Christopher Lee & Co CLC Quarterly Quarterly Vol 4...specified by the Registrar. The name of an LLP shall end with the words “Perkongsian Liabiliti-Terhad” or the abbreviation

The Limited Liability Partnerships Act 2012 (“Act”) was published inthe Government gazette on 9 February 2012 and is expected to comeinto force later this year.

This article discusses the salient provisions of the Act, with an empha-sis on how these provisions differ from the legal framework governingconventional partnerships i.e. partnerships under the Partnership Act1961 (“PA 1961”), and the rules of equity and of common law appli-cable to conventional partnerships, where such differences exist. Inthis regard, the Act provides that the provisions of the PA 1961, andother partnership laws shall not be applicable to an LLP registeredunder the Act.

What is a limited liability partnership (“LLP”)?

An LLP is a body corporate having legal personality separate fromthat of its partners, with unlimited capacity. An LLP is capable of:

(a) suing and being sued;

(b) acquiring, owning, holding and developing or disposing ofproperty; and

(c) doing and suffering such other acts and things as bodies corpo-rate may lawfully do and suffer.

An LLP shall have perpetual succession; any change in the partners ofan LLP shall not affect the existence, rights or liabilities of the LLP.

The fundamental difference between an LLP and a conventional part-nership lies in the corporate persona of an LLP – a conventional part-nership does not exist separately from its partners, and the liabilities ofa conventional partnership are that of its partners. Conventional part-nerships therefore do not enjoy the advantages of an LLP which hasseparate legal personality.

The Limited Liability Partnership Act 2012

Christopher Lee & Co

Issue 4: June 2012

CLC Quarterly

Our people

David Dass

Christopher Lee

Fiona Sequerah

Jeyamala Ariaratnam

Kuok Yew Chen

David Ong Chan Tong

Sharmitha Visvalingam

Christopher Mar Sze Wei

Lee Kher Huan

Jenny Hong

Jeremy Tan

Edwin Lee Yong Cieh

Danny Foo Sek Han

Chor Jack

Cheryl Lim

Makram Ariffin

S. Nadarajah

Loo Siok Hua

Inside this issue:

The Limited LiabilityPartnership Act 2012

1

Injuncting a Call onan On-demand Per-formance Bond forUnconscionability

6

Commercial Agree-ments and Competi-tion Law

8

Mediation — The WayForward?

13

This newsletter is circulated to clients of the firm for their information, and addresses legal issues in a general manner. The views ex-pressed in this newsletter are not intended to constitute legal advice on any specific matter and should not be relied on as a substitute fordetailed legal advice.

Formation of LLPs

Any two or more persons (individuals and/orbodies corporate), associated for carrying onany lawful business with a view to profit mayform an LLP in accordance with the terms of anLLP agreement. This is not dissimilar to theposition under the PA 1961, where there mustbe an agreement between two or more personsto carry on business in common with a view toprofit.

Registration

A person may apply to the Registrar of LLPs(“Registrar”) for registration of an LLP andthe application shall be accompanied by theprescribed fee and such documents as may bespecified by the Registrar. The name of an LLPshall end with the words “Perkongsian Liabiliti-Terhad” or the abbreviation “PLT”. Upon beingsatisfied that the application has complied withthe requirements for registration under the Act,the Registrar shall register the LLP, allocate aregistration number for the LLP and issue anotice of registration.

The registration requirement marks another ofthe main distinctions between a conventionalpartnership and an LLP; in the case of the for-mer, formal registration is not a requirement forthe establishment of a partnership. So long asall the elements prescribed under the PA 1961are fulfilled, no registration requirement needsto be complied with, and a partnership can val-idly exist.

In addition, certain similarities with the featuresof a limited liability company also exist for anLLP. For instance, an LLP is required to have aregistered office in Malaysia to which all com-munications and notices may be addressed, andto keep at its registered office certain documen-tation including a register of the names andaddresses of each partner and a complianceofficer, a copy of the most recent annual decla-

ration and a copy of the LLP agreement. Allsuch documents shall be made available forinspection and copying during ordinary busi-ness hours at the request of a partner.

Interestingly, every LLP is also required tolodge with the Registrar a declaration madeannually by any two of the partners that, in theopinion of the two partners, the LLP appears, ordoes not appear, as the case may be, as at thatdate to be able to pay its debts as they becomedue in the normal course of business. Such dec-laration must be made within ninety (90) daysfrom the end of the financial year of the LLP,or, in the case of the first annual declaration,not later than eighteen (18) months from thedate of the registration of the LLP.

Professional Practices

For the purposes of carrying on a professionalpractice, an LLP may be formed, and the part-ners of the LLP shall:

(a) consist of natural persons who are prac-tising in the same professional practiceand no one else; and

(b) have in force professional indemnityinsurance cover for an amount of notless than the amount:

(i) approved by the Registrar; or

(ii) in the case where the professionalpractice is governed by a govern-ing body, approved by the Regis-trar after consultation with thegoverning body.

The professional practices allowed under theAct to be carried on by an LLP are confined topractices carried on by chartered accountants,advocates and solicitors and company secretar-ies.


