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The law that governs Franchising in Malaysia is the Franchise Act 1998. According to Section 4(f) Franchise Act 1998 :


the franchisee operates the business separately from the franchisor, and the relationship of the franchisee with the franchisor shall not at anytime be regarded as a partnership, service contract or agency


franchise agreement” means a contract or an agreement made between a franchisor and a franchisee in respect of a franchise in return for any form of consideration but does not include any contract or agreement made for the purpose of direct selling as provided by the Direct Sales Act 1993.


A Franchise agreement should be in writing (Section 18(1) Franchise Act 1998) and would only require the franchisee to pay a fee or other form of consideration for the rights granted by the franchisor.


The Franchisor has the responsibility to provide assistance to the franchisee to operate the business including such assistance as the provision or supply of materials and services, training, marketing, and business or technical assistance ( Section 4(d) Franchise Act 1998).


The Franchisor grants to the franchisee the right to operate a business according to the franchise system as determined by the franchisor ( Section 4(a) Franchise Act 1998)


The Franchisor grants to the franchisee the right to use a mark, or a trade secret, or any confidential information or intellectual property, owned by the franchisor or relating to the franchisor, and includes a situation where the franchisor, who is the registered user of, or is licensed by another person to use, any intellectual property, grants such right that he possesses to permit the franchisee to use the intellectual property ( Section 4(b) Franchise Act 1998).


The Franchisor possesses the right to administer continuous control during the franchise term over the franchisee’s business operations in accordance with the franchise system ( Section 4(c) Franchise Act 1998).


  1. The Franchise Act 1998 would not apply if the business is operated through the joint venture company itself without any franchise being involved. Another possibility is through an agency or distribution where it would have the advantage of less initial cost investment and generally there will be lower financial rewards than if an ownership share was taken in the local operation. There will also be less control over the way in which a product is marketed.


It is possible for a joint venture company to obtain appropriate licences from proprietors of certain intellectual property rights or if the property are to become the property of the joint venture, to obtain assignments of them. In this case, the joint venture company may set up a licensing agreement with a third party or the party providing the rights though normally the ability to grant these rights will be within the power of participants in the joint venture.


For a licensor, the arrangement offers a guaranteed return with little or no investment risk or start up cost, where he is uncertain of the market and do not wish to get involved in the day to day problems of the licensee’s business or in the direct aspects of production and marketing.


Licences may also be used for the purpose where one of the joint venture parties particularly a foreign party would provide the necessary skills and technology and the local party would be providing land, manpower, and/or market access as in this case.


Licensing agreements will enable the retention of royalty by the licensor which will enable some participation in ongoing business success. Again, though there will be little effective direct control over the licensee’s activities and no direct assurance that the licensee will be fully committed to the development of the business.


In this instance, a licensing agreement between the party providing the skills and the joint venture company must be put in writing and its essential purpose will be set out in the legal rights and obligations relating to everything to be provided such as one’s involvement in developing the business plan for the joint venture company, to have equal representation on the Board of the company, in decisions of the company, nominates the CEO and will also be involved in the restaurant development and fit out, menu development and staff decisions.


The Franchise Act 1998 does not regulate licences and is only concerned with franchises. Therefore it would be possible to enter into a licence agreement without being regulated by the Franchise Act 1998.

Duties of an Internet Service Provider in Malaysia

internet service

Communications and Multimedia Act 1998

 The relevant legislation in Malaysia regulating the communications and multimedia industry is the Communications and Multimedia Act 1998 (“the Act”). The Act has been enacted to promote national policy objectives for the communications and multimedia industry and to establish a licensing and regulatory framework in support of national policy objectives for the communications and multimedia industry.

The Malaysian Communications and Multimedia Commission (“MCMC”) was established by the Act as regulator for the converging communications and multimedia industry and charged with overseeing the new regulatory framework for the converging industries of telecommunications, broadcasting and on-line activities.


The Act requires various activities to be licensed and one of the roles of MCMC is to issues licences. Under the Act, there are four categories of licensable activities :


(1)               Network Facilities Providers – who are the owners of facilities such as satellite earth stations, broadband fibre optic cables, telecommunications lines and exchanges, radiocommunications transmission equipment, mobile communications base stations, and broadcasting transmission towers and equipment. They are the fundamental building block of the convergence model upon which network, applications and content services are provided.


(2)               Network Services Providers – who provide the basic connectivity and bandwidth to support a variety of applications. Network services enable connectivity or transport between different networks. A network service provider is typically also the owner of the network facilities. However, a connectivity service may be provided by a person using network facilities owned by another.


(3)               Applications Service Providers – who provide particular functions such as voice services, data services, content-based services, electronic commerce and other transmission services. Applications services are essentially the functions or capabilities, which are delivered to end-users.


(4)               Content Applications Service Providers – who are special subset of applications service providers including traditional broadcast services and newer services such as online publishing and information services.


According to the MCMC website at http://www.mcmc.gov.my/, Time dotcom Berhad is one of the licensed service providers for Applications Service Provider.

As the Act seeks to establish a regime of self-regulation by providing for the creation of industry forums, an industry body may be designated or appointed as an industry forum if the MCMC is satisfied that the criteria stipulated in Section 94 of the Act 1998 has been fulfilled.

The primary function of a designated industry forum would be to formulate and implement voluntary industry codes, which would serve as a guide for the industry to operate. The relevant codes may be developed on the forum’s own initiative or upon request by the MCMC.

In March 2001, the MCMC designated the Communications and Multimedia Content Forum of Malaysia (“CMCF”) as the Content Forum.

The CMCF governs content by self regulation in line with the Malaysian Communications and Multimedia Content Code (“Code”). The Code is a set of industry guidelines on the usage and/or dissemination of content for public consumption. The Code has now been officially registered with the MCMC with effect from 1 September 2004.

The Code can be downloaded at MCMC’s website at http://www.mcmc.gov.my.

The Constitution of the CMCF states that a Complaints Bureau be established under Article 8 of the Code to deal with complaints. The Bureau is empowered by the Council to impose sanctions on any member who is considered to have breached the Content Code.

However, the Bureau is not permitted to consider complaints if they concern matters that are the subject of legal proceedings, or if the Bureau decides it would be inappropriate.


