Legal Environment of Business [BM011-3-1]

TUTORIAL PACK

BM011-3-1-LEB

LEGAL ENVIRONMENT OF BUSINESS

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Legal Environment of Business [BM011-3-1]

TOPIC 1: SOURCES OF MALAYSIAN LAW

Sources of law in Malaysia are divided into written and unwritten rules.

Under the written rules, we are governed by the supremacy of the Federal Constitution, the primary
document that captures the legal principles and fundamental rights of all Malaysian citizens. The
Parliament derives its power for legislation from the Federal Constitution, as well as the State
Legislative Assembly for its delegated legislation.

Under the unwritten law, its classifications are divided into English law (comprising common law
and equity), Judicial Precedents (discussed below) and customs. English law prior to 7 April 1956 is
directly applicable in Malaysia, pursuant to section 3(1) of the Civil Law Act 1956.

Government Administration System

Separation of power between Legislature, Executive and Judiciary

Legislation

They refer to the power of the Parliament to make, revoke or alter the law. The controlling majority
(after an election) becomes the government and they have power to pass law.

Essentially Parliamentary law-making involves the introduction of a Bill that will go through
Parliamentary reading/ debate & thereafter passed as an Act of Parliament

Process of law-making in Parliament:

1) Minister/ Ministry frames Bill at the advice of the Attorney Generals office
2) Cabinet passes a Bill Policy to explain the importance of presenting Bill to Parliament
3) Once Cabinet agrees, Bill is printed and presented to Parliament
4) Bill is then presented before the House of Representatives:
(a) First Reading- Minister reads Bill to the House
(b) Second Reading- Principles of Bill discussed by Members of Parliament (MPs),
debates happen between MPs
(c) Third Reading- House of Committee discusses and reviews the Bill
(d) Bill goes to Senate for approval
5) Once House of Representatives and Senate approves the Bill, Bill is presented to the Yang Di-
Pertuan Agong (YDPA).
6) Finally the YDPA stamps the Bill with his Royal Seal for approval- Bill becomes an Act.

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Delegated Legislation

It refers to the power given (delegated) by Parliament to certain bodies/ individuals to make law
(e.g. regulations issued by Ministries; by-laws issued by local authorities)

Advantages of delegated legislation:-

(i) Saves Parliamentary time
(ii) Can be made effective immediately
(iii) Access to expertise
(iv) Flexible- ad hoc response by the ministers & bodies; regulations can also be modified
without having to pass a new Act of Parliament

Disadvantages of delegated legislation:-

(i) Erosion of Parliaments constitutional role
(ii) Difficult to monitor & control (e.g. which department issues which regulation)
(iii) Bulk- difficult to keep up with recent regulations
(iv) Less democratic process as power is now given to government departments

How may delegated legislation be controlled?

(a) Judicial review- where regulations are passed ultra vires
(b) Parliamentary control & scrutiny

Judicial Precedent
The local system of judicial precedent is derived from the English law system. Judicial precedent is
also known as stare decisis, it is a principle based on the view that it is not the judges duty to
make law, but instead to decide on cases based on existing rules. The following requirements must
be met for a precedent to be binding:
(a) ratio decidendi (i.e. reason for deciding & binds future judges)
(b) hierarchy of courts: earlier court must have superior or equal status to the court considering the
statement at a later date
(c) material facts: facts must be similar for judicial precedent to be binding in subsequent cases

Example of judicial precedent:

Donoghue v Stevenson (1932): duty of care by manufacturer of food
Grant v Australian Knitting Mills (1936): precedent applied to include defective underpants

Terms to remember:-
Stare decisis- (a.k.a. doctrine of judicial precedent) is a principle which states that a decision of
a higher court is binding on a court of lower hierarchy
Ratio decidendi- a statement of law applied by the judges in deciding legal problems raised by the
facts of each case- it is the basis of the judges decision & binds other judges/
courts of inferior standing
Obiter dicta- any statement which is not an essential part of the judges decision & said by the
way; however- obiter dicta has persuasive authority & may be referred to or
considered by judges of subsequent cases

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The advantages of the doctrine of judicial precedent:-

(i) certainty and uniformity
(ii) development of rules based on changing needs of society
(iii) flexibility- e.g where material facts are similar
(iv) practical and deals with factual (cf theoretical) situations
(v) detailed discussion and reasoning- case by case basis
(vi) time-saving (need not re-argue case)
(vii) formal justice (cases are decided on like basis & not on the whim of judges)

The disadvantages of the doctrine:-

(i) Uncertainty due to the large bulk of cases & where the ratio decidendi is difficult to detect
(ii) Unjust precedent may not be overruled if similar cases are not brought to a court of higher
standing
(iii) Rigidity of rules which must be followed & bind courts of lower standing; judges not wanting
to follow a decision may distinguish the present case, creating an artificial distinction so as
not be bound
(iv) Slow growth- litigation must be taken for rules to emerge
(v) Danger of certain rules being overlooked where lawyers/ judges fail to keep up with the new
cases

How may judges avoid or alter precedents?

