITRATE

The Act contains many default provisions which deal with specificpowers of the arbitral tribunal and the Court. As these defaultprovisions would apply in the absence of the parties’ agreement tothe contrary, it is important for parties to direct their mind as towhether they are happy for the default provisions to apply. If not,they must specifically provide for an alternative.

A summary of some of the provisions of the Act, to which partieswould be well advised to apply their minds to at the point ofcontracting or alternatively prior to commencement of the arbitralproceedings, are as follows :

to specify the “seat of arbitration” pursuant to sec. 22 – it is tobe noted that the seat of arbitration refers to the juridical centreof the arbitration which may not be synonymous with thevenue of the arbitral proceedings;

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to decide whether Part III of the Act should apply to anyarbitration arising from the agreement pursuant to sec. 3 - thedefault position under the Act is that, where the seat is inMalaysia, unless parties agree otherwise, Part III shall apply in adomestic arbitration but shall not apply in an internationalarbitration;

to decide on the notice provisions for delivery of writtencommunications under sec. 6 including the question of whetherelectronic communications are to be deemed to have beenreceived as soon as these are sent to the addressee;

to decide on the number of arbitrators pursuant to sec. 12 - thedefault position under the Act is that the arbitral tribunal in aninternational arbitration would be made up of 3 arbitratorswhilst a sole arbitrator would make up the arbitral tribunal in adomestic arbitration ;

to decide whether any person should be precluded from actingas an arbitrator by reason of nationality pursuant to sec. 13(1) -the default position under the Act is that the nationality of thearbitrator is irrelevant;

to decide on the procedure for appointing the arbitrator or thepresiding arbitrator pursuant to sec. 13(2);

to decide whether the procedure for challenging the appoint-ment of an arbitrator as set out in sec. 15 is acceptable;

to decide under sec. 17 whether any hearings previously heldshould be repeated where an arbitrator has been replaced andwhether prior orders or rulings should be invalidated simplybecause there has been a change in the composition of thearbitral tribunal;

to decide whether the tribunal is empowered to make orders forsecurity for costs, discovery of documents and interrogatories,giving of affidavit evidence and/or the preservation, interimcustody, or sale of any property which is the subject-matter ofthe dispute under sec. 19;

to decide whether the provisions on enforcement in sec. 38 and39 shall apply to orders made by the arbitral tribunal under sec.19;

to decide on the procedure to be adopted by the arbitral tribunalin conducting the proceedings under sec. 21;

to decide on the date of commencement of the arbitral proceed-ings under sec. 23 - the default position under the Act is that thearbitration shall commence on the date on which a writtenrequest for to decide on the language of the arbitration undersec. 24;

to decide whether parties may amend or supplement their claimor defence during the arbitral proceedings under sec. 25;

to decide whether or not oral hearings need to be held andwhether the proceedings should be conducted on the basis ofdocuments only under sec. 26;

to decide whether the arbitral tribunal should be empowered toproceed ex parte and/or terminate proceedings upon the failureto proceed or appear by one party under sec. 27;

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CORPORATE

It will be appreciated that the Act is still in its infancy, and, given thatit applies to all arbitrations commenced after 15.3.2006, it is inevitablethat it will be used in relation to arbitration clauses which weredrafted with the superseded Arbitration Act 1952 in mind. As such,it is to be expected that some years will elapse before the Courts ofMalaysia will have an opportunity to consider arbitration clausesdrafted with the provisions of the Act in mind. Pending this, thosedrafting contracts will have to trust that their interpretation of theoperation of the Act is consonant with the eventual interpretationadopted by the Courts. Future installments of this Rough Guidewill address the commencement and conduct of arbitrations underthe Act, and eventually, it is hoped, the scope for judicial interven-tion.

N. PATHMAVATHY (npv@skrine.com)& KAMRAJ NAYAGAM (kn@skrine.com)

Confidentiality Obligations

The Guidelines impose a duty on the banking institution to incorpo-rate a provision in the sale and purchase agreement that imposes anobligation on the buyer to preserve the confidentiality of customers’information.

Management’s Obligations

The Guidelines also impose specific duties on the board of directorsand senior management of banking institutions in relation to thesale and purchase of NPLs and the management by the buyer of suchloans.

FISCAL ISSUES

Stamp Duty

For the purposes of the Stamp Act 1949 (“SA”), “accounts receiv-ables” and “book debts” are deemed to be “property”. The convey-ance of property under the SA is subject to ad valorem duty (themaximum rate of which is 3%) under item 32(a) of the 1st Scheduleof the SA.

In the case of the sale of accounts receivable or book debts to variousentities, including banking institutions and companies that carry on a“scheduled business” under the Act, pursuant to a factoring agree-ment, a flat rate duty of RM10 is payable under item 32(c) of thesame schedule.

