Insights

What’s changed?

Since June 2023, the EU has implemented the European Union Deforestation Regulation (EUDR) aimed at mitigating deforestation and forest degradation associated with certain commodities, including palm oil.

What this means for Malaysian palm oil businesses

Under the new Regulation, Malaysian palm oil businesses that export their commodities covered by the EUDR into the EU market must prove that their products are both deforestation-free and compliant with relevant local laws.

These businesses will have until 30 December 2024 to ensure that their products meet these new requirements, a failure of which will result in a loss of market access in the EU.

Key compliance requirements

1. Due diligence statement

Before placing goods into the EU market, the EUDR requires businesses to produce a due diligence statement. This statement needs to expressly confirm, that due diligence has been conducted and no or only a negligible risk of deforestation and incompliance with the legislation of the country of production of the commodities have been identified.

The due diligence statement requires three main steps to be completed:

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2. ‍Reporting Obligations

Businesses must also report their due diligence systems yearly and keep documentation related to due diligence for at least five years.

Penalties for non-compliance

The EUDR places significant penalties on businesses that fail to comply with the Regulation including having their products confiscated and facing fines of at least 4% of a business’ annual turnover in the EU. More severely, violations of the EUDR can lead to businesses being denied access to the EU market.

How we can help

The required due diligence statement under the EUDR can be a complex and challenging task for palm oil businesses. It requires a comprehensive collection, management and analysis of data and information extending to individual raw material producers, which must be disseminated throughout the entire value chain.

With only six months to go before these requirements are mandatory by law, our team of experts can help your business be fully equipped to meet EUDR obligations and maintain continued success in the EU market.

If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with.

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In the second edition of the KPMG Intellectual Property Newsletter for 2024, our Senior Associate, Stanley Lee, has contributed an article on dealing with employee-generated IP in Malaysia. The article explores key issues pertaining to ownership of IP assets created by employees, including some pointers for employers to consider before entering into a Confidential Information and Invention Assignment Agreement (“CIIAA”) with an employee based in Malaysia.

This article highlights predictions from Global KPMG Legal Services leadership from around the world on how data, privacy and cyber security issues will affect the future of legal functions and legal practice. As predictions, they are not intended to guarantee any future outcomes.

Today’s legal teams are challenged by rapid technological innovations. Generative artificial intelligence (gen AI) and other new technologies are being adopted across legal functions and broader businesses at breakneck speed. While productivity is being pushed to new heights, organizations are being exposed to a new range of risks, including data privacy breaches, loss of attorney-client privilege, heightened regulatory scrutiny, ransomware and related reputational damage.

At the same time, new abilities to access, manipulate and analyze huge pools of data are compelling legal professionals, regulators and policy innovators to balance technology’s potential to drive positive social change against the dangers of exposing large swathes of sensitive personal information.

How will these trends reshape the legal functions of the future? Here are KPMG professionals’ top five predictions:

1. As gen AI becomes ever more embedded into legal function processes, legal teams will need to understand how and when to keep humans in the loop to maintain the skills needed to guard against the related risks.

The application of gen AI and other new technologies to legal work will significantly increase efficiency and productivity. These gains will grow as legal professionals get more comfortable with these powerful solutions and continue to develop more constructive ways to employ them.

Dependence on gen AI will grow apace, however, and legal teams will need to stay vigilant about the attendant risks. For example, using gen AI to inform legal advice could lead to data breaches that could affect privilege. And eventually, as gen AI subsumes ever more routine legal activities previously done by junior lawyers and paralegals, there will be fewer people in the organization with the skills to do that type of work.

Legal professionals will need to avoid the tendency to simply accept that a computer’s output is correct without questioning the reasoning behind it. They will need to develop the skills to work backwards from the output to explain how a legal conclusion was derived and independently verify whether it is accurate. Attorneys will also need to be purposeful in determining which processes are a good fit for AI and where they still need to maintain the skills to verify the legitimacy and accuracy of AI output.

2. A raft of new legislation will emerge to address a wide array of AI-related issues.

As new AI legislation is enacted, legal teams will move beyond building AI for their own use cases to advising their businesses on the AI implementation. Legal departments will need to understand all of these different rules so they can establish legal frameworks that enable the organization to innovate and use AI. This use must follow ever-evolving new laws and regulations and must proceed in a safe and trusted way.

