syariah courts.pdf

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Legal HeraldMAY 2015

1. The Syariah Court: Its Position Under the Malaysian Legal System 11. Wavering on Waivers 18. GST Rules or Ruins?From a Ship Financier’s Perspective 24. The ‘Law’ on Trade Secrets 28. Partner Profile 29. Senior Associate Profiles

in this issue

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The Syariah Court: Its Position Under theMalaysian Legal System

|by Rosli Dahlan and Fawza Sabila Faudzi|

It has been said that Islamic law and the civil law exist as parallel systems in Malaysia.The proposition, while attractive, is grossly inaccurate in law. As it stands today, theadministration of Islamic law is conned to personal law for Muslims and the Syariah court

is subordinate to the courts established by the Federal Constitution and under federal law,

as this article will show.

The Syariah court has in recent years become a prominent subject in public discussion,

not least of all with the constitutional provision that “Islam is the religion of the Federation”. 1

It is vital that the history of how religion came to be inserted in the Federal Constitution

be rst examined, objectively and dispassionately, given that the subject is fraught with

difculty.

Federation of Malaya

The Federal Constitution has its roots in the Federation of Malaya Agreement 1948

(“the FMA 1948”) which established a federation known as the Federation of Malaya

or Persekutuan Tanah Melayu comprising the nine Malay states2 and the Settlements3

1 Article 3, Federal Constitution

2 The Federated Malay States of Selangor, Pahang, Perak and Negeri Sembilan and the States of Perlis,Kedah, Kelantan, Terengganu and Johor 3 Previously part of the Straits Settlements


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Lega l Hera ld . MAY 20152

of Penang and Malacca.4 It was envisaged that the

Federation, while remaining under British rule for the time

being, would progress towards eventual self-government.5

Historically, British rule in the Malay States eschewed

interference with the powers of the Malay Rulers on

matters relating to Islam and Malay customs. This position

was maintained in the FMA 1948,6 with a proviso that

federal legislation could be made for enabling the courts

to ascertain Islamic law or Malay customs concerning

matters brought before them for adjudication.7

As for legislation, each Malay State had the power to

pass laws on Islam and Malay customs to the extent not

repugnant to any law passed by the legislative council

of the Federation.8 This distribution of legislative powers

between the Federation and the Malay States remains

unchanged to this day. Islam as the religion of the

Federation was to come later.

The Reid Commission

In 1956, as one of the nal steps taken in the direction

of self-government for the Federation, an independent

commission headed by Lord Reid9 was appointed by

the British Crown and the Conference of Rulers to make

recommendations for a constitution for an independent

Federation of Malaya.

The draft constitution and the report submitted by the

Reid Commission was passed with amendments and

approved by the Federal Legislative Council in July 1957.

In the course of the deliberations of the Reid Commission,

the then-dominant political party called the Alliance

submitted a proposal that Islam be made the ofcial

religion.10

The Reid Commission decided to not make any provision

for an ofcial religion, preferring to maintain the status

quo by retaining religion as a State matter 11 as they were

concerned over the apparent contradiction between the

Alliance declaration that Malaya would be a secular state

and the proposed provision for Islam to be the ofcial

religion of the Federation.12

This omission led to the formation of a Working Party

comprising representatives of the British Government,

the Malay Rulers and the Alliance coalition to review the

Reid Report.13 Tunku Abdul Rahman argued strongly

for an article declaring Islam as the ofcial religion of

the Federation.14 The component parties in the Alliance

agreed that the proposed provisions should include two

provisos — rst, that it would not affect the position of

the Rulers as head of religion in their respective States,

and second, that the practice and propagation of other

religions in the Federation would be assured under the

Constitution.15

Justice Sheik Abdul Hamid, the member of the Reid

Commission from Pakistan who initially agreed with the

other members to omit any provision for an ofcial religion

in the draft constitution, later proposed in his Notes of

Dissent that the Alliance proposal be adopted as it was

4 Clause 3, Federation of Malaya Agreement 1948 (“FMA 1948”)5 Recital, FMA 19486 Clause 5, FMA 19487 Proviso, Clause 5, FMA 19488 Clause 100, FMA 19489 Hence, the Reid Commission10 Joseph M Fernando, The Making of the Malayan Constitution (MBRAS, 2002) [Fernando] at 12911 Citing the request of the Rulers to retain religion as a State matter on the grounds that the provision would infringe their position as the head of the

Muslim religion in their respective States; Fernando, supra n 1012 Fernando, supra n 10

13 Ibid , at 14914 Ibid , at 16115 Ibid , at 162


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Article 3 of the Federal Constitution remained unchanged.

Public and private aspects of Islam in Malaysia

In 1988, a full bench of ve in the Supreme Court (as

the Federal Court was then known) had occasion to

consider Article 3 in an appeal against a mandatory death

sentence for drug trafcking and possession of rearms.

It was contended on behalf of the accused that Islam

being the religion of the Federation, as declared in the

Federal Constitution, and the Federal Constitution being

the supreme law of the Federation, the imposition of the

death penalty was unconstitutional, being contrary to

Islamic injunction.24

Although the Supreme Court acknowledged that Islam

was not just a mere collection of dogmas and rituals but a

complete way of life covering all elds of human activities,

be they private or public, legal, political, economic, social,

cultural, moral or judicial,25 it held that this was not the

meaning intended by the framers of the Constitution. So

far as Islam was concerned, the result of the development

of law by the British in Malaya had the effect of turning

the legal system into a secular institution. Thus, all laws,including the administration of Islamic law, had to be

validated through a secular at.26

The court also observed that during the British colonial

period, through their system of indirect rule and

establishment of secular institutions, Islamic law was

rendered isolated in the narrow connes of the law

of marriage, divorce and inheritance — the sphere of

personal law. This private aspect of Islamic law is only

applicable to Muslims as their personal law.27

Islam being the religion of the Federation did not mean

that laws passed by Parliament must be imbued with

Islamic religious principles; nor did the existence of

Syariah law prior to independence require that laws of

general application must conform to the Syariah, for to

hold otherwise would be contrary to the constitutional

and legal history of the Federation and also to the Civil

Law Act 1956, which provides for the reception of English

common law in this country.28

It is in this sense of the dichotomy that the framers of the

Constitution understood the meaning of the word “Islam”

in the context of Article 3. Religion being often described

as a sensitive matter in Malaysia, the concluding words of

Salleh Abbas LP are noteworthy:

“... we have to set aside our personal feelings

because the law in this country is still what it is today,

secular law, where morality not accepted by the law

is not enjoying the status of law.”29

Jurisdictional controversies

This dichotomy between the public and private aspectsof Islamic law, when ignored, has given rise to difculties.

In recent years, the bitter custody and child’s religious

rights battles in Subashini Rajasingam,30 Indira Gandhi 31

and Deepa Subramaniam32 sparked new conicts

between the Syariah court and the civil court. In these

three cases, all involving Hindu married couples with

children, the husband had converted to Islam, taken

the children away from their mothers and in two cases,

converted the children also to Islam. Controversy also

24 Che Omar bin Che Soh v Public Prosecutor [1988] 2 MLJ 5525 Ibid , at 56C26 Ibid , at 56C-D27 Ibid , at 56E28 Supra, n 24 at 56A-C29 Ibid , at 57E-F30 Subashini a/p Rajasingam v Saravanan a/l Thangathoray and other appeals [2008] 2 MLJ 147

31 Indira Gandhi a/p Mutho v Pengarah Jabatan Agama Islam Perak & Ors [2013] 5 MLJ 552; Ketua Polis Negara v Indira Gandhi a/p Mutho [2015] 2 MLJ149 (CA)32 Viran Nagapan v Deepa Subramaniam [2015] 3 CLJ 537 (CA)


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Lega l Hera ld . MAY 2015 5

arose when State religious authorities and the Syariah

court purported to subject the non-Muslim spouse to

the jurisdiction of the Syariah court, although state

Syariah laws clearly provided that the Syariah court had

jurisdiction only over Muslims. Another issue was the

reluctance of the police to act on the complaints made by

the non-Muslim spouse.

In the now infamous Borders case,33 in 2012, ofcers of

JAWI,34 accompanied by the media, raided the Borders

Bookstore at The Gardens, Mid Valley City in Kuala

Lumpur. During the raid, the JAWI ofcers seized several

books by international author Irshad Manji, titled Allah,

Kebebasan dan Cinta, a Malay translation of Allah,

Liberty and Love which was also seized, on the grounds

that the books were prohibited.35

At the material time, the publications were, in fact, not

subject to any prohibition order by the Minister of Home

Affairs. The JAWI ofcers proceeded to examine the

Muslim and non-Muslim employees of Borders, and

issued orders compelling them to be subject to further

investigation and examination.