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CLC Quarterly

“Formal registrationis not a requirementfor the establishment

of partnerships solong as all the

elements prescribedunder the Partnership

Act 1961 arefulfilled.”

Issue 4: June 2012

LLP Agreement

The Act specifically provides that the mutualrights and duties of the partners of an LLP, andthe mutual rights and duties of the LLP vis-a-vis its partners shall be governed:

(a) by an LLP agreement; and

(b) in the absence of agreement as to anymatter set out in the Second Schedule(Default Provisions for LLPs) of theAct, by any provision relating to thatmatter as set out in the Second Schedule.

The default provisions listed under the SecondSchedule concern mainly the management ofthe LLPs, for instance, the sharing of the capitaland profits of the LLP, the management of theLLP and the assignment of interests in the LLP.

The Act goes on to set out the fundamental ele-ments to be included in an LLP agreement. ThePA 1961, on the other hand, does not specifi-cally govern the contents of a partnershipagreement.

Compliance Officer

Another notable feature of the Act is the intro-duction of a compliance officer (“ComplianceOfficer”) from amongst the partners of an LLPor persons qualified to act as company secretar-ies under the Companies Act 1965, who mustbe a citizen or permanent resident of Malaysiaand who ordinarily resides in Malaysia. Therole of a Compliance Officer is akin to, alt-hough not entirely similar with, that of a com-pany secretary of a limited liability company. ACompliance Officer is accountable for all acts,matters and things done or required to be doneby the LLP under section 17 (Registration ofchanges in particulars), section 19 (Registersand documents to be kept at registered office)and section 20 (Publication of names), and ispersonally liable for all penalties including ad-ministrative penalties imposed on the LLP for

any contravention of those sections unless hesatisfies the court hearing the matter that heshould not be liable.

Power of Partner to Bind the LLP

Similar to conventional partnerships, everypartner of an LLP is the agent of the LLP. AnLLP, however, is not bound by anything doneby a partner in dealing with a person if:

(a) a partner is acting without authority; and

(b) the person with whom the partner isdealing knows that the partner has noauthority or does not know that he is apartner of the LLP.

For the purposes aforesaid, the Act interestinglystates that no person is deemed to have noticeof any lack of authority of a partner by reasononly that the notice is made available by theRegistrar for inspection, the underlying intentbeing that notice needs to be sufficiently giventhat a person has no authority to act on behalfof, or to bind the LLP.

Where a person has ceased to be a partner of anLLP, the former partner is to be regarded as stillbeing a partner of the LLP unless:

(a) the person dealing with the LLP knowsthat the former partner has ceased to be apartner of the LLP; or

(b) a notice that the former partner hasceased to be a partner of the LLP hasbeen lodged with the Registrar by theLLP or the former partner.

Limited Liability of Partners

Any obligation of an LLP whether arising incontract, tort or otherwise, is solely the obliga-tion of the LLP. A partner is not personallyliable, directly or indirectly, whether to indem-nify the LLP or contribute to its obligationssolely by reason of being a partner of the LLP.Nevertheless, the personal liability of a partnerin tort for his own wrongful act or omission is


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CLC Quarterly

“A limited liabilitypartnership is notbound by anything

done by a partner indealing with a personif the partner is actingwithout authority, andthe person knows that

the partner has noauthority or does not

know that he is apartner of the limitedliability partnership.”

Issue 4: June 2012

not affected, but a partner shall not be personal-ly liable for the wrongful act or omission of anyother partner of the LLP. An LLP is liable tothe same extent as a partner who has actedwrongfully or omitted to act in the course ofthe business of the LLP or with its authority.Any liability of the LLP shall be borne out ofthe property of the LLP.

This feature marks another cardinal differencebetween a conventional partnership and anLLP. The beauty of a conventional partnership,or what its naysayers would call its major draw-back, is that every partner in a firm is liablejointly with the other partners for all debts andobligations of the firm incurred while he was apartner; after his death his estate will becomeseverally liable in the due course of administra-tion for such debts and obligations, so far asthey remain unsatisfied but subject to the priorpayment of his personal debts. Hence, the factthat a partner in a firm is not prima facie liablefor all debts and obligations incurred by thefirm poses an attractive proposition to thoseintending to carry on business or a profession.

The Act introduces a claw-back mechanism fordistributions made to any partner prior to thewinding-up of an LLP. Notwithstanding any-thing under the Act, a partner or former partnerof an LLP who receives a distribution from theLLP shall be personally liable to the LLP forthe amount or value of the distribution if it wasreceived within a period of two (2) years beforethe commencement of the winding-up of theLLP if:

(a) the LLP was insolvent and the partnerknew or ought to have known at the timeof the distribution that the LLP was in-solvent; or

(b) the distribution results in the LLP be-coming insolvent and the partner knewor ought to have known at the time ofdistribution that the LLP would become

insolvent as a result of the distribution.

In this regard, the benchmark of ‘insolvency’ iswhen the LLP is unable to pay its debts as theybecome due in the normal course of business.Additionally, a partner or former partner shallbe deemed to have received a distribution if thedistribution is received by that partner or for-mer partner’s assignee or nominee.

Cessation of Partnership

Under the Act, a partner of an LLP may ceaseto be a partner either in accordance with theLLP agreement, or, in the absence of suchagreement, by that partner giving thirty (30)days’ notice to the other partners of that part-ner’s intention to resign as a partner.

