New Malaysian Latent Damages Regime: Uncertainty out of Clarity?

On 1 September 2019, the Malaysian Limitation (Amendment) Act 2018 ("Act") came into force, introducing, for the first time, a statutory limitation period regime for latent damages claims[1] – currently only applicable to negligence actions that do not involve personal injuries.[2] With the new Section 6A, the limitation period for non-personal injury negligence claims is now extendable up to a maximum period of 15 years.

While a welcome intervention in an area of Malaysian law previously governed by conflicting jurisprudence, the Act introduces various new concepts but with little legislative guidance. This creates unintended legal risks for entities with Malaysian law exposure. In this post, we discuss how these changes can impact your business.

Pre-Amendment Malaysian Position

The default Malaysian position is that actions founded on tort must be brought within six years from the date on which the cause of action accrued.[3] Failure to do so provides a complete defence to a claim – a position that Malaysian courts strictly enforce.[4] This presents considerable difficulties for actions involving latent damages, which are not uncommonly non-discoverable by reasonable inspection or do not manifest themselves during the six-year limitation period.

Compounding this strictness is the Malaysian courts' approach to the accrual date of actions. Under Malaysian law, tortious claims accrue on the date damage is caused by the tort. This has been understood differently in conflicting Court of Appeal decisions, one of which significantly hinders latent damages claims:

• In Ambank (M) Berhad v Abdul Aziz Bin Hassan[5] ("Abdul Aziz"), a tortious claim for professional negligence was brought for a solicitor's failure to advise on the invalidity of a loan security document that was only discovered when its enforcement was refused. This occurred seven years after the loan and security documents were signed. Relying on this timeline, the defendant argued that the relevant limitation period had expired as any tortious action had accrued at the document signing date, which was over six years prior. The claimant's riposte was that it could not reasonably have detected the defendant's negligence, and any right of action, until and unless the dismissal of the enforcement action. The Malaysian Court of Appeal rejected the claimant's argument and found that the six-year limitation period ran from the date of the loan's signing. In its view, it is irrelevant whether the claimant had or could have discovered the damage underlying its tortious action.
• By contrast, the Malaysian Court of Appeal later took a diametrically opposed view in AmBank (M) Bhd v Kamariyah bt Hamdan & Anor[6] ("Kamariyah"). Assessing a similar fact pattern involving a solicitor's negligence in the preparation of a loan security document, the court declined to follow Abdul Aziz and held that limitation should run from the date the damage was discovered, or ought to have been discovered by the claimant – a principle termed the "discoverability" rule. Applying this rule, it held that the earliest that it could be said that the claimant should have suspected – and sued for – possible solicitor negligence was at the challenge against the security instrument.

This jurisprudential conflict remains unresolved. While Kamariyah sought to moderate the strict position in Abdul Aziz, the latter remains binding precedent in Malaysia, which has not uncommonly precluded otherwise meritorious tortious claims for latent damages, particularly in construction disputes.

New Malaysian Position

The new Section 6A is thought to resolve the conflict. Under the new provision, the limitation period for non-personal injury negligence actions is the later of either:

• Six years from when the cause of action accrued; or
• Three years from the date when the claimant knows or ought to have known:
  • The "material facts about the damage" suffered;
  • The identity of the defendant(s); and
  • That the loss was attributable, in whole or in part, to the act or omission that is alleged to constitute negligence.

Where the latter situation applies, no action shall be brought after fifteen years from the date on which the cause of action accrued.

