December 2004

KDN PP 13829/7/2005

The articles in thisnewsletter are also

available on our website:www.taypartners.com.my

Contents

1Product Liability

4Trade Marks

6Franchise

8Moneylending

11No MoreDiscounts

INTRODUCTIONMost people would have heard of the well-known caseof Singapore MediaCorp artiste, Andrea De Cruz’s suitagainst the manufacturer, importer, distributor andretailer of slimming pills called “Slim 10” after shesuffered liver failure from its consumption. One maywonder which area of law does this case fall under. It isnone other than the law on “Product’ Liability”. Thisarticle seeks to discuss the civil liability of each partyfrom the manufacturer to the retailer of products withparticular reference to the recent Singapore case of DeCruz Andrea Heidi v Guangzhou Yuzhitang HealthProducts Co. Ltd1 and others as many lessons can bedrawn from it. Reference will also be made to productliability law in Malaysia as far as possible.

PRODUCT LIABILITY – an overviewProduct liability is the body of law that provides forcompensation for physical injuries and propertydamage resulting from defective and unreasonablydangerous products and from the failure of amanufacturer or seller to warn the consumer of productdangers. Broadly, the defects, upon which liability canarise fall into three categories:-

design defects which are inherent and exist beforethe product is manufactured. While the item mayserve its purpose well, it can be unreasonablydangerous due to design flaw;manufacturing defects which occur duringconstruction or production of the item such as thecomposition of its raw materials. Only a few out ofmany products of the same type may be flawed inthis case; anddefects in marketing which deal with improperinstructions and failure to warn consumers of latentdangers in the product.

a)

b)

c)

Products mean any goods and includes a productwhich is comprised in another product, whether byvirtue of being a component part, raw material orotherwise.2 Products which are the subject of productliability suits may range from tangible products such asvehicles, buildings, appliances, machineries, writings(navigational charts), cosmetic products, food items,medicine, healthcare products and others to intangiblessuch as gas, electricity and even naturals such as pets.A product liability claim can only be asserted againstany or all parties along the chain of manufacture to thesupply of any product for damage or harm caused bythat product. The parties who could be made liableinclude the manufacturer of component parts (at thetop of chain), an assembling manufacturer, theimporter, the wholesaler and retail store owner (bottomof the chain).In Malaysia, the law on product liability can be found inPart X (sections 66 to 72) of the Consumer ProtectionAct, 1999 (Act 599).3

BASIS OF LIABILITYAt the time of the De Cruz’s case, there has not beenany consumer protection legislation in Singapore untiltheir Consumer Protection (Fair Trading) Act 2003.4

Therefore, the Court had to decide the product liabilityissues on the basis of common law contractual andtortious principles. Nevertheless, the tortious principlesexpounded in this case could still be persuasiveauthority in the event of a similar case here since undersection 70 of our Consumer Protection Act, 1999 (Act599), it is provided that liability for damage under PartX shall be treated as liability in tort.In the case of De Cruz Andrea Heidi v GuangzhouYuzhitang Health Products Co. Ltd and others(hereinafter referred to as “De Cruz’s case), the Plaintiffsued five Defendants:-

ProductLiability is the body of law that provides for compensation

for physical injuries and property damage

1. [2003] 4 SLR [HC] and [2004] 3 SLR543 [CA]2. definition under Section 66(1) Consumer Protection Act 1999 (Act 599)3. came into force on 15 November 19994. came into effect on 1 March 2004

a)

b)c)

d)

e)

the manufacturer of the slimming pills - GuangzhouYuzhitang Health Products;the importer of the slimming pills – HealthBiz Pte Ltd;the major shareholder and director of HealthBiz PteLtd, Mr. Semon Liu;the sole distributor of the slimming pills – TV MediaPte Ltd; andthe supplier of the slimming pills to her – hercolleague, Mr. Rayson Tan.

(a) Case against the manufacturer

Plaintiff’s suit against the manufacturer of the slimmingpills in China did not proceed because the saidmanufacturer could not be located for the purpose ofthe service of the writ of summons. However, we cansafely conclude that had the trial proceeded against thesaid manufacturer, there would be no doubt that thesaid company will be held liable in negligence forhaving manufactured the adulterated and highly toxicslimming pill for sale.