Application of the Code

 The Code applies to all content made available in the content industry in the networked medium and as defined the Code and under the Act.

This Code also applies to all persons who provide a content applications service (“Content Application Service Providers”) and in particular but is not limited to:


(1)        Each member of the industry forum;

(2)        Each person who has submitted their agreement to the Forum that they will be bound by this Code; and

(3)       Each person whom the Commission has directed in accordance with Section 99 of the Act.


Under Section 100 of the Communications and Multimedia Act 1998 (“the Act”), a person who fails to comply with a direction of MCMC that the for person complies with any provision of a voluntary industry code shall be liable to pay to the MCMC a fine not exceeding two hundred thousand (200,000) ringgit.


The Code

The relevant part of the Code for the parties who provide online Content or those who provide access to online content through present and future technology is Part 5 of the Code. These parties include, but are not limited to:


(1)               Internet Access Service Providers;

(2)               Internet Content Hosts;

(3)               Online Content Developers;

(4)               Online Content Aggregators; and

(5)               Link Providers


(collectively referred as “Content Subject”)


Internet Service Provider falls under the definition of Internet Access Service Providers which is defined in paragraph 12.1 of Part 5 of the Code as a service provider who provides users with access to the Internet including (but not limited to) the World Wide Web.

The Code has provided that no Content Subjects shall knowingly provide prohibited content. The Code has classified ‘prohibited content’ into 9 categories namely:

(1)               Indecent Content

(2)               Obscene Content

(3)               Violence

(4)               Menacing Content

(5)               Bad language

(6)               False Content

(7)               Children’s Content

(8)               Family Values

(9)               People with Disabilities


Content is defined as any sound, text, still picture, moving picture or other audio-visual representation, tactile representation or any combination of the preceding which is capable of being created, manipulated, stored, retrieved or communicated electronically but does not include for the purpose of the Part 5 of the Code:

(1)        ordinary private and/or personal electronic mail other than bulk or spammed electronic mail;

(2)        content transmitted solely by facsimile, voice telephony, VOIP and which is intended for private consumption; or

(3)        content which is not accessible to the public whether freely, by payment of a fee or by registration, including (but not limited to) content made available by way of a closed Content Application Service or a limited Content Applications Service under Sections 207 and 209 of the Act respectively;


Appendix 2 of the Code provides that, apart from the Act, licensees under the Act may need to be aware of the following Acts of Parliament and are advised to have sufficient resources and expertise to ensure compliance where necessary.


(1)               Accountants Act 1967 (revised 1972)

(2)               Children & Young Persons (Employment) Act 1966 (Revised 1988)

(3)               Consumer Protection Act 1999

(4)               Copyright Act 1969

(5)               Defamation Act 1957

(6)               Dental Act 1971

(7)               Film (Censorship) Act 1952

(8)               Geneva Conventions Act 1962

(9)               Indecent Advertisements Act 1953

(10)           Internal Security Act 1960

(11)           Medicine (Advertisement and Sale) Act 1956

(12)           National Anthem Act 1968

(13)           Penal Code

(14)           Pesticides Act 1974

(15)           Poisons Ordinance 1952

(16)           Poisons (Sodium Arsenite) Ordinance 1949

(17)           Printing Presses and Publications Act 1984

(18)           Private Higher Educational Institutions Act 1996

(19)           Private Hospitals Act 1971

(20)           Sale of Drugs Act 1952 (Revised 1989)

(21)           Sale of Food Act 1983

(22)           Food Regulations 1985

(23)           Securities Industry Act 1983

(24)           Sedition Act 1948

(25)           Trade Description Act 1972

(26)           Trade Marks Act 1976

(27)           Women and Girls Protection Act 1973


Compliance of the Code as a legal defence

Section 98 of the Act provides that compliance with the Code is a legal defence. Section 98(2) of the Act provides that ‘compliance with a registered voluntary industry code shall be a defence against any prosecution, action or proceeding of any nature, whether in a court or otherwise, taken against a person (who is subject to the voluntary industry code) regarding a matter dealt with in that code’.

Notwithstanding the above, paragraph 6.4 of Part 2 of the Code states that all applicable Malaysian Laws including but not limited to sedition, pornography, defamation, protection of intellectual property and other related legislation are to be complied with.


Duties of Internet Access Service Provider under the Code

The Code has set out the guidelines to be followed by an Internet Access Service Provider (“IASP”) in Part 5 of the Code.

An IASP shall comply with and incorporate terms and conditions in the contracts and legal notices as to terms of use with subscribers of their services. This shall include the following terms:

(1)        Subscribers will comply with the requirements of Malaysian law including, but not limited to, the Code and shall not provide prohibited Content nor any Content in contravention of Malaysian law;

(2)        The IASP will have the right to withdraw access where a subscriber contravenes the above; and

(3)        The IASP shall have the right to block access to or remove such prohibited Content provided such blocking or removal is carried out in accordance with the complaints procedure contained in the Code.

The existence of the above-mentioned terms and conditions will be displayed on the IASP’s website in a manner and form easily accessible by its subscribers by way of a link or other similar methods.

The Code recognises the concept of innocent carrier. Code Subjects providing access to any Content but have neither control over the composition of such Content nor any knowledge of such Content is deemed an innocent carrier for the purposes of the Code. An innocent carrier is not responsible for the Content provided. Further, it is also a defence that access providers had adhered to the general measures provided by the Code.

However, once an IASP is notified by the Complaints Bureau that its user or subscriber is providing prohibited Content and the IASP is able to identify such subscriber the IASP will take the following steps:


(1)        Within a period of 2 working days from the time of notification, inform its subscriber to take down the prohibited Content.


(2)        Prescribe a period within which its subscriber is to remove the prohibited Content, ranging from 1 to 24 hours from the time of notification.


(3)        If the subscriber does not remove such prohibited Content within the prescribed period, the IASP shall be entitled to suspend or terminate the subscribers’ access account.


(collectively referred as “Notice and Take Down Procedure”)


However, paragraph 11 of Part 5 of the Code provides that IASPs are not required to undertake any of the following:


(1)        Provide rating systems for Online Content;

(2)       Block access by their users or subscribers to any material unless directed to do so by the Complaints Bureau acting in accordance with the complaints procedure set out in the Code;

(3)       Monitor the activities of users and subscribers; or

(4)       Retain data for investigation unless such retention of data is rightfully requested by the relevant authorities in accordance with Malaysian law.