It appears that the purchase of NPLs comprising unsecured loansmay qualify for stamp duty under item 32(c). The position is lesscertain in the case where the NPLs comprise secured loans and entailthe transfer of securities. If the purchase of NPLs does not qualifyfor abated duty under Item 32(c), the stamp duty payable on suchtransaction under Item 32(a) may be quite substantial.

It is submitted that the Malaysian Government should exempt allpurchases of NPLs under the Guidelines from ad valorem stamp duty(if an abated duty under Item 32(c) is not applicable) to reduce thetransaction costs of buying NPLs.

Reclassification of NPLs

Under the Guidelines, a buyer of NPLs which is a banking institu-tion is permitted to re-classify the purchased NPLs as performingloans for up to 6 months. If the principal or the interest continues tobe unpaid for 6 months or more, these loans must be classified asnon-performing.

Amortisation of Losses

Banking institutions are not permitted to amortise the losses on theNPLs sold and must recognise the losses that arise at the point ofsale.

CONCLUSION

While the Malaysian Government is to be commended for introduc-ing the Guidelines, the extent to which these Guidelines will achievetheir objective of assisting the Malaysian banking institutions toreduce their NPL ratios remains to be seen.

KWAN KIN SUM kks@skrine.com

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• to decide whether the arbitral tribunal should be empowered toappoint experts and require a party to provide relevant informa-tion or access to any relevant documents, property or goods tothe expert under sec. 28;

to specify the governing law of the agreement;

to decide whether any decision of an arbitral tribunal of morethan one person may be made by a majority and whetherquestions of procedure may be decided by the presiding arbitra-tor under sec. 31;

to decide whether the arbitral tribunal should be empowered toaward interest on any sum of money ordered to be paid by theaward from the date of award to date of payment as well asdetermine the rate of interest under sec. 33;

to determine the period of time within which to request thearbitral tribunal to correct computational, clerical or typographicalerrors in an award or request for an interpretation of a specificpart of the award under sec. 35(1);

to determine whether the arbitral tribunal should be empoweredto make an additional award on claims presented to the tribunalbut omitted from the award upon the request of a party undersec. 35(4);

where Part III applies to the proceedings, to determine whetherthe arbitration proceedings arising out the agreement may beconsolidated with other arbitration proceedings and whetherconcurrent hearings may be held under sec. 40;

where Part III applies to the proceedings, to determine thepowers of the arbitral tribunal in respect of payment of costsand expenses of the proceedings under sec. 44(1);

where Part III applies to the proceedings, to determine whetherthe tribunal should be empowered to take into account aCalderbank offer in awarding costs and expenses of the proceed-ings under sec. 44(2);

where Part III applies to the proceedings, to determine whethertime may be extended in a situation where time for making anaward is limited by the agreement under sec. 46.

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... Dumping the Dead Weights

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THE REGAL CASE

In Regal (Hastings) Ltd v. Gulliver [1942] 1 All E.R. 378,Company A wished to lease two cinemas with a view to sell bothcinemas together with another cinema owned by Company A as asingle concern. The directors of Company A then formed Com-pany B to lease the two cinemas. The owner of the cinemasrequired Company B to have a paid up capital of at least £5,000.

Company A could only afford to subscribe for 2,000 shares of £1each in Company B. Among those who subscribed for theremaining 3,000 shares were four directors (other than the chair-man of the board) who each subscribed for 500 shares and threeinvestors procured by the chairman who collectively subscribed for500 shares.

The shares in both companies were eventually sold for a profit ofnearly £3 per share. The buyers sought to recover for Company Athe profit made by the directors (including the chairman).

The High Court and the Court of Appeal dismissed the action asthey were satisfied that the directors had acted in good faith and inorder to facilitate a transaction for Company A which the latter wasunable to finance from its own resources. On appeal, the House ofLords (“HL”) upheld the decision of the lower courts that thechairman was not liable as there was no evidence that he made anyprofits from the sale of shares by the investors procured by him.

The HL, by a unanimous decision, reversed the lower courts’decision in respect of the four directors who had each subscribedfor 500 shares and held them liable for profits made on the sale oftheir shares.

According to Lord Russell of Killowen (@ p. 386) –

“The rule of equity which insists on those, who by use of a fiduciaryposition make a profit, being liable to account for that profit, in no waydepends on fraud, or absence of bona fides; or upon such questions orconsiderations as whether the profit would or should otherwise have gone tothe plaintiff … The liability arises from the mere fact of a profit having,in the stated circumstances, been made. The profiteer however honest and wellintentioned, cannot escape the risk of being called upon to account.”