The next day, a similar raid was conducted at another

Borders store. Notwithstanding the full co-operation

given by Borders and its employees, the JAWI ofcers

arrested one Nik Raina Nik Abdul Aziz, who was the

store manager, and charged her for disseminating or

distributing publications deemed contrary to Islamic law.

Both the High Court36 and the Court of Appeal37 held that

the act of enforcement by JAWI was unlawful and i llegal,

primarily on the grounds that the books were in fact not

subject to any prohibition order at the material time. The

Court of Appeal was of the view that any law, be it Federal

or State, that breached the Federal Constitution must be

struck down and any Federal or any State Government

and its agencies that apply the law wrongfully must be

corrected.38

In June 2014, enforcement ofcers of JHEAINS39

arrested 17 people at a wedding reception. Those

arrested were transgender persons, nicknamed mak

andam, present at the wedding in service as wedding

planners and beauticians. They were charged for cross-

dressing against the Syariah law in Negeri Sembilan.40

These mak andam applied to the High Court for judicial

review, which was refused. In the Court of Appeal,41 it

was declared that the Negeri Sembilan Islamic religious

enactment barring cross-dressing was contrary to the

Federal Constitution.42

The Director-General of JAKIM

43

publicly criticised theCourt of Appeal for interfering with the administration

of lslamic law by the Syariah court in contravention of

Article 121(1A) of the Federal Constitution. The Minister

for Religious Affairs then issued a statement to the effect

that the Government was planning to establish a Syariah

Federal Court in order to prevent any further interference

by the civil court.44 This reignited the debate whether

Malaysia had a dual legal system of civi l law and Syariah

law.

33 Berjaya Books Sdn Bhd v Jabatan Agama Islam Wilayah Persekutuan Wilayah Persekutuan & Ors [2014] 1 MLJ 13834 Jabatan Agama Islam Wilayah Persekutuan (Department of Federal Territory Islamic Affairs)35 By virtue of s 13 of the Syariah Criminal Offences (Federal Territories) Act 199736 Supra, n 3337 Jabatan Agama Islam Wilayah Persekutuan & Ors v Berjaya Books Sdn Bhd & Ors [2015] 1 AMR 73938 Ibid , at 761(53)39 Jabatan Hal Ehwal Agama Islam Negeri Sembilan (Department of Negeri Sembilan Islamic Affairs)40 Syariah Criminal (Negeri Sembilan) Enactment 1992, s 6641 Muhamad Juzaili Mohd Khamis & Anor v State Government of Negeri Sembilan & Ors [2015] 1 AMR 673; [2015] 1 CLJ 95442 Decided by Mohd Hishamudin Yunus, Aziah Ali and Lim Yee Lan JJCA

43 Jabatan Kemajuan Islam Malaysia (Department of Islamic Development Malaysia)44 ;


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By far, the most divisive of these controversial cases

have been the ban on the use of “Allah” by non-Muslims

including the ruling that the weekly Herald Malaysia

newspaper of the Roman Catholic Church could not

refer to God in that way in its Malay-language edition; 45

the seizure of an Indonesian publication that used “Allah”

for Sunday school materials,46 and the seizure of 300

copies of the Bible in Bahasa Melayu and Bahasa Iban

that contained the word.47 The High Court in the Herald

case held that the church had a constitutional right to

use “Allah”,48 a decision that was set aside by the Court

of Appeal.49 Unfortunately, the constitutionality of the

prohibition remains unclear as the Federal Court refused

leave to appeal.50

The jurisdictional controversies referred to above remain

unsettled as these circumscriptions on the legislative

power of the State and the jurisdiction of the Syariah

court have yet to be closely examined before the courts.

It is moot that some of the actions taken by the religious

authorities and the orders issued by the Syariah court in

the above cases may have exceeded their power and

jurisdiction.

The Syariah court

Unlike the High Court which is established by the Federal

Constitution, the Syariah court is a creature of State law.51

Article 74 of the Federal Constitution, read together with

the State List,52 prescribes that Islamic law and Islamic

matters — including the establishment of Syariah courts

— fall under the jurisdiction of the State. According to the

State List, the legislative power of the State assembly to

legislate on Islamic law and Malay customs is conned to

26 matters:

(a) Succession, testate and intestate, betrothal,

marriage, divorce, dower, maintenance, adoption,

legitimacy, guardianship, gifts, partitions and

non-charitable trusts;

(b) Wakafs and the denition and regulation of

charitable and religious trusts, the appointment

of trustees and the incorporation of persons

in respect of Islamic religious and charitable

endowments, institutions, trusts, charities and

charitable institutions operating wholly within the

State;

(c) Malay customs;

(d) Zakat, Fitrah and Baitulmal or similar Islamic

religious revenue;

(e) Mosques or any Islamic public places of worship;

(f) Creation and punishment of offences by persons

professing the religion of Islam against precepts

of that religion; and

(g) Constitution, organisation and procedure of the

Syariah courts.

The State List stipulates that the Syariah court is to have

jurisdiction only over persons professing the religion

of Islam and in respect only of the above matters. It is

also provided that the Syariah court shall not have any

jurisdiction in respect of offences unless conferred by

federal law.

Jurisdiction cannot be implied

It is a common misconception that once established, a

Syariah court has, ipso facto, jurisdiction over all matters

relating to Islamic law and Malay customs set out in the

State List.

In a case where a widow sought a declaration that her

deceased husband was a Buddhist during his lifetimeand at the time of his death,53 the High Court held that

45 Titular Roman Catholic Archbishop of Kuala Lumpur v Menteri Dalam Negeri & Ors [2014] 4 MLJ 76546 Jerry WA Dusing @ Jerry W Patel & Anor v Menteri Keselamatan Dalam Negeri Malaysia & Anor [2015] 1 MLJ 67547 48 Supra, n 45 at 782(12)49 Ibid , at 782(18)50 Supra, n 4551 Article 74 (2) of the Federal Constitution52 Read with the Ninth Schedule of the Federal Constitution, Item 1 of List II (State List)53 Ng Wan Chan v Majlis Ugama Islam Wilayah Persekutuan & Anor (No 2) [1991] 3 MLJ 487


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the jurisdiction of the Syariah court cannot be derived by

implication and that if State law did not confer jurisdiction

to deal with a particular matter in the State List, the Syariah

court would be precluded from dealing with that matter.54

As State law did not confer jurisdiction to determine the

issue whether a person is a Muslim or not at the time of

his death, the High Court was not precluded from hearing

and determining that issue.55

Similarly, in a dispute over wakaf land,56 it was held that

when there is a challenge to the jurisdiction of the High

Court, the test was not whether the court had jurisdiction

but whether jurisdiction had been conferred on the

Syariah court. Only if such jurisdiction were conferred on

the Syariah court would the High Court be precluded from

considering the matter before it.57

However, there is dicta to the contrary in Soon Singh

a/l Bikar Singh v Pertubuhan Kebajikan Islam Malaysia

(Perkim) Kedah & Anor,58 a case before the Federal

Court, that the jurisdiction of the Syariah court to deal

with the issue conversion out of Islam, although not

expressly provided in State law, could be implied from

the express provisions conferring jurisdiction on the issue

of conversion into Islam.59 The Syariah court in that case

had held that the deceased convert had not renounced

the religion of Islam and therefore was a Muslim at the

time of his death.

The rationale of the Federal Court appears to be as

follows:

“As in the case of conversion to Islam, certain

requirements must be complied with under hukum

syarak for a conversion out of Islam to be valid,

which only the Syariah courts are the experts and

appropriate to adjudicate. In short, it does seem

inevitable that since matters on conversion to Islam

come under the jurisdiction of the Syariah courts, by

implication conversion out of Islam should also fall

under the jurisdiction of the same courts.”60

The Federal Court was much persuaded by statements

in the authorities61 that the question of conversion out of

Islam involves issues requiring substantial consideration

of the Islamic law by relevant jurists qualied to do so and

that therefore the only forum to qualied to do so is the

Syariah court.62

It is submitted that although the fact that the determination

of a Muslim’s conversion out of Islam may involve inquiry

into the issue of renunciation of Islam under Islamic law, it

did not follow that it would be “inevitable” that the Syariah

court should have jurisdiction.63

With the greatest respect, the Federal Court decision

also appears to contradict two authorities cited in the

judgment:

“... express and unambiguous language appears to

be absolutely indispensable in statutes passed for

the following purposes: imposing tax; conferring or

taking away legal rights; excepting from the operation

of or altering clear principles of law; altering the

jurisdiction of courts of law64... ‘the general rule

undoubtedly is, that the jurisdiction of the superior

courts is not taken away, except by express words or

necessary implication’.”65

54 Ibid , at 489C-F55 Ibid , at 490D56 Shaik Zolkafly bin Shaik Natar & Ors v Majlis Agama Islam Pulau Pinang dan Seberang Perai [1997] 3 MLJ 281 (see also Barkath Ali bin Abu Backer

v Anwar Kabir bin Abu Backer [1997] 4 MLJ 389)57 Shaik Zolkafly; supra, n 56 at 293F58 [1999] 1 MLJ 48959 Ibid , at 502A60 Ibid , at 502G61 Dalip Kaur v Pegawai Polis Daerah, Balai Polis Daerah, Bukit Mertajam & Anor [1992] 1 MLJ 1; Md Hakim Lee v Majlis Agama Islam Wilayah Persekutuan,

Kuala Lumpur [1998] 1 MLJ 68162 Dalip Kaur; supra, n 61 at 10A

63 Supra, n 58 at 502G64 Ibid , at 502B65 Ibid , at 502C


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Unfortunately, Soon Singh was not discussed, but by

implication not followed, in Latifah Mat Zain,66 where the

Federal Court held that:

“What it means is that, the Legislature of a State, in

making law to ‘constitute’ and ‘organize’ the Syariah

courts shall also provide for the jurisdictions of such

courts within the limits allowed by item 1 of the

State List, for example, it is limited only to persons

professing the religion of Islam. The use of the word

‘any’ between the words ‘in respect only of’ and ‘of

the matters’ means that the State Legislature may

choose one or some or all of the matters allowed

therein to be included within the jurisdiction of the

Syariah courts. It can never be that once the Syariah

courts are established the courts are seized with

jurisdiction over all the matters mentioned in item 1

automatically. It has to be provided for.”67

The Syariah court an inferior court

Unlike the High Court, the Court of Appeal and the Federal

Court, which are established by the Federal Constitution,68

the Syariah court has been equated to the Sessions Court

and Magistrates’ Court which, in the Federal Constitution,

are called inferior courts.69 The Syariah courts are mere

“State courts” and do not enjoy the same status and

powers as the High Court.70

It follows that the High Court has supervisory powers over

the Syariah court just as it has supervisory powers over

other inferior tribunals, such as the Industrial Court.71

Quite clearly, the Syariah court cannot be considered any

greater than the inferior courts.72

(a) The Sessions Courts and Magistrates’ Courts

are established by the Subordinate Courts Act

1948, which is a federal law, whereas the Syariah

court is established by State law, Article 121(1A)

notwithstanding;

(b) In exercising its criminal jurisidiction,73 the

Magistrates’ Court can impose a sentence of an

imprisonment up to 5 years, a maximum ne of

RM10,000 and whipping up to twelve strokes,

or a combination thereof, the so-called “5:10:12

Rule”; and

(c) the Syariah court in its criminal jurisdiction is

subject to limits imposed by Federal law74 of a

maximum sentence of three years imprisonment,

maximum ne of RM5,000 and whipping up to six

strokes, the so-called “3:5:6 Rule”.

It is therefore clear that under no circumstances can

the Syariah court be considered equivalent to the High

Court. It follows in principle that, where there is an issue

of competing jurisdiction between the High Court and the

Syariah court, the proceedings before the High Court

must take precedence over the Syariah court.75

No exclusive jurisdiction on Islamic law

It is also inaccurate to hold that the Syariah court has

exclusive jurisdiction on all matters related to Islamic law.

Given that the Syariah court is a creature of State law, it

has no power of interpretation on any matter which is the

province of the High Court and the subordinate courts,

including issues on the interpretation of federal law and

State law.76

66 [2007] 5 MLJ 10167 Ibid , at 116(43)68 Article 121, Federal Constitution69 Latifah Mat Zin v Rosmawati bte Sharibun & Anor [2007] 5 MLJ 101 at 114G70 Dato’ Kadar Shah Tun Sulaiman v Datin Fauziah Haron [2008] 7 MLJ 779 at 785E71 Ibid , at 785F72 Article 121(1), Federal Constitution73 Subordinate Courts Act 1948; s 87

74 Syariah Court (Criminal Jurisdiction) Act 1965, Act No. 355 (Rev – 1988); s 275 Supra, n 70; para 14 at 78576 Zaina Abidin bin Hamid @ S Maniam & Ors v Kerajaan Malaysia & Ors [2009] 6 MLJ 863


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In 2008, one Abdul Kahar 77 was charged in the the

Syariah court for several offences for deviant teaching

contrary to a State Enactment.78 He challenged the

constitutionality of the State Enactment on the grounds

that the subject matter of the offences fell outside the

term “precepts of Islam” in the State List circumscribing

the legislative power of the State. The issue then arose

as to whether the Syariah court had jurisdiction to enter

upon the interpretation of the term “precepts of Islam” and

thereby determine whether the provisions in the State

Enactment creating the offences were in accordance with

the provisions of the Federal Constitution.79

The Federal Court held that the Syariah court had no

such power and that State law could not possibly confer

such power because:

(a) the ascertainment of Islamic law and other

personal laws for purposes of federal law is a

federal matter;80

(b) any question whether a law made by a State is

within the power of a state;81 and the interpretation

of the Federal Constitution is a matter for the

High Court.82

In 2012, one Siti Hasnah applied to the High Court to

declare her conversion to Islam when she was a year old

to be invalid. The Court of Appeal held that the jurisdiction

of the civil court was not ousted merely because the

subject matter of a claim or complaint has an Islamic law

element in it.83

No overlapping jurisdiction

Another common misunderstanding is that the Syariah

court is a parallel system established under Article

121(1A) of the Federal Constitution.

Article 121 establishes the High Court, the Court of Appeal

and the Federal Court and recognised such inferior courts

as may be prescribed by law. Article 121(1A), however,

merely excludes the jurisdiction of the High Court in

respect of any matter within the jurisdiction of the Syariah

court.

Quite clearly, Article 121(1A) neither establishes nor

confers jurisdiction on the Syariah court.84 It is only when

some jurisdiction is expressly conferred by State law

on the Syariah court that Article 121(1A) would apply

to exclude the jurisidiction of the High Court and the

subordinate courts on that matter.

It has been stated above that the Syariah court can only

have jurisdiction if expressly conferred by State law within

the constraints of the Islamic law matters mentioned in

the State List.

In the absence of jurisdiction being conferred on the

Syariah court in respect of any matter, such matter

would fall within the jurisdiction of the High Court and the

subordinate courts, unfettered by the operation of Article

121(1A).85

In any case, Article 121(1A) does not take away the

jurisdiction of the High Court to interpret any State law

enacted for the administration of Islamic law,86 such

77 Abdul Kahar bin Ahmad v Kerajaan Negeri Selangor (Kerajaan Malaysia, intervener) & Anor [2008] 3 MLJ 61778 Charged with ve offences under various provisions of the Syariah Criminal Offences (Selangor) Enactment No 9 of 199579 Supra, n 75 at 622H-I80 Ibid , at 623C81 Ibid , at 623G82 Ibid , at 62283 Siti Hasnah Vangarama Abdullah v Tun Dr Mahathir Mohamad & Ors [2012] 7 CLJ 845 at 854(14)

84 Shaik Zolkafly supra, n 56 at 293F85 Ibid 86 Dalip Kaur v Pegawai Polis Daerah, Balai Polis Daerah, Bukit Mertajam & Anor [1992] 1 MLJ 1 at 7F


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jurisdiction being outside the scope of State law, although

concerning Islamic law.

Article 121(1A) was introduced to prevent conict of

jurisdiction between the civil court and the Syariah court.87

If federal laws and State laws are made in strict compliance

with the Federal List and State List, there should not be a

situation where both the civil court and the Syariah court

have jurisdiction over the same matter or issue.88

If an issue were to arise on whether State law infringes on

the Federal List, Article 121(1A) cannot be an argument

for ousting the jurisdiction of the civil court.89 In such a

situation the question to be asked is whether such State

law is constitutional in the rst place, which is a matter for

the Federal Court to decide.90

Although there may be distinct issues falling within the

jurisdiction of the civil court and the Syariah court at the

same time as in Latifah Mat Zain,91 it does not follow that

there is an overlapping jurisdiction or assisting jurisdiction

between the two nor are they considered double

proceedings.92

Conclusion

Quite clearly, the idea of a “dual” legal system in Malaysia

of civil law and Syariah law is misconceived. Syariah law

is only applicable to Muslims and only as personal law,

with provision for certain offences against the precepts

of Islam. Nothing in the Federal Constitution suggests

that the Syariah court is to compete with or be parallel

to the civil court on the same subject matter, and this is

supported by judicial authority.

This issue is of vital importance to the peoples of

Malaysia, with their multicultural, multi-ethnic and multi-

religious history.