Notwithstanding the above, the definition of ‘prohibited content’ does not include content which infringes other parties’ intellectual property or contains element of fraud. As such, the Notice and Take down procedure may not apply to such matters. We are of the view that the types of remedies available to the aggrieved party limited to the traditional remedies specified under their specific legislation.


Liability of Internet Application Service Provider in general

So far there have not been any reported cases on the liability of an IASP in Malaysia as a conduit that who passively allowed for the transmission of data. However, we may refer to the position in United Kingdom and the United States of America.


United Kingdom

We refer to the case of Godfrey v Demon Internet Ltd, QBD, [1999] 4 All ER 342. In the said case, Demon Internet Ltd, an Internet service provider offered a Usenet facility, enabling authors to publish material to readers worldwide. An unknown person made a posting in that newsgroup on an American service provider, and it reached Demon Internet Ltd’s server in England. The posting, which purported to be written by Godfrey, was a forgery and defamatory of Godfrey. Godfrey subsequently informed Demon Internet Ltd that the posting was a forgery, and asked it to remove the posting from its Usenet news server. However, Demon Internet Ltd failed to do so, and the posting remain on the server until its expiry. Godfrey brought proceedings for libel against Demon Internet Ltd.

In its defence, Demon Internet Ltd sought to rely, inter alia, on the defence provided by s 1(1) of the Defamation Act 1996, namely (a) that it was not the publisher of the statement complained of, (b) that it had taken reasonable care in relation to its publication, and (c) that it had not known, and had no reason to believe, that its action had caused or contributed to the publication of a defamatory statement. On Godfrey’s application to strike out that part of the defence, Demon Internet Ltd contended it had not published the defamatory posting and that there had been no publication within the meaning of s 1(1)(b) of the Act. Although s 1(2) and (3) provided a special definition of the word ‘publisher’ as used in s 1(1)(a), s 17 provided that the words ‘publication’ and ‘publish’ had the same meaning as in the general law of defamation. The issue therefore arose whether Demon Internet Ltd had published the posting within the common law meaning of the term.

The Court, in allowing Godfrey’s application, held that Demon Internet Ltd’s defence under Section 1 of the Defamation Act is hopeless and struck out Demon Internet Ltd’s defence.

However, recently in Bunt v Tilley and others [2006] 3 All ER 336, the Court struck out a claim by a Plaintiff against a number of internet service providers for defamation. The Plaintiff claimed that the said internet service provider published the defamatory words of the other defendant ‘via the services provided’ by the said internet service providers. The Court held, distinguishing the case of Godfrey v Demon Internet Ltd (Supra), that an internet service provider which performed no more than a passive role in facilitating postings on the internet could not be deemed to be a publisher at common law.  It was essential to demonstrate a degree of awareness or at least an assumption of general responsibility, such as had long been recognised in the context of editorial responsibility, in order to impose legal responsibility under the common law for the publication of words. Although it was not always necessary to be aware of defamatory content to be liable for defamatory publication, there had to be knowing involvement in the process of publication of the relevant words. It was not enough that a person had played merely a passive instrumental role in the process.


United States

In the United States of America, IASP has relied on 47 USC 230 of the American Telecommunications Act of 1996 as their defence. 47 USC 230 of the American Telecommunications Act of 1996 provides that:




(1)        TREATMENT OF PUBLISHER OR SPEAKER- No provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.


 (2)       CIVIL LIABILITY- No provider or user of an interactive computer service shall be held liable on account of–


(A) any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected; or


(B) any action taken to enable or make available to information content providers or others the technical means to restrict access to material described in paragraph (1).

47 USC 230 of the American Telecommunications Act of 1996 was applied in the cases of Kenneth M. Zeran v. America Online, Inc.; U.S. District Court, E.D. Virginia, 958 F.Supp. (1997).


In the American case of Kenneth M. Zeran v. America Online, Inc.; U.S. District Court, E.D. Virginia, 958 F.Supp. (1997), the Plaintiff initiated proceedings for defamation after an unknown America Online, Inc (AOL) subscriber made posting that the Plaintiff had for sale tasteless t-shirts regarding the bombing of the Alfred P.Murrah Building in Oklahoma City, and listed the contact details of the Plaintiff. In response, the Plaintiff received telephone complaints and death threats. The issue was whether an online service, website, or other interactive computer service, can be held liable for defamation made by third parties, where the defamed party has been injured by defamatory speech made by persons who post in an interactive computer service. The Supreme Court ruled against the Plaintiff and held that, applying 47 USC 230 of the American Telecommunications Act of 1996, held that no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider. Applying this case to the position in Malaysia, the same may not apply to Malaysia as Malaysia does not have such provision to protect IASP.


However, the above 47 USC 230 of the American Telecommunications Act of 1996 has no effect on intellectual property law.


Liability of Internet Application Service Provider for Copyright infringement

As for the liability of IASP for the wrongdoings of a third party i.e. infringing materials, at the present, there has not been any explicit attempt by the legislators to clarify this position. In the United States of America, the Digital Millennium Copyright Act 1998 was enacted to exempt IASP from copyright liability if they take measures to take down the infringing materials from the internet. In the United Kingdom, the Copyright and Related Rights Regulations 2003 allow the grant of an injunction against a service provider, only in instances where the service provider has ‘actual knowledge’ of another person using their service to infringe copyright.

In this regard, in order to ascertain whether copyright subsists in the works, one must determine whether the works fall within one of the categories of works protected under the Copyright Act 1987 (“Copyright Act”). Section 7(1) of the Copyright Act sets out the categories of works which are eligible for copyright protection and it is worded in this way:


    7. Works eligible for copyright

   (1)     Subject to this section, the following works shall be eligible for copyright:

(a)        literary works;

(b)        musical works;

(c)        artistic works;

(d)        films;

(e)        sound recordings; and

(f)         broadcasts.


Upon determination whether the work in question is eligible for copyright, in order to determine whether there has been an infringement of copyright, we are of the view that we refer to Section 36 of the Copyright Act which provides:
36.  Infringements.


