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The landscape for carbon credits in Malaysia is rapidly evolving as Malaysia advances its commitment to a decarbonised economy [1]. Carbon credits represent a sophisticated intersection of environmental stewardship and economic opportunity, enabling businesses to meet climate objectives while capitalising on sustainability initiatives. For prospective producers –encompassing landowners, project developers, and corporations investing in climate-positive ventures – the pathway from a climate-positive venture to a marketable carbon credit is one of significant potential, yet it is laden with complexity.

This article delineates the critical considerations that producers must address to successfully develop, register, and transact carbon credits. It serves as a strategic guide to ensuring project integrity, regulatory compliance, and commercial viability within Malaysia's dynamic carbon market.

1. Defining Carbon Credit

At its foundation, a voluntary carbon credit is a measurable and verifiable representation of climate action. It is generated when a project reduces or removes greenhouse gas emissions, with one credit corresponding to one metric tonne of carbon dioxide (CO2) or its equivalent.[2] It functions as a "credit" in that it can be used to offset the emission of an equivalent amount of CO2, thereby creating a tangible asset from a positive environmental outcome.[3]

While this serves as a universally accepted functional definition, the formal legal framework in Malaysia is still evolving. Currently, there is no single, overarching legal definition for a "carbon credit" under federal law. However, proactive legislative measures, particularly in Sabah and Sarawak, have established specific legal definitions and provide important clarity for projects in those states:

• In Sarawak, the Environment (Reduction of Greenhouse Gases Emission) Ordinance, 2023 of Sarawak, which complements the Forests (Forest Carbon Activity) Rules 2022, define a “carbon credit unit” as a unit of account representing one tonne of emission reductions.[4]These units are issued by a carbon standard according to its rules and are held in a carbon registry.[5] The rules are linked to a "forest carbon activity," which is any activity leading to verified emission reductions under a carbon standard.
• In Sabah, amendments to the Forest Enactment 1968 define a "carbon credit" as a tradable instrument for both domestic and international markets.[6] It is issued by a government or an independent certification body as a permit, licence, or certificate that results from a forest carbon activity.[7] The law also defines a "carbon credit unit" as representing one tonne of emission reductions.[8]

This distinction between a functional, market-accepted definition and the emerging, specific legal definitions within state jurisdictions is a critical consideration for any prospective producer in Malaysia.

2. The Malaysian Carbon Market Ecosystem

Malaysia's carbon ecosystem is uniquely characterised by its dual engagement with both international and domestic frameworks. This structure provides producers with distinct strategic choices:

The primary actors navigating this ecosystem include:

3. The Carbon Credit Lifecycle: From Concept to Asset

The generation of credible carbon credits follows a structured and meticulous project cycle, rigorously defined by leading international standards. While terminologies may differ slightly between standards, the fundamental stages are consistent and form a coherent progression from idea to issuance [9]:

4. Core Principles of Carbon Credit Integrity

The credibility and market value of carbon credits are anchored in several universally accepted principles [10]:

5. Avenues for Commercialization

Once issued, carbon credits can be monetized through various channels including the Bursa Carbon Exchange and others:

6. Key Legal Considerations for Producers of Carbon Credits in Malaysia

Aproactive and sophisticated legal strategy is indispensable for navigating the complexities of carbon credit development and commercialization. Experienced legal counsel provides pivotal value by transforming potential legal hurdles into managed risks and strategic opportunities.

A foundational legal imperative is the unambiguous definition and securement of carbon rights. In Malaysia, land ownership per se does not automatically confer rights to the carbon sequestered or emission reductions generated on that land. Legal professionals are crucial for conducting exhaustive due diligence on land tenure, including pre-existing encumbrances or overlapping claims. This is particularly intricate in Sabah and Sarawak, where unique state land laws and Native Customary Rights (NCR) necessitate specialized local legal acumen. Parties typically enter into bespoke "carbon rights agreements" or integrate precise specific clauses into broader land use or concession agreements. These instruments are essential not only for establishing clear ownership and control over the carbon asset but also for structuring equitable benefit-sharing mechanisms with landowners and indigenous communities, thereby fortifying the project's social license and the legal defensibility of its core claims. See our article Carbon Credit Series - Key Legal Lessons from the Sabah Nature Conservation Agreement for case study on issues that arose from the Sabah Nature Conservation Agreement.

Successfully navigating state-level approvals and dynamic jurisdictional frameworks is another domain demanding expert legal guidance, especially considering the proactive legislative measures in states like Sabah and Sarawak. Legal counsel provides ongoing interpretation of these specific state enactments, such as Sabah's Forest (Carbon Activity) Rules and Sarawak's Forests (Forest Carbon Activity) Rules 2022, alongside its Environment (Reduction Of Greenhouse Gases Emission) Ordinance, 2023. Additionally, the Sabah State Legislative Assembly recently passed the Forest Enactment (Amendment) Bill 2025 which introduces a regulatory regime over carbon credits activities in the state. This involves advising on the precise scope of mandatory licensing, assisting in the preparation of comprehensive applications to state authorities, and ensuring project plans meticulously comply with conditions relating to state revenue sharing or local benefit reinvestment. Such proactive legal engagement allows clients to anticipate regulatory shifts and maintain steadfast compliance.

The strategic structuring of the project entity itself profoundly influences long-term liability, taxation, governance, and access to finance. Legal advisors assist in selecting the optimal legal vehicle—be it a Special Purpose Vehicle (SPV) to isolate project-specific risks (including long-term liabilities like permanence failures), or a Joint Venture (JV) requiring meticulously crafted shareholders' agreements. These agreements must clearly delineate capital contributions, profit and carbon credit revenue distribution, robust governance protocols for project oversight, and incisive dispute resolution and exit strategies, all tailored to the unique nuances of carbon asset management and optimized under Malaysian tax law, inclusive of any applicable green incentives.