Lord MacMillan held (@ pp. 391 - 392) that the directors were liableto account once it has been established “(i) that what the directors didwas so related to the affairs of the company that it can properly be said tohave been done in the course of their management and in utilisation of theiropportunities and special knowledge as directors; and (ii) that what they didresulted in a profit to themselves.”

The decision in Regal imposes strict fiduciary standards ondirectors and renders them accountable for profits even if they hadacted in good faith and the company was not in a position toexploit the opportunity.

THE COOLEY CASE

The plaintiff in Industrial Development Consultants Ltd v.Cooley [1972] 1 W.L.R. 443 employed the defendant, an architect,as its managing director with the aim of obtaining contracts fromgas boards. The defendant attempted to obtain contracts from agas board but was unsuccessful as the gas board disliked the set-upof the plaintiff.

INTRODUCTION

Kingsley IT Consulting Ltd v. McIntosh & Anor [2006] All E.R.(D) 237 (Feb) (“Kingsley”) is a timely reminder on the liability ofdirectors for diversion of corporate information and opportunity.The facts of Kingsley are not set out in detail in the case note butMowschenson QC (presiding as a Deputy Judge of the High Court)held as follows:-

Applying these principles to the facts, the judge held that a formerdirector of the plaintiff and the company formed by him were liableto the plaintiff for all benefits received by them from three contractsentered into by the defendants.

Although Kingsley merely restates the common law principles laiddown in earlier cases, it has given impetus to this writer to reviewsome of the leading cases in this area of law.

THE COOKS CASE

Cooks v. Deeks [1916] 1 A.C. 554, a Privy Council (“PC”) appealfrom Canada, is one of the earliest cases on diversion of corporateopportunity. The appellant and the first three respondents weredirectors and shareholders of a company (TCC). These respondents,while being directors of TCC, negotiated with another party andsecured a contract for the fourth respondent, a company formed bythe first three respondents.

The appellant sought a declaration that all four respondents weretrustees of the benefit of the contract for TCC.

According to their Lordships (@ p. 563), the first three respondents,while acting as directors, are “not at liberty to … divert in their ownfavour business which should properly belong to the company theyrepresent.” Their Lordships further held that the first three respon-dents were guilty of a breach of duty and could not retain the benefitof contract but must be regarded as holding it in trust for TCC. ThePC also held the fourth respondent accountable as it had acquired therights with full knowledge of all the facts.

Apart from establishing that directors who improperly divert corpo-rate opportunity are trustees of the benefits for the company, Cooksis noteworthy as it renders an entity to which the opportunity istransferred liable if that entity has or is deemed to have knowledge ofthe breach of duty.

FLIRTATIONS OF THE FAITHLESS FIDUCIARIES

In the first of a two-part series, Kok Chee Kheong discusses directors’ liability for diversion of corporate

The duty of a director not to divert corporate opportunityarose from two sources, namely the ‘no conflict rule’, whichprohibits a director from putting himself in a positionwhereby there is a conflict between his personal interests andhis duty to the company, and the ‘no profit rule’, whichprohibits a director from making a profit for himself throughthe use of corporate assets, information or opportunity.

It is also well established that a director cannot set the ground-work for diverting a corporate opportunity whilst a directorand then take it for himself after he ceased to be a director.

It did not matter that the company is not in a position toexploit the opportunity.

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to a corporate employer by its directors. Hence it followed that theystood in a fiduciary relationship with the appellant, which amongstothers, required good faith and avoidance of a conflict of duty andself-interest. More specifically, Laskin J held that this relationshipprecluded the respondents from obtaining for themselves anyproperty or business advantage belonging to the appellant or forwhich it has been negotiating, especially when the respondents hadparticipated in negotiations on behalf of the appellant.

THE PJTV DENSON CASE

The only reported case on this area in Malaysia is P.J.T.V. Denson(M) Sdn Bhd & Ors v. Roxy (Malaysia) Sdn Bhd [1980] 2 M.L.J.136. In this case the first appellant, a company, entered into anagreement to purchase land from another party. The land wasregistered in the names of the second and third appellants whowere directors of the first appellant. The respondent, a judgmentcreditor of the first appellant, sought a declaration that the landbelonged to the first appellant and was therefore subject to execu-tion.

The Federal Court, applying Regal, held that the second and thirdappellants were trustees of the land for the first appellant as theywere at all material times directors and in a fiduciary relationshipwith the first appellant. Raja Azlan Shah CJ (Malaya) held that thetrust relationship with the first appellant prohibited the second andthird appellants from purchasing the land, however honest thecircumstances, and the interests of justice required that the purchasebe set aside. In coming to his decision, the learned judge rejected theappellants’ contention that the first appellant lacked funds tocomplete the purchase and the second and third appellants boughtthe property with their own funds as members of the public as atravesty of the facts.