(a) by overruling the precedent (provided that later cases are brought before a higher court)
(b) by distinguishing the facts of a present case with the case law precedent

Sources & Further Reading:

(1) Business Law (2014) - Lee Mei Pheng & Ivan Jeron Detta
(2) Keenan & Riches Business Law 10th Ed (2011) - Sarah Riches & Vida Allen
(3) Business Law 9th Ed (2013) - Keith Abbott, Norman Pendlebury & Kevin Wardman
(4) Law for Business Students 8th Ed (2014) - Alix Adams

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Legal Environment of Business [BM011-3-1]

Topic 1: Sources of Law

Questions

1. Discuss the sources of law in Malaysia. (8 marks)

Which do you consider most important and why? (7 marks)

2. Explain with examples the concept of separation of powers. (10 marks)

Why is this concept important in a democracy? (5 marks)

3. Define the following terms:

a) Separation of powers (10 marks)
b) Legislation (5 marks)
c) Delegated Legislation (5 marks)
d) Judicial Precedent (5 marks)

4. Describe briefly the law-making process in Parliament. (10 marks)

Why is this process important? (5 marks)

5. Describe the operation of Delegated Legislation. (7 marks)

Briefly explain 2 advantages and 2 disadvantages of delegated legislation. (8 marks)

6. Describe the operation of Judicial Precedent in the Malaysian Courts. (7 marks)

Elaborate on its 2 advantages and 2 disadvantages. (8 marks)

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Topic 2: Civil Justice Process

CIVIL LAW CRIMINAL LAW

Governs relationship between individuals Wrong done to the state (Public law)-
(Private law)- e.g. contract, tort moral fault: actus reus (prohibited act) &
mens rea (guilty mind)

Action taken by a party seeking Prosecution commenced by the state (after

compensation for a loss offenders arrest by police).

Successful action results in the finding of Successful prosecution will result in the
liability against the Defendant and allows finding of guilt against the accused and
the claimant (Plaintiff) an award of causes the accused to be punished (e.g. by
damages (monetary loss) fine, imprisonment)

Standard of proof: Balance of Standard of proof: Beyond Reasonable

Probabilities i.e. the plaintiff must prove Doubt i.e. there is a presumption of
on a balance of probabilities that the innocence; the prosecutor must prove
defendant has committed the breach beyond reasonable doubt that the accused
committed the crime
Purpose: to compensate the Plaintiff for Purpose: to punish an accused for a
loss caused by Defendants breach wrongdoing/ criminal act

Parties: Donoghue v Stevenson Parties: R v Jones

DPP v Jones
(Plaintiff v Defendant)
(Prosecutor v Accused)

Takes action Defends action Takes action Defends action & casts
on behalf of doubt on prosecutions
the state case

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Topic 2: Civil Justice Process

Questions

(1) Alan bears a grudge against Stephen for going out with Alans girlfriend, Alice. Alan
sees Stephen while driving one day and knocks Stephen down, causing severe injury to
Stephen. As a result of this incident, Alan could be sued or prosecuted (or both).

Discuss the standard of proof and the outcome/ effect on Alan (upon the standard of
proof being fulfilled):-
(i) if Alan is sued
(ii) if Alan is prosecuted (15 marks)

(2) (a) Discuss three distinctions between civil law and criminal law. (10 marks)

(b) Compare the standard of proof in civil law and criminal law. What is the outcome
once the standard of proof is met? ( 5 marks)

(3) (a) Discuss the advantages of an alternative dispute resolution body compared to a court
of law. (10 marks)

(b) Can a criminal case be heard before an alternative dispute resolution body?
State the reason. ( 5 marks)

(4) Elaborate on any two types of alternative dispute resolution body. (10 marks)

(5) Alex and Sam have been doing import & export business together for more than 10 years.
Recently Alex and Sam had a dispute in their dealings and as a result, Alex would like to
take action against Sam. Referring to the facts of the case, identify the advantages if Alex
and Sam refer their matter to an ADR body.
(10 marks)

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Topic 2: CONTRACT
Definition: a legally binding agreement

FORMATION OF DISCHARGE OF
CONTRACT CONTRACT

Performanc Agreement Frustration Breach

AGREEMENT e

CONSIDERATION: ITCLR: CAPACITY to FREE Unilateral Bilateral Common Equitable

value of contract reasonable Law remedies
CONTRACT: CONSENT:
inference from willingness remedies
action & type of 1. majority age
to contract
agreement- social/ 2. legal
domestic vs personality 1.Damages 1.Specific
3. able mental 2.Agreed
commercial performance
faculties (sane sum
& sober) 2.Injunction
3.Quantum
meruit
OFFER: ACCEPTANCE: VOID VOIDABLE
promise to CONTRACT CONTRACTS
be bound absolute &
S
unqualified
agreement to be
bound Mistake Illegality Duress/
Misrepresentation
Undue
Influence

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Topic 3.1: Law of Contract

Offer & Acceptance

(1) You return someones cat, and later see there was a $50 reward offered for this. Can you go back
and claim the $50 reward? Yes/ No
(2) Acceptance must always be communicated. Yes/ No
(3) You offer to sell your car to A, and promises A that you will keep the offer open for one (1)
week. Can you sell it to B the next day? Yes/ No
(4) You hand a letter of acceptance to a postman delivering letters. If it gets lost, is there a binding
contract? Yes/ No
(5) If the offer says reply by post, and you accept by fax, there is no valid acceptance, since it was not
made the proper way. True/ False

Consideration

(1) You promise to give someone RM50 for the lecture notes you borrowed last year. Is your promise
enforceable? Yes/ No
(2) For your birthday, Ali promises to give you RM50 and Chong promises to do the same. If one of
them doesnt pay, can you enforce their promise? Yes/ No
(3) You promise to pay someone in one years time, if they deliver the goods to you now. When the
time comes to pay them, you can argue that their consideration is past.
True/ False

Intention to Create Legal Relations

(1) You promise your friend that if she pays for dinner today, youll pay for it tomorrow. The next day
you refuse to pay. Was your promise enforceable? Yes/ No
(2) You agree to go shares with three other people on a lottery ticket. Its a winning ticket, but they
refuse to share the money. Is the agreement enforceable? Yes/ No
(3) If a husband and wife set up a business together, the agreement will be presumed to be legally
binding, even though it is between husband and wife. True/ False