The commercial actualization of a carbon project often pivots on expertly drafted and negotiated Emission Reduction Purchase Agreements (ERPAs).These are not standard commodity contracts but highly specialized, bespoke agreements. Legal professionals are indispensable in structuring terms that strategically allocate a wide array of complex risks, including price volatility, credit delivery shortfalls, adverse changes in law or carbon accounting methodologies, and liability for potential credit reversal events. This involves tailoring clauses on credit specifications, conditions precedent to payment, robust representations and warranties concerning credit integrity and exclusivity, and effective default and remedy provisions, thereby securing the producer’s revenue streams and adeptly managing counterparty vulnerabilities.

In an era of intensifying scrutiny regarding environmental claims, maintaining ESG disclosure integrity and rigorously preventing the double counting of emission reductions is critical for corporate reputation and market credibility. Legal counsel advises on harmonizing a project's carbon credit transactions with broader corporate sustainability reporting obligations, such as those mandated by Bursa Malaysia or aligned with international frameworks like the TCFD and ISSB. This includes ensuring that contractual terms within ERPAs unequivocally delineate usage rights and effectively preclude the producer from inadvertently or otherwise making misleading environmental claims about emission reductions that have already been sold, thus mitigating greenwashing risks and potential legal challenges.

Furthermore, given that carbon projects typically demand substantial upfront capital, optimising project financing and establishing robust security interests are key concerns. Legal advisors play a pivotal role in enhancing a project's "bankability" by ensuring that all foundational legal elements—including unequivocally established carbon rights, requisite permits, and bankable offtake agreements like ERPAs—are sound and meticulously documented. They guide clients through the complexities of negotiating term sheets and loan documentation with financiers and undertake the often intricate legal work of creating and perfecting security interests over project assets. This may involve addressing novel legal questions concerning the use of future carbon credit streams as collateral, within the evolving parameters of Malaysian law.

Finally, while meticulous contracting aims to pre-empt disagreements, the long operational lifecycle of carbon projects necessitates strategic and effective dispute resolution mechanisms. Legal counsel advises on, and drafts, tailored dispute resolution clauses in all critical project agreements. This typically involves considering multi-tiered approaches (e.g., good-faith negotiation, structured mediation) and, where necessary, binding arbitration, often specifying appropriate institutional rules and a suitable legal seat, such as the Asian International Arbitration Centre (AIAC) in Malaysia, to ensure that any emergent conflicts can be resolved efficiently and with commercial pragmatism.

Conclusion

The endeavor of becoming a successful carbon credit producer in Malaysia offers profound environmental and economic dividends. However, this path is intricately woven with multifaceted legal and regulatory considerations. Engaging experienced legal counsel proactively, from the earliest stages of project conception, is not merely a defensive risk mitigation tactic but a crucial enabler of sustained project success. By astutely navigating the legal terrain, prospective producers can develop robust, credible, and commercially viable carbon credit projects that contribute significantly to Malaysia's ambitious climate objectives and the broader global transition towards a sustainable and resilient economy.

[1] Malaysian Green Technology and Climate Change Corporation, 'Corporate Malaysia drives low-carbon transition' (6 December 2024) https://www.mgtc.gov.my/2024/12/corporate-malaysia-drives-low-carbon-transition/

[2] Legal High Committee for Financial Markets of Paris, Reporton the Legal and Regulatory Aspects of Voluntary Carbon Credits (16October 2024) https://www.banque-france.fr/system/files/2024-11/Rapport_66_A.pdf

[3] Ibid note 1.

[4] Section 2, Environment (Reduction of Greenhouse Gases Emission) Ordinance, 2023 of Sarawak.

[5] Ibid note 4.

[6] Sandra Sokial, ‘Mandatory licensing for carbon trading activities in Sabah after Forest Enactment amendments’ The Star (Kota Kinabalu, 17 April 2025) https://www.thestar.com.my/news/nation/2025/04/17/mandatory-licensing-for-carbon-trading-activities-in-sabah-after-forest-enactment-amendments

[7] Ibid note 6.

[8] Ibid note 6.

[9] UNFCCC, 'CDM: Project Activities' https://cdm.unfccc.int/Projects/diagram.html

[10] Integrity Council for the Voluntary Carbon Market, 'The Core CarbonPrinciples' (ICVCM) https://icvcm.org/core-carbon-principles/

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In conjunction with the recent adoption of the ASEAN Community Vision 2045, this policy brief published by the Economic Research Institute for Asean and East Asia (ERIA), co-authored by Dr. Intan Murnira Ramli, Senior Policy Fellow in the Policy Design Department at ERIA, and our Mohamad Izahar Mohamad Izham, Partner of the Government Advisory Practice at Zaid Ibrahim & Co, examines ASEAN’s progress on Good Regulatory Practice (GRP) and outlines key policy recommendations to be undertaken for the future. The brief highlights the pivotal role of GRP in supporting ASEAN’s long-term goals and calls for its systematic integration across all ASEAN Economic Community (AEC) initiatives.

Zaid Ibrahim & Co contributed to the Lexology Panoramic: Corporate Governance 2025 Malaysia.

Authored by  Director, Client Solutions, Chua Wei Min and, Partner, Mohamad Izahar Mohamad Izham, the article offers a detailed overview of essential information regarding Malaysia’s corporate governance landscape.

The guide provides an overview of corporate governance by exploring, among others, sources of corporate governance rules and practices, rights and equitable treatment of shareholders and employees, as well as latest developments and trends. Please connect with us should you require further advice and guidance relating to corporate governance in Malaysia.

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Read the full article here.

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The growing interest in carbon markets in Malaysia has brought into sharp relief the need for legal clarity, governance oversight, and stakeholder alignment in carbon credit transactions. A case that underscores these complexities is the Sabah Nature Conservation Agreement (NCA), which attracted national and international attention due to its opacity, legal ambiguities, and stakeholder backlash.