(1) Copyright is infringed by any person who does, or causes any other person to do, without the licence of the owner of the copyright, an act the doing of which is controlled by copyright under this Act.


  1. Section 13 of the Copyright Act provides for the following acts that is controlled by copyright,


(1)                           the reproduction in any material form;

(2)                           the communication to the public;

(3)                           the performance, showing or playing to the public;

(4)                           the distribution of copies to the public by sale or other transfer of ownership; and

(5)                           the commercial rental to the public,


of the whole work or a substantial part thereof, either in its original or derivative form.


Technically speaking, when an internet user posts a message through the internet, the said message will be transmitted through the IASP who will then in turn reproduce the said message to the intended recipient.

As such, passive IASP who is merely a conduit that who passively allowed for the transmission of data, may reproduce files and documents belonging to third parties that is controlled by copyright. In this regard, on the issue whether there is copyright infringement, we may refer to the definition of ‘causes any other person’ of Section 36 of the Copyright Act. The word ‘causes’ is not defined nor has been defined in the Malaysian Court.

Professor Dr. Khaw Lake Tee in her book “Copyright Law in Malaysia” (2nd Ed, 2001, Malayan Law Journal) at page 182 to 183, in defining ‘causes’ referred to the case of Dunia Muzik WEA Sdn Bhd v Koh Tay Eng [1989] 2 MLJ 356. Professor Dr. Khaw Lake Tee summarised Dunia Muzik WEA Sdn Bhd v Koh Tay Eng, at page 182 to 183 of “Copyright Law in Malaysia” (2nd Ed, 2001, Malayan Law Journal) to the following:


In that case, the plaintiffs who were engaged in the making, production and publication of musical works and sound recordings, used the defendant for infringement of their copyright. It was alleged that the defendant had sold infringing copies of the plaintiffs’ sounds recordings and had therefore, inter alia, caused, enabled or assisted others to reproduce and to dispose off unlawfully the plaintiff’s works. Gunn J (as he then was) held that the plaintiffs have proved all the allegations made and were therefore entitled to an injunction, damages as well as delivery of the infringing copies. But although evidence was adduced to show that the defendant had sold infringing copies, there was nothing from the facts of the case to suggest that the defendant had made the infringing copies himself. The court could have thus meant that the defendant had ‘caused’ other to reproduce the infringing copies. There was also nothing in the facts to indicate the person involved in the actual reproduction were the servants or agents of the defendant. The court would seem to suggest that a person selling infringing copies could be held to have ‘caused’ copying of the work even though the act was done by a third party who was acting neither on the person’s behalf nor his instructions. In other words, the word ‘cause’ seemed to be used in the sense of ‘bringing about an effect or results’.


Further, in Saleha Hussin lwn. AB Wahid Nasir & Yang Lain [2004] 2 CLJ 204, the Court held that a television broadcasting company was liable for copyright infringement although they had no knowledge that the infringing work, a television program, had infringed the copyright of the Plaintiff. In the said case, the learned Judge, Abdul Hamid Mohamad HMP in his judgement, relied on the English case of Mansell v. Valley Printing Co.[1908] 2 Ch. 441 where the Court held that a person who infringed another person’s copyright is liable to the owner of the copyright although he is not guilty or had knowledge of the infringement.


Liability of Internet Application Service Provider for Fraud

To date, there have not been any reported cases on the liability of internet service providers for fraud in Malaysia. We have made extensive research on the position in the United Kingdom and the United States of America but our research did not yield any results.


  1. Fraud is defined in Clerk & Lindsell at page 1012 as “The tort involves a false representation made by the defendant, who knows it to be untrue, or who has no belief in its truth, or who is reckless as to its truth. If the defendant intended that the claimant should act in reliance on such representation and the claimant in fact does so, the defendant will be liable in deceit for the damage caused”

In order to prove fraud, the other party will have to show that there is a representation of a past or existing fact. The representation may be either express or implied from conduct. Representation implied by conduct is whereby a party conducts himself in a particular way with the purpose of fraudulently inducing another to believe in the existence of certain things which is contrary to the facts and to act upon the basis of its existence which causes the other party to suffer damages. Thus, there must be a deliberate concealment with the intention to defraud.

In the leading case of Derry v Peek (1889) 14 Appl. Cas.337, Lord Herschell laid down the essentials of fraud in the following proposition:


“First, in order to sustain an action of deceit, there must be proof of fraud and nothing short of that will suffice. Secondly, fraud is proved when it is shown that a false representation as been made (i) knowingly, (ii) without belief in its truth, or (iii) recklessly, careless whether it be true or false. Although I have treated the second and third as distinct cases, I think the third is but an instance of the second, for one who makes a statement under such circumstances can have no real belief in the truth of what he states. To prevent a false statement from being fraudulent, there must, I think, always be an honest belief in its truth”.

 In order to establish fraud, the state of mind of the Defendant as regards to his knowledge of the falsity or belief in the truth is essential in proving fraud. The representation must be untrue to the Defendant’s knowledge and made with the intent to deceive which is acted upon by the Plaintiff. Therefore, the Defendant may still be liable for fraud even if they did not obtain knowledge of the untruth of his statement until after it has been made and becomes aware of it before the Plaintiff acted upon it. For IASP, if their role is merely as a conduit to transmit information, we are of the view that they may not be liable for fraud if they do not know of such fraudulent statements.

However, if the IASP is aware of such statements and did not act accordingly when receiving a complaint of the same, the IASP may be subjected to legal action by aggrieved parties.



 Although the general legal duty of an IASP in Malaysia has been lined up in the Code, the Code does not provide for matters which are contentious. The Malaysian parliament has not enacted specific legislations to address the legal liability of an IASP unlike the United States of America.

In view of the uncertainty, certain IASP in Malaysia had taken steps to include exclusion clauses and also indemnity clauses against their subscribers in their service agreements.

Letter of Intent vs Letter of Undertaking

letter of intent

  • A letter of intent is generally not legally binding unless both parties intended that it should be enforceable and it does not refer to a resulting future contract. On the other hand, the law imposes an obligation to pay a reasonably price for work done pursuant to a request under the principle of quantum meruit. A letter of undertaking is contractual in nature and failure to comply with it will result in a breach of obligation.