Within these frameworks, legal teams need to set business-optimized guardrails so they can make the most of business opportunities while preventing their organizations from incurring risk.

Smart use of technology will be a key to managing these new compliance obligations. gen AI and large language model AI can ingest, decipher, summarize and automate data and regulatory and compliance rules to a much wider degree than any current technology. Legal professionals who learn how to use technology for both improving productivity and policing its use will have a distinct competitive advantage.

3. Privacy laws and approaches to open data innovation will continue to diverge. The more AI is relied on, the more the risks increase, leading to more rigorous requirements aimed at protecting personal data on one hand while enabling its use for productivity gains and positive social change on the other.

Revolutionary AI systems have enormous potential to help solve various societal problems, such as disease and vendor diversity-based discrimination. However, these systems require copious amounts of personal data to create reliable statistical conclusions, raising issues about whether the right permissions and safeguards are in place for processing that data.

Regulatory restrictions on data usage, such as data localization and data sovereignty rules, will continue to increase. However, there will be some push and pull as some jurisdictions, such as the UK, attempt to simplify those rules in order to encourage innovation, sharing of data and open data. For example, the EU Data Act aims to allow public authorities to make public data available for purposes of the wider community via a public data trust.

Legal teams are likely to increase their use of AI-enabled privacy technology to demonstrate compliance as new data protection legislation comes onstream. This technology can also make legal data analysis more efficient and ultimately help make legal decisions more consistent.

4. With gen AI’s ability to create and transform, data sources will become more opaque and harder to trace, leading to more data privacy and intellectual property disputes.

As machine learning, large language models and gen AI continue to advance and collect huge volumes of data, it will become increasingly difficult to trace and verify the sources used to train these technologies. Currently, we have seen disputes over AI’s use of copyrighted texts and artworks in generating new works. The inability to prove who “owns” a source of original data could frustrate attempts to gain intellectual property protection for AI-generated results.

Challenges in tracing data could also cause companies to run afoul of data privacy legislation by hampering their ability to comply with legislated data subject rights, such as access or erasure requests.

In-house privacy teams will need to expand their focus to streamline processes and controls and adapt to AI-related risks and regulations. Legal departments will also need to have the ability to quickly develop internal policies, procedures and controls to keep up with the pace of new usage.

5. Legal departments will be on the front lines of defending against cyber attacks and upholding organizational resilience.

Cyber security threats are likely to multiply in the future as cyber criminals become adept at using gen AI for writing ransomware, bypassing protections, spreading misinformation and other offences. Legal teams will be called on to respond to these risks on a number of fronts by:

• advising companies on consistent policies for responding to and dealing with ransomware attacks
• working with in-house technology or operational teams to implement or adopt appropriate cybersecurity technology to protect the organization’s data (in compliance with stricter data protection/cyber security laws).
• educating people across the company on cyber risks, including the guardrails needed to mitigate those risks and what red flags to watch out for
• ensuring that the people responsible for complying with data security and privacy legislation:
  • have the skills to understand the sources of cyber risks and related safeguards
  • maintain their human connections within the organization so they can ensure AI uses remain safe and secure.

Governments can also be expected to get involved to ensure businesses in their jurisdiction have appropriate cyber security policies and governance in place. In the near future, we are likely to see legislation enacted to mandate organizational resilience on adopting stronger cyber security technology and efficient response to cyber security breach. Legal professionals will need to help their organizations develop approaches to complying with these rules.

This article is prepared by Usman Wahid, Partner, Head of Technology Law at KPMG Law in the UK; Nadarashnaraj Sargunaraj, Head of Technology, Privacy and Cybersecurity, Zaid Ibrahim & Co. (in association with KPMG Law); and Isabel Simpson, Partner, Data Protection, Technology and Telecommunications Practice Group lead, EMA.

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The Companies (Amendment) Act 2024 (“Amendment Act”) brings about a raft of changes to the current Companies Act 2016 (“Companies Act”). The amendments establish the disclosure and reporting framework for beneficial ownership in companies; strengthen the existing provisions in relation to corporate governance, schemes of compromise or arrangement and corporate rescue mechanisms; and introduces a new Division 9 on protection for essential goods and services.