What is the cause of action which a buyer of goods hasagainst a manufacturer? Under common law, it hasbeen said that if a buyer wishes to sue themanufacturers he cannot prima facie invoke the strictliability involved in a breach of warranty, but must stillbase his case on negligence as, for instance, in thefamous case of Donoghue v Stevenson.5 However,there are a number of qualifications to be made to thisprima facie situation. Firstly, strict liability can often beeffectively imposed on the manufacturer through thirdand (if necessary) fourth-party proceedings. If thebuyer sues the seller for breach of warranty, the sellermay claim an indemnity from his own supplier, and thatsupplier (if not himself the manufacturer) may in turnclaim an indemnity from the manufacturer. As betweeneach pair of parties, the relationship will be contractualand liability for breach of warranty can be established.A second possible exception whereby a buyer may beable to hold a manufacturer strictly liable (withouthaving to prove negligence) despite apparent absenceof privity is the collateral contract. This is in the casewhere the specific and personal assurance of quality orfitness of purpose is not given by the seller but by themanufacturer to the buyer. A manufacturer markets hisproducts through retailers; he advertises directly to thepublic, inviting them to buy his products. It does notseem unreasonable to hold that he is impliedly offeringa warranty of reasonable fitness for ordinary use to amember of the public who buys the product.6

In Malaysia, a personwho manufactured thedefective productwould, without a doubtbe liable undersection 68 of theConsumer ProtectionAct, 1999 (Act 599).That liability wouldalso extend to aperson who, by putting his name on the product orusing a trademark or other distinguishing mark inrelation to the product.

(b) Case against the importer and its director

In the De Cruz’s case, the importer (HealthBiz) was acompany founded and owned by its director, Semon

Liu. On one of his trips to China, he was introduced tothe slimming pills which he personally consumed andfound to be effective without suffering any side effects.elsewhere although he was new to this business ofimporting slimming products for sale. The saidslimming pills (named Slim 10) were sent formicrobiological test and toxic heavy metal chemicalanalysis test. He was told by the laboratory which didthe testing that nothing harmful was detected. Theimporter received the import and wholesale dealer’slicence for Slim 10 from Singapore Health SciencesAuthority (“HSA”) on 27th June 2001. On 1stNovember 2001, the importer, at the request of HSAprovided an undertaking to comply with HSA'srequirements to submit test results for toxic heavymetal and microbial contamination within two months ofimport of the consignment of Slim 10. HSA thenapproved the product listing for Slim 10 and theimporter commenced importing the products from themanufacturer. Up until 1st February 2002, the importerhad still not tested any samples from the importedconsignments. On 30th April 2002, HSA issued a pressrelease stating that fenfluramine, a controlledsubstance under the Poisons Act, had been detected inSlim 10. In June 2002, HealthBiz and Semon Liu werecharged for offences relating to Slim 10. In the criminalproceedings, they admitted that the product had arrivedby air parcel, unlabelled and in aluminium foil or inplastic bags, unaccompanied by any documentation asto their identity or source. The contents were notdeclared to the customs authorities in Singapore andthere were no records of the imports and therefore nodetails were available on the various consignments.

Against the backdrop of the above facts, the HighCourt found that there can be no doubt that HealthBizas importers owed a duty of care to consumers, like thePlaintiff, of its product. However, the Court disagreedwith the Plaintiff’s argument that the importer’s duty ofcare extended to conducting a “due diligence” check onthe manufacturer. It was sufficient that the importerknew who the manufacturer was, where it was situatedand whether it was properly licensed to produce theIn Malaysia, a person

who manufactured thedefective productwould, without a doubtbe liable under section68 of the ConsumerProtection Act, 1999(Act 599).

5. [1932] AC 5626. For a more detailed discussion on product liability, please refer to Sale of Goodsby PS Atiyah.

goods. What the Court found wanting was theimporter’s failure to keep proper records of theconsignments of pills imported and to do proper batchtests. It was not sufficient for the importer to merelycommission tests and then leave it to the authority toinform the company if poisons and syntheticsubstances were shown. It was required to submit adeclaration of the absence of poisons and syntheticsubstances in the product but it did not do so. Due tothe very exceptional circumstances of the case, theCourt lifted the corporate veil and found Semon Liupersonally liable in negligence too because hisinvolvement in the negligence was not merely verygreat, it was total. The Court of Appeal upheld thedecision of the High Court on the issue of liabilityagainst the importer and its director.

A person, who has, in the course of his business,imported the product into Malaysia in order to supply itto another person shall be liable for damage causedwholly or partly by a defect in the product.

(c) Case against the sole distributor

The sole distributor, a well-known company hadadvertised Slim 10 extensively in the media, usinganother TV artiste (Rayson Tan’s wife) as theirspokeswoman in their commercials to sell the product.The High Court Judge found that the Plaintiff hadbought Slim 10 after being convinced by TV media’sadvertisements that Slim 10 was effective and safe. Heheld that it was TV media’s corporate backing of thepills which assured the Plaintiff of their safety, as shewould not have relied on the names of Health Biz, theChinese manufacturer, or any assurances given by hercolleague, Rayson to purchase herbal medicines whichhad no established reputation in Singapore. Eventhough, the Plaintiff did not purchase the pills directlythrough the authorized retail channels of TV media butfrom her colleague in unmarked containers withoutwritten precautions or dosage instructions, the Courtheld that since TV Media knew that Health Biz waspromoting the product to artistes through Rayson bysupplying him the products for distribution, TV Mediacannot claim that Rayson was an illegitimate source ofthe product. Moreover, the product whether from theofficial or unofficial sources all came from the samebatches from the China manufacturer, none of whichwas approved by HSA.