Capacity to contract

(1) A 15-year-old buys an exercise machine and promises to pay for it in a weeks time. If the minor
changes his mind, he can return the machine, since it is a luxury good. True/ False
(2) A minor refuses to pay for a coat bought by his wife. The contract will be unenforceable since the
coat was not for his personal use. True/ False
(3) X got very drunk at a party and agreed to buys an antique car from Y. Is X bound by the agreement?
Yes/ No

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Vitiating factors (Free Consent)

(1) A tells B the car hes selling has done less than 5,000 km. B, a car dealer, knows this to be untrue
but decides to buy it anyway. B then sues A for misrepresentation. Will this be possible? Yes/ No
(2) A threat to burn your house is considered as duress. True/ False
(3) A wife was pressured by her husband to sign a mortgage deed for their property. This was done to
save their business. Would she be able to avoid the contract for undue influence? Yes/ No
(4) Using a fake identity, B buys a car from C. By the time C realises the cheque given by B is
worthless, B has already sold the car. C will be able to reclaim the car. True/ False
(5) D and E agreed to rob a rich man and divide the proceeds equally. If D keeps all the money, can E
sue for his half? Yes/ No

Formation of Contract (Cases for Discussion):

(a) Mandy goes into a shop and sees a price label of RM20 on an ironing board. She takes the board to
the checkout but the till operator tells her that the label is misprinted and should read RM30. Mandy
maintains that she only has to pay RM20. How would you describe the price on the price label in
terms of contract law?

(b) Miranda owes Emma RM500 for a dress. Emma, because she is in need of cash, agrees to accept
RM400 in full settlement, but she later claims the full amount. Will she succeed?

(c) Leonard, aged 17, agreed to buy a refrigerator for his sandwich-making business. Is the contract
valid?

(d) Jill got very drunk at a party and agreed to buy a vintage car from Bill. Later, she is appalled by her
behaviour and does not want the car. What can she do to avoid to be bound by the agreement?

(e) Your father promises to give you a car if you obtain good results in your Level 1. If you obtain
straight As in Level 1, can you enforce the promise?

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Topic 3.2: Law of Contract

(1) Identify three differences between an offer and an invitation to treat. (10 marks)

(2) Briefly explain the differences between a condition and a warranty. (10 marks)

(3) Mimi buys from Gary a rare book signed by Lewis Carroll for $1000. Mimi paid the deposit of
$100 and agreed to collect the book one (1) month later once Gary completes the restoration work.
When Mimi comes to collect the book, Gary refuses to give it to her as he plans to donate it to the
National Museum.

(a) Discuss the remedies under contract that Mimi may claim from Gary. (10 marks)
(b) Would your answer be different if Mimi is a minor? Explain. (5 marks)

(4) Molly, a florist, contracts to buy 500 tulips from Jeb, a supplier, at $1 per stalk. Molly pays Jeb the
deposit of $1 and Jeb promises to deliver the tulips to Molly on 1 August. On 1 August, Jeb packed
the flowers for delivery to Molly but overheard his staff gossiping that Mollys business is doing
badly. Jeb decided to sell the flowers to another buyer, fearing that Molly will not be able to pay
him.
On 2 August, Jeb informs Molly by phone that he would not be delivering the flowers to
Molly. Molly had to purchase 500 tulips from Joe at $2 per stalk to meet urgent customer orders.

Discuss the following:

(a) Legal issues regarding breach of contract; ( 5 marks)
(b) Remedies that Molly may claim from Jeb for breach of contract. (10 marks)

(5) What is a voidable contract? Identify and explain the elements that make a contract voidable.
(15 marks)

(6) State and explain briefly the remedies available to a plaintiff for a defendants breach of contract.
(10 marks)

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(7) On Monday, Anne contracts to buy an antique sofa from Billy. Anne paid the deposit of $100 to
Billy and Billy promised to deliver the antique sofa to Annie on Friday. On Tuesday, Billys
warehouse caught fire and the antique sofa was destroyed.

Discuss the impact of the fire on the contract between Anne and Billy. (10 marks)

(8) Alice is a bakery owner. On 1 January, she contracted to buy 1000 kg of flour from Bobby at $1 per
kg. Alice paid the deposit of $100 to Bobby and Bobby promised to deliver the flour on 3 January.
On 2 January, Bobby called Alice to tell her that he is unable to make the delivery.

Identify the nature of breach and discuss the remedies for breach of contract that Alice may claim
against Bobby.
(15 marks)

(9) Dave owns an art gallery. At the price of $10,000, Dave commissioned 2 paintings from John, an
artist, for display at Daves gallery on 1 December. Dave paid a deposit of $1000 for the painting
and John agreed to get the paintings ready by 15 November. On 1 November, John informed Dave
that he cant deliver the paintings. One painting has been sold to Anne for a higher price and is
being packed for delivery to Anne, who stays in Australia. The second painting will be displayed in
Johns studio as his personal collection.

Discuss the nature of breach and the remedies in contract that Dave may claim against John. \

(20 marks)

(10) Ashly, a famous singer, contracts to sing at a summer concert organised by Albert & Co. The terms
of contract require Ashly to attend 3 days of rehearsal and 2 days of performance. Ashly fell sick
and was unable to attend all 3 days of rehearsals. When Ashly arrived on the day of performance,
Albert & Co tells her that the contract is terminated.