The Amendment Act was gazetted in February 2024 and is expected to come into force in 2024. Companies in Malaysia, in particular foreign companies, will need to familiarise themselves with the new provisions and ensure compliance with the new legal requirements, while also leveraging any opportunities presented by the enhanced corporate governance framework and corporate rescue mechanisms.

Definition of “beneficial owner"

Prior to the Amendment Act, the Companies Act interpreted “beneficial owner” as the ultimate holder of the shares and excludes any nominee of any description.

The new interpretation now distinguishes between the beneficial owner in relation to shares, and beneficial owner in relation to a company. Notably, the existing definition of a beneficial owner in relation to shares remains unaltered.

Beneficial ownership reporting framework

A new Division 8A, encompassing sections 60A to 60E, in relation to beneficial ownership of a company has now been introduced.

The new section 60A(1) specifies that a person is considered as a beneficial owner of a company if he is a natural person who ultimately owns or controls over a company, and includes those who exercises ultimate effective control over a company. Note that reference to a “company” also includes reference to a “foreign company”. Additionally, section 60A(2) grants the Registrar of the Companies Commission of Malaysia ("Registrar") the authority to establish guidelines for the identification of a company's beneficial owner.

Prior to the Amendment Act, the Companies Act was silent on any register of beneficial owners. The new section 60(B) sets out the requirements in relation to the beneficial owners register (“BO Register”) of a company.

In relation to the BO Register, note that:

Non-compliance with these requirements by the company and its officers constitutes an offence. Upon conviction, the company and/or its officers can be fined up to RM20,000, with an additional daily fine of up to RM500 for a continuing offence. Prior to the amendments, while both the Companies Act[1] and the Beneficial Ownership Guidelines[2] outlined this obligation, they did not enforce non-compliance as an offence.

In addition, section 60(B) also:

Company to require disclosure of beneficial owner of company

The new section 60(C) requires any member of the company to inform the company whether they are a beneficial owner of the company. If they are not, they would have to provide particulars sufficient to enable persons to be identified as the beneficial owners of the company and any other information as specified in section 60B(1). An important implication of this change is that a trust company which holds shares on behalf of individuals or entities would be considered as legal owners of the shares, and hence, may be obligated to disclose the beneficial ownership of the trust company itself.

Notices in relation to the identity of beneficial owner

When a company possesses knowledge or reasonable grounds to believe that an individual is a beneficial owner, sections 60C(1)-(3) obliges the company to issue a written notice. Once the information has been provided, they have 14 days from the date when the information was received to record it in the BO register.

Notice must also be given to the beneficial owner of the company with regards to any changes to the particulars of a beneficial owner listed in the register. If the company has reasonable grounds to believe that a change has occurred, it must notify the beneficial owner to confirm the change and provide the relevant details. Similarly, if there are reasonable grounds to suspect inaccuracies in the particulars listed, the company must notify the beneficial owner to confirm or correct the information. This ensures transparency and accountability by compelling companies to actively seek and confirm beneficial ownership information.

In addition, a company and every officer who contravenes sections 60C(1)-(6) commits an offence. Violating any notice under section 60C is an offence, unless they can demonstrate that the company is already in possession of the relevant information or that the request for information was frivolous or vexatious. False statements or recklessly providing false information while purportedly complying with a notice issued is also considered an offense.

Duty of beneficial owner of company to provide information

Any individual who believes they are a beneficial owner of a company must promptly inform the company and provide the required information. Beneficial owners are also obligated to update the company about any changes in their details listed in the BO Register. Furthermore, if a person ceases to be a beneficial owner, they must promptly notify the company, specifying the cessation date and relevant details. Violation of the provisions outlined in section 60D constitutes an offence. However, it is worth noting that the Minister has the authority to exempt certain categories of companies from complying with the new Division 8A. This exemption can be granted through an official order published in the Gazette, with or without conditions, as long as these companies are already subject to similar requirements under other laws.