Based on those facts, the Court held that TV Media asa distributor or wholesaler of the product was in aproximate enough relationship to the Plaintiff so as toowe her a duty of care to check the safety of what itdistributes. TV Media was held to be in breach of itsduty of care to the Plaintiff because it had placed blindfaith in everything an importer who had no experiencewith the product said without verifying the safety of theproduct independently. The Court also rejected adefence by TV Media that by placing a written adviceon the Slim 10 packaging warning its consumers to

seek medical advice if problems were encountered orto call a hotline number to make enquiries, it haddischarged its duty of care. The Court of Appeal alsoupheld the High Court’s decision on liability against TVMedia.

Interestingly, in Malaysia section 68 of the ConsumersProtection Act, 1999 did not classify a distributor asfalling within the class of persons liable for the damageunless the distributor is also the importer of theproduct. However, since a distributor or retailer fallswithin the definition of “supplier”7 under section 3 ofthe Consumers Protection Act 1999, it can be arguedthat if the supplier fails to comply with a request toidentify the producer or importer of the product or anyof them, then the supplier shall be held liable for theloss or damage.

(d) Case against the supplier

The Plaintiff sued Rayson for breach of contract insupplying to her the defective slimming pills. However,the High Court found Rayson to be not liable, as therewas no intention to create legal relations with thePlaintiff and Rayson when he supplied her with thepills.

CONCLUSION

Presently, case laws on product liability are indeed veryfew in Malaysia and Singapore but with the growingawareness of consumer rights and their protection, it isforeseeable that such cases will increase in future.

By Neoh Lay Choo(laychoo.neoh@taypartners.com.my). Lay Choo is a partner based inthe Johor Bahru office and her practice areas range from commerciallitigation to corporate and family laws.

For legal assistance from our Johor Bahru office, please contact

Lau Lee Jan (leejan.lau@taypartners.com.my)Neoh Lay Choo (laychoo.neoh@taypartners.com.my)

7. Supplier means a person who trades or supplies goods to a consumer bytransferring the ownership or the possession of the goods under a contract ofsale, exchange, lease, hire or hire-purchase to which that person is a party.

3

Trade marks are personal property and, like the ownerof a physical property, the trade mark owner can exploitit in whichever manner it deems fit. Registration of atrade mark is direct and prima facie evidence ofexclusive ownership.

There are generally three common ways where theowner of a registered trade mark can benefit from itsregistered trade mark:-

i) the trade mark owner may use themark himself on the goods for which itis registered, to the exclusion ofothers.ii) the trade mark owner may licensethe use of his mark, under agreedconditions, to a third party.iii) the trade mark owner may chooseto assign his interest in the mark to athird party

Assignment of a trade mark involves an outright saleand transfer whilst a licence merely authorizes thelicensee to use or exploit the licensed mark inconsideration of a fee or a royalty, under the control ofthe licensor.

Licensing is the most commonly deployed tools tocommercialize one’s intellectual property rights. In thecontext of trade marks, a trade mark licence agreementmay assume various forms such as a franchise.License agreements in Malaysia are primarily governedby the Contracts Act 1950, the Trade Marks Act 1976and where applicable, the Franchise Act 1998 and/orcommon law principles.

A license agreement is essentially a contract and setsout what the licensee is permitted to do and the termsand conditions applicable to such use. A licenseagreement usually contains standard conditions suchas exclusivity, territorial scope, quality control androyalties.

The licensor must ensure that the license agreement iswell-structured, properly worded and all potentialissues are addressed in writing. In this article, we willdiscuss briefly the importance of providing for goodsmade in excess capacity (“production overrun”) by thelicensee, dealing with goods post-termination of thelicense agreement and rejected goods.

In the case of remaining stocks of products post expiryor termination of the licence agreement, such goodswere produced under licence and as such are originalproducts. If the license agreement expressly providesthat the licensee is to deal with these goods in a certainmanner, the licensee is obliged to do so. An act ofinfringement and breach of contract would have beencommitted if these goods were disposed off in amanner not in accordance with the terms stipulated.

Trade Marks and issues in dealing withproducts made under licence

C

R

TM

If the agreement is silent on how these products are tobe disposed off, the licensor may face a difficultsituation if the products end up in the market stillbearing the trade mark of the licensor. Third parties andconsumers may not have notice that such productswere not authorized to be sold. If the licensorcommences an action in infringement, the third partyrecipient (being a distributor or retailer without notice ofany restriction in the licence agreement) may put fortha defence of implied consent by the licensor to sellthose goods. The plausibility of such a defence willdepend on the unique facts of each case and the termsof the licence agreement.

Rejected goods are sub-standard products that havefailed to fulfill the quality criteria set out in the licenseagreement. Rejected goods are original products inthat they are manufactured during the course of a validlicense agreement. There is no trade mark infringementon the part of the licensee in the disposal of suchrejected items in accordance with the provisions of theagreement. The trade mark owner usually stipulates indetail how such goods are to be disposed of (the mostcommon of which is to allow the sale of these goodswithout the labels bearing the trade mark).