Discuss the legality of Albert & Cos action in this case. (15 marks)

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Topic 4: Tort of Negligence

Pre-Class Questions/ Exercise

(1) Awie is riding his motorbike on his way to work when Bessy knocked into him while speeding around
a corner. As a result, Awie was severely injured and his motorcycle was damaged. Police investigation
found that Awie did not fasten his helmet at the time of the accident.

(2) Ben buys a plate of fried noodles for his girlfriend on a date. The cook who prepared the fried noodles
used some soy sauce as an ingredient (after its expiry date has passed). Bens girlfriend ate the fried
noodles and became very ill.

(3) Kitty was walking past a railway track when she was struck by a wheel that came off a train. Kitty was
hospitalised for a week and incurred expensive medical fees.

(4) Lily, a noted IT consultant, published an online working paper about computer network and software
compatibility. XYZ & Co decided to install new software on all staff PCs to increase efficiency and
productivity, after referring to Lilys working paper. The software is incompatible with the staff PCs
and all data was lost.

(5) Collin won a pair of hiking boots in a lucky draw. The hiking boots were produced by Hikers
International, a well-known manufacturer. Collin wore the boots on a hiking trip. Collin slipped, fell
and broke his legs because the hiking boots have a slippery sole.

(6) Lina went into surgery to remove her appendix; the cost of surgery paid by her father. She was under
anesthetics and was unconscious throughout the surgery. When she woke up, she found out that her
appendix is intact. Instead, one of her kidneys was removed during the surgery.

For each of the above cases, answer the following questions:-

(a) What types of damage/ loss was suffered?
(b) What will be claimed by the party who suffered the loss?
(c) Who was at fault? [Was a tort committed?]
(d) What was the standard (of performance) expected?
(e) Can the reason (for loss) be explained?

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To prove negligence, Plaintiff (Claimant) must prove:

ELEMENTS TEST/ LEGAL DUTY QUESTIONS/ APPLICATION

(1) DUTY OF CARE Neighbourhood Test Is the Plaintiff within reasonable proximity
(closeness) for the Court to impose duty of
care upon the Defendant?

Should the Defendant consider the

Plaintiffs safety when he acts?

(2) BREACH OF DUTY Reasonable Mans Test Did the Defendant act like a reasonable
(of Care) man (in similar circumstances) should?

(3) LOSSES CAUSED 1. Causation 1. Was the injury/ loss (to Plaintiff) caused
BY BREACH by the Defendants action (negligence)?

2. Remoteness 2. Was the Defendant able to foresee the

damage/ loss/ injury to Plaintiff?

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Topic 4: Tort of Negligence

Questions

(1) John is driving his taxi from KL to Petaling Jaya to drop off his passenger. On the way there, the
taxi brakes suddenly fail and Johns taxi crashes into another car driven by Janet. As a result of the
accident, both Johns passenger & Janet suffered serious injuries.

(a) Referring to the facts of the case, advise on the following elements to prove a claim under
tort of negligence:
(i) Duty of care ( 5 marks)
(ii) Breach of Duty of Care ( 5 marks)
(iii) Damage/ Loss caused by breach ( 5 marks)

Police investigation found that Janet did not wear a seatbelt during the crash & the doctors treating
Janet confirmed that she would only have minor injuries if she had worn a seatbelt.

(b) How would John use the defence of contributory negligence in this case? Explain.
(5 marks)

(2) Explain with examples the following defences for tort of negligence:
a) Consent
b) Contributory negligence
What is the effect on the defendants liability when the respective defences succeed?
(15 marks)

(3) Tommy buys an action figure manufactured by Toyhouse for his 3-year old son Barry to play with.
On every action figure box, there is a label stating Not suitable for children below 5 years old.
One day, while playing with the action figure, Barry chokes on a detachable part and suffers minor
injuries.

(a) Elaborate on the duty of care owed by Toyhouse towards Barry (5 marks)
(b) Discuss the remedies under tort that Barry/Tommy may claim against Toyhouse.(5 marks)
(c) Is any defence available to Toyhouse? Briefly explain your answer. (5 marks)

(4) Bunny buys a cupcake from Aidan for her daughter Kitty. Due to the unhealthy preparation of the
cupcake by Aidan, Kitty suffered severe stomach discomfort, has to be admitted to hospital and is
unable to come to work for two days. In this case, Kitty may claim against Aidan under tort of
negligence. Discuss the THREE elements that Kitty must prove to establish negligence and state the
possible remedies available to Kitty if negligence is proven.
(15 marks)

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Topic 5: Legal Entities

1. Agent & Principal

Relationship between agent & principal

The relationship between agent and principal is a contractual one, where the agent is able to make binding contracts
between his principal and a third party (without the agent himself becoming a party).

An agents obligations are, among others:-

(a) to carry out the principals lawful instructions;
(b) to act in good faith and for principals benefit
(c) to act in agents personal capacity (no delegation)
(d) to act with reasonable care and skill, expected from the agents type of business
(e) not to allow a conflict of interest
(f) not to make secret profit etc

An agency may be terminated by the following ways:-

(a) by mutual termination
(b) if there is any breach by the agent of his duties
(c) revocation by the principal (by notice to the agent)
(d) upon the death/insanity of the agent
(e) upon the principals bankruptcy
(f) if the contract of agency is frustrated (e.g. destruction of subject matter)
(g) at the expiry of agency agreement (if agent was appointed for a limited period)
(h) upon completion of agents task (e.g. a sales agent- upon reaching sales target)

Where an agent exceeds his authority, a principal may ratify/ authorize the agents actions at a later date subject to
the following conditions:-

- agent must have named the principal and informed the third party as such at the time of contract, or
- principal had a contractual capacity at the date of contract and date of ratification (i.e. if principal is a company,
company must have been incorporated at the time of agents contract), or
- principal had full knowledge of material facts at the time of transaction, or
- principal was prepared to ratify the agents actions in any event.