Signed in 2021, the Sabah NCA involved a proposal to monetise carbon credits from more than two million hectares of forest reserves in Sabah through a 100-year agreement between the state government and Hoch Standard Pte Ltd, a little-known Singapore-based private company. The company was purportedly granted exclusive rights to develop and monetise nature conservation and carbon credit initiatives within the designated forest areas.[1]

The agreement was met with immediate controversy due to several reported flaws:

• Lack of transparency: The terms of the agreement were not publicly disclosed, nor were they tabled before the state legislative assembly. This created concerns about governance, public accountability, and regulatory compliance.[2]
• Questionable corporate profile: Hoch Standard Pte Ltd was described as having no prior track record in carbon markets or conservation work. It had minimal publicly available corporate history and an unclear funding structure, which raised red flags regarding its capacity to execute such a large-scale initiative.[3]    
• Failure to consult stakeholders: Indigenous communities and other key local stakeholders were reportedly not consulted in advance of the agreement. This raised concerns over Free, Prior and Informed Consent (FPIC) obligations, a cornerstone     principle in international environmental and human rights law.[4]    
• No clear benefit-sharing framework: Critics highlighted that the agreement lacked transparent mechanisms for sharing financial benefits with local communities or reinvesting in forest conservation.[5]    
• Bypassing procurement norms: There was no evidence of an open bidding or selection process, raising issues of compliance with public procurement laws and principles of fair competition.[6]    
• Concerns over additionality: The forests involved were already gazetted as protected areas, casting doubt over the additionality of any claimed carbon benefits. This raised questions about the environmental integrity and legitimacy of the credits that could be generated under the agreement.[7]

These concerns culminated in a backlash from civil society, scrutiny from legal commentators, and calls for the agreement to be reviewed or annulled. The Sabah Attorney General ultimately suspended the agreement for further investigation.

Key Legal Considerations for Purchasers Demonstrated by the Sabah NCA

The Sabah NCA serves as a practical case study for carbon credit purchasers. The key legal takeaways include:

1. Legal provenance of carbon rights: Buyers must assess whether the entity offering credits has a clear and legitimate legal right to generate and sell them. This involves reviewing concession agreements, land titles, and the basis of carbon ownership under domestic law.
2. Regulatory compliance: Ensure that the transaction complies with national and subnational laws governing land use, conservation, and public procurement.
3. Stakeholder consultation: Purchasers should require proof that Indigenous and local communities have been consulted and that FPIC obligations have been fulfilled.
4. Due diligence on counterparty: Review the financial health, track record, and capacity of the project developer or intermediary. Lack of transparency or inexperience can expose buyers to reputational and contractual risk.
5. Verification vs. legal due diligence: Even where a project is verified by a voluntary standard (e.g., Verra or Gold Standard), legal advisors must still verify the enforceability of underlying rights and compliance with local law.
6. Benefit-sharing arrangements: Credibility and sustainability of carbon projects are bolstered by clear, fair, and documented benefit-sharing mechanisms with impacted communities.
7. Environmental integrity and additionality: Buyers should question whether the project meets genuine additionality. If the land is already protected, then carbon benefits may not be new or incremental, potentially affecting the credibility and market value of the credits.

The Sabah NCA highlight show legal risks in the origination of carbon credits can cascade to buyers, potentially undermining their ESG commitments and inviting scrutiny from investors, regulators, and civil society.

A well-advised transaction in the carbon market requires more than technical validation or registry-level certification. Legal counsel plays an essential role in evaluating the enforceability of carbon rights, ensuring alignment with local and international legal norms, and managing transaction risks across regulatory, contractual, and reputational dimensions. By conducting targeted legal due diligence and advising on structuring and compliance, lawyers help ensure that buyers enter the market with confidence, mitigating the very risks that surfaced in the Sabah NCA.

[1] The Edge Markets, “Cover Story: Getting Carbon Markets Right”, 22 September 2022. https://theedgemalaysia.com/article/cover-story-getting-carbon-markets-right

[2] Free Malaysia Today, “Sabah’s carbon credit deal: Why the secrecy?”, 5 November 2021. https://www.freemalaysiatoday.com/category/nation/2021/11/05/sabahs-carbon-credit-deal-why-the-secrecy/

[3] Eco-Business, “UN investigates contentious forest carbon pact in Malaysian Borneo”, 19 March 2024. https://www.eco-business.com/news/un-investigates-contentious-forest-carbon-pact-in-malaysian-borneo/

[4] Mongabay, “Sabah’s secretive carbon deal sparks alarm over Indigenous rights, forest protection”, 3 November 2021. https://news.mongabay.com/2021/11/sabahs-secretive-carbon-deal-sparks-alarm-over-indigenous-rights-forest-protection/

[5] Details emerge around closed-door carbon deal in Malaysian Borneo”, 24 November 2021. https://news.mongabay.com/2021/11/details-emerge-around-closed-door-carbon-deal-in-malaysian-borneo/

[6] Malaysiakini, “Questions mount over Sabah’s opaque forest carbon deal”, 3 November 2021. https://www.malaysiakini.com/news/598291

[7] Ibid note 1.

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Zaid Ibrahim & Co contributed to the Lexology Panoramic: Private Equity 2025 (Fund Formation) Malaysia.

Authored by  Director, Client Solutions, Chua Wei Min , Partner, Geraldine Oh, Kellie Allison Yap and, Senior Associate, Jean Lee, the article offers a detailed overview of essential information regarding Malaysia’s private equity fund formation regime.

The guide explores, among other, forms of vehicle, forming a private equity fund vehicle, limited liability for third-party investors, fund manager's fiduciary duties and more. Please connect with us should you require further advice and guidance relating to private equity fund formation in Malaysia.

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Read the full article here.