In cases where the agreement is silent on how rejectedgoods are to be disposed off, can the licensee sell,deal and/or dispose off those rejects as he wishes?The answer is arguably a “no” if the products are stillaffixed with the trade mark of the licensor or sold withreference to the licensor’s trade mark. It may also beimplied in a licence contract that rejects are non-saleable and the licensee bears the risk of any lossinvolved in these items. The licensee should thusobtain prior approval from the licensor before disposingoff these rejected items. Failure to do so may risk trademark infringement and/or breach of contract actions bythe licensor.

“Overruns” exists when the licensed manufacturerproduces more than the quantity stipulated or desiredby the licensor. There is no issue about inferior qualityin most of the overruns. It is pertinent to note thatsection 38 of the Trade Marks Act 1976 provides aninfringement of a registered trade mark where there isunauthorized use of a mark which is identical with ornearly resembling the registered mark, as is likely todeceive or cause confusion in the course of trade.

The crux of the matter depends on what has thereforebeen “authorized” by the trade mark owner or licensor,be it express or implied. When a licensee sells, dealsand/or disposes off the overruns in a manner that hasnot been authorized by the trade mark owner, thelicensee would have committed an act of infringement.It is arguable that most overruns are not authorized tobe dealt with by the licensee and they should betreated in the same manner as rejected goods. Theextent of the acts that a licensee is empowered toundertake should, however, be spelt out clearly or thesituation may be complicated once these overruns endup in the hands of resellers who are not privy to thelicence agreement. An action in trade markinfringement would still avail the trade mark owneragainst any unauthorized third party use but such costof enforcement may be curtailed if proper restrictionsand monitoring are put in place to regulate thelicensee.

A well drafted intellectual property license agreementshould therefore provide for the consequences oftermination on the rights and obligations of each of theparties as well as detailed specification on the mannerof disposal of products manufactured, whether they areof inferior quality or simply over-production.

By Jason Leong(jason.leong@taypartners.com.my). Jason is attached to theIntellectual Property and Technology Practice Group with particularinterest in IP enforcement and anti-counterfeiting programs.

For further information and advice on IP and Technology laws, pleasecontact:

Linda Wang (linda.wang@taypartners.com.my)Su Siew Ling (siewling.su@taypartners.com.my)

What is the position onproduction overrun?

5

FRANCHISE:FRANCHISE:

ranchising has become a widely acceptedstrategy for business growth in Malaysia and itis recognized as one mode of

entrepreneurship that can help entrepreneurs achievehigher standards not only in the goods and servicesoffered, but also in upgrading effective managementsystems and skills.

Previous studies conducted by the government haveindicated that the failure rate of business by way offranchise is generally lower than those of conventionalstartups. The government has come to recognize therole franchises play in the commercial arena andintroduced the Franchise Act 1998 which came intoforce on 8th October 1999 to regulate franchises inMalaysia.

The Act’s chief means of regulation is by imposing therequirement of registration on franchisors andfranchisees or foreign franchisors who wish to sell oroperate their franchise in Malaysia. To this end, theFranchise Registry was established. For franchisesinvolving foreign franchisors, the Act also imposes acondition on the foreign franchisor to obtain theRegistrar’s approval prior to selling his franchise to aMalaysian franchisee in Malaysia. Similarly, where alocal franchisor is desirous of selling his franchise to aforeign franchisee, prior approval will have to beobtained from the Registrar.

Encik Mohamad Amin from the Franchise Division ofthe Ministry of Entrepreneurial and CooperativeDevelopment shares his experience and views with usand our readers on some of the issues and problemsencountered in the franchise business.

What challenges and pitfalls await peoplewhen they decide to take on a franchise?

There are a few major challenges that awaiteach aspiring franchisee. Apart from thecommon challenges that most businessowners may face in operating a smallbusiness such as managing employees,selling products and services that are indemand, I think that the biggest challenge inoperating a franchise is the franchisee’sability to keep operating costs low. Many atimes, the actual costs of running afranchise is far higher than the estimatedcost presented by the franchisor to thefranchisee. Thus, if one is interested inpurchasing a franchise, he or she shouldbudget their finances slightly higher than theestimated costs presented by the franchisorto avoid the possibility of facing financialdifficulties in the future.

Secondly, in a franchise system,franchisees are required to operate thefranchise according to the franchisor’sstandards set in the Agreement or theOperations Manual provided by thefranchisor to the franchisee. Franchiseesare generally accorded with very littlefreedom or sometimes no freedom at all inhow he or she may want to operate thebusiness. One should refrain from venturinginto a franchise business if one is notprepared to work under such constraints.

The government has been especially activein promoting franchise as a system ofbusiness to small business owners.However, not all franchises are successful.What are the common complaints lodgedwith the Registry by franchisees?

