Discover How the Real Estate Developers Manage Their Risks

1. Introduction

Real estate development consists of land assembly, development, financing, building and the lease or sale of residential, commercial and industrial property. Real estate development is a very dynamic process with a significant average duration.

Real Estate Types

Real estate consists of the following types:

a) Retail: These are projects suitable for shopping purposes with modern outfitting, appropriate access and visibility and sufficient parking space. The occupiers will be tenants. Investors and, more exceptionally occupiers, will be purchasers.

b) Residential: This concerns the development of buildings suitable for family living on a long-term basis. The ultimate occupier will be a “resident”; however the ultimate investor can vary from owner-occupier to institutional investor.

c) Offices: Buildings that could be used for market standard office buildings. The buildings should normally be fitted for occupancy by multiple tenants.

d) Industrial/logistics: Industrial real estate building for multi or single-tenant purpose. The investors are the ultimate purchasers.

e) Mixed-use: This concerns projects being a combination of two or more of the above types.

f) Area development: This concerns complex long-term mixed-use developments, which are often undertaken in joint effort with public bodies.

2. Risks and risk-mitigating measures at the project level

Each type of Real Estate has its own risks. Below is a description of the risks that may occur in the Real Estate business, along with the mitigating measures.

Project Risks

The risks can be grouped in the following clusters:

a) Land value risk: land acquisition costs and the risk that the value of acquired land changes due to market circumstances.

b) Land exploitation risk: the risks mainly related to environmental issues.

c) Planning permit risk: the risk that no usable planning permit is received or that this process takes longer than expected. This risk also applies to other municipal approvals/permits, such as commercial licenses. Whether or not grants are obtained is also included in this risk.

d) Construction risk: this regards pricing, design, quality and possible delays.

e) Revenue risk: there are many factors that influence revenues. These include yields, rent levels, sales price levels, inflation and interest rate levels, demand and supply

f) Duration risk: the duration is a consequence of other risks. It can impact interest costs, but can also cause other problems, such as claims from tenants if the agreed opening date of a shopping centre is not met. A delay could also mean that the project has to face adverse market circumstances.

g) Political risk: the risk that the project encounters problems due to a change in government, regulations, etc.

h) Partner risk: the risk that a partner in the project cannot meet its obligations or disagrees on the way forward.

i) Legal risk: this covers a broad area of topics: possible objections against changes in zoning, liability risks or contracts which have not been drawn up correctly. It also concerns the risk of not obtaining the required permits and the risks involved with buying existing companies to acquire land positions. Tax risk is also included in the legal risk.

Risk mitigating measures at project level

To mitigate the above mentioned risks the following mitigations can be highlighted:

a) Research is essential in assessing virtually all kinds of risks. Important research areas will include:

1) Forecast of yield development;

2) Allocation strategy;

3) Investor demand;

4) Occupiers and consumer demand: The research into partners (financial position and due diligence check) is also included under ‘research’ and should be satisfactory;

a) Phasing: By adequately phasing projects, the steps to be taken are smaller, with possible exits following each phase.

b) Contracts: Many risks can be mitigated by carefully drawn up contracts. It is therefore essential that the legal department is involved, either directly or indirectly by instructing local lawyers. Regarding construction risk it is crucial to use controlled pricing mechanisms when entering into construction contracts. Therefore, it is preferred to have a fixed price contract to the largest possible extent. Depending on the project, flexibility might be needed to achieve the best price possible or to allow for tenant demands, design changes etc. All projects need also to be insured in line with insurance policies. Furthermore, the quality of partner agreements (clauses on the decision process and exit possibilities) need to be highlighted.

c) Cost calculations: A development appraisal consists of assumptions which become more certain in the course of the project. The risk of surprises and wrong assumptions made during the process need to be mitigated by meticulous calculations. These will be made during the development process as the design will evolve toward final specifications and will have to take into account inflation levels, price increases as a result of increasing demand etc. Where necessary, these should be verified externally.

d) Pre-lease/-sales: In order to ‘test’ the market of end-users before entering into the commitment to actual starting of construction of a project, a certain rate of pre-letting or pre-selling is required. It’s also the ambition to enter other major commitments (a.o land purchase) conditional upon these market-tests. In addition to demonstrating the market appetite this will reduce the amount at risk as well, since pre-leasing/selling locks in part of the revenues.

e) Timing payments: in the case of costs it is preferred to pay as late as possible, whereas in the case of revenues it is preferred to receive these as early as possible.