Environmental, Social, and Governance (ESG) considerations are no longer just a corporate responsibility; they are a business imperative. Investors, regulators, and consumers are increasingly scrutinizing ESG claims, and businesses that misrepresent their sustainability efforts—whether by exaggeration (greenwashing) or excessive silence (greenhushing)—face legal, financial, and reputational risks.

The Global Crackdown on Greenwashing

Regulators worldwide are intensifying efforts to combat misleading ESG claims. In Europe, litigation has resulted in the removal of misleading sustainability advertisements, with courts and regulators shifting toward imposing financial penalties and securities fraud charges.

In the Netherlands, KLM faced legal action over its marketing campaign that implied air travel with the airline was sustainable due to its carbon offset program. Environmental groups challenged these claims, arguing that offsetting did not equate to genuine emission reductions. The case resulted in KLM retracting its advertising campaign, setting a precedent for stricter enforcement against misleading environmental claims in the aviation industry[1]. In Italy, oil giant Eni was fined EUR 5 million by the Italian Competition Authority for falsely marketing its diesel product as "green"[2]. The investigation revealed that Eni's claims were misleading because they referred only to a minor bio-based component of the fuel rather than the entire product. The ruling reinforced the principle that environmental claims must be fully substantiated and not selectively framed to mislead consumers.

The legal consequences have since escalated beyond advertising breaches. The Mercer Super annuation case in Australia serves as a clear warning—Mercer was fined AUD 11.3 million (USD 7.2 million) for falsely marketing its “Sustainable Plus” pension fund as excluding fossil fuels, gambling, and alcohol investments, when in reality, such investments were present[3]. Similarly, Deutsche Bank subsidiary DWS faced significant penalties after German authorities and the U.S. Securities and Exchange Commission (SEC) investigated its ESG claims. In 2023, DWS was fined a combined USD 25 million for overstating its ESG credentials in investment products and failing to establish a proper anti-money laundering program[4]. These cases highlight a regulatory shift from simple compliance warnings to substantial financial penalties and legal consequences under securities fraud and misrepresentation laws.

ESG Enforcement in Southeast Asia

While Southeast Asia has yet to impose similar financial penalties, enforcement is increasing. Advertising regulator in Singapore has begun scrutinizing greenwashing claims, and regulatory frameworks are evolving to align with international ESG standards. This shift signals that businesses must proactively strengthen compliance efforts to avoid regulatory scrutiny and potential financial repercussions in the near future.

A notable case is the VietJet incident in Singapore, where the Advertising Standards Authority of Singapore (ASAS) ruled against the airline’s misleading green marketing campaign. VietJet promoted its “Green Friday” sale, suggesting that discounted air tickets contributed to a greener future, and made claims about the environmental benefits of its fleet and digital services. ASAS determined that the claims were misleading, lacking substantiation, and ordered their removal. This case underscores the increasing regulatory vigilance in the region and the expectation for businesses to ensure transparency and accuracy in their ESG-related claims.[5]

Key Greenwashing-Related Legal Frameworks in Malaysia

From a legal standpoint, misrepresenting ESG commitments may constitute corporate fraud, misleading advertising, or securities violations. In Malaysia, key statutes that regulate corporate misrepresentation and deceptive business practices include:

• Capital Markets and Services Act 2007 (CMSA) – Prohibits false or misleading statements in securities offerings, which could include ESG-related financial disclosures.
• Companies Act 2016 – Addresses fraudulent trading and misrepresentation in business dealings.
• Financial Services Act 2013 – Regulates misrepresentation in financial products, including sustainability-linked investments.
• Consumer Protection Act 1999 – Prohibits misleading claims in advertising and marketing, including environmental claims.
• Malaysian Anti-Corruption Commission (MACC) Act 2009 – Covers governance failures that may arise from unethical ESG reporting.

Given this legal landscape, businesses must recognize that ESG deception or greenwashing can expose them to regulatory enforcement, lawsuits from stakeholders, and significant reputational damage.

The Cost of Inaction is High

For corporate leaders, the message is clear: ESG compliance is no longer optional. Regulators are tightening enforcement, investors are demanding transparency, and consumers are holding businesses accountable. Companies that fail to substantiate their ESG commitments risk financial penalties, regulatory scrutiny, and loss of investor trust.

If you have any questions or require any additional information, please contact Andreanna Ten Maven or the partner you usually deal with at Zaid Ibrahim & Co.

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

[1] https://www.bloomberg.com/news/articles/2024-03-20/klm-loses-dutch-greenwashing-case-on-climate-advertising

[2] https://www.reuters.com/business/energy/italys-top-administrative-court-upholds-eni-appeal-against-biofuel-fine-2024-04-24/

[3] https://asic.gov.au/about-asic/news-centre/find-a-media-release/2024-releases/24-173mr-asic-s-first-greenwashing-case-results-in-landmark-11-3-million-penalty-for-mercer/

[4] https://www.reuters.com/legal/dws-pay-25-mln-over-us-charges-over-esg-misstatements-other-violations-2023-09-25/

[5] https://www.eco-business.com/news/vietjet-promotion-for-eco-friendly-budget-air-tickets-scrapped-after-greenwash-ruling-by-singapore-ad-watchdog/

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People generally conduct their affairs on the basis of what they understand the law to be. This ‘retrospective’ effect of a change in the law of this nature can have disruptive and seemingly unfair consequences. ‘Prospective overruling’, sometimes described as ‘non-retroactive overruling’, is a judicial tool fashioned to mitigate these adverse consequences. It is a shorthand description for court rulings on points of law which, to greater or lesser extent, are designed not to have the normal retrospective effect of judicial decisions.