Beneficial Ownership of foreign company

A new section 573A clarifies that the provisions relating to beneficial ownership in Division 8A is also applicable to all foreign companies. In addition, section 576(2), detailing the content of an annual return for foreign companies, requires beneficial ownership information and address of where the BO Register is maintained if it differs from the foreign company's registered office.

Enhancements on Corporate Rescue Mechanism

In summary, the Amendment Act sets out changes relating to compromise or arrangement provisions under Division 7 - Charges, Arrangement and Reconstructions and Receivership, and Subdivision 2 Arrangements and Reconstruction. Key changes include the following:

Amended provisions on Judicial Management orders

In summary, Division 8 - Corporate Rescue Mechanism, Subdivision 2 Judicial Management of the Companies Act has been amended to include the following:

New protection for essential goods and services provisions

The new Division 9 of the Companies Act introduces protective measures for suppliers of essential goods and services in commercial contracts. The automatic exercise of insolvency-related clauses against companies for the supply of such goods and services is prohibited. Suppliers must notify the company at least 30 days in writing before exercising insolvency-related clauses. This aims to promote communication and potential resolution. The new section 430A(3) ensures that suppliers can still exercise other contractual rights, including payment for essential goods and services. Further, "insolvency-related clauses" are defined comprehensively, encompassing terms that allow automatic termination or modification due to the company's involvement in compromise, arrangement, voluntary arrangement, or judicial management. "Essential goods and services" are specified in the Ninth Schedule, namely the supply of water, electricity or gas, point of sale terminals, computer software and hardware, information, advice and technical assistance in connection with the use of information technology, data storage and processing and website hosting.

Conclusion

With regards to the beneficial ownership framework, the new provisions bring about amore comprehensive beneficial ownership reporting framework under the Companies Act as well as to address the gaps identified by the Financial Action Task Force (FATF) through the Malaysian Mutual Evaluation Report published in 2015 (MER 2015).[3] The new amendments are critical to prepare Malaysia, a member of the FATF and the Asia Pacific Group on Money Laundering for the upcoming Mutual Evaluation exercise starting from 2024 to 2025.[4] To minimise the risks faced by companies in Malaysia against illicit activities, the new provisions relating to the beneficial ownership reporting framework aims to promote corporate transparency through a disclosure regime, in line with the current international standards and best practices.

The separate objectives of the Amendment Act in relation to corporate rescue mechanisms and protection for essential goods and services aim to maintain a balance between the interests of suppliers and companies, offering clear guidelines and stability in crucial supply chains during insolvency-related difficulties. It serves to protect companies in Malaysia by regulating insolvency-related clauses in contracts for the supply of essential goods and services. It is crucial for businesses to comprehend and follow these rules for successful management of commercial partnerships.

If you have any questions or require any additional information, please contact Chan Xian Ai, or the Zaid Ibrahim & Co (in association with KPMG Law) partner you usually deal with. This article was prepared with the assistance of Sarah Menon, an Associate at Zaid Ibrahim & Co (in association with KPMG Law).

This alert is for general information only and is not a substitute for legal advice.

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[1] Section 56 of the Companies Act 2016.

[2] Guideline for the Reporting Framework for Beneficial Ownership of Legal Persons.

[3] FATF, ‘Anti-money laundering and counter-terrorist financing measures Malaysia Mutual Evaluation Report’ (Sept 2015) <https://www.fatf-gafi.org/content/dam/fatf-gafi/mer/Mutual-Evaluation-Report-Malaysia-2015.pdf>.

[4] Bank Negara Malaysia, ‘Preparation for Malaysia's Mutual Evaluation 2024-2025’ (7 June 2023) <https://amlcft.bnm.gov.my/documents/6312201/10624487/Preparation+of+Malaysia%27s+MEE+2024-2025.pdf/ea9e1196-17bb-db01-2614-c9902446dc58?t=1686211932154>.

The Blueprint for Advancing Good Regulatory Practices in the APEC Region was published in November 2023 to propel regulatory practices in the 21st century. Our Partner and Head of the Government Advisory practice, Mohamad Izahar Mohamad Izham will examine and outline the core GRP principles in the Blueprint with commentary on its applicability in the Malaysian context.