The nation called “Malaysia” has no existence outside of

the Federal Constitution, which is the supreme law of the

country. A united and functional Malaysia can only exist

when legal issues are determined in accordance with

principle, in well-reasoned judgments by the courts, with a

willingness to grapple with difcult issues without glossing

over or avoidance or oversimplication or a giving way to

sentiment.

The authorities reviewed in this article have in the main

avoided these dangers and provided guidance and a path

to the future, although with some anomalies that need in

due course to be resolved. LH-AG

About the authors

Rosli Dahlan ([email protected]) heads the

Corporate & Commercial Disputes Practice

Group at Lee Hishammuddin Allen & Gledhill

and regularly appears at the High Court and

appellate courts on public law issues.

Fawza Sabila Faudzi ([email protected])

graduated from the Ahmad Ibrahim Kuliyyah

of Laws, International Islamic University

Malaysia, and is currently a pupil-in-

chambers with the rm

87 Mohamed Habibullah bin Mahmood v Faridah Bte Dato Talib [1992] 2 MLJ 793 at 804A (see also Professor Ahmad Ibrahim, “The Amendment of art. 121of the Federal Constitution: Its effect on the Administration of Islamic Law” [1989] 2 MLJ xvii; cited in Latifah Mat Zin, supra, n 69 at 117I

88 Latifah Mat Zin; supra, n 69 at 118C-E89 Ibid , at 118F

90 Ibid , at 118G; Article 128 of the Federal Constitution91 Supra, n 8892 Ismail bin Mohamad v Wan Khairani bt Wan Mahmood and another appeal [2011] 1 MLJ 743 at 750G


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Wavering on Waivers|by Chng Keng Lung|

The law of variation, waiver and estoppel, it has been

said, is a difcult subject. Perhaps the following passage

explains it best:

“The law is still in a state of development and neither

the boundaries nor the requirements of the two

doctrines (waiver and estoppel) are as yet clearlymarked out. The area is further confused by the

inconsistent use of terminology. Different judges

and writers use different words to mean the same

thing and the same words to mean different things.

‘Waiver’, ‘total waiver’, ‘waiver of remedy’, ‘waiver

of rights’, ‘election’, ‘abandonment’, ‘equitable

estoppel’, ‘ quasi estoppel’ and ‘waiver estoppel’ are

among the expressions which have been used. It

is clear that several of these expressions mean the

same thing.”1

This article examines the doctrine of waiver and itsapplication in this jurisdiction.

Waiver at common law

The word “waiver” should apply strictly to forgiving

non-performance, either before or after the time for

performance has arisen. However, the word has also been

used with reference not only to a waiver of performance,

but also to a waiver of a breach of contract; that is to say,

a waiver of the rights of an innocent party arising out of

the breach by the other party.

It appears from the literature that there are at least four

types of waiver to consider:

(a) A waiver of breach which may be in the form of:

(i) a waiver by election; or

(ii) a total waiver.

(b) A waiver of performance which can take the form

of:

(i) a forbearance waiver;

(ii) a unilateral waiver.

The distinction between the two categories is premised

on whether there is an accrual of a right.

In situations involving a breach of contract, the application

of either category of waiver would depend on the

seriousness of the breach. Where there has been a

serious breach which goes to the root of the contract,

a right accrues to the innocent party to terminate the

contract and it is in that situation that a waiver of breach

could operate.

If, however, the breach does not entitle the innocent party

to terminate the contract, his remedy lies only in damages

and it is in such a situation that a waiver of performance

could arise.

Further, there can be a waiver of performance without a

breach of contract.

1 M Furmston, The Law of Contract (4th Ed, 2010), at 359-360 [Furmston]


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Common elements

There are several common elements in all four types of

waivers. Firstly, a waiver in principle does not require

consideration.2 This is what differentiates a waiver from

a variation, where the presence of consideration is vital:

“A waiver is distinguishable from a variation of a

contract in that there is no consideration for the

forbearance moving from the party to whom it is

given… Although consideration need not be proved,

certain other requirements must be satised for such

an estoppel to be effective.”3

(Emphasis added)

Even where performance is varied, it only amounts to a

waiver if there is no consideration:

“Where an agreement to vary a contract is not itself

contractually enforceable for want of consideration it

will only take effect, if at all, as a waiver or on the

basis of the doctrine of promissory estoppel.”4

Secondly, in order for a waiver to be effective, the waivor

needs to make a clear and unequivocal representation to

that effect, either by words or by conduct:5

“A party can represent that he will not enforce a

specic legal right by words or conduct. He can

say so expressly — this of course he can only do if

he is aware of the right. Alternatively he can adopt

a course of conduct which is inconsistent with the

exercise of that right. Such a course of conduct

will only constitute a representation that he will not

exercise the right if the circumstances are such to

suggest either that he was aware of the right when

he embarked on the course of conduct inconsistent

with it or that he was content to abandon any rights

that he might enjoy which were inconsistent with that

course of conduct.”6

For conduct to amount to an unequivocal representation,

it must be unequivocal in the true sense of the word — it

must be capable of one construction only, namely, that the

waivor has chosen to forgo his rights.7 Although silence

alone cannot constitute a waiver, it may give rise to an

unequivocal representation of a waiver when viewed in

its context.8

Finally, it is necessary for the waivor to be aware of the

facts that gave rise to the rights being forgone, the right to

forgo those rights and the connection between the two.9

Waiver by election

This form of a waiver of breach arises:

“… when a state of affairs comes into existence in

which one party becomes entitled, either under

the terms of the contract or by the general law, to

exercise a right and the party has to decide whether

or not to do so”.11

In other words, waiver by election arises as a reaction

to a non-contractual or defective performance by the

other party,12 and therefore occurs only when a right to

terminate has arisen.13

2 Furmston, supra n 1 at 366-367; Chitty on Contracts (29th Ed, Sweet & Maxwell, 2004), Vol 1, at 1303, para 22-044 [Chitty]3 Chitty, supra n 24 Furmston, supra n 1, para 2.1035 Ibid , at 369, para 2.1076 Youell & Ors v Bland Welch & Co Ltd (The Superhulls Cover case) (No 2 ) [1990] 2 Lloyd’s Rep 431 at 4507 Sean Wilken and Karim Ghaly, The Law of Waiver, Variation and Estoppel (3rd Ed, 2012) at 43, para 4.08 [Wilken and Ghaly]8 Furmston, supra n 1 at 369, para 2.107; Plasticmoda Societa Per Azioni v Davidsons (Manchester) Ltd [1952] 1 Lloyd’s Rep 5279 Wilken and Ghaly, supra n 7 at 59, para 4.4510 Chitty, supra n 2 at 1304, para 2-406

11 Furmston, supra n 1 at 364, para 2.10112 Wilken and Ghaly, supra n 7 at 40, para 4.0113 Furmston, supra n 1 at 365, para 2.101


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The circumstances that would lead to the accrual of a

right to terminate include those where the waivor suffers

a repudiatory breach of a contract by the other party, or

where the waivor is prejudiced by a misrepresentation of

the other party.14

In the case of a repudiatory breach, the waivor as the

innocent party can accept the repudiation and treat himself

as discharged from the contract and claim damages or,

alternatively, to afrm the contract and reserve the right to

claim damages.15 In the case of a misrepresentation, the

waivor as the representee is faced with a similar choice,

either to rescind or to afrm the contract.16

Faced with a choice of two alternative and inconsistent

courses of action,17 once the waivor chooses one over

the other, he will be taken to have waived the rights to the

course so abandoned.18

Because of the need for certainty and nality in contract

dealings, once a waivor has elected one course of

action over the alternative, the election is irrevocable,

irrespective of whether there has been any reliance onsuch election by the waivee.19

The nature of a waiver by election has been described in

the following terms:

“Where a party in his own mind has thought that he

would choose one of two remedies, even though

he has written it down in a memorandum or has

indicated it in some other way, that alone will not bind

him; but so soon as he has not only determined to

follow one of his remedies but has communicated it

to the other side in such a way as to lead the opposite

party to believe that he has made that choice, he

has completed his election and can go no further;

and whether he intended it or not, if he has done an

unequivocal act — I mean an act which would be

justiable if he had elected one way and would not

be justiable if he had elected another way — the

fact of his having done that unequivocal act to the

knowledge of the persons concerned is an election.”20

Total waiver

As with waiver by election, total waiver is also a response

to a repudiatory breach of contract.21 A total waiver,

similarly, does not require reliance on the part of the

waivee, and is irrevocable once exercised.