Where a partner of an LLP ceases to be a part-ner, unless otherwise provided in the LLPagreement, such partner shall be entitled to re-ceive from the LLP an amount:

(a) equal to the former partner’s capital con-tribution to the LLP and that formerpartner’s right to share in the accumulat-ed profits of the LLP after the deductionof losses of the LLP; and

(b) determined as at the date the formerpartner ceased to be a partner.

In the event a partner ceases to be a partner,such partner shall cease involvement in themanagement of the LLP.

In addition, an automatic cessation happensupon death, dissolution (in the case of a corpo-rate partner) or, in the case of the professionsallowed to form LLPs under the Act, upon thepartner’s disqualification from professionalpractice.

If a partner of an LLP is adjudicated a bankrupt,his bankruptcy will not by itself cause him tocease being a partner of the LLP, but the Direc-tor General of Insolvency (“DGI”) or trustee ofthe estate of the bankrupt partner shall be enti-


Page 4

CLC Quarterly

“The beauty of aconventional

partnership is thatevery partner in a

firm is liable jointlywith the other

partners for all debtsand obligations of thefirm incurred while hewas a partner; afterhis death his estate

will become severallyliable...for such debtsand obligations…”

Issue 4: June 2012

tled to receive distributions from the LLPwhich the bankrupt partner is entitled to receiveunder the LLP agreement. The Act prohibits thebankrupt partner, the DGI or trustee of the es-tate of the bankrupt partner from interfering inthe management of the LLP.

Conversion to LLPs

To further encourage the use of LLPs, the Actprovides for the possibility of existing conven-tional partnerships and private limited liabilitycompanies converting to LLPs in view of theinteresting features of LLPs. Subject to certainconditions being met, conventional partnershipsand private companies are allowed under theAct to convert to LLPs if and only if all thepartners of the conventional partnership or allshareholders of the private company form thepartners of the new LLP.

On and from the date of registration of conver-sion, all assets, liabilities and obligations willbe transferred to, and vest in, the newly formedLLP without further assurance, act or deed. TheLLP will substitute the conventional partner-ship or private companies in all existing agree-ments, whether or not the rights and liabilitiesunder these agreements can be assigned, asthough the LLP were a party to such an agree-ment. All existing deeds, contracts, schemes,bonds, applications, instruments and arrange-ments shall continue in force on and from thedate of registration as if they relate to the LLP,and are enforceable by or against the LLP as ifit were a named party. In the same vein, everycontract of employment, appointment, pendingproceedings, conviction, ruling, order or judg-ment binding upon a conventional partnershipor a private company is treated similarly underthe Act, with the exception of licences and per-mits issued. The conventional partnership will,with effect from the date of registration of con-version, be deemed dissolved, and if registeredunder the Registration of Businesses Act 1956,will be removed therefrom, as will the private

company be deemed dissolved and accordingly,removed from the register of companies main-tained with the Companies Commission.

Consistent with the aforesaid, the Act requiresevery partner of a conventional partnership thathas converted to an LLP to continue to be per-sonally liable, jointly and severally with theLLP, for all liabilities and obligations of theconventional partnership incurred prior to theconversion or which arose from any contractentered into prior to the conversion.

Conclusion

The introduction of an LLP offers a welcomealternative to the existing structures available tolawyers, accountants and company secretarieswhen carrying on their respective businesses inMalaysia. Whilst an LLP shares certain featuresof a conventional partnership, its strength liesin a more palatable apportionment of businessliability compared with that of a conventionalpartnership. Coupled with that, the process ofregistration of an LLP is not unduly cumber-some for business owners, whilst the possibilityof converting an existing private company orconventional partnership into an LLP withoutdisrupting the current business arrangementsmakes the LLP an irresistible proposition.

Is an LLP something you would consider?

Lee Kher HuanAssociate


Page 5

CLC Quarterly

“...conventionalpartnerships and

private companies areallowed...to convert to

limited liabilitypartnerships if and

only if all the partnersof the conventionalpartnership or all

shareholders of theprivate company form

the partners of thenew limited liability

partnership.”

Issue 4: June 2012

Injuncting a Call on an On-demand PerformanceBond for Unconscionability

Page 6

CLC Quarterly Issue 4: June 2012

Previously, the courts in considering interlocutory injunctions in relation to a call on an on-demandbond, had usually restricted intervention in the mechanism of on-demand bonds on the grounds offraud only.

However, the Court of Appeal in Kejuruteraan Bintai Kindenko Sdn Bhd v Nam Fatt ConstructionSdn Bhd & Anor [2011] 7 CLJ 422, Court of Appeal (“Kejuruteraan Bintai”), and recently theFederal Court in Sumatec Engineering and Construction Sdn Bhd v Malaysian Refining CompanySdn Bhd [2012] 3 CLJ 401, Federal Court (“Sumatec Engineering”), have confirmed that fraud isno longer the sole ground for granting injunctive relief; unconscionability is also a separate anddistinct ground on which one may obtain an injunction to restrain a beneficiary from making a callon an on-demand performance bond.