Although pursuing clarity, Section 6A raises further questions by, amongst others, introducing concepts new to Malaysian law. Some potential issues are:

• One uncertainty is the elements constituting "material facts about the damage" underlying the negligence claim, on which the Act does not give guidance. A fallback position may be to look to jurisprudence on the English Latent Damage Act 1996 ("LDA") from which the Act draws inspiration. For this reason, the text of the Act largely mirrors Section 14A LDA with the said phrase appearing in both instruments. However, while the LDA contains a statutory definition of this phrase,[7] the same does not appear in the Act. Recent experience shows that Malaysian courts view such differences in drafting as a signal to depart from related foreign jurisprudence.[8] Thus, it is uncertain if Malaysian courts will have regard to the approach of the English courts. While losing access to a developed corpus of law in such event, it is a chance for Malaysian courts to develop their own jurisprudence redressing the deficiencies in the LDA.
• A second point of uncertainty is what qualifies as a negligence action under Section 6A. While clearly applying to tortious actions for negligence, the section is unlikely to cover claims for breach of a contractual duty to take reasonable care. However, claims for negligent misrepresentation relating to a contract may nevertheless fall within its ambit as they are, by nature, tortious claims for negligence.[9] Relatedly, although Section 6A does not apply to all forms of torts, a non-negligence tort may arguably enjoy the extended limitation period where it substantially overlaps with the tort of negligence. An example of this overlap is the tort of nuisance, which sees significant similarities with negligence under modern law. With careful drafting, a nuisance claim may enjoy the utility of Section 6A.
• A further uncertainty is the applicability of Section 6A to transactions commencing or completed before 1 September 2019. The Act is clear that existing legal actions are unaffected by the amendments.[10] However, it does not clarify the position for existing transactions from which no legal actions have arisen. Should it be found by Malaysian courts that Section 6A applies to ongoing or completed transactions, this would have significant commercial implications as the additional nine-year legal risk exposure would not have been priced into the parties' already agreed risk allocation.

Conclusion

These uncertainties have considerable implications for latent damages claims in Malaysia. Where the Act does not apply, a claimant would need to rely on Malaysian common law on limitation periods to sue for latent damages and, thereby, navigate the debate between Kamariyah and Abdul Aziz. These are areas ripe for judicial guidance and a space worth watching.

In the meantime, parties to Malaysian transactions should assess the bearing of the Act on existing contracts and arrangements. For construction projects, it is worthwhile considering the sufficiency of post-completion insurance and guarantees in light of the extended limitation period. Equally important is for parties to reassess the sufficiency of existing data retention and record keeping policies for this new timeframe.

For further information, please contact Peter Godwin, Regional Head of Practice – Dispute Resolution, Asia and Managing Partner, Kuala Lumpur, Nicholas Hoh, Senior Associate, Daniel Chua, Associate, Lim Tse Wei, Associate, Rebecca Pang, Associate or your usual Herbert Smith Freehills contact.

[1]        For a helpful judicial definition of "latent damages", see Baxall Securities Ltd v Sheard Walshaw Partnership 83 ConLR 164 at [46]: " The concept of a latent defect is not a difficult one…it must be a defect that would not be discovered following the nature of inspection that the defendant might reasonably anticipate the article would be subjected to."

[2]        Separately, the amendments also introduce an extended limitation period for claims commenced by persons under disability (see new Section 24A, Malaysian Limitation Act 1953). This is beyond this article's scope but may be of interest to investors with Malaysian exposure.

[3]        Section 6(1), Malaysian Limitation Act 1953.

[4]        Loh Wai Lian v S.E.A. Housing Corporation Sdn Bhd [1984] 2 MLJ 280; Credit Corporation (M) Bhd v Fong Tak Sin [1991] 1 MLJ 409.

[5]        Ambank (M) Berhad v Abdul Aziz Bin Hassan [2010] 3 MLJ 784.

[6]        AmBank (M) Bhd v Kamariyah bt Hamdan & Anor [2013] 5 MLJ 448.

[7]        Section 14A(7) LDA

[8]        Far East Holdings Bhd & Anor v Majlis Ugama Islam dan Adat Resam Melayu Pahang and other appeals [2018] 1 MLJ 1

[9]        Laws v Lloyds [2003] EWCA Civ 1887

[10]       Section 5, Malaysian Limitation (Amendment) Act 2018.

Disclaimer

Herbert Smith Freehills LLP is licensed to operate as a Qualified Foreign Law Firm in Malaysia. Where advice on Malaysian law is required, we will refer the matter to and work with licensed Malaysian law practices where necessary.