T & P:

En. Amin:

T & P:

A Boon or Bane?An Exclusive Interview with EncikMohamad Amin Ma’amon B. MohamadPrinciple Assistant Secretary of theFranchise Division, the Ministry ofEntrepreneurial and CooperativeDevelopment

F

Failure in a franchise business is usually caused by thebreakdown in relationship between the franchisor andthe franchisee. Generally, I find that most disputes arecaused by discontented franchisees. Franchisors areoften blamed when the franchise business is notmaking money. The franchisee usually believes that thefranchisor is not fulfilling his part of the obligation underthe franchise agreement. For example, it is notuncommon for the franchisee to allege that thefranchisor has failed to provide the agreed support tothe franchisee or has failed to live up to the terms ofthe agreement in relation to on-going commitments.We also received complaints that the franchisor isopening additional units too close to the existingfranchisee’s unit which affects profitability.

From my experience in handling disputes betweenfranchisors and franchisees, I find that franchisees arevery quick in finding fault with franchisors and fewrealize that the failure of a franchise business may alsobe caused other factors, such as the franchisees’ lackof competence in operating the franchise business.

Thus, I think that the key to operating a successfulfranchise lies not only in the franchisor providing agood operating and business system, it is imperativethat the franchisee has the adequate knowledge andskills in operating the franchise.

What is your advice to prospective franchisees?

Franchising is a wonderful business model that canproduce great personal success. However, one shouldalways remember that not everyone is suited to run afranchise business. Interested party may find out aboutfranchises by attending one of the monthly seminarsorganized by the Malaysian Franchise Association(MFA).

Briefly, one of the many things that one should dobefore buying a franchise is to ensure that adequateresearch is conducted on the franchise before aninvestment is made. One must carefully review alldisclosure documents and other materials delivered bythe franchisor. One should pay special attention to anydisclosed litigation history.

The terms and conditions of a franchise agreementshould be reviewed properly before signing. If possible,all clarifications should be made in writing. If verbalpromises were made by the franchisor prior to signingof the franchise agreement, such promises should bereduced to writing and incorporated as part of the termsand conditions of the franchise agreement. This iscritical to avoid disputes over whether such promisesexisted or what promises were exactly made.

It is also important to know the law and the rightsaccorded to a franchisee under the law. Proper legaladvice should be sought if one is not clear theseissues.

En. Amin:

T & P:

En. Amin:

When faced with franchise disputes, litigation may bean expensive method of conflict resolution especiallywhen the monetary claims are not substantial. Whatpositive steps have the Ministry taken so far infacilitating dispute resolution between franchisors andfranchisees?

The Malaysian Franchise Association is hoping to setup a mediation centre in the near future. The centre willfunction as a forum to collect data and complaints fromdisgruntled franchisors and franchisees which wouldthen be brought to the Ministry for resolution. Theprocedure for lodging a complaint at the mediationcentre would be simple. The franchisor or franchiseeneed only lodge his complaint through a prescribedform and the Ministry will look into and investigate thecomplaint. The Ministry will only act on complaints thatare lodged with valid grounds. The plan is still in itsinfancy and details will be publicized once theproposals are adopted and approved.

Is the Registry more stringent in approving franchiseapplications in light of the rising number of franchisedisputes in the country?

Yes, the Registry is strict. This is to ensure bettercompliance on the franchisor’s part. The franchisebusiness must be one of “excellence” with a good andproven business system. With such good and provenbusiness system, new franchisees can be taughtexactly what they need to know and do in order toproduce successful results. A good franchise systemshould also have a brand that has value in the eyes ofthe consumers.

When an application is made, the franchisor will haveto show that the business format has strong support forfranchisees. This includes not only the initial supportand training provided by the franchisor to get the newfranchisee’s business up and operating, but mostimportantly, a good ongoing support system to help thefranchisee deal with problems that arise in the future.

The Ministry has approved some of the franchisebusinesses which are not that successful in Malaysiabut which are doing very well in overseas. If thefranchisor is able to prove that the franchise is veryprofitable in other countries, there is no reason why theMinistry should reject the registration of such afranchise in Malaysia.

T&P Thank you for spending time with us and shedsome light on issues confronting the franchise system.

T & P:

En. Amin:

T & P:

En. Amin:

T & P:

By Tepee Phuah(tepee.phuah@taypartners.com.my). Tepee practices in the Intellectual Property andTechnology Practice Group and advises on a broad range of IP issues includingfranchising and licensing of IP rights.

For further information and advice on IP, Technology and franchise laws, you maycontact:

Linda Wang (linda.wang@taypartners.com.my)Su Siew Ling (siewling.su@taypartners.com.my)

7

Previously, the old section 2 provides that“moneylender” includes every person whose businessis that of moneylending or who carries on or advertisesor announces himself or holds himself out in any wayas carrying on that business whether or not that personalso possesses or earns property or money derivedfrom sources other than the lending of money andwhether or not that person carries on the business as aprincipal or as an agent.