– Lord Nicholls |Re Spectrum Plus Ltd [2005] UKHL 41

The Doctrine of Prospectivity

The Blackstonian principle dictates that common law courts must adhere to past precedents, even if doing so (the rule of stare decisis) would lead to a significant miscarriage of justice in certain circumstances.[1] The doctrine of prospective overruling is viewed to be a departure from the long-standing rule of stare decisis. Judges essentially went from cautiously following binding precedents to performing legislative functions.[2]

The concept of prospective overruling arose from the brilliance of Justice Cardozo in Great Northern Railway v Sunburst Oil and Refining Co [3] and later again by the US Supreme Court in Linkletter v Walker [4]. Essentially, the principle allows courts to be free to express its judicial activism by overruling previously upheld “bad” law whilst safeguarding past transactions and preventing harm to parties that have relied on such laws in good faith. The rationale behind the doctrine is not to enlarge the powers of the judiciary in so far that it bleeds into legislative functions, but rather to support judicial discretion in bringing out the true essence of a particular law, as it has always existed unrestrained by time.[5]

Prospectively overruling aims to maintain the peace of the past whilst correcting current and future injustices.

Retrospectivity against Prospectivity

To better understand the concept of prospective ruling, it is essential to compare its principles with those of retrospective application. The House of Lords deliberations in Re Spectrum [6] is the leading authority on retrospectivity with Lord Nicholls providing illuminating insight into the principles of prospective overruling by comparing it with retrospectivity.

Lord Nicholls pondered several themes when deciding between retrospective and prospective effects. The concern was that the prospective effect had a high degree of tendency to cause unfairness and discrimination.[7] Subsequently, the power of the courts to decide that a ruling shall have prospective effect could lead to encroachment on the legislative function, thus, blurring the boundaries between judicial and legislative powers. A court’s function is to decide on past events that have occurred between disputing parties and deliver decisions based on the law that is currently in operation. It is argued that retrospectivity does not offend the rule of law in the sense that it falls squarely within judicial functions and powers.[8]

Although Lord Nicholls and the majority of the House acknowledge the benefits of prospective overruling, a pure prospective overruling should solely apply when a retrospective operation of the “new” law would cause a disastrous injury, prejudice and unfairness to those who have relied in, good faith, on the operation of the previously “bad law”. In this particular House of Lords case, the facts and issues in dispute fell far away from any exceptional category or circumstance that necessitated a pure prospective approach to the newly overruled law.

The decision in Re Spectrum, has been highly influential and caused many courts to embrace the philosophy of its reasonings in their own cases. In Alvin Leong Wai Kuan & Ors v Menteri Kesejahteraan Bandar, Perumahan dan Kerajaan Tempatan and other appeals [9], the High Court decided that the declaration in Ang Ming Lee should be applied retrospectively. The court laid out two deciding factors namely (i) that the Federal Court failed to expressly state whether the declaration shall only have a prospective effect and (ii) that there are no exceptional circumstances in existence for the doctrine of prospective overruling to apply. The court went further and found that it is well within the interests of homebuyers, thus, within the spirit of the Housing Development (Control and Licensing) Act 1966 to apply the declaration retrospectively.[10]

Although, the tension between retrospectivity and prospective overruling is high, the majority trend by Malaysian courts is to embrace prospective overruling.

The common law experience – Prospectivity in other jurisdictions

India

The very first account of the adoption of prospective overruling was observed in the locus classicus of Golak Nath v State of Punjab [11]. The Supreme Court delivered a powerful commitment to prevent injustices brought by retrospectivity, by holding that the courts should never be restricted from overruling a previous wrong or “bad” law. Despite many objections to prospective overruling, courts should not be hindered from dispensing justice and fairness even if it deviates from tradition as “stability in the law does not mean that injustice shall be perpetuated” [12].

However, the position in Golak Nath was exclusive to constitutional matters under the Indian Constitution. The Supreme Court laid down specific guidelines to the application of prospective overruling, namely:

1. to only apply to matters arising under the Indian Constitution;
2. to be applied solely by the highest court of the country; and
3. the doctrine shall be applied by the discretion of the Supreme Court and be moulded in accordance with the justice of each matter.[13]

The position expounded in Golak Nath is significant as it recognizes the doctrine of prospective overruling, while simultaneously allowing the courts to exercise the flexibility in applying the doctrine judiciously, in accordance with the facts of each case.[14]

Again, in M/S Somaiya Organics (India) Ltd v State of Uttar Pradesh [15], the Supreme Court of India held that prospective overruling is merely a principle recognizing the court’s discretion to shape reliefs claimed to meet the justice of the case. It represents justice in its “equitable sense”. [16] Thus, allowing flexibility to stretch its limbs to suit each particular fact and circumstance so as to determine the most just course of action. The Supreme Court made further reference to Art. 142 of the Indian Constitution which empowers the judiciary to make any order necessary to complete justice in any cause or matter pending before the court.

It is obvious that the Indian experience offers the judiciary wide discretion to determine the applicability of the prospective doctrine. The Supreme Court has likened the doctrine of prospective overruling to be almost synonymous to the principle of equity, in such a manner that both jurisprudential concepts have an inherent flexibility in reaching justice. The Indian courts are strict in applying the doctrine only when it is necessary to meet the ends of justice and rather than a general rule for cases presented before them.

Another notable case is Patil Automation Private Limited and Others v Rakheja Engineers Private Limited [17] where the Supreme Court had to deliberate on whether section 12A of the Indian Commercial Courts Act 2015, as amended by the 2018 Amendment Act, is mandatory. A plea was raised to suggest that if the court determines the provision to be mandatory, then the application of the declaration should be made prospectively. In response, the Supreme Court clarified that the doctrine of prospective overruling is not confined to matters that involve either an overruling of a previous decision by a Court or where the Court has pronounced a law that shall cause transactions to be void. The doctrine can be applied in circumstance where a new law or decision can affect cases that have already been settled.

It can be said that that India’s approach to prospective overruling can be characterized by its liberal and flexible nature. The pivotal factor to consider is whether the pronouncement of the law would disrupt past transactions and/or settled disputes.