Next to the obvious advantage of lower interest costs, this strategy provides control in case of possible disputes, relating to for example contracts.

Furthermore, it is preferable to keep the level of spending in the development phase to such a level that a real go/no-go decision before the start of the construction phase is still possible.

3. Risk-mitigating measures at the portfolio level

At the portfolio level there are a number of risk mitigating measures in place. These are the following:

Portfolio diversification

A Real Estate developer is often active in more than one country; the markets in these countries differ. Because the portfolio of the company is spread over several countries, segments and project sizes the portfolio is rather diversified. However, it is difficult to set up exact target portfolio diversification, since it is not possible to determine which diversification would create an optimal risk/return ratio.

In order to be able to manage the portfolio and diversification over countries and segments, regular reports are essential together with an outlook based on the existing pipeline.

Maximum Investment at Risk at the portfolio level

Current commitments minus secured revenues should never exceed pre-specified limits on amounts at the portfolio level.

Restrictions regarding strategic land positions

Strategic land positions concern land /buildings without sufficient rental income and not yet zoned for new development functions. At the portfolio level the following limits should be in place:

– the total investment in strategic land positions should not exceed a pre-specified limit on amounts.

– strategic land will only be purchased for the purpose of residential or retail development.

– the maximum tenure of strategic land positions is restricted in line with the pre-specified policy: for example, differentiation between mature and growth countries.

To diversify the risk the average tenure of holding the land for strategic purposes should be roughly spread over a pre-defined number of years which should be monitored via periodic reporting.

Do you want to learn more about Risk management? Does your organisation require help in setting up your Risk management programme or analysing current and future risks? Please click on the link below to directly discuss ways in which we can help you deliver your risk management requirements:

The Need to Manage Risks in IT Outsourcing

The benefits of IT Outsourcing are immense; no wonder that for almost every organization that likes to focus on its core competencies, IT outsourcing is a standard practice. However, IT Outsourcing entails some risks and as organisations do with all other ventures and investments, IT outsourcing risks should also be evaluated and managed efficiently.

To be precise, while IT outsourcing can help a business with lower costs, economies of scale and access to dedicated resources, it may sometimes lead to unwarranted outcomes such as diminishing service levels, escalating costs and loss of expertise. Needless to mention that there is a need to manage risks in IT outsourcing to ensure compliance and profitability.

Given below is an insight into the four major types of risks associated with IT outsourcing. Some tips on how to mitigate these risks are explored as well:

Operational risks

Operational risks are often a by-product of the complexity of operations, cultural and geographical gap between the client and the vendor. Some of these risks may arise due to lack of or limited communication and transmission channels between the client and the vendor. Operational risks include the possibility of losing all employees who are familiar with the process. Moreover sovereign risk and exchange rate risk to fall in the category of operational risk. To mitigate these risks, organisations need to develop a foolproof communications plan and ensure that a strong governance model is in place. To retain control, some organisations place an employee at the site of the vendor to periodically oversee and manage the process.

Compliance and Security threats

One of the most dangerous risks faced by organisations that choose to outsource their IT is security and compliance risks. To minimize these risks, organisations should first consider the volume and type of data that will be handled by vendors when the process is outsourced. It is needless to mention that organisations should avoid sharing very critical data as it leads to an increase in the likelihood of compromise. CIO’s and IT Heads should also take time to visit vendor sites frequently to ensure that security and data protection protocols are followed diligently.

Country risks

When an enterprise engages with a vendor based overseas, it exposes the organisation to possible political, social and economic conditions that are unique to the country where the service provider is located. It is recommended that organisations opt for the services of vendors who have service capabilities from multiple locations, thus minimizing country risks.

Legal risks

Sometimes vendors may expose an organisation (knowingly or unknowingly) to possible lawsuits and legal expenses. To avoid such possibilities, organisations should thoroughly research the background of possible vendors and select the services of a vendor who has no history of litigations, regulatory actions, complaints, or compliance issues. It is additionally crucial that the contract is reviewed by the organisation’s legal counsel prior to execution.

Enterprises considering to outsource should strategically assess their risk appetite before outsourcing crucial functions.