However, the meaning of “moneylender” has now beenamended – it now means any person who lends a sumof money to a borrower in consideration of a larger sumbeing repaid to him. This new definition is wider thanthe one provided by the old section 2.

“Moneylending agreement” is now defined to mean anagreement made in writing between a moneylenderand a borrower for the repayment, in lump sum orinstalments, of money borrowed by the borrower fromthe moneylender. Previously, no definition of“moneylending agreement” was provided.

The old section 2A(1)(h) has been deleted by theAmending Act. The issue that arises is whether theamendments have retrospective effect? Would aperson, say, Mr. X, who lends money to Mr. Y in thecourse of his business which does not have lending ofmoney as its primary object, before the amendmentcame into effect, be able to argue that the amendmentdoes not apply retrospectively? Under the new section2A(1), Mr. X would be a moneylender and thus beliable under the Moneylenders Act. Can Mr. X rely onthe old section 2A(1)(h) to exclude himself fromliability?

The Court of Appeal in Sim Seoh Beng @ Sim SaiBeng & Anor v Koperasi Tunas Muda Sungai AraBerhad [1995] 1 CLJ 491 held that the traditionalapproach to the interpretation of statutes is that, in theabsence of express words or necessary implication,statutes affecting substantive rights are prospectivewhile those affecting procedure are retrospective.

The Moneylenders (Amendment) Act 2003 (“theAmending Act”) has made substantial changes to theMoneylenders Act 1951 (“the Principal Act”). Thesechanges are effective from 1st November 2003. Someof the changes made to the Principal Act which will bediscussed here, are:-

As a result of the above stated amendments, thefollowing issues need to be considered:-

The definition of “moneylender” in section 2 of thePrincipal Act.

The old section 2A(1)(h) of the Principal Act whichexcludes any person bona fide carrying on anybusiness not having for its primary object thelending of money in the course of which and for thepurposes whereof he lends money from theapplication of the Act, has been deleted by section5 of the Amending Act.

(a)

(b)

Whether a party can rely on the old section 2A(1)(h)of the Principal Act to argue that the MoneylendersAct is not applicable to him?

Whether the amendments made by the AmendingAct apply retrospectively?

Whether the meaning of “unenforceable” undersection 15 of the Principal Act is the same as void?5 of the Amending Act.

(a)

(b)

(c)

Moneylending –Impact an the Moneylenders (Amendment) Act 2003

The Court of Appeal went on to say, that the correcttest to be applied in determining whether a written lawis prospective or retrospective is to first ascertainwhether it would affect substantive rights if appliedretrospectively. If it would, then, prima facie that lawmust be construed as having prospective effect only,unless there is clear indication in the enactment that itis in any event to have retrospectivity.

The Court of Appeal derived support for their view fromthe decision of the Privy Council in Yew Bon Tew vKenderaan Bas Mara [1983] CLJ (Rep) 56, wherebyLord Bingham stated that, “…a statute should not beinterpreted retrospectively so as to impair an existingright or obligation unless that result is unavoidable onthe language used. ... Their Lordships consider that theproper approach to the construction of the Act is… tosee whether the statute, if applied retrospectively to aparticular type of case, would impair existing rights andobligations.”

Zakaria Yatim in Jeou-Shun Industrial Co Ltd v ShuangHor Enterprise (M) Sdn Bhd [1995] 1 CLJ 359 held thatin the absence of any express words in the newprovision that is should apply retrospectively, it must beconstrued to apply prospectively. If the amendingstatute had the effect of altering a substantive law orremoving a substantive right, it should not be construedretrospectively.

Reference should also be made to section 30(1) of theInterpretation Acts 1948 and 1967 which is concernedwith rights of a substantive kind. This section provides,inter alia, that the repeal of a written law, whether inwhole or in part, shall not affect the previous operationof the repealed law nor shall it affect any right, privilegeor liability acquired, accrued or incurred under therepealed law.

As such, it is opined that the amendments should notapply retrospectively, as it would affect a party’s right tobe excluded from liability under the Moneylenders Act.Thus Mr. X could, arguably, still rely on the old section2A(1)(h) to absolve himself from liability under theMoneylenders Act.

What if Mr. X could not rely on the old section 2A(1)(h)and thus, being an unlicensed moneylender, would heable to enforce the moneylending agreement betweenhim and Mr. Y? Would Mr. Y be able to argue that themoneylending agreement is void and thus, he need notrepay Mr. X the money lent to him? Does“unenforceable” have the same meaning as themeaning of “void” under the Contracts Act 1950?

Section 2(g) of the Contracts Act 1950 provides that,“... an agreement not enforceable by law is said to bevoid.” This seems to be in favour of Mr. Y. What doesthe case law say about this?