In the first edition of the KPMG Intellectual Property Newsletter for 2024, our Senior Associate, Stanley Lee, has contributed an article on measures to curb illegal streaming in Malaysia. The article looks at recent amendments to the Copyright Act 1987 to tackle the growing problem of online piracy of copyrighted media.

With the constant evolution of technology, the regulatory landscape has evolved to accommodate the dynamic nature of financial technology. Regulatory bodies are actively engaging in dialogue with industry players to ensure that the sector is up to date and relevant while maintaining the integrity of the financial system.

The regulatory environment in Malaysia reflects a balance between fostering technological advancements and safeguarding the interests of both businesses and consumers in the rapidly evolving fintech ecosystem. In this article Jonathan Lim Hon Kiat, Co-Head Corporate TMT team highlights the key regulatory developments in Malaysia in 2023.

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We make our friends; we make our enemies; but God makes our next-door neighbour. - Gilbert K. Chesterton

Interrelationship of Law and Society – The rule of Rylands v Fletcher

As humankind progressed from a nomadic hunter-gatherer existence to an agrarian society, and subsequently, toward an industrialised civilisation, a common feature emerged. We found ourselves living in increasingly close proximity. This led to the concept of “urbanisation”.

With increased human proximity, any actions gone awry have a higher risk of affecting our neighbours adversely. Common examples include dust, noise pollution, fallen trees, or fires-spreading whereas incidents which are less typical may be the escape of water or chemical substances causing floods or pollution.

When something does happen and it affects others, then these inconveniences may be actionable on a case-to-case basis under negligence, nuisance, rule of Rylands v Fletcher, or a combination of any of the above.

One of the main distinguishing factors under the Rylands v Fletcher rule is the requirement for an accumulation of dangerous substance which constitutes an unusual use of land. Once this has been established and there has been foreseeable damage due to the escape of the substance, the liability attributed to the defendant is of a strict nature,[1] i.e., the absence of fault or blame worthiness is immaterial.

Strict or selective liability?

The justification for strict liability was elaborated in the case of inception  ­̶  he who for his own purposes brings unto his lands and keeps there anything likely to do mischief must keep it at his peril.[2] In Rylands v Fletcher, the defendants had employed independent contractors to construct a reservoir on their land. While digging on the lands, the contractors found disused mines that they failed to seal properly. As a result, water flooded through the mineshafts into the plaintiff’s mines on the adjoining property.

As the activities of storage and accumulation of substances caught under the rule of Rylands v Fletcher by themselves are already potentially risky, it is only fair and right that such activities conducted intentionally and deliberately comes with a high price. This is reflected through the assignment of strict liability.[3]

The rule’s reasoning is easily relatable due to empathy towards the innocent victims. However, it is increasingly difficult for the rule to remain operative given the developments in judicial stance and concern that the rule is overly harsh towards defendants who may be similarly blameless.

Firstly, the creation of several defences and exceptions by the judiciary effectively restricts and restrains the applicability of the rule to a certain extent.

Secondly, the adjudication in Cambridge Water Co Ltd v Eastern Counties Leather plc[4] provides that the foreseeability of the type of damage is a prerequisite to liability. This appears to be an attempt to attribute a certain extent of culpability to the rule.

Thirdly, ever since the occurrence of industrial and scientific evolution, lands have been increasingly used for industrial processes. Gone are the days where land was used primarily for agricultural activities and human habitation. Advances in science and technology not only reduced instances of land used for natural purposes, but also mitigated previous reservations on using land for artificial or non-natural purposes.

There is no exception to the rule that every rule has an exception. - James Thurber

Types of Defences

Default of the plaintiff

If the damage is caused by the plaintiff’s own action or wrongdoing, he will not be compensated. In Ponting v Noakes,[5] the plaintiff's horse died after nibbling on some poisonous vegetation near the defendant's boundary. The English court held that the defendant was not liable for the horse’s own intrusion and action. Where the plaintiff is contributorily negligent, however, section 12 of the Civil Law Act 1956 will apply.