The Federal Court in Sumatec Engineering agreed wholly with the principles enunciated by theCourt of Appeal in Kejuruteraan Bintai, with respect to unconscionability.

Kejuruteraan Bintai

Kejuruteraan Bintai gave on-demand performance bonds to Nam Fatt Construction Sdn Bhd. asrequired by the terms of its sub-contract. Disputes arose. Nam Fatt called on the performance bondsafter Bintai Kindenko applied to injunct the call on the bonds.

The application for the injunction was disallowed by the High Court, being constrained by existingprecedent that the court should only intervene in the case of fraud. Bintai Kindenko appealed.

In its application, Bintai Kindenko contended that demanding for the sums guaranteed was uncon-scionable for the following reasons:

(a) Nam Fatt had failed to pursue all the sums owing to Bintai Kindenko by reason of its claimsunder the contract;

(b) Nam Fatt and the employer had sought to engineer a situation to avoid making payments toBintai Kindenko;

(c) the employer’s granting of a Certificate of Practical Completion (CPC) demonstrated that ithad satisfactorily performed its obligations; and

(d) the demand could only be made, as per the contract, if the employer certified that Bintai Kin-denko was in default, and this had not been done.

Nam Fatt denied all allegations and contended that:

(a) Bintai Kindenko was in breach of its obligations; and

(b) fraud, not unconscionability, was the only exception that could effectively stop payment ondemand under an on-demand performance bond.

The Court of Appeal ruled that unconscionability is a ground to injunct the beneficiary from receiv-ing payment based on the balance of convenience test and application of a standard of proof forunconscionability that the plaintiff must have a “seriously arguable case that the only realistic in-ference is the existence of fraud or unconscionability …a strong prima facie case … but not neces-

“Fraud is no longerthe sole ground forgranting injunctive

relief;unconscionability isalso a separate anddistinct ground on

which one may obtainan injunction to

restrain a beneficiaryfrom making a call on

an on-demandperformance bond.”

Injuncting a Call on an On-demand PerformanceBond for Unconscionability

Page 7

CLC Quarterly Issue 4: June 2012

sarily beyond reasonable doubt … ground should only be allowed with circumspect where events orconduct are of such degree such as to prick the conscience of a reasonable and sensible man.”

The Court, recognizing that it was impossible to define unconscionability, suggested that it could bea lack of bona fides or where there is unfairness in the case or some form of bad faith. Here itseemed that the reasons for unconscionability were: the unfulfilled pre-requisite employer’s certifi-cation which was a criteria to activate the call on the bond; Nam Fatt, upon the bond’s renewal, asper the parties’ accord, was supposed to withdraw its demands but instead, Nam Fatt had issuedfurther demands; Nam Fatt was alleged to owe Bintai Kindenko a significant sum which meant thatif Nam Fatt called on the bond, it would owe even more to Bintai Kindenko.

Summary of the effect of the Court of Appeal decision

A failure to follow the underlying contract terms may be judged unconscionable when demandingpayments under a bond and may result in the courts intervening in the mechanism of on-demandbonds. If a beneficiary owes substantial monies to the party obliged to deliver the bond under theunderlying contract, it may be unconscionable for the beneficiary to demand payment under thebond.

The beneficiary should therefore, to comply with the underlying contract, prior to making a call onany on-demand performance bonds and as far as possible, provide for interim certifications to re-flect an approximately true accounting position with respect to all valid claims. A reasonable papertrail of breaches and sums owing, would aid in countering allegations of unconscionability.

Conclusion

Payment under a performance bond is meant to defray the cost of employing another party to com-plete the works, offset cost increases, provide the required margin for a new party to accept respon-sibility and take over the previous works and finish the incomplete works to make it whole, andother associated delay costs. Yet a bond can sometimes be an oppressive instrument which a benefi-ciary can sometimes abuse with wrongful calls.

But equally, if damages may be recovered for a wrongful call on the bond, then perhaps an injunc-tion ought not to be granted. It will support the fundamental concept that the parties know the risksassociated in entering the underlying contract with the counterparty and should accordingly bearthat risk which it would have factored into its pricing.

Dr. S. NadarajahAssociate

“The beneficiaryshould, prior to

making a call on anyon-demand

performance bondsand as far as possible,

provide for interimcertifications to

reflect anapproximately trueaccounting positionwith respect to all

valid claims.”

Introduction

The Competition Act 2010 (“Act”) came intoforce on 1 January 2012. The Act has a signifi-cant impact on how businesses should carry outtheir daily activities so as not to infringe thevarious anti-competition prohibitions under theAct. These anti-competition issues may arisefrom the day-to-day dealings with competitors,joint venture partners, manufacturers, wholesal-ers, suppliers, retailers, agents as well as cus-tomers, and will likely come under the scrutinyof competition authorities.

The Act applies to any commercial activity byany enterprise (including Government-linkedcompanies) within and outside Malaysia whichaffects competition in any market in Malaysia;save for those sectors exempted by the Act inSchedule 1 (namely the industries under thepurview of the Communications and Multime-dia Act 1998 and Energy Commission Act2001, which have competition provisions). Theregulator of the Act is the Malaysian Competi-tion Commission (“MyCC”)1. In addition to theAct, the MyCC has also set out a non-exhaustive list of factors and circumstances thatthe MyCC may consider in deciding whether anagreement is anti-competitive in the“Guidelines on Chapter 1 Prohibi-tion” (“GC1P”).