The Privy Council in Menaka v Lum Kum Chum [1976]1 LNS 71 deciding on the then section 15 of theMoneylenders Ordinance 1951 were of the opinion thatcontract which is not enforceable is void under section2(g) of the Contracts (Malay States) Ordinance 1950.Here, neither party was aware of the illegality at thetime of making the loan transaction. The documentswere prepared and executed on both sides in completegood faith. The contract was ‘discovered’ to be voidonly after the proceedings had been started. Thereforethe Privy Council held that section 66 of the ContractsOrdinance would apply and thus, any person who hasreceived any advantage under such an agreement orcontract is bound to restore it; or to makecompensation for it, to the person from whom hereceived it.

Section 66 of the Contracts Act 1950 provides that,“When an agreement is discovered to be void, or whena contract becomes void, any person who has receivedany advantage under the agreement or contract isbound to restore it, or to make compensation for it, tothe person from whom he received it.”

The Federal Court in Wong Yoon Chai v Lee Ah Chin[1980] 1 LNS 132, quoted the case of Menaka v LumKum Chum and stated that,

“...even though the moneylendingtransaction is void andunenforceable by reason of thecontravention of certain provisionsof the Moneylenders’ Ordinance,there remains thereafter an issuefor consideration whether amoneylender is entitled to recoverthe money lent under section 66 ofthe Contracts Act.

…Moneylending

9

However, as stated by Wan Yahya in of Soh Eng Kengv Lim Chin Wah [1979] 1 LNS 98, section 66 of theContracts Act has to be applied with care and is notopen to indiscriminate use by unlicensedmoneylenders whose claims have been defeated byreason of the contravention of the provisions of theMoneylenders Ordinance, 1951. Section 66 of theContracts Act is not intended to override thoseprovisions of the Moneylenders Act which makecontracts in moneylending transactions void but ismeant to provide some relief to a party whose right inan agreement has become unenforceable through nofault of his own making.

The changes made by the Moneylenders (Amendment)Act 2003 have yet to be tested in any reported cases.The question as to whether or not the amendmentswould apply retrospectively has not been fullyanswered nor is it judicially settled. As such, we wouldhave to wait until there is a judicial pronouncement onthis particular issue. In relation to section 15, it wouldseem that the courts are applying section 66 of theContracts Act to afford some relief to a party whoseright in an agreement has become unenforceablethrough no fault of his own making. However,moneylenders should be aware that section 15 is notonly restrictive but also punitive in nature. It is there toprevent moneylenders from enforcing their illegalinterest as well as to deprive them from recovering anysum of money outstanding in the borrower’s hands.Therefore, one must not place too much reliance onsection 66 of the Contracts Act.

By Lim May Fenn(mayfenn.lim@taypartners.com.my). May Fenn specialises incommercial litigation and practises in the Litigation and DisputeResolution Practice Group.

For further information and advice on Litigation and DisputeResolution, please contact:

Asmet Nasruddin (asmet@taypartners.com.my)Leonard Yeoh (leonard.yeoh@taypartners.com.my)

In Suu Lin Chong v Lee Yaw Seong [1978] 1 LNS 187,Wan Yahya J stated that the term “discover” in section66 of the Contracts Act indicates something which theparties were not aware of at the time of making theagreement and which they gained sight of or detectedonly subsequently. Similarly the word “become” refersto something not present when the contract was signedbut came into being at a later stage. It is for the party toa contract claiming such restitution to satisfy the Courtthat he was unaware of the illegality until afterexecution.

Moneylending

“... it is for the court in each case to determine whetheror not the parties to a transaction are aware of theillegality at the time of making the loan transaction. It isalso for the court to consider whether in all thecircumstances the loan transaction was concluded ingood faith. The question that must necessarily bedecided is whether in all circumstances of this particularcase it is proper to order restitution...”

IntroductionThe remuneration of a solicitor in Malaysia is governedby the Solicitors’ Remuneration Order 1991 (SRO). TheMalaysian Bar Council has recently passed aresolution relating to the remuneration of a solicitor inrespect of non-contentious business as compared tocontentious business. Amongst the non-contentiousbusiness includes sales, purchases or other forms of

conveyances involving immovableproperties, tenancies or leases,charges, debentures or even forbusinesses where no provisions areprovided by any scale fees but insteadsuch sum shall be based on thefairness and reasonableness of thecircumstances of the case, as can befound in the sixth schedule of theSRO.

Under the SRO and depending on thetype and scope of work required, a solicitor is requiredto charge the full scale fee based on the value of theproperty, the rental or the amount that is secured undera debenture. The SRO prohibits all legal fees to bediscounted on non-contentious business. Theprohibition applies to solicitors accepting less than thescale fees laid down by the SRO.

No More Discounts?It is no secret that such discounts are openly andrampantly offered by legal firms in Malaysia. Since thelegal fees are fixed, the firms giving or allowingdiscounts would thus have an unfair advantage overfirms that abide by the rules. Clients would be moreattracted to firms that gives them attractive discountsand would then “fish” for firms willing to give them thehighest discounts. This would create an unhealthycompetition amongst the legal firms. The notion that aclient chooses or wants to be represented by a solicitorbased on the solicitor’s competence and expertise hasnow been disregarded.