CONCLUSION

It can be seen from the above cases that the Courts insist thatdirectors comply strictly with the “no conflict rule” and the “no profitrule” which are imposed on them by reason of their fiduciaryrelationship with the company. Directors who fail to comply withthese rules will be in breach of their fiduciary duty even if they hadacted in good faith or the company was not in a position to exploitsuch opportunity or information. The cases also establish thatformer directors will be held accountable if they vacate office withthe object of exploiting such opportunity or information after theycease to hold office. Likewise, the Courts have not hesitated to holdaccountable an entity to which the corporate opportunity is divertedif such entity has or is deemed to have knowledge of the breach offiduciary duty.

The right of a company to recover profits that accrue to directorsfrom a breach of fiduciary duty is succinctly stated by Laskin, J (@ p.392) in O’Malley –

“It is entitled to compel the faithless fiduciaries to answer for theirdefault according to their gain.”

Hence, the faithless fiduciaries who flirt with the dangers ofdiverting corporate opportunity and information do so at the riskof having to disgorge their ill-gotten gains.

KOK CHEE KHEONG (kck@skrine.com)

While the defendant was still the managing director of theplaintiff, he received information from the gas board that theyintended to award contracts for several depots and intimated thatthey may consider appointing him personally as the architect forthe project. The defendant concealed this information from theplaintiff and resigned from the plaintiff ’s employment on thepretext of ill-health. Several months later, the gas board awarded acontract to the defendant.

Arising from a claim brought by the plaintiff, the Court held thatthe defendant was a trustee for the plaintiff of all contractsawarded to him by the gas board in respect of the project andordered him to account to the plaintiff for all profits received byhim under such contracts.

Roskill J held that the defendant was in a fiduciary relationshipwith the plaintiff at the time the information on the prospectiveprojects was disclosed to him as he was their managing director.Accordingly, the defendant was under a duty to disclose thisinformation to the plaintiff and not withhold it for his own useand benefit. The learned judge held that (@ p. 453) –

“It is an overriding principle of equity that a man must not be allowed to puthimself in a position in which his fiduciary duty and his interests conflict.”

The judge further held that it was immaterial that the likelihood ofthe gas board awarding the contracts to the plaintiff was remote.He also rejected the defendant’s contention that the informationhad been disclosed to him in his personal capacity.

THE O’MALLEY CASE

One of the respondents in Canadian Aero Service Ltd v.O’Malley (1973) 40 D.L.R. 371 was the chief executive officer andpresident of the appellant while another was its executive vicepresident. Various representatives of the appellant, including therespondents, had for several years represented the appellant innegotiations with another party in relation to a business opportu-nity. The respondents resigned and incorporated a company whichwas later awarded the contract to carry out the project. The SupremeCourt of Canada awarded damages against both respondents. Asin Cooks, the company was also held liable as being the vehiclethrough which the respondents acted in breach of their fiduciaryduty.

At first blush, the facts and decision in O’Malley appear similar toCooley. However, the basis of the Court’s decision in these casescan be distinguished. In Cooley, liability was founded on thewithholding and misuse of information by the fiduciary. On theother hand, liability in O’Malley was based on diversion of acorporate opportunity which the appellant had been developingthrough its representatives including the respondents.

O’Malley is interesting in another respect. The respondentscontended that they were not appointed as directors of theappellant and did not act as its directors. Laskin J was satisfied thatthey were senior officers of the appellant and held that it wasimmaterial whether they were appointed as directors of the appel-lant.The learned judge further held that the duty owed by the respon-dents as senior officers of the appellant was similar to that owed

opportunity and information

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INTRODUCTION

The prequel to this article introduced the readers to the somewhatunfamiliar concept of Exchange Traded Funds (“ETF”) in Malay-sia. In this article, we shall explain how ETFs are created and discussthe roles of the main participants as well as the regulatory aspectsrelating to the management of ETF.

The Securities Commission (“SC”) is the regulatory body respon-sible for the regulation of all matters relating to ETF. The primarylegislation that regulate ETF are the Securities Commission Act1993 (“SCA”) and the Securities Industries Act 1983 (“SIA”). Ofequal importance are the Guidelines on Exchange Traded Funds(“ETF Guidelines”) issued by the SC.

THE PRINCIPAL PLAYERS

In a nutshell, the main parties involved in ETF and their principalroles are as follows:

The rights and responsibilities of these parties will be dealt infurther detail in this article.

LIGHTS, CAMERA, ACTION! THE MAKING OF AN ETF

The creation of ETF units begins when a participating dealerassembles a basket of securities (“index basket”) and deposits itwith the trustee through the management company. The indexbasket is determined by the management company.