Consent of the plaintiff

In Malaysia, where the plaintiff had agreed to the non-natural use of land, he has no right of action unless he is able to prove negligence. This was seen in the case of Sheikh Amin bin Salleh v Chop Hup Seng,[6] which is in line with the English case of Kennard v Cory Bros & Co Ltd.[7]

Implied consent may also be raised if a tenant of the premise, allows the condition of adjoining premises to become such that the likelihood of an escape under the Rylands v Fletcher rule is probable, as decided in the English authority of Kiddle v City Business Properties Ltd.[8]

It is important to note that implied consent cannot be presumed just because the occupied land is situated near or adjacent to a premise where dangerous substances are accumulated on a daily/ordinary basis.[9] Similarly, occupation of a land in proximity to inherently dangerous and unsafe state of affairs or installations does not equate to implied consent.[10]

All of the above are not contradictory as the defence is only available within the context of a tenant-landlord relationship rather than just neighbours or tenants who are renting from the same landlord, as ruled in the case of Humphries v Cousins.[11] Parties who are neighbours are not deemed to have consented to inherently dangerous activities just by way of proximity.

Common benefit

Where the source of the danger is maintained for the common benefit of the plaintiff and the defendant, the rule under Rylands v Fletcher will not be established. This is by analogy similar to the defence of consent.

In the English cases of Carstairs v Taylor[12] and Dunne v North Western Gas Board,[13] the defendants were found to be not liable, subject of course, to the defendants’ non-negligence.

However, commentators no longer regard this as a defence. It is submitted that perhaps common benefit ought to be considered only as a factor in determining whether the plaintiff has consented to the risk of damage. This would eliminate common benefit as an independent defence and include it as an element of consent.[14]

Act of third party

The defendant is not liable where the escape of accumulated substance is due to an unforeseen act of a third party, provided that there is no negligence on the part of the defendant. In the English Court of Appeal case of Perry v Kendricks Transport Ltd, the court held that the basis of the defence is the absence of any control by the defendant over the acts of a stranger on his land.[15]

Notwithstanding that, a cause of action would succeed if the plaintiff could show that the act that caused the escape was one that the owner could have contemplated and taken reasonable precautions against. In Hale v Jenning Brothers,[16] the proprietor of a chair-o-plane was held liable for the escape of a chair caused by a passenger’s tampering that resulted in the plaintiff suffering severe injuries, whereas in North Western Utilities Ltd v London Guarantee & Accident Co Ltd,[17] the construction of a storm sewer beneath the defendant's underground gas pressure main caused it to crack and destroyed the hotel by fire.

However, academicians have argued that the legal doctrine upon which the cases ought to have been decided is mistaken as such cases involve common negligence and should not be classified as Rylands v Fletcher cases.[18] The reasoning is that the Rylands v Fletcher rule is a strict liability tort and therefore any negligence – as in breach of duty of care – on the part of the defendant is irrelevant in determining liability.[19] It should not matter that the defendant could or could not have reasonably foreseen the act of the stranger.

Act of God

An act of God refers to circumstances that are beyond anyone’s control which cannot be foreseen or guarded against. This defence will apply for natural disasters that is not within the foresight of the defendant.[20] Examples includes extraordinary rainfall, high wind and high tide tsunami, lightning, earthquakes, cloud burst and tornadoes.

Nonetheless, in situations where such natural disaster can be foreseen, the defence will not apply. In Kwan Sun Ming v Chak Chee Hing, it was held that in a towage contract, a storm must be expected and would have to be guarded against. For a storm at sea to be regarded as an act of God, it would have to be a storm that could not have been reasonably foreseen.[21]

It can be deduced that the objection against the defence for an act of a third party would similarly apply here since both are events with randomised probability beyond control. The Rylands v Fletcher rule is a strict liability tort and therefore it should not matter that the defendant could or could not have reasonably foreseen the act of God.

Statutory authority

Sometimes statutes, like section 95 of the Street, Drainage and Building Act 1974, affords state authorities or officers with immunity and exempts them from liability.  Whether they are exempted or not, and to what extent, is a question of statutory interpretation. For instance, sections 5, 6 and 7 of the Government Proceedings Act 1956 relating to proceedings by and against the Federal Government and the Governments of the States have been relied upon to establish legal actions against officers and vicariously, the government.