However, unlike a waiver by election, in the case of a total

waiver, the waivor forgoes all his rights. In other words,

the waivor waives not only his rights to treat himself as

discharged from further performance, but also his right todamages.22

The drastic nature of a total waiver makes it a rarity:

“Court will generally be slow to construe such a

situation as involving a total waiver and clear evidence

will be needed to show that the waivor intended to

abandon all rights in respect of the breach and not

merely to forgot the right to terminate the contract.”23

14 Ibid , at 364, para 2.10115 Ibid 16 Ibid 17 Ibid 18 Ibid 19 Furmston, supra n 1 at 364, para 2.101; at 370, para 2.10820 Wilken and Ghaly, supra n 7 at 39, para 4.01; Kammins Ballroom Co v Zenith Investments [1971] AC 850

21 Wilken and Ghaly, supra n 7 at 53, para 4.3122 Chitty, supra n 2 at 1304, para 2-04623 Furmston, supra n 1 at 371, para 2.109; Wilken and Ghaly, supra n 7 at 55, para 4.37


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Forbearance waiver

This form of a waiver may be described as:

“The abandonment of a right in such a way that the

other party is entitled to plead the abandonment

by way of confession and avoidance if the right is

thereafter asserted.”24

Forbearance waiver may arise before or after a

contractual term falls due for performance.25 The effect

of a forbearance waiver in the context of a breach of

contract is that the waivor is prevented from complaining

of any breach of the term, the performance of which has

been waived.26

Unlike a waiver by election, in the case of a forbearance

waiver, the waivor is not put to any election of alternative

remedies and can expressly or by its conduct suggest that

the waivee need no longer perform its future obligations

under the contract.27

A forbearance waiver is only binding if it is relied on by the

waivee.28 However, a forbearance waiver is suspensory

in nature in that it is revocable, and only becomes

irrevocable after the waivee alters his position in reliance

on it:29

“It has been suggested that reliance is necessary

in such a case because the waiver operates in

effect as an alternative to a variation of the contract;

reliance is therefore necessary to take the place of

consideration. Election waiver, on the other hand, is

justied by reference to the need for certainty and

nality in contact dealings.”30

A further distinction between a waiver by election and

a forbearance waiver is that the former is retrospective

while the latter is prospective which waives the future

performance of a particular obligation.31 Forbearance

waiver has therefore been said to:

“… amount to a ‘dissolution pro tanto of the

[particular] contractual tie between the parties’ with

both parties retaining their accrued obligations but

being discharged from the future performance of

particular obligations under the contract.”32

Unilateral waiver

This form of a waiver of performance arise where the

waivor, having the sole benet of a provision in the

contract, decides unilaterally to forgo the benet of

such provision.33 The exercise of a unilateral waiver is

wholly for the benet of the waivor and does not affect

the waivee’s performance of the contract.34 Naturally,

there need be no breach of contract by the waivee for

the waivor to exercise a unilateral waiver.35

Waiver under Malaysian law

The courts in Malaysia do not appear to have considered

the subject of waiver with the same degree of distinction

similar to what has been presented in the above.

24 Banning v Wright [1972] 1 WLR 97225 Furmston, supra n 1 at 365, para 2.10126 Furmston, supra n 1 at 364, para 2.10127 Wilken and Ghaly, supra n 7 at 52, para 4.2828 Supra n 26 at 36429 Ibid 30 Supra n 26 at 37131 Wilken and Ghaly, supra n 7 at 52, para 4.28; at 40, para 4.02 — appendix 932 Ibid , at 52 para 4.28

33 Ibid , at 55 para 4.3634 Ibid 35 Ibid


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It has been suggested in the leading case on the subject,

Associated Pan Malaysia Cement Sdn Bhd v Syarikat

Teknikal & Kejuruteraan Sdn Bhd 36 (“ APMC ”), that our law,

which is founded on s 64 of the Contracts Act 1950 (“the

Act”), represents a departure from English law.

Section 64 of the Act reads as follows:

“Every promisee may dispense with or remit, wholly

or in part, the performance of the promise made to

him, or may extend the time for such performance,

or may accept instead of it any satisfaction which he

thinks t.”

In delivering the judgment of the court, Gunn Chit Tuan

SCJ (as he then was) held:37

“The word ‘waiver’ is used in the English common law

in a variety of different senses. As pointed out by the

respondent, it was unfortunate that the appellant, as

the defendant, had not submitted to the trial judge in

what sense the word was pleaded and used. But we

agreed with Mr Sri Ram [counsel for the appellant]

that s 64 of our Contracts Act 1950, which was also

not brought to the attention of the learned judge,

represents a departure from the common law in

England. Our law on waiver in s 64 of the Contracts

Act 1950 is similar to the Indian law on the general

principles of waiver under which it is open to a

promisee to dispense with or remit wholly or in part

the performance of the promise made to him or he

can accept any promise which he thinks t. Under

our law neither consideration nor an agreement

will be necessary. But in this case we also agreed

with the respondent that it had not been shown

to the trial judge or to us that the respondent

had intentionally forgone its claims. On the other

hand the learned judge who saw and heard Mr Ong

in the witness box accepted his evidence that the

respondent did not intend to abandon its claims

under the various contracts. We therefore agreed

with the learned judge that as a matter of fact waiver

did not apply in this case.

“… . In any case there was no evidence of any

clear and unequivocal representation by the

respondent in the correspondence or orally that it

was abandoning its claims for damages. Nor was

there evidence that the appellant had believed and

relied on such representation and had acted to his

damage upon such belief thus created. The learned

judge had also expressly found on the evidence that

there was no such reliance. The appellant could not

have relied on estoppel or any such issues not raised

in the lower court and could not now therefore raise

them at the appellate stage.”

(Emphasis added)

The Supreme Court’s decision on the issue of waiver may

be summarised as follows:

(a) The law in Malaysia on waiver represents a

departure from English law in that our law does

not require consideration or an agreement by

virtue of s 64 of the Act, both of which are needed

in English law;

36 [1990] 3 MLJ 287 (SC)37 Ibid , at 295-296


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(b) There was no evidence to show that the

respondent intended to abandon its claims under

the various contracts;38

(c) There must exist an unambiguous and

unequivocal representation on the part of the

waivor;39 and

(d) There is a need for reliance on part of the waivee.

Section 40 of the Act

It is submitted that the decision of the Supreme Court is

per incuriam for the reasons below.

As a start, the court failed to take into account s 40, which

reads:

“When a party to a contract has refused to perform,

or disabled himself from performing, his promise in

its entirety, the promisee may put an end to the

contract, unless he has signied, by words or

conduct, his acquiescence in its continuance.”

(Emphasis added)

If we apply the distinctions in English law as described

above, it can be seen that s 40 of the Act deals with waiver

of breach, while s 64 provides for waiver of performance.

Since the Supreme Court in APMC held that there was a

breach of a condition that went to the root of the contract,

the type of waiver relevant to the case must be a waiver

of breach in the face of the accrual of a right to terminate.

Therefore, the innocent party when faced with such a

repudiatory breach has three options:

(a) to terminate the contract and claim damages,

which is a waiver by election;

(b) to afrm the contract while also reserving its

rights to damages, also a waiver by election; or

(c) to afrm the contract but waive the rights to

damages, a total waiver.40

Section 64, which makes no reference to a breach of

contract, was therefore inapplicable to the facts of the

case. Had the Supreme Court been referred to s 40, it

would not have been compelled to force t s 64 to the

facts of the case or to hold that it was a departure from

English law.

Although the Supreme Court was correct in stating that

an unambiguous and unequivocal representation on part

of the waivor was required, the court was, with respect,

incorrect in requiring reliance on the part of the waivee.

In so far as the court was considering s 64, it was correct

in holding as a matter of law that reliance is required,

since the context of that section is a forbearance waiver.

Had the court taken the opportunity to apply s 40, the

question of reliance would not have arisen but rather the

question of an election which, in the words of s 40, allows

the promisee to “put an end to the contract, unless he

has signied, by words or conduct, his acquiescence in

its continuance”.

38 Agreed with counsel for the respondent (Syarikat Teknikal Kejuruteraan) that a waiver requires an intention to forego a claim and the judge had accepted

the evidence of Mr Ong (CEO of the respondent) that there was no intention on the part of the company to abandon its claims39 The court found no clear and unequivocal representation by the respondent that it was abandoning its claims for damages40 All three options fall under the category of waiver of breach


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This again illustrates the failure on the part of the Supreme

Court in appreciating the existence of the different types

of waiver.

It is respectfully submitted that s 64 does not in any

way represent a departure from English law, but instead

represents a statutory reafrmation41 of what is considered

under English law as a forbearance waiver.

Waiver by election under English law, it is submitted, is

encapsulated in s 40, which unfortunately the Supreme

Court had no opportunity to examine.

As with the Supreme Court in APMC , subsequent cases42

made no attempt to identify the different types of waiver

and to distinguish a waiver of breach from that of waiver

of performance.

Conclusion

It is therefore suggested that the law of contract on waiver

in Malaysia has not departed from English law and can be

reconciled in the following equivalents:

(a) Section 64 ― Waiver of performance

(b) Section 40 ― Waiver of breach.