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2. Employees & Independent Contractors

EMPLOYEE INDEPENDENT CONTRACTOR

Contract OF service: contract of employment Contract FOR service: party providing
and fiduciary relationship between employer service is self-employed/ an independent
and employee (position of trust) contractor

Employer vicariously liable for torts/ civil Bears own liability

wrongs committed by employee

Given statutory rights (e.g. social security, Does not enjoy similar statutory rights
employee benefits, leave, dismissal)

Works for an employer, paid fixed salary Works for own benefit, paid upon work
being completed

Example: Example:

TESTS TO DISTINGUISH BETWEEN EMPLOYEES & INDEPENDENT CONTRACTORS

Test 1: CONTROL TEST

Question to ask: What is the extent of CONTROL that the employer has over the employee?

Test 2: INTEGRATION TEST (ORGANISATION TEST)

Question to ask: Is the employees work an integral (key) part of the employers business?

Whittaker v MPNI (1976) Plaintiff in this case was a trapeze artist and an usherette. It was held by court
that Plaintiffs duties were integrated into the employers operation and there was a contract of service
(contract of employment).

Test 3: MULTIPLE TEST (ECONOMIC REALITY TEST)

Consider all other relevant factors, such as:-

- remuneration (salary, wages, allowances, commission etc)
- membership of pension scheme
- holiday pay
- paid medical leave
- prohibition of working against competitors
- control by employers disciplinary code
- supply of uniform/ equipment
- work done at employers premise (or at home)
- lack of business risk (for employees)

Ready Mixed Concrete v MPNI (1969)

Fact: Financial assistance by company to buy drivers vehicle; vehicle painted with company colours;
uniform given; all employees must be on call; pay based on mileage rate
Held: Plaintiff an independent contractor because he is operating at their own financial risk

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Other Tests:
i- MUTUALITY OF OBLIGATIONS TEST
Q: Do both parties have mutual legal obligation to provide work and to do work?

ii- OTHER ISSUES TO CONSIDER

- contract between parties and their intention
- part-time employee may be an employee
- continuous service over a period of time

3. Business Organisation: Companies & Partnerships

ADVANTAGES & DISADVANTAGES OF STARTING A COMPANY (a corporation)

ADVANTAGES DISADVANTAGES

1) limited liability 1) shareholder/director dichotomy in a

company (not the same person owns the
2) company exists as a separate entity [*see company and runs it)
accompanying explanation]
2) bound by Memorandum/Articles of
3) perpetual succession Associations/statutory regulations (less
freedom administratively)
4) shares in a company can be transferred
freely 3) costly to start up/ register a company

5) not limited in size 4) administratively more taxing since there

is a requirement of disclosure of firms
6) day to day management can be handed accounts, financial position, charges of
over to directors/managers if the firms assets, drawing of profits etc
shareholders choose not to be involved

7) where company is a public company,

funding from shares, debentures and
loans can be easily obtained

* Corporate Veil a.k.a. Veil of Incorporation

The Corporate Veil refers to the corporate personality. When a company is created, the company
becomes a separate legal person from its members (shareholders & directors): see Salomon v Salomon
(1897). Because of the corporate veil, members of the company are shielded by this veil (i.e. members are
treated as separate from the company).

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Effect of the Corporate Veil

1- Limited liability of members

2- Allows property ownership by the company (cf ownership of companys shares by shareholders)
3- The company may make contracts in its own capacity
4- Perpetual succession- company may continue to exist even where the shareholders have died or become
incapacitated
5- Shares may be freely transferred by members
6- Company allowed bigger opportunity for borrowing (e.g. a floating charge over the companys existing
assets)

Piercing/ Lifting the Veil of Incorporation

The veil of incorporation may be lifted by the following means:-

1- If the company is used to evade a legal obligation: Gilford Motor Co v Horne (1933)
2- If there is fraudulent or wrongful trading by the directors: ss 213- 214 Insolvency Act 1986
3- Groups, Holding & Subsidiary companies- treated as one and the same
4- European Court of Justices order- veil may be lifted where there has been a breach of (European)
Community rules on competition

ADVANTAGES & DISADVANTAGES OF STARTING A PARTNERSHIP

ADVANTAGES DISADVANTAGES

1) more control and management power as a 1) unlimited liability & liability of partners
partner are joint and several

2) more freedom to carry on business and to 2) partnership is not a distinct legal entity
run the partnership from partners; partners are the firms
agents, own the firms property & are
3) mutual trust and confidence between the liable in contracts between firm and a
partners third party (where contracts are made
outside the partners knowledge)
4) creation of partnership by
express/implied agreement between the 3) limitation as to size (not more than 20,
partners except for professionals in a partnership)

5) less fee incurred to create a partnership 4) consent of other partners required for
compared to a company assignment of 1 partners share

6) less formal arrangement regarding firms 5) less avenue for financing

accounts, financial position, charges of
the firms assets, drawing of profits & no 6) partners must be involved in running a
requirement for disclosure partnership (note: liability ensues even
where a partner is a silent and a non-
managing partner)

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Legal Environment of Business [BM011-3-1]

Type of business more suitable for a company model:-

- a business with a view to growth & expansion (e.g. to sell goods overseas)
- where additional funding is required
- limited liability & separate entity
- where the promoters/ owners do not wish to have active participation in the day to day running of
the company

Type of business more suited for partnership:-

- small number of persons starting up, have trust in each other & able to provide start-up funds from
their own resources
- small family businesses/ sole traders
- people with common interest or carrying on similar trade with a view to profit (e.g. accountants,
solicitors, estate agents)
- where the owners wish to participate more in the management and control of the establishment

Private limited company or Partnership?