This article considers some of the basic princi-ples for assessing commercial agreements in thelight of the Act. Chapter 1 of the Act, whichprohibits anti-competitive agreements, is partic-ularly important and needs to be considered inrelation to all commercial agreements as towhether the agreements involve vertical rela-tionships between enterprises operating at thedifferent levels of the production or distributionchain (“Vertical Agreements”)2, which nor-mally means between buyers and sellers at dif-ferent stages of the production or distributionchain; or horizontal relationships between en-

terprises operating at the same levels of theproduction or distribution chain (“HorizontalAgreements”)3 which normally means they arecompetitors in the same market.

Anti-Competitive Agreements

Section 4 of the Act prohibits Horizontal andVertical Agreements between enterprises wherean agreement has the object or effect of signifi-cantly preventing, restricting or distorting com-petition in any market for goods or services.

In order to understand the scope of Section 4, itis important to first understand each elementunder Section 4.

“Agreement”

Agreements for the purposes of the Act includeany form of contract, arrangement or under-standing between enterprises, including the so-called “gentlemen’s agreements”, whether le-gally enforceable or not, and include decisionsby associations (such as trade and industry as-sociations) and concerted practices. The term“agreement” is very wide and includes bothwritten and oral agreements. For example, anyform of communication about price betweencompetitors might constitute “an agreement”.An “agreement” may also be found where com-petitors attend a business lunch or meeting andanti-competitive matters are discussed and(passively) agreed among the attendees.4

“Enterprises”

Enterprises mean any entity carrying on eco-nomic or commercial activities relating togoods or services. For the purposes of the Act,the MyCC will look at whether two or moreenterprises form a single economic unit. Forinstance, if a subsidiary company does not en-joy real autonomy in determining its actions onthe market, then the subsidiary company to-gether with its parent company will be regardedas a single enterprise.5 This differs from thetraditional concept of companies under compa-

Commercial Agreements and Competition Law

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CLC Quarterly

“The Act applies toany commercialactivity by any

enterprise...withinand outside Malaysia

which affectscompetition in any

market inMalaysia...”

Issue 4: June 2012

ny law, where each company is considered as aseparate legal entity.

“Market”

Market means a market in Malaysia or in anypart of Malaysia. For competition law purposes,market definition is about identifying all thesuppliers of products (or services) that competewith the product (or service) under investiga-tion. This means identifying those products thatconsumers see as substitutes (i.e. consumerswould switch to) if the price of the product (orservice) under investigation goes up by 5-10%above the competitive price.6

“Object”

Section 4(2) of the Act states that HorizontalAgreements which have the object of price-fixing, market sharing, limiting or controllingproduction, market outlets or market access,technical or technological development, invest-ment, and bid rigging are deemed to have theobject of significantly preventing, restricting, ordistorting competition in any market for goodsor services.

The MyCC will examine the actual commonintentions of the parties to an agreement andalso the aims pursued by the agreement in thelight of the agreement’s economic context. Ifthe “object” of an agreement is highly likely tohave a significant anti-competitive effect, thenthe MyCC may find the agreement to have ananti-competitive “object”.7

The significance of this is that once an anti-competitive “object” is discovered, the MyCCdoes not have to examine or prove that the Hor-izontal Agreement will have an anti-competitive “effect” on the market; the mereexistence of the object is sufficient to establishliability.8 The European Court of Justice in theSTM case9 has also held that the words “object”and “effect” should be read disjunctively.

“Effect”

However, where an agreement (whether a Hori-zontal or Vertical Agreement) does not have ananti-competitive “object”, the MyCC may con-tinue to examine the agreement to see if it hasan anti-competitive “effect”.10 In consideringthe effect of an agreement, it is important toanalyse the effect of the agreement on the exist-ing market in its economic context.11 The Euro-pean Courts are also increasingly willing toaccept agreements that contain restrictive claus-es provided that the clauses are pro-competitivewhen considered in their context i.e. whetherthey are “necessary” for the agreement to be ofcommercial value.12 It remains to be seenwhether the European approach will be fol-lowed and adopted by the MyCC.

In the absence of an anti-competitive object oreffect, the agreement will fall outside Section 4of the Act.

Types of agreements set out in GC1P

The MyCC has set out a non-exhaustive list ofthe types of agreements that may potentially beanti-competitive. Horizontal Agreements thatfacilitate information (price or non-price) shar-ing, that restrict advertising and standardiseagreements to set new standards or to sell newproducts, or that serve as a barrier to new en-trants to the market will be investigated.13

Vertical Agreements involving price re-strictions such as setting minimum resale pricemaintenance, maximum price or recommendedretail price which serve as a focal point fordownstream collusion, may be anti-competitive, and the MyCC has made it clearthat it will take a strong stance against thesetypes of anti-competitive agreements.14 As such,setting a floor price would likely be anti-competitive whilst a ceiling price would not be,unless it serves as a focal point for downstreamcollusion. Other non-price Vertical Agreementssuch as tying and bundling agreements that


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CLC Quarterly

Section 4 of the Actprohibits Horizontal

and VerticalAgreement which hasthe object or effect of

preventingcompetition.