We must not look at a past incident with the spectacles from the future. - Lord Denning

Foreseeability of damage

The general tenor of Justice Blackburn's statement of principle Cambridge Water Co Ltd v Eastern Counties Leather plc is that knowledge, or at least foreseeability of the risk, is a prerequisite of the recovery of damages under the principle.[22]

What is unclear is whether it is only the kind of damage that needs to be foreseeable or that the escape must be foreseeable too. Lord Goff, in holding that the seepage of the chemical through the factory floor into the earth and subsequently into the water was unforeseeable, seemed to suggest that the escape too, need be foreseeable.[23]

In Malaysia, there is yet to be any case which relates specifically to the question regarding which element does foreseeability pertain to – the type of damage or the possibility of escape, but cases often quote the English judgment in verbatim, i.e. “it could not possibly have foreseen that damage of the type now complained of might be caused.”.

In Projek Lebuh Raya Utara-Selatan Sdn Bhd v Kim Seng Enterprise (Kedah) Sdn Bhd, the Court of Appeal stated that liability arose only if the defendant knew or ought reasonably to have foreseen that those things might, if they escaped, cause damage.[24]

Many academicians have also submitted that if the escape must also be foreseeable, the notion that the rule in Rylands v Fletcher connotes with it a strict liability would no longer hold true.[25] There will no longer be any element that is independent from the establishment of blameworthiness. The accumulation of dangerous substance which constitutes an unusual use of land, the foreseeability of type of damage and the foreseeability of escape will all be associated with fault. In Ellison v Ministry of Defence, it was suggested that it is only the type of damage and not the escape that must be foreseeable.[26]

What would be a nuisance in Belgrave square would not necessarily be so in Bermondsey. – Lord Justice Thesiger

Non-natural use of land

The judiciary has managed to keep up with the times when it comes to the development of the rule in Rylands v Fletcher. The case of Rainham Chemical Works v Belvedere Fish Guano[27] ruled that the use of land to build a factory for the manufacture of explosives was a non-natural use in 1920, but later in the 1940s, the House of Lords refused to consider itself bound by the same finding in light of the industrial activities during war time.[28]

Whether the use of the land is non-natural is a question of fact – factors such as time, location and ordinary activities of mankind must be taken into consideration.[29] Since storage of ammunitions is not a non-natural use of the land during wartime, the legal regime will not provide protection. Plaintiffs will have to resort to the tort of negligence, which is a separate cause of action with its own technicalities.

In British Celanese Ltd v AH Hunt (Capacitors) Ltd, the court refused to adjudge the manufacturing and storage of electrical and electronic components on a factory situated in an industrial area planned and laid out for the purpose of accommodating manufacturers in the year 1964 to be a special use of land.[30]

In Mason v Levy Auto Parts of England, the utilisation of land for the storage of spare parts for vehicles and other combustible materials was held by the judge to be non-natural because of three factors, one of it being the character of the neighbourhood.[31]

However, Lord Goff said in Cambridge Water Co Ltd v Eastern Counties Leather plc that “the storage of substantial quantities of chemicals on industrial premises should be regarded as an almost classic case of non-natural use”.[32] Malaysian academicians have expressed their reservations towards the statement and opine the decision to have been delivered by way of per incuriam.[33]

This was arguably settled in Transco plc v Stockport Metropolitan Borough Council where Lord Bingham made it clear that the rule will only apply to extraordinary and unusual use.[34] In line with majority of the cases mentioned above, it appears that locality is in fact a significant factor to be taken into consideration, similar to the quote under nuisance that “what would be a nuisance in Belgrave Square would not be so in Bermondsey”.[35]

Taking into consideration the Malaysian landscape, locality, custom and usual practice, the fact that city planning is mostly conducted based on functionality in most parts of the country (i.e., segregated into residential, business, and industrial areas), this would pose considerable challenge for plaintiffs as they need to establish that the use of land must be non-natural.

Commentary

The study of interrelationships explores the connections between people and system. In the context of law and society, this perspective examines how urbanization has prompted the establishment of and reforms to legal frameworks to address disruptions among neighbours in land-related matters. It emphasizes the evolving dynamics between people and the legal system in response to societal changes.