  • A letter of intent (LOI) is a document which expresses the intention of a party to enter into a contract at a future date by outlining the terms which are intended to be included in a finalised agreement. As a general principle, a LOI is not legally binding save in exceptional circumstances. However, many LOIs contain provisions that are binding such as non-disclosure agreements, a covenant to negotiate in good faith, or a “stand-still” or “no-shop” provision which promises exclusive rights to negotiate.


  • The Supreme Court in Ayer Itam Tin Dredging Malaysia Berhad v. YC Chin Enterprise Sdn. Bhd. [1994] 2 AMR 32:1631 held that generally, an arrangement made “subject to contract” or “subject to the preparation and approval of a formal contract”, and similar expressions, would be construed to mean that the parties were still in a state of negotiation and did not intend to be bound unless and until a formal contract was exchanged.



  • However, having said that, there are still exceptional circumstances which can cause a LOI to be legally binding despite having a “subject to contract clause”. In determining whether any liability shall attach to the person who issues the LOI, the Court will scrutinise the terms of the document and the circumstances in which it came to be written (See Turriff Construction Ltd. and Turriff Ltd. v. Regalia Knitting Mills Ltd. [1971] 9 BLR 20 (QBD)). Where the LOI indicates that both parties intend that it should be enforceable and it does not refer to the execution of a formal contract in the future, the LOI can constitute an agreement between the parties.


  • On the other hand, it is to be noted that even if both parties expect a formal contract to eventuate, but one party requests the other to commence work, the work done is treated as having been done under the expected contract, and if no contract is entered into, the party carrying out the work at the request of the other, can claim payment under the principle of quantum meruit, i.e. a reasonable price for work done pursuant the said request.



  • An undertaking from a bank is similar in effect as that of a bank guarantee, performance bond or standby letter of credit. The definition of a valid undertaking adopted in Public Bank Bhd v Perwira Affin Bank Bhd (2001) 7 CLJ 447 HC was “a pledge, a promise and a guarantee”.


  • The construction to be given to an undertaking is similar to that applied to an ordinary contract (See Michael C Solle v. United Malayan Banking Corporation [1984] 1 CLJ 151). Thus, a breach of an undertaking attracts damages in the same manner as a breach of contract.

Licensing Requirement for the Import of Heavy Construction Equipment into Malaysia

heavy equipment

ABC Sdn Bhd wishes to bring into Malaysia several pieces of heavy construction equipment owned by them, for a certain period of time.


A.        Is a license required for importing heavy construction equipment into Malaysia?

Import Permit Licenses, or Approved Permits, are usually required when importing heavy construction equipment into the country. This requirement, however, only extends to machinery or equipment that is less than five years old. The importation of any machinery or equipment that is more than 5 years old is prohibited.

The importation of machinery that is less than 5 years old is restricted under Schedule Two of the Customs (Prohibition of Imports) Order 1998 as goods that may not be imported into Malaysia except under an Import Licence. Hence Approved Permits are required for the importation of certain items of heavy machinery. These requirements must be checked in the Tariff Customs Code. This can be done in the Classification Code Section of the Royal Customs and Excise Department, Putrajaya (Bahagian Kod Perjenisan)

Guidelines for the application of the Approve Permits should also be used to facilitate easy and efficient application. These can be obtained at the Service Counter of the Ministry of International Trade and Industry (MITI) or from the MITI website. The purpose of these guidelines is to explain the conditions and procedures that need to be complied with by companies that wish to apply for Approved Permits for commercial products controlled under the Customs Orders (Prohibition of Imports) 1998 and the Customs Act 1967.

The conditions and procedures for application of an Approved Permit for heavy construction equipment is as follows:


  • Companies that are eligible to apply need to be register with the Companies Commission of Malaysia.


  • How to apply

Companies need to submit the Application Form together with:

    1. Customs Form JK69.
    2. Memorandum and Article of Association (M & A).
    3. Form 24 : Information of Shareholders.
    4. Form 49 : Information of directors, managers and secretary of company

                          M&A, Forms 24 and 49 are required for the first time application.


  • Supporting Documents

Other documents that need to be enclosed with the Application Form are:

Heavy Machinery and Spare Parts

Heavy Machinery.

  • Certificate of Origin from exporting country (heavy machinery must not exceed 5 years old).
  • Catalogues and photographs.
  • Record of importation.
  • Purchase Invoice.

Spare Parts of Heavy Machinery

  • Catalogues and photographs.
  • Record of importation.
  • Purchase Invoice.

Prime Mover

  • Certificate of Origin from exporting country. (Prime Mover must not exceed 5 years old).
  • Approval letter from Commercial Vehicles Licensing. Board (LPKP).
  • Purchase Invoice.


  • Application Form

Customs Form JK69 is available from:

Syarikat Percetakan Nasional (M) Bhd.
Jalan Chan Sow Lin
50554 Kuala Lumpur

Tel. : 03-92212022
Fax. : 03-92220690

  • Submission of Application:

Completed application must be submitted to:

Ministry of International Trade & Industry (MITI)
Trade Services Department
Ground Floor, (Service Counter), Block 10
Government Offices Complex, Jalan Duta
50622 Kuala Lumpur

Tel.: 03-6203 3022
Fax.: 03-6201 3012


 The approving authority for these applications is the Secretary General of MITI. After the application is received, the documents will be checked and verified, and after consideration, the decision letter will be issued. The applicant will also be sent a letter of notification of receipt within seven working days of MITI receiving the completed application form.

  Import Permit Licenses, or Approved Permits, are not required for the temporary importation of heavy construction equipment for the purpose of carrying out specific construction projects. The importer must be able to prove that there is a fixed project for which the equipment is required.

B.               Is an Approved Permit required to store heavy construction equipment in a Free Trade Zone?

 The Free Zones Act 1990 describes activities that are permitted within a Free Zone. Section 4 of the Act pertains to goods and services in a free zone, as follows:

“ Subject to this Act, goods and services of any description, except those specifically and absolutely prohibited by law, may be brought into, produced, manufactured or provided in a free zone without payment of any customs duty, excise duty, sales tax or service tax.”