What is suitable will depend on the following:-

- whether there is a preference for a distinct entity from the business (where liability & property
ownership is concerned)
- size & management of the business- if there is an intention to keep the business small, then maybe
partnership is a more suitable model cf benefits of a registered company (e.g. limited liability,
potential of growth etc)

Source: Business Law 9th Ed (2013) - Keith Abbott, Norman Pendlebury & Kevin Wardman

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Legal Environment of Business [BM011-3-1]

Topic 5: Legal Entities (Principal & Agents)

(1) Discuss the agents/ employees duties in the following circumstances: (5 marks each)

(a) Anne was asked by Billy her manager to take Billys shoes to be repaired
(b) Chan was asked to drive the company car to the airport to pick-up a business client and had to
buy petrol on the way back, because the tank is almost empty
(c) Daniel, a despatch clerk, was asked to bring the office printer to the managers house on a
weekend for printing urgent documents
(d) Edna, a marketing executive, who sold a product to a customer at cost price causing the
employer to lose money
(e) Freddy, a delivery clerk, who delivered goods to the wrong address- this resulted in the goods
being lost/untraceable

(2) Minnie appoints Mickey as agent to sell her house for $50,000.
(a) Identify and briefly explain Mickeys duties towards Minnie. (10 marks)

(b) If Mickey sells Minnies house to Goofy for $55,000 and keeps the $5,000, discuss the
breach that Mickey has committed.
(5 marks)

(3) The relationship between principal and agent creates obligations for both parties.

Discuss the agents responsibility and obligations to the principal. How may an agent end a
relationship with the principal?
(15 marks)

(4) Distinguish between the legal status of employee and an independent contractor from the following
perspectives:

(a) The level of control that employer has over them;

(b) Their extent of integration into the organisation; and
(c) The ability to get the employer to share in the liability for a tort committed

You are required to provide the relevant illustration for each portion of the answer.

(15 Marks)

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Legal Environment of Business [BM011-3-1]

(5) Sunshine Cabs, which operates a fleet of taxis, engages Bart as a driver. Sunshine Cabs provides
and maintains the taxi driven by Bart and pays for its petrol. Bart promises to work only for
Sunshine Cabs. Bart does not receive a wage but is paid a commission based on Barts collection.
Sunshine Cabs allow Bart to determine the number of journey he makes and his own working hours.
Applying the relevant tests to the facts of the case, evaluate whether Bart is an employee of
Sunshine Cabs or whether Bart is an independent contractor.

(15 Marks)

(6) Adam is a baker for Queens Bakery that has branches all over Malaysia. Queens Bakery provides
the cooking utensils for Adam and Adam is required to wear a uniform with company colours.
Queens Bakery also pays for Adams health insurance policy. Adam has to be available for work
on weekdays and is allowed to work for others on weekends. Adam is paid based on the hours that
he put in during the weekdays.

Determine whether Adam is an employee or an independent contractor by applying the relevant

test(s) to the facts of the case.
(15 marks)

(7) Max is a self-employed guitarist, playing gigs at local clubs. Recently, Max began to work for Nina
as a guitarist at Ninas club. Max has to work two nights a week and he is paid a monthly sum. Nina
buys for Max the musical instruments he needs and he plays with an in-house band assembled by
Nina. Nina does not allow Max to work for her competitors on other days of the week. Apply the
relevant tests to the facts of the case to determine whether Max is an employee or independent
contractor.
(10 marks)

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Legal Environment of Business [BM011-3-1]

Topic 5: Legal Entities (Business Entities)

(1) You are considering whether to carry on business as a partnership or a corporation.

Elaborate on the legal issues that you need to consider when making your decision.
(15 marks)

(2) Mark informs you that he wishes to set up a partnership with his brother Simon. Advise Mark on the
advantages and disadvantages of a partnership. (10 marks)

(3) Brian and Carl wish to start a business providing car wash service. Brian prefers to keep the
business small but Carl feels that the business can be expanded further. Advise Brian and Carl on
the legal issues they need to consider when deciding whether to start a partnership or a private
limited company.
(15 marks)

(4) Abby and Jack are good friends who wish to start a business to market Abbys homemade cookies.
Abby is a homemaker without any business background while Jack has a lot of experience in
running a business. Both Abby and Jack plan to expand the business internationally once they have
established themselves in the local market.
With reference to the above facts, which business model (partnership or private limited
company) is most suitable for Abby and Jack? Give your reasons.
(15 marks)

(5) Describe the effects of corporate personality on a private limited company.

(10 marks)

(6) Ken and Barbie are good friends who have just graduated from university. Both of them have saved
some money and wish to set up a business together selling new and secondhand books. Since they
are both business graduates, they would like to apply their knowledge in managing the business.
Both Ken and Barbie have plans to expand the business regionally once they have established
themselves in the local market.

With reference to the above facts, answer the following questions:-

(a) Elaborate THREE advantages of starting a partnership. (10 marks)
(b) Elaborate THREE advantages of starting a private limited company. (10 marks)
(c) Which business model (either a partnership or a private limited company) would you
recommend for Ken and Barbie? Justify your answer.
(10 marks)

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Legal Environment of Business [BM011-3-1]

Revision 1

Question 1

(a) Explain the operation of the doctrine of judicial precedent in the Malaysian courts. What are its
disadvantages? (15 marks)

(b) Describe the importance of the written source of law in Malaysia.