In the attempt to keep up with times, the rule in Rylands v Fletcher has been expanded gradually over the years through the evolving judicial stance and interpretation as well as introduction of defences. Unfortunately, this has led to various differing views and dissents among the judiciary.

The attribution of the element of fault increasingly blurred the lines between negligence claims and Rylands v Fletcher actions, thereby causing greater confusion and uncertainty in relation to the continued relevancy and applicability of the latter in this age and time. This phenomenon is reflected in the limited number of case authorities in this respect compared to other causes of action in Malaysia.

Some academicians have suggested for the rule to apply to instances of ultra-hazardous activities or extraordinary use of land to avoid the rule from becoming obsolete. It would be interesting to witness the fate of the rule in Rylands v Fletcher within the Malaysian landscape from hereon – whether it would fall into disuse and lead a quiet death or be revived and transformed by the judiciary to adapt with the times.

If you have any questions or require any additional information, please contact Jeyakuhan Jeyasingam or the partner you usually deal with at Zaid Ibrahim & Co (in association with KPMG Law). This article was prepared with the assistance of Viviana Goh Wen Li, a Trainee Associate in Zaid Ibrahim & Co (in association with KPMG Law).

This article is for general information only and is not a substitute for legal advice.

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[1] John Rylands and Jehu Horrocks v Thomas Fletcher (1868) LR 330 (HL).

[2] Ibid.

[3] Norchaya Talib, Torts in Malaysia (Sweet&Maxwell, 2021) p 442.

[4] Cambridge Water Co Ltd v Eastern Counties Leather plc [1994] 2 AC 264.

[5] Ponting v Noakes [1894] 2 QB 281.

[6] Sheikh Amin bin Salleh v Chop Hup Seng [1974] 2 MLJ 125.

[7] Kennard v Cory Bros & Co Ltd [1921] AC 521.

[8] Kiddle v City Business Properties Ltd [1942] 2 All ER 216.

[9] Thomas v Lewis [1937] 1 All ER 137.

[10] Prosser & Sons Ltd v Levy [1955] 3 All ER 577.

[11] Humphries v Cousins (1877) 2 CPD 239.

[12] Carstairs v Taylor [1871] LR 6 Ex 217.

[13] Dunne v North Western Gas Board [1964] QB 806.

[14] Donal Nolan and James Goudkamp, Winfield and Jolowicz on Tort (20^th edn, Sweet & Maxwell, 2020) at 16-019 and 16-027. Common benefit is not included as a defence in Christian Witting, Street on Torts (15^thedn, OUP, 2018).

[15] Perry v Kendricks Transport Ltd [1956] 1 WLR 85.

[16] Hale v Jenning Brothers [1938] 1 All ER 579.

[17] North Western Utilities Ltd v London Guarantee & Accident Co Ltd [1936] AC 108.

[18] Christian Witting, Street on Torts (15^th edn, OUP, 2018) pp 466 and 467.

[19] Supra note 3 at p 442.

[20] Dr Syed Ahmad S A Alsagoff, The Law of Torts in Malaysia (LexisNexis, 2017) p 423.

[21] Kwan Sun Ming v Chak Chee Hing [1965] 1 MLJ 236 at 237.

[22] Supra note 4.

[23] Supra note 3 p 438.

[24] Projek Lebuh Raya Utara-Selatan Sdn Bhd v Kim Seng Enterprise (Kedah) Sdn Bhd [2013] 5 MLJ 360 at [120].

[25] Supranote 3 at pp 438 and 439.

[26] Ellison v Ministry of Defence (1996) 81 BLR 101.

[27] Rainham Chemical Works v Belvedere Fish Guano [1921] 2 AC 465.

[28] Read v J Lyons & Co Ltd [1947] AC 156.

[29] Ibid at 176.

[30] British Celanese v Hunt [1969] 1 WLR at 963.

[31] Mason v Levy Auto Parts of England [1967] 2 QB 530.

[32] Supra note 4.

[33] Supra note 20 at p 420.

[34] Transco plc v Stockport Metropolitan Borough Council [2004] 2 AC 1.

[35] Sturges v Bridgman (1879) 11 ChD 852.

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