Australia

The position in Australia stands as a stark contrast against the Indian and Malaysian experience. In Babaniaris v Lutony Fashions Pty Ltd [18], Mason J opined that the doctrine of prospective overruling is merely a wolf in sheep’s clothing. It converts the judiciary into the legislative thus, usurping legislative functions. Furthermore, in Torrens Aloha Pty Ltd v Citibank NA [19], the Australian Federal Court opined that in the absence of prospective overruling, declarations made by the court are not attached to events occurring after the date of the said declaration.

Even with respect to changes to common law in criminal matters, the Australian courts stated that such changes should affect events that have already occurred rather than future events.[20] The Australian Supreme Court in R v P, GA [21] held the concept of a prospective overruling has yet to be accepted by the courts in Australia.

More recently, the High Court of Australia considered arguments raised on the effect of prospective overruling. The court in Bell Lawyers Pty Ltd v Pentelow [22] maintained the longstanding position that judicial decision should only apply retrospectively,

Singapore

The jurisprudence on prospective overruling in Singapore is slightly more regimented than other jurisdictions that have embraced the precepts of prospectivity within their respective laws. The very first recognition of acceptance by the Singapore courts was noted in PP v Manogaran s/o R Ramu [23] where the Court of Appeal referred to Art. 11(1) of the Constitution of the Republic of Singapore and also to the Latin maxim of “nullum crimennulla poena sine lege” which means “conduct cannot be punished as criminal unless some rule of law has already declared conduct of that kind to be criminal and punishable as such” [24]. Another rendition of early adoption of prospective overruling in Singapore is found in Abdul Nasir bin Amer Hamsah v PP [25] where the same considerations were made by the Court of Appeal.

Essentially, the Singaporean experience was to accept prospective overruling within the criminal ambit on the rationale of legitimate expectation. To declare an act or conduct to be criminal where many have relied on it as lawful constitutes an unjust, unfair and prejudicial declaration of the law. The aforementioned Latin maxim is the basis of the adoption of prospective overruling by Singaporean courts in criminal matters. The application of prospective overruling is not limited to criminal laws. It has also been extended to non-criminal matters. In light of this, the Singaporean courts have created a framework [26] as a guide on the application of prospective overruling aiming to balance the tensions against retrospectivity.

In PP v Hue An Li, the Singapore High Court elucidated that the general proposition is for all declarations of law to be retroactive in nature. However, the appellate courts are given the judicial discretion to effect judicial pronouncements prospectively, provided that they are guided by a factors-based test.

The limbs to be considered are:

1. the extent to which the law concerned is entrenched;
2. the extent of the change in the law;
3. the extent to which the change to the law is foreseeable; and
4. the extent of reliance on the law concerned [27].

The Court of Appeal in Adri Anton Kalangie v PP [28] crystallised the position in Singapore on the effect of prospectivity. This has become the touchstone decision on the use and application of the doctrine of prospective overruling. Here, the court referred to the pronouncement effect of a sentencing rule in Suventher Shanmugam [29], Given that the Court in Suventher failed to state whether the declaration shall have a pure prospective effect only, it cannot be applied in such a way.

In this case the Court of Appeal marked a significant departure from the traditional understanding that the rule of prospectivity applied only to protect legitimate public interests. Instead, the court expanded the rule of exceptionality to allow appellate courts the discretion to apply the doctrine of prospectivity in exceptional cases, such as where prospectivity is necessary to curb “serious and demonstrable injustice to parties at hand or to the administration of justice”. The Court in establishing this rule referred to the framework of the factors-based test expounded in Hue An Li.

The position in Singapore appears to strike a balance between the more liberal approach in India versus the Australia’s restrictive stance. Unlike India, the approach taken by the Singapore judiciary is far more structured as there is an established framework offered to the appellate courts so as to ensure that its discretion is wielded judiciously and only in circumstances that necessitate a prospective effect to pronouncements of law.

Obata-Ambak Sdn Bhd v Prema Bonanza Sdn Bhd  - Revisiting prospectivity

The Malaysian experience seems to be following in the same path as carved out in Singapore. The very first adoption of the doctrine can be seen in the Supreme Courts case Public Prosecutor v Dato’ Yap Peng.[30]

Here, the Supreme Court took judicial notice of the fact that any retrospective pronouncement of the newly invalidated section 418A of the Criminal Procedure Code would cause chaos and disruption. This is as the provision had been relied upon and utilized to conduct trials and other proceedings at the High Court while the case was being deliberated. To declare the provision to be invalid at this time would be an injustice and thus, shall be overruled with a prospective effect.

Following this, the Federal Court in PP v Mohd Radzi Abu Bakar [31] referred to the decision in Dato’ Yap Peng where Abdul Malek Ahmad FCJ opined that retrospectivity should be the general rule while prospective ruling should only be applied in exceptional cases where appropriate. The court’s position was that the appropriate approach for decisions invalidating past law should apply to only pending and future cases, not for cases that has already been resolved. However, there were contentions that the opinion by Abdul Malek Ahmad FCJ was merely an obiter and was unsupported by authority.[32] Thus, no pronouncement on an established position was made.

Years later, in Aminah bt Ahmad v The Government of Malaysia& Anor [33], the Court of Appeal strengthened Malaysia’s approach and reinstated the position in Dato’ Yap Peng. The court clarified that “prospective overruling” is merely the exception to the general rule that a declaration by the court should have retrospective effect. It was further clarified that it is well within adjudicative jurisprudence that all decisions must have a retrospective effect, thus staying within the judicial function in administering the law instead of making it.

However, a shift can be seen in the recent Busing Jali &Ors v Kerajaan Negeri Sarawak & Anor and other appeals.[34] It is important to note that this particular case concerned amendments to the Sarawak Land Code and whether such amendments should be applied retrospectively or prospectively. Unlike the case laws cited above, the issue of prospective overruling did not involve a prior declaration to invalidate previous operation of law by a court. The Federal Court held that the general principle is that all legislative changes shall always apply prospectively, unless contrary intention is expressed in “unmistakable terms”.[35]  

However, it is important to note that Busing Jali did not concern judicial pronouncement and/or invalidation of legislative law. Therefore, the position of prospective overruling with respect to judicial declarations of changes in the law was still left in a lacuna.