Waiver, however, is by no means a simple subject; in fact,

the opposite is true.

“The confusion is not merely terminological. The

relationships between the doctrines or waiver and

promissory estoppel, and the situations of waiver,

estoppel and contractual variation are often not clear.

… ‘Waiver’ and ‘promissory estoppel’ are sometimes

treated as the same thing, sometimes as different

aspects of the same broad principle”.43

It is hoped that there will be an opportunity for the

doctrine of waiver to be reconsidered in future

cases. LH-AG

About the author

Chng Keng Lung ([email protected]) is

an associate with the Corporate Disputes

Practice Group at Lee Hishammuddin Allen

& Gledhill, who is part of a team headed by

SM Shanmugam ([email protected]) that

regularly appears at the High Court and

appellate courts for various matters.

They also advise on and act in various litigious

matters such as shareholders’ disputes,

breaches of directors’ duties, minority

oppression actions, contractual and property

disputes. Shan has been credited by Legal500 Asia Pacic 2014 for his “intelligence,

practicality and expertise” and has also been

described by Asialaw Proles 2014 as an

“up-and-coming corporate disputes partner”.

Shan has also garnered praise from clients,

with one saying, “He is the complete package

and I can’t say enough good things about him

and his rm.”

41 In relation to a waiver of performance42 Norsechem Resin Sdn Bhd v Seal Incorporated Bhd [1999] MLJU 390; Sime Securities Sdn Bhd (formerly known as UMBC Securities Sdn Bhd) v

Anthony Lee Sin Choy [2003] 1 MLJ 204; Majlis Perbandaran Seberang Perai v Four Winds Freight Logistics Sdn Bhd [2012] 9 MLJ 627; Muniandy a/lThamba Kaundan Anor v D & C Bank & Anor [1996] 1 MLJ 374; and Sarawak Electricity Supply Corp v Celcom (M) Sdn Bhd [2002] 5 MJ 49043 Furmston, supra n 1 at 359-360, para 2.99


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GST Rules or Ruins?From a Ship Financier’sPerspective

|by Datuk D P Naban and Jennifer James Ilango|

The hype is over! The long-debated goods and services

tax (“GST”) was implemented on 1 April 2015 by virtue ofthe Goods and Services Tax Act 2014 [ Act 762 ] (“the GST

Act”). Introduced as part of the government’s tax reform

programme to enhance the efciency and efcacy of the

taxation system, the rationale for GST is to eliminate

inherent weaknesses in the now-abolished sales and

service tax, which had a cascading effect due to what is

known as “double taxation”.1 That said, like many other

sensational political issues in Malaysia, there are several

differing schools of thought on its economic implications

on a larger scale.

The key objective of this article is to provide an overviewon the mechanics and dynamics of GST that a nancier

in Malaysia may face in connection with ship nancing.

Inconsistency in denition of ‘ship’

In accordance with s 2 of the Merchant Shipping Ordinance

1952 (“MSO”), the meaning of a “ship” includes every

description of vessel used in navigation not propelled by

oars. For the purposes of GST, however, the GST Act does

not provide any denition as to what constitutes a “ship”.

In this regard, the Zero-Rated Supply Order 2014 comes

to its rescue. Despite incorporating the interpretation of

a “ship” as reected in the MSO, the Zero-Rated Supply

Order 2014 goes a step further to exclude vessels that

are “designed or adapted for recreation, pleasure or other

than freight or passenger transportation”.2 The GST Guide

on Shipping Industries, on the other hand, provides a list

of vessels that do not constitute a “ship” for the purposes

of GST. Among the excluded vessels are powerboats and

yachts, although passenger liners are accepted as “ship”.

Why a distinction has been drawn between these vessels

is unclear.

Notwithstanding the distinction drawn by the Zero-Rated

Supply Order 2014 and the Guide on Shipping Industries,

there is a string of established authorities that show

pleasure crafts, motor boats and yachts come within the

denition of “ship”.3 One may argue that powerboats and

yachts are expressly excluded from the denition for GST

purposes due their private nature primarily designed for

recreation or pleasure. We are unable to agree with this

reasoning. It will be naïve to ignore the fact that powerboats

or yachts can also be utilised to transport passengers in

international waters for commercial purposes.

In this context, we took the liberty to consider the denition

of “ship” under s 21(4)(a) of the Singapore Goods and

Services Tax Act 1993. Prior to July 2010, a ship for the

purposes of the Singapore GST Act was dened as one

that is not designed or adapted for use for recreation

or pleasure. Consequently, prescribed services did not

enjoy zero rating. We can see the similarity between the

Malaysian and Singapore GST Acts in this regard.

However, that denition was subsequently amended on 1

July 2010 to include ships used or adapted for recreation

1 2 Section 17 of the GST Act, read with item 2 of the Goods and Services Tax (Zero-Rated Supply) Order 2014 (PU(A) 272/2014)3 For example, in The Winnie Rig (1998) 2 Lloyd’s Rep 675, a motor yacht was held to be a ship


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or pleasure, provided that they are wholly internationally

bound.4 This means any services by ship used or adapted

for recreation or pleasure that is used within international

waters is now zero-rated in Singapore.

With respect, the haphazard distinction in regards to the

denition of a “ship” provided in the Zero-Rated Supply

Order 2014 and the Guide on Shipping Industries causes

difculty within the shipping industry. Our view is that

the Zero-Rated Supply Order 2014 should be rectied

to reect established authorities. Alternatively, it will be

worthwhile to explore the expansion of the denition

of a “ship” as has been done in Singapore to maintain

competitiveness within the shipping industry.

Overview of GST within shipping industry

A “ship” will fall within the ambit of movable property under

the denition of “goods” provided by s 2 of the GST Act,

following which any service within the shipping industry

is subjected to GST at either the standard rate which is

at 6%,5 or zero rate.6 The latter was introduced with the

intention of boosting Malaysia’s competitiveness abroad

where GST registrants in such circumstances can claim

input tax credit from the government for the production of

taxable supplies.

To break it down into perspective, goods such as ship

store supplies and spare parts purchased for the purposes

of international voyages are zero-rated.7 These rates,

however, do not extend to domestic travel. Similarly,

services provided by intermediaries such as navigation

and ship handling services,8 shipping agents or ship

managers are zero-rated supplies.9 Further, services

rendered by classication society, salvors and the supply

of containers, whether by way of sale or leased, are also

zero-rated. As most Malaysian shipping companies ply

international routes, it can be surmised that most of their

activities will be zero-rated 10 as they involve exportation

of services.

Effect of GST on facilities over vessel

It is settled that nancial services specic to loan,

advances or similar facilities are exempted from GST.11

This also extends to bonds, debentures or other similar

nancial instruments representing or evidencing debt,

whether secured or otherwise.12

In short, apart from other considerations that may become

payable for the usage of the facility, nanciers shall

not charge GST over the actual loan sum itself. “Other

considerations” in this context will include fees relating to

arranging, broking, advisory services, legal services and

so on wherein the service provider shall charge GST at

their respective GST rate.13 On a related note, it seems

that supply of insurance coverage pertaining to the facility

for the purchase of a vessel or the construction of a new

ship is taxable supply at standard rate. However, based

on item 14 of the Zero-Rated Supply Order 2014, if the

insurance policy is meant to cover risks directly related

to the export of a ship out of Malaysia, GST will then be

zero-rated.14

Enforcement of mortgage over vessel

A mortgagee may wish to enforce his mortgage over a

vessel when the shipowner is in default under the terms

of the mortgage. The mortgagee has two possibilities in

doing so. He may use “self-help” or seek the assistance

of the court.

4 Item 6 of the Singapore Goods and Services Tax (Amendment) Act 20105 Goods and Services Tax (Rate of Tax) Order 2014 (PU(A) 184/2014)6 Royal Malaysian Customs Department, Goods and Services Tax (Guide on Shipping Industry), 24 March 20147 First Schedule of Goods and Services Tax (Zero-Rated Supply) Order 2014 (PU(A) 272/2014)8 For example, pilotage, towage, berthing, wharfage and so on9 Supra, n 710 Paragraph 3 of the Second Schedule of the Goods and Services Tax (Zero-Rated Supply) Order 2014 (PU(A) 272/2014)11 Section 18(2) of the GST Act 2014, read with item 2 of Second Schedule of the Federal Government Gazette Goods and Services Tax (Exempt Supply)

Order 2014 (PU(A) 271/2014). See also Royal Malaysian Customs Department, Goods and Services Tax (Guide on Commercial Banking), 19 November2013

12 Ibid , item 7 of the Second Schedule of the Exempt Supply Order 201413 Ibid , item 12 of the Second Schedule of the Exempt Supply Order 201414 Ibid , item 14(a) of the Second Schedule of the Exempt Supply Order 2014


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As for the rst option, the mortgagee can exercise his

right under the mortgage deed to take possession of

the ship and appoint a receiver and manager to manage

earnings from the vessel or, alternatively, to sell the ship.15

In practice, however, this may pose some difculty since

shipowners will not co-operate with the mortgagee who

wishes to dispossess them of their vessel. Therefore, the

mortgagee, more often than not, will choose to enforce

his security through an in rem action and have the vessel

arrested and subsequently sold by way of judicial sale to

recover the debts under the facility.