As stated in paragraph 5 above, the importation of heavy construction equipment that is less than 5 years old is merely restricted, and not absolutely prohibited. Therefore, it may be brought into a free zone without the need of an Approved Permit.



  • ABC Sdn Bhd is advised that they should enquire into the exact requirements under the Customs Tariff Code for the specific type and/or class of heavy construction equipment that they wish to import into Malaysia, and thus whether or not an Approved Permit is required of each one.


  • However, it must be noted that only heavy machinery that is less than 5 years old may be imported into Malaysia and if any of the equipment that ABC Sdn Bhd wishes to import into the country does not meet this requirement it will be completely prohibited from entering Malaysia. ABC Sdn Bhd may thus wish to consider another route.


  • As no Approved Permit is required for bringing heavy construction equipment into a Free Trade Zone, ABC Sdn Bhd is advised that it may be a more suitable course would be to adopt this option.



Question & Answer on Tenancy Issues



ABC Sdn Bhd took out a loan with Bank XYZ with a charge on a shop office (the Premises).

On 28 April 2013, MAX Co entered into a tenancy agreement with ABC Sdn Bhd for the tenancy of the Premises. The tenancy agreement was entered into with the understanding that MAX Co would restore, make improvements and maintain the Premises for the length of the tenancy, with an option to purchase at a later date.

However, ABC  has since 2 May 2013 become insolvent and Bank XYZ has since appointed a receiver and manager to administer to the affairs of ABC.



A.    Is the tenancy agreement specifically enforceable?

The remedy of specific performance is an equitable remedy, hence can only be invoked where there is an equitable interest, i.e. a tenancy coupled with equity. The case King’s Confectionery Sdn Bhd v KT Systems Protection Sdn Bhd [2001] MLJU 680 held that:

“In order to enable the money expended by the tenant for renovation of the premises to be regarded as a tenant coupled with equity, the tenant must be led to believe by the landlord that as a result of the expenditure, the tenant will be allowed to remain in the premises for as long as he liked or for a considerable time.”

 In ABC’s case, one of the terms of the tenancy was that MAX Co restore, improve and maintain the farm, which they have been doing. Therefore, MAX Co has an equitable interest in the farm, as it has expended money believing that it would be allowed by the landlord to remain on the Premises for the length of the tenancy, with an option to purchase the Premises at a later date.

7.         The English case of Verrall v Great Yarmouth Borough Council [1981] 1 QB 202 held that where it was appropriate to do so, the court would protect any interest, including a license of a transient nature, by specific performance. The court concluded that:


“(1) the duration of the license, no matter how limited, is no bar to this kind of relief;


(2) the fact that a license can be revoked does not lead inevitably to the conclusion that damages are the only remedy for revocation.”


Therefore, as it is possible for a temporary license to be specifically enforceable, it should follow that a tenancy agreement should be specifically enforceable as well.


 B.     Is the tenancy specifically enforceable against the Receiver & Manager?


The English case Freevale Ltd v Metrostore (Holdings) Ltd [1984] Ch 199 held that the mere fact of receivership afforded no defence to a claim for specific performance.


This case was applied in Ah Kaw v Ayer Keroh Heights Sdn Bhd [1990] 1 CLJ 566, which quoted it stating that:


“…the fact that the vendor company is placed in receivership by a debenture holder if the company prior to  a completion of the contract does not destroy a purchaser’s equitable interests in the land under the contract and substitute for it a mere right to claim damages against the vendor company if the contract is not completed, instead the vendor company remains liable to complete the contract. Accordingly, this appointment of a receiver does not itself afford the vendor company a defence to a claim by the purchaser for specific performance of the contract.”


This means that if the contract or agreement was one that was specifically enforceable from its inception, the appointment of a receiver neither destroys the purchaser’s or tenant’s equitable interest in the land nor the ability to specifically enforce the agreement.




MAX Co is advised that its tenancy agreement is specifically enforceable, as it has an equitable interest in the land.


The tenancy agreement may be specifically enforced against the receiver and manager, as the mere fact that the company is receivership does not destroy a pre-existing ability to specifically enforce an agreement.


Change of Control in An Insurance Company


Section 67(1) of the Insurance Act of 1996 of Malaysia provides that any agreement or arrangement to acquire or dispose of any interest in shares of a licensed insurer incorporated in Malaysia or of its controller[1] by a person (either alone or with any associate) together with any existing interest in the shares of the licensee or its controller (either alone or with any associate), which will in aggregate exceed 5% of the shares of that licensee or of its controller, requires the written approval of the Ministry of Finance. The approval process is implemented by way of a two-step process as below:

  • Approval in principle by Central Bank of Malaysia or Bank Negara Malaysia (BNM): A proposed acquirer must first obtain approval in principle from BNM before it enters into any arrangement or agreement to acquire more than 5% of its shares in the insurer or its controller[2]. This approval process, which takes approximately 1 to 2 weeks, generally begins when the proposed acquirer intends to commence preliminary negotiations or conduct due diligence of a licensed insurer in Malaysia.[3]
  • Final approval by the MOF: The approval of the MOF is required before parties can finalize the sale and purchase agreement to acquire or dispose of any interest in shares or any interest, as the case may be, exceeding 5% of the shares of the licensed insurer or its controller[4].  After the draft sale and purchase agreement has been finalized between the parties but prior to signing the agreement, both the buyer and the seller are required to apply for the prior approval of the MOF via BNM.  BNM will submit the application together with its recommendation to the MOF, which in turn will approve or refuse the application[5].  This approval process would typically take 2 to 3 months from the submission of a complete application.[6]

In addition, an insurer licensed under the Insurance Act of 1996 of Malaysia must seek and obtain BNM’s written approval before appointing or reappointing a director or a CEO[7].  This approval process can take about 3 months. For the purpose of such appointment, a person must fulfill the regulatory requirements of a “fit and proper” person, where the person must, amongst others, (i) have educational qualifications and experience that will enable him to satisfactorily discharge his responsibilities; (ii) not be a bankrupt; (iii) have not been convicted for criminal offence involving fraud or dishonesty or under the relevant business laws punishable with imprisonment or fine; (iv) be available for full-time employment; (v) not carry on any other business or vocation; (vi) have personal qualities of honesty and integrity; and (vii) manage his debts or financial affairs prudently[9].  Failure to meet the aforesaid requirements could lead to BNM’s rejection of the appointment.[10]

[1]         “Controller” means, in relation to an institution, (a) a chief executive officer of the institution or of a body corporate of which the institution is a subsidiary; (b) a person who, either alone or with any associate, (i) has interest in one-third or more of its voting shares; (ii) has the power to appoint, or cause to be appointed, a majority of its directors; or (iii) has the power to decide or cause to be decided, in respect of its business or administration.