Upon receipt of the index basket, the trustee creates a specifiednumber of new ETF units and forwards them to the participatingdealer who is free to sell such units in marketable lots on BursaMalaysia Securities Berhad.

The trustee will hold the index basket in the fund’s account for themanagement company to manage in a passive manner.

ROLES OF THE PLAYERS

Management Company

An ETF is managed and administered by a management companyapproved by the SC under the SCA. Unless otherwise permitted bythe SC, the management company is required to be a subsidiary orrelated corporation of a company involved in the financial servicesindustry in Malaysia. ‘Financial services’ business includes (but isnot limited to) deposit-taking and provision of loans (includingcommercial/retail banking and finance company activities), fundmanagement, merchant banking, broking and dealing in securitiesand insurance activities.

The management company is required to have at least 30%Bumiputera equity. Foreign equity participation is restricted to 49%.Unless otherwise approved by the SC, the activities of the manage-ment company must be restricted to managing the investmentportfolio and administering unit trust funds, marketing and distrib-uting unit trust funds, providing investment advisory services and ifit is a universal broker, activities which a universal broker is permittedto undertake.

The principal duty of the management company is to manage andadminister the ETF in a proper, diligent and efficient manner inaccordance with the trust deed of the fund, the ETF Guidelines,securities laws and acceptable and efficacious business practice withinthe unit trust industry.

A management company is required to manage the ETF to the bestand exclusive interests of the unit holders. Other duties of themanagement company include ensuring that the fund or units of thefund are correctly valued, informing the trustee of any acquisition ordisposal of investments of the fund and maintaining proper ac-counting records.

The board of directors of the management company must at alltimes have at least two independent members and maintain a ratio ofat least one-third of independent members. The chief executive ofthe management company should be a full-time officer of thecompany whose appointment is subject to approval by the SC. Themanagement company is required to have suitably qualified andexperienced personnel to carry out its investment managementfunction and to head the compliance unit which is responsible for themanagement company’s compliance with all applicable legal andregulatory requirements and internal policies and procedures.

Trustee

An ETF must appoint a trustee approved by the SC under the SCA.The trustee must be a trust company registered under the TrustCompanies Act 1949 or incorporated pursuant to the Public TrustCorporation Act 1995 and registered with the SC. The trustee mustbe independent of the fund and must not on its own behalf, holdunits or other interests in the fund. The primary responsibilities ofthe trustee are to act as custodian of the assets of the fund and tosafeguard the interests of the unit holders of the fund.

The trustee should actively monitor the administration of the fundby the management company and act with due care, skill, diligenceand vigilance. The trustee must be informed of the investmentpolicies established by the management company for the fund and ofany changes thereto. It is required to notify the SC immediately of anyirregularity in the fund.

Investment Committee

The management company must establish an investment committee forthe fund that comprises at least three individuals whose appoint-ment must be approved by the SC. The investment committeeoversees the investment decisions and management by the manage-ment company to ensre that they are consistent with the objectives ofthe ETF, the constituent documents of the fund, internal

Cheah Meng Choo continues her discussion on Exchange Traded Funds in the second part of this two-part series

FUND TIMES : WILL IT LAST?

LEGAL INSIGHTSA SKRINE NEWSLETTER

the management company who is responsible for the managementand the administration of the ETF;

the trustee who acts as the custodian of the fund’s assets andsafeguards the interest of the unit holders;

the participating dealers who are responsible for the creation ofthe fund; and

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policies, securities laws and the ETF Guidelines. The investmentcommittee’s powers and duties include ensuring that the strategiesselected are implemented properly and actively monitoring andevaluating the investment management performance of the manage-ment company or its delegate.

Participating Dealers

Participating dealers are responsible for the creation and redemption offund units and are appointed by the management company. Aparticipating dealer deals in the market for the fund either as aprincipal or on behalf of clients. The participating dealer mustcomply with the terms of the participating dealer agreement enteredinto with the management company to regulate the procedures forthe creation and redemption of ETF units.

The redemption of ETF units involves the delivery by the participat-ing dealer to the trustee of the number of ETF units specified by themanagement company, in exchange for which it receives a basket ofsecurities of equivalent value to the redeemed units. The basket ofsecurities may thereafter be sold by the participating dealer on theappropriate secondary market.

SHARING THE SPOTLIGHT / THE SUPPORTING ACTOR

Any delegation of the management company’s functions requires theapproval of the SC, the only exception being the delegation ofinvestment management function to a fund manager licensed undersec. 15A of the SCA, which does not require such approval. Aninvestment management agreement is usually entered into betweenthe fund manager and the management company for providing thefund management services.