Obata-Ambak Sdn Bhd v Prema Bonanza

To cure this gap, the Federal Court recently reviewed the doctrine of prospective overruling against retrospectivity in Obata-Ambak Sdn Bhd v Prema Bonanza Sdn Bhd and other appeals.[36] The case deals with payment of Liquidated Ascertained Damages (LAD) and the declaration in Ang Ming Lee & Ors v Menteri Kesejahteraan Bandar, Perumahan dan Kerajaan Tempatan & Anor and Other Appeals [37] that Regulation 11(3) of the Housing Development (Control and Licensing) Regulations is ultra vires (hereinafter referred to as “HDR”) to its Parent Act.

In discussing the doctrine, the Federal Court reviewed previous case laws. Amongst the cases reviewed, the Court considered the approach provided in Re Spectrum Plus Ltd [38] as well as Busing Jali &Ors v Kerajaan Negeri Sarawak & Anor and other appeals [39]. In these cases, the approach was that any legislative changes to a statute shall always apply prospectively unless there is a clear and unmistakable term indicating that the new law is to be applied retroactively.[40]

The Federal Court took judicial notice that the declaration made in Ang Ming Lee was devoid of any guidance and direction. It then begs the question, should the declaration pertaining to Regulation 11(3) of the HDR apply retrospectively or overrule prospectively. Justice Hasnah Mohammed Hashim opined, on behalf of the Federal Court, that applying the declaration retrospectively would cause grave injustices to the parties involved. The court highlighted that at the time the application for extension of time was granted, Regulation 11(3) of the HDR remained valid and reliable. Furthermore, the terms and conditions expressed within the Sales and Purchase Agreement relied on the activity of such regulation.

The test applied by the Federal Court, couched as the reliance test, was to consider whether the declaration would have “serious ramifications and implications on those who would have relied on its validity in the past”.[41] It was further deliberated that unless there is an exceptional public interest requirement, any order invalidating legislation or provisions to a piece of legislation shall always apply prospectively. This is as the potential ruckus of retrospective effect would be disastrous to the housing industry and administration.[42]

To reiterate, the doctrine of prospective overruling is not a tool intended to extend judicial functions, rather it is to be wielded in the face of wrong or unfair operation of law. When a court finds that a legislative law has been operating in contradiction to the spirit of a superior body of law, the courts should take judicial action to right whatever wrongs that have occurred. Further, altering the results of past cases that were based on invalidated legislative law would lead to complications and further injustices for the parties involved.

Other issues of limitation and res judicata may become important factors to consider as previous litigants maybe barred from exercising a possible right to have their case re-litigated. Prospective overruling aims to right the injustices of the past and to bring the true essence of the law to light.

Consequences of Obata-Ambak– impact on interested parties

The decision in Obata-Ambak leaves a blazing trail with respect to the application of prospective overruling in Malaysia. The implications of the case can be summarized as follows:

• declaration that Regulation 11(3) of the HDR to be null and void shall only apply to interested parties from the date of pronouncement of the decision in Ang Ming Lee, and not before;
• the doctrine of prospectivity shall be determined based on the reliance test, in that, only when there is “serious ramifications and implications on those who would have relied on its validity in the past” shall the doctrine apply;[43]
• the conflict between retrospectivity and prospectivity has been resolved and precedent established to address any or all ongoing divergence of judicial opinions; and
• the position established by the Federal Court demonstrates strong judicial independence. The judiciary’s main role is to uphold the rule of law and to be proactive in protecting the interests of the public and the law of the land. As per the words of the Right Honourable Chief Justice, “public confidence in the Judiciary is the measure and tool by which judges remain transparent and accountable to the public”.[44]

An interesting illustration of the implications of the decision in Obata-Ambak can be observed in the recent passing of the Constitution (Amendment) Bill 2024. One of the most notable amendments is that children of either a male or female Malaysian citizen born outside of Malaysia are now entitled by operation of law to be awarded Malaysian citizenship.[45] Currently, only male Malaysian citizens can pass their citizenship to their children. This particular amendment has brought on positive reactions as it bridges the gender equality gap among female and male Malaysian citizens who have birthed children outside the Federation.  

One of the principal considerations is whether such amendments should take a retrospective effect or not. Pursuant to Clause 12 of the Amendment Bill 2024 [46], the above mentioned amendment shall only affect those applying for citizenship after the date the Amendment Bill 2024 comes into force. Thus, it can be seen that previous and existing cases before the coming into operation of the amendments would not be allowed to enjoy the benefits from the change in the law.

This position has been highly criticized by many stakeholders. The Human Rights Commission of Malaysia (SUHAKAM), in their recent press statement [47], urged Parliament to ensure that the right to citizenship of individuals born from either male or female Malaysian citizens should take a retrospective effect, so as to cure the wrongdoings and injustices caused by the previous law.[48]

The position of the Amendment Bill 2024 can be considered through the lens of the decision in Obata-Ambak as well. The main distinguishing feature is that in Obata-Ambak, the Federal Court was deciding on the effect of change of law pronounced in a previous Federal Court case. Moreover, in Ang Ming Lee, there was no express proclamation on whether the striking out of Regulation 11(3) of the HDR should be applied retrospectively or prospectively. Thus, the Federal Court in Obata-Ambak could exercise its judicial discretion to decide what would be just and fair.