[2]        Circular JPI: 27/1998 dated 28 October 1998 on Acquisition or Disposal of Interest in Shares of an Insurer.

[3]         ING may have already applied for and obtained the approval in principle.

[4]       Circular JPI: 27/1998 dated 28 October 1998 on Acquisition or Disposal of Interest in Shares of an Insurer.

[5]         Section 67(3) of the Insurance Act of 1996.

[6]         Delays normally arise where the application is not complete or the Minister is not in Malaysia to consider the application and give his approval.

[7]         Section 70(1) of the Insurance Act of 1996.

[9]      Part 6 of the Guidelines on Fit and Proper for Key Responsible Persons [BNM/RH/GL 018 - 3], regulation 51 of the Insurance Regulations 1996, section 71 of the Insurance Act, 1996.

[10]       There have been cases where the appointment of CEOs or directors was rejected by BNM, such as where the person was a director of a corporation that has been wound up or where the fit and proper criteria were not satisfied.  The board and the nominating committee of an insurer are primarily responsible for ensuring that all key responsible persons fulfill the fit and proper requirements and for conducting assessments of the fitness and propriety of directors and the CEO.  BNM expects that the fit and proper assessments on each key responsible person is conducted both prior to initial appointments and at regular intervals of at least annually or whenever the nominating committee becomes aware of information that may materially compromise a key responsible person’s fitness and propriety.  When the person becomes disqualified after his appointment, he must immediately cease to hold office and the insurance company must immediately terminate his appointment and that person, notwithstanding any contract of service, must not be entitled to claim any compensation for his loss of office or termination of appointment.  Section 127 of the Companies Act of 1965 of Malaysia provides for the validity of the acts of a director or manager notwithstanding any defect that may afterwards be discovered in his appointment.  However, that section only applies where either those concerned in the appointment were not aware of the facts rendering the appointment invalid or they were honestly unaware that the legal consequence of those facts was to invalidate the appointment.

What is the meaning of “indebted” under the law?


The meaning and the scope of the word “indebted” used in s.9(1)(b) of the Companies Act, 1965 with particular reference to credit card, housing loan and HP facilities with companies which are related companies of audit client are as follows:

S.9(1)(b) of the Companies Act, 1965 states as follow:

(1)  A person shall not knowingly consent to be appointed, and shall not knowingly act, as auditor for any company and shall not prepare, for or on behalf of a company, any report required by this Act to be prepared by an approved company auditor –

(b)  if he is indebted to the company or to a corporation that is deemed to be related to that company by virtue of section 6 in an amount not exceeding two thousand five hundred ringgit.

Hereinafter, this provision will be referred to as “the said provision”.

According to The New Shorter Oxford English Dictionary, the word “indebted” carries the meaning “involve in debt”. Besides that, The New Shorter Oxford English Dictionary also stated that “indebted” would mean:

  • Under obligation to another on account of some liability incurred or claim unsatisfied; liable for some omission of duty, or in other word, “bound”.
  • Under obligation on account of money borrowed; owing money, in debt (to).
  • Under obligation for favours received; owing gratitude to (someone or something) for a benefit.

Stroud’s Judicial Dictionary of Words and Phrases (Sixth Edition) provides that “indebted” has a similar meaning to “due”, i.e. presently payable, as in Re Stockton Malleable Iron Company [Chancery Division] 2 Ch D 101, where the Court gave judgment that the word “due” meant due and payable, and the word “indebted” had a similar signification. In this case, it was said that “moneys due” may mean either owing or payable, and what it means is determined by the context.

In Words and Phrases Legally Defined (Third Edition), the word “indebted” is stated to have the same meaning as “owing”, and that the word “indebted” describes the condition of a person when there is a present debt, whether it be payable in present or future, and that the words “all debts owing or accruing” mean the same thing. They describe all debt in present, whether solvent in future, or solvent in present. Future possible debts are not included in this definition. This was adopted from Webb v Stenton and others [1881 – 1885] All ER 312.

In Webb v Stenton and others [1881 – 1885] All ER 312, the word “is indebted” and the words “debts owing or accruing” refer to the same subject matter. There must be an actual present debt, either equitable or legal. The requirements of the rules are satisfied by a present debt, whether payable now or in the future, and that the words include all such debts.

The meaning of a present debt, whether payable in the present or in the future would also require the Court to look into the present situation of their case at hand. In this case, since there was clearly no debt payable in the present from the trustees, hence it is in question whether there is going to be debt payable in the future. Fry LJ was of the opinion that in this case, trustees are not equitable debtors until they have money in hand which they are bound to pay over, or until they are made liable for breach of trust, or for default in the performance of their duties as trustees. Since they were under no liability to pay money now, there may be no question of debt in the future as well.


Therefore, in our present context, the words “if he is indebted to the company” would mean if there is an obligation on the auditor to pay debt that is already due, or debt that is presently owing and accruing to the company.

Debt that is not currently due is not included in the meaning of the word “indebted”. Hence, debt that is only going to be owing and accruing in the future would not be included in this context.

Thus, an auditor who is a credit card holder of companies which are related companies of audit clients would not fall within the meaning and scope of the word “indebted” used in the said provision unless there is a debt due and payable by the auditor to the company.

If an auditor has acquired housing loan from the company, and the loan is not yet accruing, then he is not prohibited to act as the auditor of the company.

Similarly, if an auditor is under an obligation to make payment to the company in the form of installments in HP facilities, it is not a prohibition to him to act as the company auditor as well, unless the payment is already due and accruing.