Effect of GST on the sale of a ship

The sale of a ship is treated as a supply of goods.

Accordingly, the supply of a ship, whether or not an

onward trading of a whole ship or the construction of a

new ship, is subject to GST at the standard rate. 16 This

also applies to the importation of foreign vessels into

Malaysia to be registered under the Malaysian ag.17

However, the supply becomes zero-rated if the ship is

built by a local business but eventually exported out of

Malaysia. The key word here is “export ”. Therefore, if a

vessel is built by a local business, then sold to a foreign

registered company (and foreign agged) but operates

within Malaysian waters, the sale will not amount to

“export of goods”. In such instances, GST at standard

rate will apply.

In a straightforward sale of a vessel, it is plain that the

seller is liable to pay GST at standard rate but he is

entitled, if the contract so allows, to require the purchaser

to pay the GST. However, circumstances differ in the case

of enforcement of mortgage. In this regard, we will have

to consider sub-paragraph 5(7) of the First Schedule that

ought to be read conjunctively with s 65(5) of the GST Act.

Sub-paragraph 5(7) of the First Schedule of the GST Act

provides that:

Where any goods, forming part of the business

assets of a taxable person, are sold by any other

person who has the power to do so to recover any

debt owed by the taxable person, the goods shall

be deemed to be supplied by the taxable person in

the course or furtherance of his business. (Emphasis

added )

In this instance, it can be surmised that the borrower,

in the event of default, will be deemed to be the person

supplying the goods if the mortgagee chooses to enforce

his right of sale over the vessel to recover the debt under

the facility. However, this matter does not end here. In

furtherance to the above sub-paragraph 5(7), one must

also consider s 65(5) of the GST Act which provides as

follows:

Where goods are deemed to be supplied by a

taxable person pursuant to subparagraph 5(7) of the

First Schedule, any person, whether or not he is a

taxable person, who sells the goods in satisfaction

of any debt owed by that taxable person, shall be

liable for any tax due and payable on the supply.

(Emphasis added )

15 Goldrein, Ian S, Ship Sale and Purchase (2nd Ed, Lloyd’s of London Press Ltd (1993) at 21116 Supra, n 217 Sections 9 and 13 of the GST Act


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This section addresses the question of “liability”. In short,

although the borrower is deemed as the “taxable person”

in a mortgage scenario, according to s 65(5) of the GST

Act, the party selling the vessel is the one ultimately

accountable for GST arising out of the sale. In other words,

the burden to account for GST shifts from the taxable

person to the person carrying out the sale. Ordinarily, this

consideration turns on the manner in which the sale is

done, either through the enforcement of the mortgagee’s

debenture by a receiver and manager, or pursuant to a

power of attorney or by virtue of a court order.

Sale of a ship by way of judicial sale

There are two main modes of judicial sale: sale by

private treaty and sale by public auction. In normal

circumstances, upon the execution of a warrant of arrest

on the res (which is usually a ship), unless the owner of

the res furnishes security for the claim, the res is likely to

be subjected to judicial sale.18 In such case, the vessel

will be sold by the sheriff free of all encumbrances by

virtue of a court order.19 Once the vessel has successfully

undergone the sale process, the proceeds of judicial sale

will then be utilised to satisfy the plaintiff’s claim and the

claims of other parties, if any, according to an established

order of priorities.

The authority to carry out a judicial sale is vested in the

sheriff by virtue of a court order to sell the vessel. It is worth

noting at this juncture that when the vessel is arrested, it

enters into the care and custody of the sheriff, although

possession of it is not thereby transferred.20 The question

then is: Who is the actual vendor in a judicial sale of a

vessel ? This question plays a crucial role in determining

who is in fact liable for GST in this regard.

There is no clear authority to suggest that the sheriff,

in reality, carries out the judicial sale on behalf of the

vendor in an enforcement of mortgage scenario, i.e. the

mortgagee in this case. In light of this, we considered how

the courts have interpreted the term “vendor” in a judicial

sale in foreclosure proceedings, which is similar to the

enforcement of mortgage deeds. The Malaysian courts

have on several occasions held that the “chargee” must

be regarded as the vendor in judicial sale for foreclosure

proceedings.21 If the same rationale applies, regardless

whether the judicial sale of a ship is by way of public

auction or private treaty, although the sale of the vessel

takes place in the name of the sheriff, the mortgagee of

the ship remains the actual vendor in the judicial sale.

This proposition is consistent with the GST Act. The term

“any person who sells” in sub-paragraph 5(7) ought to

reect the person who has the “power to recover any debt”

as provided in s 65 of the GST Act. Reference to the word

“power” in this instance certainly must be the mortgagee.

Therefore, we take the view that the obligation to pay

GST ultimately lies with the mortgagee in a judicial sale

of a vessel.

(i) By way of private treaty sale

Principally, the implication of GST in judicial sale — or

rather known as a “court sale” — is no different from an

ordinary private tender exercise, i.e. GST at standard rate

18 Order 29 of the Rules of Court 201219 A “ship”, in this instance, includes her apparel, tackle and stores on board the ship

20 Kian Sing, Toh, Admiralty Law and Practice (2nd Ed, LexisNexis (2007) at 18021 Kimlin Housing Development Sdn Bhd (Appointed Receiver & Manager) (In Liquidation) v Bank Bumiputra (M) Bhd [1997] 2 MLJ 805 (SC); Public BankBhd v Phan Seng Kee [1991] 3 CLJ Rep 491; M & J Frozen Food Sdn Bhd v Siland Sdn Bhd [1994] 1 MLJ 294 (SC)


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is applicable. As for potential bidders who place a deposit

to register their interest in the tender exercise, there is no

obligation to pay GST on the receipt of the “deposit” until

the said deposit forms part of the full payment made by

the successful bidder towards the purchase of the vessel.

Accordingly, if their bid becomes unsuccessful, their

deposit will be returned without any additional charges.

One may also wish to take note that although court-related

services are exempted supply,22GST at standard rate is still

chargeable for the additional services rendered towards

the sale. For instance, this may include advertisement of

the sale and/or expenses incurred by the sheriff during

the arrest period.23 In order to ensure GST is claimable at

the conclusion of the sale from the purchaser, solicitors

acting for the mortgagee (who usually assists the sheriff

in the preparation of the proclamation of sale) must be

minded to specically include conditions with respect

to the payment of GST in addition to the contract price,

example of which is set out below.

(ii) By way of auction process

In our opinion, the blanket statement that an auctioneer

only acts as an agent for the owner or nancier as

provided in the GST Guide on Auctioneer 24 is inaccurate.

More often than not, an auctioneer is called to assist the

sheriff, the receiver and manager or persons executing the

power of attorney to sell a ship by way of public auction.

The auctioneer is engaged to merely carry out the auction

exercises while the mortgagee remains the selling party.

Therefore, the auctioneer’s liability is limited to his duty

to account for GST in so far as it concerns the services

rendered by him to assist the court as an auctioneer.

He will not be liable to pay for GST on the sale of the

vessel, which will be the duty of the mortgagee instead as

discussed earlier. It is nonetheless imperative that before

the vessel is auctioned, the auctioneer must rst inform

bidders that the vessel is subject to the payment of GST.

Suggested solutions

We know that the essence of GST is based on a value-

added concept. From our understanding, the solution to

s 65(5) of the GST Act is relatively simple. The person

selling the vessel must ensure that the conditions of sale,

whether in the form of a contract for sale or proclamation

of sale, provide for the payment of GST in addition to the

contract price.

A sample GST term would read as follows:

Goods and Services Tax (GST)

(a) Unless specied to the contrary in the Contract

Details, all prices are exclusive of Goods and

Services Tax (“GST”) on the Services and

Products and other supplies made under this

Contract to the extent that they are taxable

supplies within the meaning of the Goods and

Services Tax Act 2014 (‘the GST Act’).

(b) In this clause, a word or expression dened in the

GST Act has the meaning given to it in that Act.

22 Section 64 of the GST Act 201423 Section 65(5) read with sub-paragraph 5(7) of the First Schedule of the GST Act 201424 By the Royal Malaysian Customs Department, 18 July 2013


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(c) If a party (Supplier) makes a supply under or

in connection with this Contract in respect of

which GST is payable, the recipient of the supply

(Recipient) must pay to the Supplier, an additional

amount equal to the GST payable on the supply

(GST Amount).