Issue 4: June 2012

require a buyer to buy all or most of its suppliesfrom the seller, exclusive distribution agree-ments covering a geographic territory, exclu-sive customer allocation agreements as well asup-front access payments conditions may giverise to anti-competition concerns.15

Saving the Agreement

As mentioned above, Horizontal Agreementswhich are found to have an anti-competitive“object” under Section 4(2) of the Act are abso-lutely prohibited under the Act. For other typesof agreements, if, after having examined theagreement, it is found to be anti-competitive, itis still possible that the agreement may be“saved” by the following methods:

(a) by establishing that the agreement doesnot significantly prevent, restrict or dis-tort competition; This approach isknown as the “safe harbour” approach.An agreement will not be considered“significant” if:

(i) the parties to the agreements arecompetitors (Horizontal Agree-ments) who are in the same mar-ket and their combined marketshare does not exceed 20%; or

(ii) the parties to the agreement arenot competitors (Vertical Agree-ments) and the market share heldby each of the parties individual-ly does not exceed 25%.

As can be seen from the safe harbourspermitted by the MyCC, the thresholdsfor Vertical Agreements are much higherand more generous than those for Hori-zontal Agreements as the MyCC viewsVertical Agreements as less harmful tocompetition generally. The MyCC rec-ognises that while competitors in Hori-zontal Agreements compete with eachother, enterprises in Vertical Agreements

usually have a joint interest in ensuringthe final product or service is competi-tive and might be beneficial to the endconsumers.16 However, it should be not-ed that as the market share of the partiesmay increase over time, it is prudent thatparties should always keep an eye on themarket share to ensure that the relevantmarket share(s) does not exceed what isprohibited under the Act;

(b) by establishing that the agreement isentitled to the relief of liability underSection 5 of the Act.

In order to rely on this relief of liability,four conditions under Section 5 must becumulatively satisfied, namely:

(i) there must be significant identifi-able technological, efficiency orsocial benefits directly arisingfrom the agreement;

(ii) the benefits could not reasonablyhave been provided by the partiesto the agreement without theagreement having the effect ofpreventing, restricting or dis-torting competition;

(iii) the detrimental effect of theagreement on competition is pro-portionate to the benefits provid-ed; and

(iv) the agreement does not allow theenterprise concerned to eliminatecompetition completely in respectof a substantial part of the goodsor services.

The burden lies on the parties to theagreement to prove that the benefitsgained are passed on to their consumers.The parties may rely on Section 5 toobtain an individual exemption. It can bealso used as a defence if they are investi-


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CLC Quarterly

“Even if anagreement is found tobe anti-competitive, it

is still possible thatthe agreement may be

‘saved’...”

Issue 4: June 2012

gated by the MyCC, or in a civil suitbrought by a member of the public;

(c) by establishing whether the agreementmight be eligible for exemption under anindividual exemption;.

If all the conditions under Section 5 aresatisfied, the parties may apply to theMyCC for an individual exemption un-der Section 6 of the Act. The individualexemption granted by the MyCC may besubject to conditions, obligations and/orfor a limited duration. The exemption,once granted, is not permanent. TheMyCC has the power to cancel, vary,remove or impose additional conditionsor obligations to the exemption if therehas been a material change of circum-stances’ a condition or obligation hasbeen breached or information submittedby the applicants for the exemption isfalse or misleading in a material particu-lar; and

(d) by establishing whether the agreementmight be eligible for exemption under ablock exemption.

The MyCC may, on an application bythe parties, grant a block exemption un-der Section 8 of the Act to a particularcategory of agreements. An agreementwhich falls within a category of agree-ments specified in a block exemption isexempt from the prohibition under Sec-tion 4. Block exemption recognises thefact that certain agreements, althoughtechnically prohibited under Section 4,should be exempted as the pro-competitive effects of the agreementsoutweigh their anti-competitive effects.

As at the time of writing, we are notaware of any individual or block exemp-tions having been granted by the MyCC.According to the media statement issued

by the MyCC on 22 May 2012,17 Malay-sia Ship Owners Association, ShippingAssociation of Malaysia, Federation ofMalaysian Port Operators Council, As-sociation of Malaysian Hauliers and LifeInsurance of Malaysia have submittedapplications for block exemptions,whilst Nestle Products Sdn Bhd is thesole applicant for an individual exemp-tion. A fee of RM50,000 will be im-posed on each application for an exemp-tion. An annual fee of RM10,000 forindividual exemptions, and RM20,000for block exemptions, will also be lev-ied;18 and

(e) unlike the position under the EU and UKcompetition laws, agreements that arefound to have infringed the Act are notautomatically void. As such, the partiesmay consider amending their agree-ments by entering into supplementalagreements to amend or delete the claus-es which may be deemed or construed asanti-competitive. The benefit of doingthis is that, once the invalid clauses areamended or deleted, the remainder of theagreement is still enforceable.