The management company must ensure that the delegate is compe-tent to undertake the functions in a proper and efficient manner. Itmust also take full responsibility for the acts and omissions of thedelegate and is not entitled to charge the remuneration of the delegateto the fund.

THE SCRIPT - FUND DOCUMENTATION

The trust deed is entered into between the fund manager, the trusteeand the unit holders. The terms and conditions of the trust deed andany supplemental deed is binding on each unit holder as if he hadbeen a party to and executed this deed and had authorized the trusteeand the fund manager to do all acts and things as the deed mayrequire. The trust deed and any supplemental deed must be registeredby the SC. The trust deed describes how the ETF operates and setsout the rights and liabilities of a unit holder as well as the duties andobligations of the fund manager and trustee. Each unit held in thefund entitles the unit holder to an equal and proportionate beneficialinterest in the fund. A unit holder has the right to receive incomedistribution (if any), sell fund units, attend and vote at meetings andreceive annual and interim reports of the fund. A unit holder may,subject to the provisions of the trust deed, have a right to call formeetings of unit holders. The trust deed limits the unit holder’sliability to the value of their investments in the fund.

The prospectus is a document containing detailed information whichenables the the investors to make an informed assessment of the

fund before investing in it. The prospectus and any supplementaryprospectus must be registered with the SC. The information whichis disclosed in the prospectus includes the investment objectives ofthe fund namely, the underlying index which the fund intends totrack or replicate, the investment strategies, circumstances that maylead to tracking errors, risk factors in investing in the fund, thefund’s performance (where the fund has been in operation for atleast one financial year), fees, charges and expenses of the fund. Aprospectus, being full of legalese, may be hard reading but aninvestor should go through its fine print to ascertain whether hisgoals and expectations match the objectives of the fund.

The management company is required to provide at least two fundreports, namely an interim report and an annual report, for eachfinancial year of the fund. The purpose of these reports is to enableunit holders to evaluate the fund’s performance during the relevantperiod. Both reports must include a manager’s report which containsa review of operations of the fund, results of those operations anddetails of any significant changes in the affairs of the fund duringthe financial period and a trustee’s report which sets out the opinionof the trustee whether the fund has been managed in accordancewith the Guidelines, trust deed and securities law, whether valua-tion requirements have been complied with and whether thecreation and redemption of ETF units have been carried out inaccordance with the trust deed and any regulatory requirements. Thefund reports must be published, distributed to the unit holdersand lodged with the SC within two months from the end of thefinancial period covered by the reports.

The annual report and interim report must include the financialstatements of the fund. The financial statements included in the finalreport must be audited by an approved company auditor who isindependent of the management company and the trustee. There isno requirement for the financial reports included in the interimreport to be audited. These documents are to be made available forthe investor’s perusal at the management company and the trustee’splace of business.

The management company is also required to lodge its annualreport with the SC within six months after its financial year-end andto make the same available to the unit holders within two monthsof any request being made for the same.

A BOX OFFICE HIT?

The introduction of ETFs adds further variety to the types ofcollective investment schemes available to investors in Malaysia.The question that remains to be answered is whether it will becomea box office hit.

CHEAH MENG CHOO (chm@skrine.com)

A management company is required tomanage the ETF to the best and exclusive

interests of the unit holders

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The Industrial Court (“IC”) derives its power to make an award(including to grant a remedy to an employee who is found to havebeen dismissed without just cause or excuse) from sec. 30(1) of theIndustrial Relations Act 1967 (“the Act”) which reads

“The court shall have power in relation to a trade dispute referred to it or inrelation to a reference to it under sec. 20(3), to make an award (including aninterim award) relating to all or any of the issues.”

As is apparent, sec. 30(1) does not place any clear legislative parameterswithin which the IC is to act in granting a remedy to an employee. TheSupreme Court in the case of Hotel Jaya Puri v. National Union ofHotel, Bar & Restaurant Workers [1980] 1 MLJ 109 confirmed thewide powers conferred on the IC by sec. 30(1) when it held that aslong as there is a legal basis for the compensation, the IC has the fulldiscretion to determine the quantum to be awarded to the employee.

In the absence of comprehensive legislative guidance, what hasoccurred is that as a matter of practice, the IC would often make anaward of compensation in lieu of reinstatement of 1 month’s salaryfor each year of service and back wages of up to 24 months salary (anaward of reinstatement, although the primary remedy soughtthrough the IC, has become quite uncommon).

The practice of limiting back wages to 24 months came up forconsideration in 2 separate cases in the High Court (“HC”) recently.The result : 2 conflicting decisions by 2 different HC judges. The issueof whether back wages should be limited to 24 months and also thecreation of a new category of compensation known as ‘loss of futureearnings’ will be dealt with below.