However, in the instance where it is a Parliamentary amendment of the Constitution, there already is an express declaration that the amendments shall only apply prospectively. In these circumstances, we are encouraged to lean on the Federal Court’s decision in Loh Kooi Choon v Government of Malaysia [49] where Raja Azlan Shah FJ (as His Royal Highness then was) expounded the following:

“In so far as an Act of Parliament is concerned, the rule of construction is that in order to determine whether it is retrospective in its operation, the language of the Act itself must be looked into bearing in mind that an Act is not to be construed retrospectively unless it is clear that such was the intention of Parliament. If such was the intention that the Act was to be given retrospective effect even in respect of substantive right or pending proceeding, the courts have no alternative but to give effect to the Act even though the consequences might appear harsh and unjust.”

Therefore, although the new position of citizenship would in fact cause for better justice if applied retrospectively, Parliament has already displayed lucid intention that the effect of the change shall only exclusively apply to prospective cases regardless of the consequences. There is no want of express instructions as to the effect of these Constitutional amendments, therefore, the decision in Obata-Ambak has no place in this matter. Further, following the line of thought established in Loh Kooi Choon, the court’s hands are tied in circumstances as above. The courts are religious in their duty to uphold Parliamentary intention above all else.

The doctrine of prospective overruling serves as a crucial judicial tool to mitigate the adverse effects of retrospective changes in the law. It allows courts to invalidate previously upheld "bad" laws while safeguarding past transactions. The doctrine ensures that justice is served without causing undue harm to those who have relied on the previous laws in good faith. Nonetheless, from the cases discussed, a balanced approach should be applied when applying the doctrine, ensuring that judicial decisions are fair and just.

If you have any questions or require any additional information, please contact Jeyakuhan S K Jeyasingam or the partner you usually deal with at Zaid Ibrahim & Co. This article was prepared with the assistance of Vaishali Murali, a Trainee Associate in Zaid Ibrahim & Co.

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

[1] A. Sarkar and A. Ramesh, ‘The Doctrine of Prospective Overruling: Legislative Analysis of Its Evolution & Application in India’ (2023)6 (2) International Journal of Law Management & Humanities.

[2] Ibid.

[3] Great Northern Railway v Sunburst Oil and Refining Co. 287 U.S. 358 (1932).

[4] Linkletter v Walker 381 US 618(1965). 

[5] PP v Hue An Li [2014] SGHC 171 [100].

[6] [2005] 4 All ER 209.

[7] Ibid.

[8] Samuel Beswick, ‘Prospective overruling offends the Rule of Law’ [2021] NZLJ 261.

[9] [2020] 6 CLJ 55.

[10] Ibid.

[11] [1967] AIR 1643 (SC). See Patil Automation Private Limited and Others v Rakheja Engineers Private Limited [2022]7 MLJ 139 SC [73].

[12] Ibid.

[13] Ibid.

[14] A. Sarkar and A. Ramesh, ‘The Doctrine of Prospective Overruling: Legislative Analysis of Its Evolution & Application in India’ (2023)6 (2) International Journal of Law Management & Humanities.

[15] AIR 2001 SC 1723.

[16] Ibid.

[17] [2022] 7 MLJ 139.

[18] [1987] 163 CLR 1, per Mason J.

[19] (1997) 144 ALR 89.

[20] R v P, GA [2010] SASCFC 81.

[21] [2010] SASCFC 81.

[22] (2019) 269 CLR 333.

[23] [1996] 3 SLR(R) 390.

[24] Ibid.

[25] [1997] 2 SLR(R) 842.

[26] PP v Hue An Li [2014] SGHC 171.

[27] Ibid.

[28] Adri Anton Kalangie v PP [2018] SGCA 40.

[29]Adri Anton Kalangie v PP [2018] SGCA 40. The High Court referred to the sentencing rule pronounced in Suventher Shanmugam v Public Prosecutor [2017] 2 SLR 115 where the Court of Appeal laid down the sentencing rule however, failed to specify whether the rule would have either a retrospective or prospective effect.

[30] [1987] 2 MLJ 311.

[31] [2005] 2 MLRA 590.

[32]  Ibid.

[33] [2022] MLRA 623.

[34] [2022] 3 CLJ 1.

[35] Ibid.

[36] [2024] MLJU 1902.

[37] [2020] 1 MLJ 281.

[38] [2005] 4 All ER 209.

[39] [2022] 3 CLJ 1.

[40] Ibid.

[41] Obata-Ambak Sdn Bhd v Prema Bonanza Sdn Bhd and other appeals [2024] MLJU 1902 [156] per Hasnah Hashim FCJ.

[42] Obata-Ambak Sdn Bhd v Prema Bonanza Sdn Bhd and other appeals [2024] MLJU 1902.

[43] Obata-Ambak Sdn Bhd v Prema Bonanza Sdn Bhd and other appeals [2024] MLJU 1902 [165].

[44] The Right Honourable The Chief Justice of Malaysia, Tun Tengku Maimun binti Tuan Mat, ‘Judicial Independence’ January [2024]JMJ 558 4 (available at https://www.jac.gov.my/spk/images/stories/4_penerbitan/journal_malaysian_judiciary/januari2024.pdf).

[45] Constitution (Amendment) Bill 2024, Amendment of Second Schedule, Part II, clause11(a)(B).

[46] Ibid.

[47] SUHAKAM, ‘Press Statement on Constitutional (Amendment) Bill 2024 – 2.0’ (15 October 2024) <https://suhakam.org.my/ms/2024/10/press-statement-no-25-2024_press-statement-on-constitutional-amendment-bill-2024-2-0/>

[48] Supra, at 46

[49] [1977] 2 MLJ 187. 

Zaid Ibrahim & Co contributed to the Lexology Panoramic: Private Equity 2025 (Transactions) Malaysia.

Authored by  Director, Client Solutions, Chua Wei Min and Partner, Muhammad Zukhairi Muhammed Salehudin, the article offers a detailed overview of things to know regarding Malaysia’s private equity transactions.

The guide explores, among other, types of private equity transactions, corporate governance, tax consideration, shareholders’ agreement, shareholder rights, acquisition, exit strategies and more.

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Read the full article here.