Consequences of Infringement

Enterprises which are found to have infringedthe Act may be ordered to stop the infringementimmediately, take steps to bring the infringe-ment to an end and are liable to a fine of up to10% of their worldwide turnover for the periodduring which the infringement occurred.19 Theenterprise may also be required to change itsbusiness practices in a manner materially ad-verse to its present business model. Directors,CEOs, COOs and managers may also be sever-ally and jointly liable to pay hefty fines andsubject to imprisonment.20 Any private individ-ual who has suffered loss or damage as result ofthe infringement may also bring a private actionagainst the enterprise.21 A private action could


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CLC Quarterly

The fine can be up to10% of an

enterprise’sworldwide turnoverfor the period during

which theinfringement

occurred.

Issue 4: June 2012

potentially result in an award of damages thatfar exceeds the amount of the fine imposed bythe MyCC. It should also be noted that, a pri-vate action can be taken even if the MyCC doesnot investigate or prosecute the enterprise, or ifthe MyCC finds in favour of the enterprise afterits investigations. Aside from these potentialsanctions, a breach of the Act will also result inadditional consequences for the business as itwill take up a huge amount of management andstaff time in assisting with the investigationwhich could take years to complete. It will alsoattract negative publicity for the enterprise anddamage the enterprise’s image and brand.

Conclusion

Malaysia has come a long way to finally passand implement the Act after a delay of morethan a decade. The Act has commercially far-reaching implications in the event of non-compliance, and enterprises should bear inmind that it is no longer “business as usual” inMalaysia. Companies must, therefore, ensurethat the commercial agreements they enter into(and those which they had previously contract-ed and remain bound by) do not have any pro-visions which infringe the Act, In this regard,companies should not only review the terms oftheir contracts but also ensure that all employ-ees are cognizant of the terms of the Act andthat they do not engage in any anti-competitivebehaviour. The magnitude and consequences ofinfringing the Act, as highlighted above, arejust too huge for any enterprises to simply ig-nore or disregard the Act.

Edwin Lee Yong CiehAssociate1 The website of the MyCC is http://www.mycc.gov.my/

2 Section 2 of the Act


4 Paragraphs 2.1-2.2 of the GC1P

5 Paragraph 2.6 of the GC1P

6 Paragraph 2.8 of the GC1P. Note that MyCC has alsoissued a Guideline on Market Definition, which sets out theway the MyCC will define a market.



9 Case 56/65 STM v Maschinenbau Ulm [1966] ECR 235;[1966] CMLR 357


11 Case 23/67 Brasserie de Haecht v Wilkin [1967] ECR407; [1968] CMLR 26

12 This concept is now known as “ancillary restraint”, firstdeveloped in Case 42/84 Remia and Nutrocia v Commis-sion [1985] ECR 2545; [1987] 1 CMLR 1





17 http://www.mycc.gov.my/259_200_200/Web/WebEvent/News/News.html

18 The Star, 26 April 2012, http://biz.thestar.com.my/news/story.asp?file=/2012/4/26/business/11176730&sec=business





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“Enterprises shouldbear in mind that it isno longer ‘business asusual’ in Malaysia.”

Issue 4: June 2012

Introduction

Traditionally, disputes were resolved in an adversarial process by way of litigation or arbitration.Such processes are expensive, time consuming and parties have little, if any, say over the procedure,and the outcome of the litigation or arbitration proceedings generally favour one party, as the winnerof the case. The losing party, and sometimes even the successful party, is left feeling short changedby the processes and outcome of the case. To encourage settlement of disputes in a manner whereboth parties emerge reasonably satisfied with the outcome, modes of alternative dispute resolution,such as mediation or conciliation evolved and have become increasingly popular in recent years.

Mediation is a voluntary process and will only take place if parties agree to submit their dispute tomediation. Parties may adopt mediation or conciliation by inviting an independent and impartial per-son to assist them in their negotiations to reach an amicable settlement of their dispute. A mediatorin mediation is only obliged to facilitate the possibility of settlement and does not make a ruling orfinding unless expressly requested by all parties involved. With appropriate guidance and facilitationfrom a qualified mediator, disputing parties increase their chances of achieving a commercially via-ble solution without hostility whilst preserving the commercial relationship between the parties, thusminimising the acrimony and bitter falling out so often associated with litigation and arbitration pro-ceedings.

Historical Development of Mediation in Malaysia

Mediation is not unfamiliar to Malaysia.

To facilitate mediation in the banking and insurance industries, the Financial Mediation Bureau wasset up by Bank Negara Malaysia in 2005 to handle disputes between financial services providers andtheir customers. Mediation is also the mode of dispute resolution which is used by the Housing Buy-ers’ Tribunal and the Tribunal for Consumer Claims, respectively, in Malaysia. Further, the princi-ples of mediation have always been applied in the Syariah Court as part of the process of sulh.

With the objective of promoting mediation and providing a proper avenue for successful mediation,the Malaysian Mediation Centre (“MMC”) was established by the Malaysian Bar Council in 1999 todeal with mediation for commercial, civil and matrimonial disputes at any stage of legal proceed-ings. In addition to providing a venue for mediation, upon application to the MMC, a mediation kitcontaining the mediation agreement, mediation rules, mediator’s code of conduct, draft settlementagreement and a list of mediators, will also be provided.