In summary, the terms in the agreement leading to the

sale and purchase of a vessel and/or proclamation of sale

must specically spell out that GST charges ought to be

borne by the purchaser, in addition to the purchase price.

Otherwise, the mortgagee could be held accountable for

those charges. Whether this is a fair burden placed on the

mortgagee, who is merely enforcing his rights under the

facility, warrants an article by itself.

Conclusion

It is undeniable that the GST will affect all individuals

and industries. However, the extent of its impact varies,

depending on the type of activity. Compared to other

industries, the GST is likely to have minimal impact on

the merchant shipping sector and maritime supply chain

as most international trade activities are zero-rated. The

rationale for this is to maintain competitiveness of the

seaborne trade in Malaysia.25

Apart from the million-dollar question as to whether

Malaysia is in fact ready for the GST, the implication of

GST should not be taken lightly as it has a proven track

record in countries that have implemented it thus far. With

proper understanding of and education on the impact of

GST, it may well be a way forward in tackling the nation’s

scal decit. LH-AG

About the authors

Datuk D P Naban ([email protected]) heads

the Tax, GST and Private Clients Practice

Group at Lee Hishammuddin Allen & Gledhill.

He regularly represents taxpayers in tax and

customs disputes in Malaysia. He also advises

taxpayers on various tax matters including

transfer pricing, tax audit & investigation and

international tax law. Naban also heads the

rm’s Shipping Practice Group.

Jennifer James Ilango ( [email protected])

is an associate with the Shipping Practice

Group.

25 Margaret Ang Guat Hee and Laksme Khorana, “An Assessment of the Introduction of Goods and Services Tax (GST) in Malaysia and its Implications onthe Merchant Shipping Sector and Maritime Supply Chain”. See


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The ‘Law’ on Trade Secrets|by Lim Zhi Jian|

When Colonel Harland Sanders opened the rst Kentucky

Fried Chicken outlet in 1952, neither he nor anyone

else could have foreseen that it would grow into 18,875

locations generating US$23 billion in revenue a year, and

all due to one trade secret, the “Original Recipe”.

Coca-Cola, the world’s most valuable brand for 13consecutive years1 at US$80 billion and based on a

sugared beverage served 1.8 billion times a day, was built

on a 140-year-old trade secret that the label of ingredients

gives no hint of.

A multi-billion dollar business empire can be built on trade

secrets.

Every business has its secrets

While the average business may not have a billion-dollar-

generating secret, it may not realise the value in their

existing information. A business may have more tradesecrets than meets the eye (and these are not limited to

industrial or manufacturing processes).2

While the name of the individual client is not condential,

the list or database of clients on which a business has

expended time and effort to compile may be.3

Business information relating to cost prices, quoted prices

(which may vary depending on the particular supplier

and client), past transaction records, specic needs and

requirements of certain customers — which the business

has learned over time — may also be regarded as

condential to the business.4

In the same vein, ongoing negotiations between

contracting parties have also been regarded as highly

condential.5 Contracts, too, can be condential in

nature.6 If such information were to fall into a competitor’s

hands, clients may be poached and prices undercut.7

Information publicly available is not condential as such.

However, it is perfectly possible to have condential

information based on publicly available material, if it can

only be reproduced by a laborious compilation process.8

The fact that it consists partly of public information does

not mean it cannot be information condential to a

business.9

The list of what may be considered condential is not

exhaustive.10

Protection

As important and valuable as trade secrets are, the

protection afforded by the law is not always adequate.

Protection of trade secrets may take the following forms:

(a) copyright;

(b) patent; and

(c) duty of condence.

1 Until it was dethroned by Apple 2 Certact Pte Ltd v Tang Siew Choy [1991] 4 CLJ (Rep) 716 at 722; Faccenda Chicken Ltd v Fowler [1986] 1 All ER 617 at 6283 Schmidt Scientic Sdn Bhd v Ong Han Suan [1997] 5 MLJ 6324 Svenson Hair Centre Sdn Bhd v Irene Chin Zee Ling [2008] 8 CLJ 386 at 397-399; Schmidt Scientic Sdn Bhd, supra n 3 at 695; Worldwide Rota Dies

Sdn Bhd v Ronald Ong Cheow Joon [2010] 8 MLJ 297; [2010] 1 LNS 444; Certact Pte Ltd, supra n 25 Schmidt Scientic Sdn Bhd, supra n 3; Certact Pte Ltd, supra n 26 Certact Pte Ltd, supra n 27 Schmidt Scientic Sdn Bhd, supra n 38 Saltman Engineering Co Ltd v Campbell [1963] 3 All ER 413 at 415; Worldwide Rota Dies Sdn Bhd, supra n 3. The High Court grounds of judgment may

also be viewed here: at 34-359 Seager v Copydex Ltd [1967] 2 All ER 41610 Alfa Laval (M) Sdn Bhd v Ng Ah Hai & Ors [2008] 5 MLJ 344


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Copyright

Copyright is the exclusive right granted for the exploitation

of an artistic works, literary works, musical works, lms,

sound recordings and broadcasts. A customer database,

information on prices, contracts and individual preferences

of customers may qualify for copyright protection as

literary works.

However, copyright protection of trade secrets is

inadequate and often not feasible because:

(a) Not every trade secret can satisfy the requirement

of originality for copyright to subsist;

(b) copyright only subsists during the life of the

author plus 50 years;11 and

(c) copyright protects works in tangible form and

does not protect ideas as such.

Patent

A patent is an exclusive right granted to exploit an invention.

While a patent grants absolute monopoly, protection of

trade secrets by means of a patent may be inadequate

(and, to an extent, counter-productive) because ling for

a patent requires publication of the invention.

a) By ling for a grant of patent:

i) even after publication, there is no guarantee

that the patent would even be granted;

ii) Protection is limited to only 20 years from the

date of ling, assuming patent granted;

b) the condition for grant has high thresholds,

which most trade secrets may not satisfy the

requirement that a patent must:

i) be novel;

ii) involve an inventive step; and

iii) be industrially applicable;

c) the application process is costly and lengthy;

d) even if granted, a patent is still open to invalidation

actions.

Duty of condence

A duty of condence protects information (neither publicly

available nor trivial) that is conveyed in condence.

The law imposes a duty of condence over information

where the information:

a) is not publicly available or is trivial; and

b) is conveyed in condence

The protection is available without:

a) the need to le any application or make any

disclosure; and

b) any time limit to the protection

11 Regardless to whom he may assign ownership of the copyright to


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In the case of employees, there is an implied duty of good

faith and delity which encompasses an obligation on

employees not to divulge condential information, or use

it in a way that is detrimental to their employer. It is a

breach of the implied duty even to memorise condential

information with the intention of using it later, even if such

use or disclosure is post-employment.12

Legal protection of condential information has the

following drawbacks:

a) if the recipient has no notice of its condential

nature, he is not bound to keep it a secret;

b) therefore continuous effort is required to preserve

condential nature of the information;

c) once disclosed outside of the duty of condence,

it may enter into public domain and be available

to the whole world;

d) it does not prohibit an exploitation of a secret

manufacturing process discovered upon reverse

engineering of the same;13

e) the protection is somewhat amorphous, relying as

it does on common law and equitable principles

rather than legislation.

Keeping the cat in the bag

The manner in which secrets are guarded has been held

to be a material consideration in determining whether

a certain material is condential in nature,14 because a

duty of condence may only arise under circumstances

imparting an obligation of condence; when the recipienthas notice.15

In an environment where condential information needs

to be shared, the steps that a business should take to

retain condentiality in information include:

a) plainly making it known that the information is

regarded as condential;

b) giving notice that the sharing is by reason of

seniority or responsibility;16

c) demonstrably restricting/limiting access to the

information and guarding of the same;

d) employing technological measures to prevent

unauthorised copying and sharing of information

on devices of employees;

e) entering into non-disclosure or condentiality

agreements (which may be specic for one-off

project partners or joint ventures, or wide and

general for employees); and

f) alternatively, incorporating condentiality clauses

in employment agreements.

Feathers in the wind

In the event of a leak, seeking immediate advice from

your intellectual property legal adviser tops the list of

things to do. Once disclosed, a secret can no longer be

restored as one.17 Every legal remedy at your disposal

will be redundant once the information enters the public

domain.

The legal burden in an action for breach of condence

is discharged by establishing unauthorised use of theinformation to the detriment of the communicating party,

the information of which has the necessary quality of

12 Schmidt Scientic Sdn Bhd, supra n 313 Mars UK Limited v Teknowledge Ltd [2000] FSR 13814 Ansell Rubber Co Pty

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