Due to the reasons above, come 1 November 2004,the Solicitors’ Remuneration Enforcement Rules(SRER) will be implemented to allow the Malaysian BarCouncil (Bar Council) the powers to order these firmsto hand over their documents for investigation orinspection purposes.

Steps TakenAfter coming into force of the SRER, legal firms wouldnow have to make some minor adjustments to theiroffices. Legal firms are now required to put up a “NoDiscount” signage to be displayed inside the premisesin which the practice is carried out. The signage has to

be an A-4 size signboard prohibiting solicitors fromgiving discounts for non-contentious business.

Not only would legal firms be required to put up asignage, they would now have to submit their returnsand produce documents in order for the Bar Council toobtain full information to ascertain whether a solicitorhas complied with the SRO or any other rulings relatingto the SRO. This request can be done by the BarCouncil acting on its own motion or upon receipt ofinformation or complaint by a third party that a solicitorhas accepted less than the scale fees laid down by theSRO.

Upon finding that such solicitor has indeed acceptedless than the scale fees laid down by the SRO, thereport may be used as a basis for a complaint to theDisciplinary Board against the solicitor concerned.

Is It Foolproof?It is a known fact that the Bar Council is headed bypeople who are themselves practicing solicitors. Tosubmit the returns and documents in order for the BarCouncil to obtain full information would go against thevery essence of confidentiality. Can we be assured thataccess to such documents, accounts and bills will notbe misused?

It says that the Bar Council can on its own motion orupon receipt of information or complaint by a third partyrequest the solicitor concerned to produce the returnsrelating to the transactions for the period specified or toproduce their documents. If it is on its own motion, howwill the Bar Council decide on which firm to ask thedocuments from? How and what will it be based on?Would mere suspicion suffice? Or do they need actualproof? How valid is a complaint? These issues wouldindeed be of concern to the solicitor as the standardsto be applied appear vague.

How effective will this be? It remains tobe seen ……..

By Toh Mi Mi(mimi.toh@taypartners.com.my). Mi Mi practises in the Corporate,M&A and Banking Practice Group with experience in unit trust workand interest in corporate laws.

For information and advice on Corporate, M&A and Banking, pleasecontact

Tay Beng Chai (bengchai.tay@taypartners.com.my)Chang Hong Yun (hongyun.chang@taypartners.com.my)

NOTICE –

NO MOREDISCOUNTS?

11

NEOH LAY CHOO & CHANG HONG YUNour partners attended the International Bar Association's conference in Auckland which took place from the24th to 29th of October. Hong Yun was one of the speakers in the Asia Pacific Forum. He spoke on issuesregarding the sale and purchase of complex production equipment relating to brewery plants.

LINDAWANG & SU SIEW LINGour partners in the Intellectual Property practice group, attended the Asian Patent Attorneys Associationmeeting at Fukuoka, Japan which was held between 24th and 27th October. Siew Ling also attended theMarques Conference in Rome held from 14th to 28th of September and the 69th Conference of thePharmaceutical Trade Mark Group in Madrid from the 6th to 9th of October.

LEONARD YEOHour partner in the Litigation and Dispute Resolution practice group presented a paper at the 11th AnnualCompany Secretary’s Conference held in Kuala Lumpur on the topic “Staying Abreast with the LatestLegal & Regulatory Updates to Effectively meet the Advisory Duties of the Company Secretary” on the24th and 25th November.

CHANG HONG YUN & LEONARD YEOHcontributed to the "Doing Business in 2005: Removing Obstacles to Growth", an international publicationrecently co-published by the World Bank, the International Finance Corporation and Oxford UniversityPress.

SHARMILA SEKARANour senior legal associate in the Intellectual Property practice group spoke on the topic, "Brand Protectionunder Registered Trade Mark Law" in a 2-day national conference which was held on the 15th and 16th ofSeptember on "Intellectual Property and the Innovators" organised jointly by INTAN (Institut TadbiranAwam Negara) and Universiti Teknologi Mara and supported by both the Intellectual Property Corporationof Malaysia and Ministry of Domestic Trade and Consumer Affairs.

ASMET NASRUDDINour partner in the Litigation and Dispute Resolution practice group attended the Global Water PartnershipConference in Hanoi on 4th November.

Legal TAPs is a collectiveeffort of the firm to bring

relevant legal updates andinformation to you.

Editorial CommitteeTay & Partners

Leonard Yeoh

Neoh Lay Choo

Shaikh Mohamed Noordin

Su Siew Ling

Tay Beng Chai

This publication provides asummary only of the subjectmatter covered and is notintended to be nor should it berelied upon as a subtitute forlegal or other profesional advice.

Kuala Lumpur Office6th Floor Plaza See Hoy ChanJalan Raja Chulan50200 Kuala Lumpur, MalaysiaTel:603 2050 1888Fax: 603 2072 6354Email: mail@taypartners.com.my

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"Merry Christmas and a Happy New Year!""Merry Christmas and a Happy New Year!"We would like take this opportunity to wish all of our readers