Beware of What You Agree Online


Most often than not, we couldn’t bother much about what we click or agree to via the internet web. Prior to obtaining more information or services  from a website, we are usually required to click on the web button “Agree” or in other words, we have to e-sign the contract or statement prepared by the online website owner. Hence, the issues of validity, enforceability and admissibility in court of such contract entered by way of e-signing are discussed here.

For instance, ABC Company is developing a pricing request system which will have the ability to generate Standard Sales Contract (“the Contract”). The system will send an email containing a link to the sales contract to the appropriate customer representative for the customer to ‘e-sign’. The customer representative will then click on the link to which he will see a screen which requires him to acknowledge that he is representing the customer company and is willing to make decision on the company’s behalf.

Once acknowledged, a second screen will appear which allows the customer to print a draft of the Company Sales Contract and then proceeds to a third screen where the customer is asked to indicate whether he agree to the terms and conditions of the Company Sales Contract. (i.e. click on ‘Agree’ or ‘Do Not Agree’). If the customer selects ‘Agree’, then the customer is deemed to have ‘e-signed’ the contract.

Under Malaysian law, all contracts entered in regardless of their method are governed by the Contracts Act 1950.  As for the said Contract, it may be admissible in Court under s90A of the Evidence Act 1950 which provides that any document or statement produced by a computer are admissible in court.

Based on the facts given, the issue that may arise is whether or not the customer representative who ‘esigns’ the said Contract has the authority to enter contract on behalf of the company.

The customer representative must be authorized to sign on behalf of the company. A Director who has been authorized by the company resolution can enter contracts on behalf of the company but as for agents, this would depend whether or not they have been given the authority to do so.

Agent and Principal

Section 135 Contracts Act 1950 provides that:-

135. An “agent” is a person employed to do any act for another or to represent another in dealing with third persons. The person for who, such act is done, or who is so represented, is called “principal”.

An employee of a company may also be an agent of the firm. In MMC Power Sdn Bhd & Anor v Abdul Fattah B Mogawan & Anor [2001] 1 MLJ 169, it was held on appeal that the Defendants were bound by the acts of their employee who was given authority to act on behalf of the company. Hence, based on the said case, the company will be bound by the acts of a customer representative who may also be an employee of the company.

But if the customer representative is not an authorized person to enter contracts on behalf of the company, then the said contract shall not bind the company even though the customer representative acknowledged that he has authority to do so.

In the event that an issue arises on the legal capacity of the customer representative, we may rely on the agency by estoppel rule or the Indoor Management Rule.

 Agency by Estoppel: Apparent and Ostensible Authority 

Agency by estoppel arises where one person acted as to lead another to believe that he has authorized a third person to act on his behalf, and that other such belief enters in transactions with the third person within the scope of such ostensible authority.

However, the agency by estoppel rule only applies when a company leads the third party to believe that an agent (i.e. customer representative) is acting on his behalf. In our case, the representation that the customer representative is acting on behalf of the company is done by the customer representative himself and hence the agency by estoppel rule doesn’t apply.

Indoor Management Rule (Turquand’s rule)

This rule, derived from the case of Royal British Bank v Turquand (1855) 5 E & B 248 applied in the Malaysian case of Standard Chartered Bank v Central Wood Tiles Sdn Bhd [1990] 2 MLJ 361, provides protection to persons dealing with a company in good faith. An outsider dealing with a company does not need to enquire into the regularity in the internal affairs and proceedings of the company, and may assume that all is being done regularly (see K Sivapragasam a/l Krishnar v Renominium Development Sdn Bhd & Ors [1998] 4 MLJ 535).

However, the Indoor Management Rule has its limit. Pennington’s Company Law (2nd Ed) at pp 137-138 expressed the rule in Turquand’s case and its limits, in the following terms:

The rule prescribed that if a person deals in good faith with the board of directors or other representative body of a company which is in fact exercising powers of management and direction of its business and affairs, that person is not affected by defects of procedure within the company or by its failure to fulfil conditions which are required by the company’s memorandum or articles to be      fulfilled before the act or transaction in question is effected

In another words, the rule is only limited to deals with the board of directors or other representative body of a company. If the customer representative is an individual low in the corporate hierarchy, we cannot take advantage of the rule in Turquand’s case (Mahfuz Bib Hashim v Koperasi Pekebun Kecil Daerah Segamat & Ors [2005] 3 MLJ 726).

Injunction – The Principles


In the event that you are considering to apply for an injunction restraining an individual or company from, among others, competing with your company or business, infringing your trademarks or copyrights, divulging confidential information or trade secrets belonging to your company, selling the shares of a company and dealing with the assets of that company including creating charges and so forth, it is instructive to refer to the principles of injunction as stated below:

The cases of American Cynamid v Ethicon and Keet Gerald Noel John v Mohd Noor have laid down the following principle in order for an injunction to be granted:-

a)      There must be a serious question to be tried

b)      Whether damages would be adequately compensated the Plaintiff

c)      On which side does the balance of convenience lie

d)     If all factors above are evenly balanced; should the status quo be maintained

The facts of a case at hand must be fitted into the above-stated requirements.

For instance, an injunction could be applied in a given scenario as follows:

a)      There is indeed a serious question to be tried whereby the parties are disputing over the actual consideration that should be paid for the sale of the companies and matters relevant to the transaction;

b)      If the Defendant continues to mismanage and run the companies in a manner which is detrimental to your company; and the Court subsequently is to order the Defendant’s companies to be returned to the Plaintiff- no amount of damages could make up for the loss suffered;

c)      Balance of convenience lies in favour of the Plaintiff as the sale of the companies would cause injustice to the Plaintiff; and

d)     Status quo of the Plaintiff is difficult to be maintained when no amount of damages are adequate for the purpose of reinstating the original position of the Plaintiff.

New Minimum Retirement Age of 60 Years Old in the Private Sector


With the coming into force of the Minimum Retirement Age Act, the retirement age for employees in the private sector will be increased from the existing age of 55 to 60 commencing from 1st July 2013. However, such minimum retirement age shall not have any implication on those contracts whereby the employees are granted the option to retire early at age 55.

Those employers who wish to be exempted from the implementation of the minimum retirement age for their workers must submit their application for exemption to the Ministry of Human Resource before or on 31 December 2013. Nonetheless, the employers must provide strong and valid reasons to support their application.