In 2011, the KLRCA revised its Mediation / Conciliation Rules (which incorporates the provisionsof the UNCITRAL Conciliation Rules 1980), with the intention of facilitating domestic and interna-tional mediations / conciliations in Malaysia. The KLRCA also provides a full range of administra-tive and support services as well as makes available facilities for mediation at their premises.

Another avenue for mediation was initiated by the former Chief Justice of Malaysia, Tun Zaki TunAzmi, through Practice Direction No. 5 of 2010, who directed that judicial officers may, subject toparties’ agreement to mediate, refer the dispute before them for mediation at the pre-trial case man-agement stage, as a result of which, the Kuala Lumpur Court Mediation Centre was established inthe court building itself. Parties may either refer their disputes to mediation either by way of judge-

Mediation — The Way Forward?

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“...disputing partiesincrease their

chances of achievinga commercially viable

solution withouthostility whilstpreserving the

commercialrelationship between

the parties…”

Issue 4: June 2012

led mediation or mediation by a mediator who is empanelled on the MMC, appointed by agreementof both parties. It is heartening to note that Court annexed mediation is held at no cost to the disput-ing parties unless the parties resolve to appoint a trained mediator.

Following the foregoing efforts to promote mediation as a proper avenue to resolve disputes, Parlia-ment finally, on 7 May 2012, passed the Mediation Act 2012 (“Act”), aimed at promoting and en-couraging mediation as a method of alternative dispute resolution by providing a definitive processfor mediation.

The Mediation Act 2012

The Act covers mediation of disputes involving private persons, entities, the Federal or State gov-ernments but does not extend its application to mediation conducted by courts pursuant to any civilaction that has been filed, mediation conducted by the Legal Aid Department and such other mat-ters expressly excluded in its schedule.

Notwithstanding its application, the Act preserves the voluntary process of mediation and partiesare not obliged to proceed to mediation before litigation or arbitration nor does the commencementof mediation prevent the simultaneous commencement of any civil action in court or arbitration. Ina situation where proceedings have already been commenced, mediation does not act as a stay of, orextension of proceedings.

Whilst the Act is largely procedural in its provisions, it provides a significant boost for mediation inaddressing one of the primary concerns of litigants and lawyers in a mediation process i.e. the fearthat anything said, done or disclosed during mediation may be used against them in the on-going orsubsequent trial proceedings should mediation fail. The Act expressly guarantees the confidentialityof a mediation process and accords privilege to mediation communication i.e. everything discussedand any document prepared in the course of mediation cannot be used by any party outside of themediation process, or in any portion of a litigation or trial (in line with the English court decision inAird & Anor v. Prime Meridian Ltd [2006] EWCA 1866). Further, although a mediation process isprivately conducted, the Act allows third parties of the parties’ choice or of the mediator’s choice toparticipate in the mediation to assist the parties or mediator respectively. In relation to this, the thirdparties may include the legal counsel of each party, experts in the subject matter of the dispute andwitnesses, all of whom are bound by the obligations of confidentiality.

Despite the fact that the advocates of mediation may sniff in disdain at the Mediation Act for thelargely, procedural nature of its provisions and its failure to integrate mediation into the court pro-cess or mandate it as the first step towards dispute resolution, by gazetting the Act, Parliament hasinitiated a very critical first step – that of extending due recognition to mediation as an equally mer-itorious alternative mode of dispute resolution, with the likes of arbitration and conciliation and byaccording privilege to mediation communication.


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CLC Quarterly

“...by gazetting theAct, Parliament has

initiated a verycritical first step –

that of extending duerecognition to

mediation as anequally meritoriousalternative mode of

dispute resolution…”

Issue 4: June 2012

Conclusion

At the heart of the traditional concept of mediation lies the concept of voluntary negotiation to seekcommon ground for settlement. Any settlement agreement by the parties upon the conclusion of amediation process may be recorded as a consent judgment in court where proceedings have beencommenced. One may say that a settlement reached at a mediation would usually result in a win-win situation rather than the win-lose outcome typical of a contested court case.

To allow parties the best opportunity to avail themselves and to succeed with mediation, the frame-work for amicable dispute resolution offered by mediation should be encouraged from the veryoutset of contractual negotiations with contracting parties being encouraged to include a mediationclause in their contracts to ensure that parties are obligated to first submit to mediation, any disputethat arises prior to their pursuing remedies through arbitration or litigation. Parties have nothing tolose, and much to gain, by committing to mediation even as they enter into the contract.

Christopher Mar / Makram AriffinAssociates


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CLC Quarterly

“Parties have nothingto lose, and much togain, by committingto mediation even as

they enter into thecontract.”

Issue 4: June 2012

Christopher Lee & Co is a Malaysian law firm with lawyers that have significant commercial and corporate legalexperience across various fields of specialization. Through our experience and legal expertise, we aim to resolve thelegal needs of our clients, no matter the size or industry, locally and internationally, with the sophistication requiredin the ever-evolving legal environment.

We firmly believe in putting “you” first, and in reducing your legal costs by providing practical legal advice tailoredto your needs.

Our vision is to be a leading Malaysian corporate and commercial law firm that delivers unconventional solutionsand strategies that ultimately initiates new practices in the Malaysian legal marketplace.

Christopher Lee & Co

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