(10 marks)

Question 2

(a) Rob picks up a magazine at a convenience store owned by Sue and walked out without paying for it.
It might be expected that Rob could be sued or prosecuted (or both) in respect of this incident.
Discuss the different types of liability and standards of proof that might arise in the following
situations:
(i) if Rob is sued (5 marks)
(ii) if Rob is prosecuted (5 marks)

(b) Discuss FIVE (5) characteristics of civil law. (15 marks)

Question 3

(a) Explain the meaning of the doctrine of frustration in the law of contract. Provide relevant examples
to support your answer. (10 marks)

(b) Discuss the common law and equitable remedies available to a plaintiff for a defendants breach of
contract. (15 marks)

Question 4

(a) It is fundamental to the concept of liability for the tort of negligence that there can be no such
liability unless a duty of care is owed by a careless defendant to an injured plaintiff. With
reference to the quotation, provide explanations about the three elements that need to be proven by
an injured plaintiff in an action for negligence.
(15
marks)

(b) Explain, with appropriate examples, the following defences:

(i) volenti non fit injuria (5 marks)
(ii) contributory negligence (5 marks)

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Legal Environment of Business [BM011-3-1]

Question 5

(a) Discuss FIVE duties of an agent. (10 marks)

(b) Explain the THREE tests in employment law used by the courts to distinguish between someone
who works under a contract of service and someone who works under a contract for services. State
ONE reason as to why the distinction is important.
(15 marks)

Question 6

(a) A, B and C wish to set up a business together, but they are not sure about whether to set up a private
limited company or a partnership, as they know little about these different forms of business
organisation. Explain to them five important differences between a private limited company and a
partnership. (15 marks)

(b) Discuss the benefits of a companys separate legal personality. (10 marks)

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Legal Environment of Business [BM011-3-1]

Revision 2

Question 1

(a) Describe the characteristics of the written and unwritten sources of Malaysian law.
(15 marks)

(b) Explain in brief THREE advantages of delegated legislation. (10 marks)

Question 2

(a) List and explain FIVE differences between civil law and criminal law. (10 marks)

(b) Compare and contrast the use of alternative dispute resolution bodies and courts as the means of
settling disputes by presenting THREE areas of distinction. Provide a brief conclusion as to which
is the better avenue.
(15 marks)

Question 3

(a) Explain the FIVE elements that are required to form a valid contract. (10 marks)

(b) Discuss the vitiating factors that cause a contract to be VOID or VOIDABLE.
(15 marks)

Question 4

(a) Discuss, with examples, the three elements that need to be proven by an injured plaintiff in an
action for negligence. (15 marks)

(b) Explain the circumstances in which the Plaintiff may be allowed to use the presumption of res ipsa
loquitur. (10 marks)

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Legal Environment of Business [BM011-3-1]

Question 5

(a) Albert works as a mechanic for Fast Cars, an international repair garage chain. Fast Cars require
Albert to wear their uniform to work and provides the tools for Albert. Albert must come for work
between 9 a.m. to 5 p.m. during weekdays and is allowed to work for other companies during
weekends. Albert is paid a commission based on the number of vehicles that he repairs. Apply the
relevant tests to determine whether Albert is an employee or an independent contractor.
(15 marks)

(b) Discuss THREE situations where a Principal may terminate the contract of agency.
(10 marks)

Question 6

(a) A, B and C wish to set up a business together, but they are not sure about whether to set up a private
limited company or a partnership, as they know little about these different forms of business
organisation. Explain to them five important differences between a private limited company and a
partnership. (15 marks)

(b) Discuss the effect of the veil of incorporation for a private limited company.
(10 marks)

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Legal Environment of Business [BM011-3-1]

Revision 3

Question 1

(a) Explain the operation of the doctrine of judicial precedent in the Malaysian courts.
(10 marks)
(b) Define the following terms:-
(i) Parent Act ( 5 marks)
(ii) Doctrine of Separation of Powers (10 marks)

Question 2

(a) Explain FIVE differences between civil law and criminal law. (15 marks)

(b) Discuss THREE advantages of bringing a commercial dispute to an ADR body.

(10 marks)

Question 3

(a) Anna contracted to buy from Brad 100 kg of potatoes at $1 per kg. Anna paid $50 deposit and Brad
agreed to deliver the potatoes to Anna on 3 June. On 2 June, Brad calls Anna to refuse delivery
because Candy has agreed to buy the potatoes at a higher price. On 3 June, Anna had to purchase
100 kg of potatoes from Ditsy at $1.50 per kg.

Discuss the discharge of contract in this case, as well as the common law remedies that Anna may
claim from Brad.
(10 marks)

(b) Elaborate on the vitiating factors that makes a contract VOID. Use examples to illustrate your
points.
(15 marks)

Question 4

(a) Jack was speeding his car on a quiet stretch of road as Jill, a college student, was crossing the road.
Jack was unable to brake in time and crashed into Jill. As the result of the crash, Jill suffered
multiple injuries and was hospitalised for 6 months. Referring to the facts of the case, advise Jill on
the elements that she needs to prove if she were to claim against Jack under the tort of negligence.
(15 marks)

(b) Discuss the following defences under tort of negligence:-

(i) Consent ( 5 marks)
(ii) Contributory Negligence ( 5 marks)

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Legal Environment of Business [BM011-3-1]

Question 5

(a) Discuss THREE duties of an employer towards an employee. (10 marks)

(b) Barney works as a tailor for High Fashion Ltd, an international fashion house. High Fashion Ltd
provides the tools for Barney and requires Barney to come to work on weekdays. Barney is free to
work for others on weekends. High Fashion Ltd pays Barney by the hour for the work that Barney
puts in during the weekdays.