LIMIT TO BACK WAGES?

The President of the IC issued Practice Note No. 1 of 1987 (“thePractise Note”) which states that backwages are to be paid in full fromthe date of dismissal to the date of the conclusion of the hearing,subject to the maximum of 24 months. This Practice Note accordswith the need to have some sort of certainty in Industrial Courtawards and, as the HC in Ter Ah Chai v. The Times Packaging CoSdn Bhd & Anor [1998] 4 CLJ 923 stated, the limiting of back wagesto 24 months is also in consonance with the principle of equity andgood conscience which the IC is statutorily obliged to apply in itsadjudication. The 24 months back wages limit was also accepted bythe HC in Vadiveloo Munusamy v. General Tyre Retreaders Sdn.Bhd. [1999] 7 CLJ 596. For a number of years, most Chairmen havecomplied with the practice note.

Nevertheless, a few of the Chairmen have not followed the 24 monthback wages limit in making their awards. The reason appears to be thatthey do not consider themselves bound by the Practice Note and havedecided to exercise their wide discretion conferred by sec. 30(1) of theAct based on what they consider to be fair. It is for this reason thatTelekom Malaysia v. Ramil Akim [2005] 6 CLJ 487 and the case ofJ.T. International Tobacco Sdn. Bhd. v. Low Thow Sin (unre-ported case no. R1-25-154-2003) is interesting as in these cases, thedecision of the IC not to limit back wages to 24 months waschallenged. The outcome of the Telekom Malaysia case was a

blow to employers, as the HC held that the IC did not err in law whenawarding 53 months back wages for the following reasons:-

a)

b)

c)

However it was not all doom and gloom for employers for long. InFebruary 2006, in the J.T. International Tobacco case another HCjudge held that while the practice note to limit backwages to amaximum of 24 months is merely a guideline, it should only bedisregarded when and if it can be proved that the delay in disposinga case was contributed by the employer. The HC held that the IC hadcommitted an error of law in awarding 63 months back wages. Therationale used by the judge in the J.T. International Tobacco casewas diametrically opposed to that used by the HC judge in theTelekom Malaysia case. In the J.T. International Tobacco case,the HC judge endorsed the observation of the IC Chairman inNestle Food Store Storage (Sabah) Sdn. Bhd. v. Terrence Tan[2002] 1 ILR 280.

The effect of the decisions in Telekom Malaysia case and the J.T.International Tobacco case is that the confusion as to whether backwages should be limited to 24 months has not been resolved. Theissue will not have to be resolved by the appellate court or byParliament.

LOSS OF FUTURE EARNINGS – A NEW HEAD OF AWARD?

Citing the R Rama Chandran case as authority, the HC Judge in theTelekom Malaysia case held that the award of loss of futureearning is permissible under the law. The FC in the case of R RamaChandran, in an extraordinary majority decision, found that theemployee concerned had been dismissed without just cause or excuseby his employer and proceeded to unilaterally award the employee 88months salary as loss on back wages (less three month’s salary alreadypaid to the employee as wages in lieu of notice) and 39 months salaryas loss of future earnings.

Perhaps recognising that the decision in R Rama Chandran wasextraordinary, the IC has largely not followed the formula used inthat case in making its awards. However, the reliance of the HC judgein the Telekom Malaysia case on R Rama Chandran now putsthat case back in the limelight.

LEGAL INSIGHTSA SKRINE NEWSLETTER

Siva Kumar Kanagasabai comments on the quantum available for unjust dismissal in light of two diametrically

THE WORTH OF UNJUST DISMISSAL

sec. 30 did not have a pre-set limit as to the number of monthsof back wages that can be awarded;

the Federal Court (“FC”) in R Rama Chandran v. The Indus-trial Court of Malaysia [1997]1 CLJ 147 allowed 88 monthsback wages (meaning that it is not per se wrong for an award ofback wages to exceed 24 months as per the practice note); and

as it was the employer who started the dispute by dismissing theemployee, they should bear the consequence of any delay inhearing the case (even though the delay was not caused by theemployer or the employee)

... double compensating the employee ... isnot in accordance with equity and good

conscience ...

EMPLOYMENT LAW

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In R Rama Chandran, the FC awarded loss of future earnings as itfelt that it was unlikely that the employee would be able to fit into hisformer employment and had lost touch with his work. The FCdecision does raise the following questions (which unfortunately, willprobably never be answered):-

a)

b)

In the Telekom Malaysia case, the HC went further than R RamaChandran. It not only compensated the employee in lieu ofreinstatement with 1 month’s salary for each year of service, it alsogranted the employee loss of future earnings constituting the totalamount the employee would have earned until retirement. In effect,the claimant was awarded double compensation. He was awardedabout 25 months more salary than the maximum amount he wouldhave earned had he been reinstated and worked there until retire-ment. It is submitted that doubly compensating the employee in thismanner is not in accordance with equity and good conscience.