FTC Rules on Web Site Compliance – How to Keep Your Internet Business 100% Legal!

The Internet is the greatest equalizer of our time with countless lives being shaped by it. So can yours.

But entering the unknown terrain of the World Wide Web comes with a certain level of risk including legal risks. Not necessarily the same level of legal risks as operating a business in the real world depending on your field of operation, but risks all the same: from copyright and trademark infringement, to liability, breach of confidentiality, libel and slander, licensing, sales tax collection and reporting just to name a few.

So whether you promote other people’s products or your own, be it a one-page e-commerce Web site or a 1,500-page money-making portal keeping your business 100 per cent legal can not be over stated and should not to be ignored.

For the purpose of this article, however, let’s briefly examine some of the rules laid down by the Federal Trade Commission (FTC) with regards to protecting the online consumer from fraudulent, deceptive, and unfair business practices in the online marketplace.

The Federal Trade Commission is the United States consumer protection agency. It has become more stringent with a focus on bloggers, online advertisers and Web site owners. This new approach is the result of the Commission’s “ongoing regulatory review of all current rules and guidelines”.

I won’t spend a lot of time going through any of the details here. Instead, I’ve included links to the FTC’s Web site so you can access each individual rule directly. But please note that as an Internet business owner you must ensure that your business is in compliance with each.

Pay particular attention to the following:

1. Federal Trade Commission Policy on Advertising and Marketing on the Internet.

http://www.ftc.gov/bcp/edu/pubs/business/ecommerce/bus28.shtm

2. Consumers’ privacy ( ftc.gov/privacy )

3. Guides governing Endorsements & Testimonials

http://ftc.gov/opa/2009/10/endortest.shtm

Also check out the Ecommerce Rules Main Page and other critical info on the FTC main page.

Finally, the way business was conducted online in the past has changed. Just throwing up a Website, blog, even a product review page and then try to sell that product isn’t as straight forward anymore. We can now be held accountable for even claims made by the product owner. So no longer is it enough to read about a product and review it. You must have data to back up your review or claim.

On a more cheerful note, though, an Internet based business can still be a very simple and direct undertaking and running it can be as smooth as silk so do not be put off by all of this legal stuff. Every marketplace must have rules in place to protect the consumer. And in the current Internet marketplace we probably need more of it, not less.

Two Hidden “Legal” Risks of Debt Consolidation Loans

What are Debt Consolidation Loans

Debt consolidation is combining outstanding loans (debt) into a single package (consolidation). The debts therefore become one “new” loan, and instead of making several small payments on the loans you used to have, you make one larger payment on the new loan. Ideally and typically-and what has made debt consolidation loans popular as a home remedy for debt-the new loan is secured by some asset, often your home, and this allows you to obtain lower interest rates. Thus consolidation, in the final analysis, is the conversion of debt that is not secured into debt that is secured by some real asset, in exchange for lower interest rates. It can reduce your monthly payments considerably.

Occasionally people ask me whether debt consolidation is a good, economically constructive solution to their credit card problems. Usually, the answer is that it is no. Certainly it is not a solution by itself.

Why Doesn’t Debt Consolidation “Work?”

As a pure financial transaction, exchanging a lower interest rate for a security arrangement can be a very reasonable decision. Why then has it been such a disaster for so many people? Risk. Most people entering into complex financing are not able to assess risk and account for it, particularly when they are under economic pressure-which they usually are when they consider debt consolidation loans. Thus people systematically underestimate the risk that they won’t be able to make the payments on the new debt.

Additionally, since most people do not really want to go into debt in the first place, the existence of large credit card debt is indicative of other problems, either too little money or a tendency to overspend on unnecessary items. These issues are more likely to be made worse by the sudden reduction of economic pressure and the sudden, apparently greater amount of money or credit available to be spent.

The Hidden Legal Risks of Debt Consolidation

In addition to these “systemic” issues, there are two main hidden costs of consolidation that should be considered: loss of flexibility, and the nature of secured debt versus unsecured debt.