Apply the THREE tests in employment law to determine whether Barney is an employee or an
independent contractor.
(15 marks)

Question 6

(a) Explain FIVE benefits of starting a private limited company. (15 marks)

(b) Define the term corporate veil. In what cases will the corporate veil be lifted? Provide examples to
support your answer. (10 marks)

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Legal Environment of Business [BM011-3-1]

Revision 4

Question 1

(a) Explain in brief the following sources of law:-

(i) Federal Constitution (5 marks)
(ii) Legislation ( 5 marks)
(iii) Judicial Precedent ( 5 marks)

(b) Define delegated legislation. What are its advantages? (10 marks)

Question 2

(a) Diane returns a defective blender to a shop where she bought it but the shop manager refused to
give her a refund. Explain the civil law standard of proof that Diane must satisfy in this case. What
will be the outcome if Diane succeeds?
(10 marks)

(b) Compare and contrast the use of alternative dispute resolution bodies and courts as the means of
settling disputes, and provide a conclusion as to which is the better avenue.
(15 marks)

Question 3

(a) Discuss the common law and equitable remedies available to an injured party for anothers breach
of contract. (10 marks)

(b) Define the following terms:-

(i) Valid contract ( 5 marks)
(ii) Voidable contract ( 5 marks)
(iii) Unenforceable contract ( 5 marks)

Question 4

(a) Alan bears a grudge against Stephen for going out with Alans girlfriend, Alice. Alan sees Stephen
while driving one day and knocks the latter down, causing severe injury to Stephen. Advise Stephen
on the THREE elements that he must prove to take an action against Alan for tort of negligence.

(15 marks)

(b) Define the following terms:-

(i) Consent (volenti non fit injuria) ( 5 marks)
(ii) Contributory Negligence ( 5 marks)

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Legal Environment of Business [BM011-3-1]

Question 5

(a) Explain FIVE distinctions between an employee and an independent contractor.

(15 marks)

(b) Elaborate on the following duties of an agent towards a principal:-

(i) Duty to use reasonable care and skill ( 5 marks)
(ii) Duty not to allow a conflict of interest ( 5 marks)

Question 6

Manny and Nano are good friends who wish to set up a business together after graduating from university.
They have come to you to seek some advice.

(a) Explain to Manny and Nano five advantages of starting a private limited company.
(10 marks)

(b) Advise Manny and Nano about the effect of the veil of incorporation.
( 5 marks)

(c) Explain to Manny and Nano five advantages of starting a partnership.

(10 marks)

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Legal Environment of Business [BM011-3-1]

Revision 5

Question 1

(a) Explain what is meant by the doctrine of separation of powers by outlining the respective roles of
Parliament, Judiciary and the Executive in making law.
(10 marks)
(b) Define the following terms:-
(i) Statutory Instrument (5 marks)
(ii) Ratio Decidendi (5 marks)
(iii) Legislation (5 marks)

Question 2

(a) Identify and briefly explain any THREE alternative dispute resolution bodies.
(10 marks)

(b) There are numerous advantages to a claimant when a legal dispute is brought before an alternative
dispute resolution body. Describe FIVE advantages of referring a legal dispute to an alternative
dispute resolution body, compared to a court of law.
(15 marks)

Question 3

(a) Identify and briefly explain the FOUR circumstances that may cause a contract to be discharged.
Provide examples to support your answer (15 marks)

(b) On 20 November, Amy contracts to buys a handcrafted clock from Billy for 100. Amy paid the
deposit of 50 and agreed to collect the clock one month later, in time for Christmas. When Amy
comes to collect the clock one-month later, Billy tells her that he needs another month to complete
his handiwork.

Discuss the nature of breach and the remedies that Amy may claim from Billy for the breach of
contract. (10 marks)

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Legal Environment of Business [BM011-3-1]

Question 4

High Jump Centre regularly organises bungee jumping activity at their premise. Barney, a first timer,
suffered a mild heart attack during a jump. Barney knew of his poor heart condition but did not inform
High Jump Centre about it before participating in the bungee jump. With reference to the above facts,
answer the following questions:

(a) Identify and explain the three (3) elements that Barney must prove to claim against High Jump
Centre under tort of negligence for his injury. (15 marks)

(b) How may High Jump Centre use the defence of consent to defend itself? Explain.
(6 marks)
(c) Describe the effect on High Jump Centres liability if the defence succeeds.
(4 marks)

Question 5

(a) Larry is a plumber with Modern Plumbing. Modern Plumbing has 100 other plumbers working for
them. Modern Plumbing requires Larry to wear their uniform to work and provides the tools for
Larry. Larry must be available for work on weekdays and is allowed to work for other companies
during the weekends. Larry is paid a commission based on the hours that he put in. Apply the
relevant tests to determine whether Larry is an employee or an independent contractor.
(15 marks)

(b) Explain three circumstances in which the relationship between an agent and a principal can be
brought to an end.
(10 marks)

Question 6
(a) Donnie and Marie plans to set up a business together selling educational software. Marie is an
experienced programmer who will develop the software but has very little experience in managing a
business. Donnie on the other hand, graduated with an MBA and would like to have control of the
business. Both Donnie and Marie plan to expand the business internationally.

Discuss FIVE legal issues that Donnie and Marie will have to consider when deciding whether to
start a partnership or a private limited company.
(15 marks)

(b) Define the term veil of incorporation. Identify one (1) situation in which the veil of incorporation
may be pierced.
(10 marks)

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