CONCLUSION

In conclusion, the differences in the awards made in industrialadjudication is likely to continue as long as Parliament does notprovide clear and comprehensive legislative guidelines on the param-eters of an award. The present law, which leaves it almost entirely tothe individual Chairman concerned to make an award at his discre-tion, creates great uncertainty in settling industrial disputes.

Furthermore, employers are being inflicted with large financial awards(in what must be amongst the highest awards for unjust dismissal inthe world) for being unable to prove to the satisfaction of the IC(often more than 2 years after the event) that the dismissal was justified.

It is imperative that Parliament make the requisite amendments tothe law, not only in the sphere of determining the appropriateremedy but also in other aspects of employment law to preserve ourcompetitive edge in the global economy.

SIVA KUMAR KANAGASABAI (skk@skrine.com)

liabilities were overturned. On appeal the FC held as follows:-

WHERE IS MALAYSIAN LAW AT NOW ?

While the FC has to some extent clarified the Malaysian position onthis issue, the scope of its application remains uncertain, particularlyin respect of specific classes of persons, such as architects, engineers,builders, manufacturers and so on. Further, after the CA decision ofDr. Abdul Hamid, another “grey area” has emerged in this alreadycomplex area of law, as to where the line is to be drawn betweenphysical and pure economic loss. Such issues must await theconsideration of the Courts in future cases. Notwithstanding thestated refusal of the Malaysian Courts to follow foreign precedent, itwould appear that the creation of a Malaysian doctrine of pureeconomic loss will prove no less lengthy, troubled and painful thanthat of any other common law nation.

LAM WAI LOON (lam@skrine.com)

opposite High Court decisions

Since the primary remedy which an employee seeks is reinstate-ment, why is it justifiable for the Court to award the employee, inlieu of reinstatement, loss of future earnings which effectivelygives the employee the maximum sum of money that an em-ployee would have earned after had he been reinstated withouthaving to work for his wages? Is this not granting the employee abetter remedy than what he is entitled to seek in the first placefrom the IC?

Why did the FC not make the usual award of compensation inlieu of reinstatement of 1 month’s salary for each year of service?

unanimously decided that the CA was correct to hold that thecritical question was not the nature of the damage itself,whether physical or pecuniary, but whether the scope of theduty of care in the circumstances of the case was such as toembrace damage of the kind which the plaintiffs claimed tohave sustained;

unanimously decided that the Courts when deciding the issueof liability for claims in negligence, be it physical damage orpure economic loss, have to determine whether or not it is fair,just and reasonable to impose a duty of care;

by a majority of 2:1 (Steve Shim CJ Sabah & Sarawak,dissenting) decided that in considering whether or not it is fair,just and reasonable to impose a duty of care, the Courts haveto take into account the effects of sec. 3 of the CLA, wherebythe Malaysian Courts will have to consider the public policyand local circumstances;

by a majority of 2:1 (Steve Shim CJ Sabah & Sarawak dissent-ing) decided that it was not fair, just and reasonable to imposesuch a burden on MPAJ or other local councils in similarsituations after considering the local circumstances of Malay-sia, in the main, the civic mindedness of, and compliance withlaws and by-laws by the general public, and the limitedresources that the Malaysian local authorities have. The deci-sions of the HC case of Nepline was approved and applied.

ii)

iii)

iv)

v)

LITIGATION

in respect of the pre-collapse liability, the FC unanimouslydecided that the decision of the trial judge was correct andshould be restored;

in respect of the post collapse liability, the FC

a)

b)

unanimously decided that pure economic loss is recoverable innegligence but caution should be exercised in extending theprinciple of Donoghue v. Stevenson to new situations,following the sentiments expressed by the Singaporean CA inMan B & W Diesel SE Asia Pte Ltd & Anor v. PT BumiInternational Tankers and another appeal [2004] SLR 300.For more details, kindly refer to the second installment of thisarticle entitled “Recovering Pure Economic Loss In Negligence : TheCommonwealth Positions”;

i)

continued from page 11

The present law which leaves it almost entirely tothe individual Chairman concerned to make an

award at his discretion creates great uncertaintlyin industrial disputes

... The Malaysian Position on PureEconomic Loss in Negligence

We welcome comments and feedback onLEGAL INSIGHTS.This newsletter is produced bythe LEGAL INSIGHTS EditorialCommittee. You may contact us atskrine@skrine.com for furtherinformation about this newsletter and itscontents.

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