Consolidated Loans are Less Flexible

When you have ten loans for different things, from automobiles to credit cards, you have flexibility if hard times strike. If you simply cannot make your payments, you can give up some, but not all, of the things you have purchased. You can let some, but not all of the credit cards go into default. This is certainly not a happy thing, of course, but it raises the possibility of individualized debt negotiations, debt forgiveness, or even missed statutes of limitation. Again, these are not the choices and hopes of someone in flush economic conditions, but they are real options facing many people right now. In order for a debt collector to start garnishing your wages, it must find and sue you, must win, and then find your assets. It is an expensive and risky process for the debt collector if you fight. They sometimes drop the ball, and there are limits to how much of your wages can be garnished.

If everything else fails for you, you can declare bankruptcy, where homestead exemptions are likely to allow you to remain in your home.

The Nature of Secured Debt

The bigger risk of debt consolidation loans is the nature of secured, versus unsecured, debt. Remember that what powers the lower payments for consolidation is the existence of security-usually your home. Your home secures the debt, and that means that if you do not make your payments on the new debt, the lender can foreclose on your home and take it away. Foreclosures are generally “expedited” proceedings, meaning that your defenses are limited and the time for asserting them is restricted. In many states foreclosure is not even a judicial proceeding, although you have some legal rights you could assert in certain circumstances.

And what all that means is that instead of facing the prospect of years of battling over high-risk debts and questionable payoffs that could be trumped by bankruptcy, the banks can waltz into court and emerge in a very short time with your house.

Put a little differently, your debt consolidation loan could make you homeless almost before you know it. And bankruptcy often, if not usually, will do nothing to protect you.

Conclusion

I urge anyone considering debt consolidation to think about these risks very carefully.

How Duplication on the Internet Increases Your Legal Risk

Before the internet came along the copying of original works typically relied on human intervention. A manuscript to be published would go through many hands before printed copies were available in book form. The slow labour-intensive character of distribution systems meant that there were many opportunities to correct an error or withhold an item from public release. The time involved in publishing also operated as a restraint or discouragement, keeping documents and records away from the public eye. This was particularly the case in relation to records maintained by government departments and agencies, that were often maintained in paper-based formats that made duplication difficult and uneconomic.

Fast forward to the 21st century and there has been a significant change in how documents and records are created, stored and disseminated. Many documents now, perhaps the majority of them, are never represented in a tangible form. They start off as electronic documents, and live on “forever” in that digital form.

Even documents that start out as writing on paper or are rendered to paper, are routinely scanned into a digital format to facilitate storage, retrieval, and of course distribution. The net effect of this has been to make previously inaccessible material available to a wide audience. If information is power, we are undoubtedly more empowered than ever before.

A consequence of this digital revolution is a massive, exponential growth in the amount of information at our fingertips, and in our ability to copy and further disseminate this information without effort or significant cost. However, such distribution by way of the internet, particularly by publishing online, involves a loss of control. Even email gives us some ability to limit the target audience – we cannot control how members of that target audience deal with what they receive, but we might have trust (often misplaced) that the carefully selected recipients of our email communications will deal with the content of those communications appropriately.

Uploaded material, on the other hand, is out of our control the moment it becomes visible online. At that moment, two significant further steps are virtually inevitable. Firstly, sooner or later the uploaded documents will be indexed by a search engine, most likely Google. You may have heard the recent story of a hapless eBay vendor who put all his client records up on the internet, in what he thought was a “hidden” location, only to find that soon afterwards his clients’ details along with their passwords and other private information were revealed for all to see. This is not an isolated occurrence.

The next thing that happens is that the document, unless it is very mundane indeed, is likely to be duplicated throughout the internet. Search engines themselves often take a snapshot of a visited page which can then be accessed later if the source page becomes unavailable – see, for example, the “cache” link that appears on many Google search items. Regardless of copyright considerations the reality of the internet is that copies of documents and other material proliferate. Many websites encourage this. For example, one of the largest repositories of articles on the internet allows any other website operator to copy up to 25 articles a year. These articles then form part of the second website, the net effect of this being that some articles are duplicated hundreds or thousands of times across the web. Similarly, some government information (which may include information about court proceedings and other official documents) might be in the public domain or freely copyable for non-commercial purposes, which results in that information similarly being duplicated across thousands of websites.

To a regular user of the internet, none of this will come as a great revelation. But what many users do not realise is the legal risk that can arise from this seemingly innocuous process. If you upload erroneous information to the internet, knowing that others will rely on it, or include defamatory statements in what you publish, you are just as culpable and liable to be sued as if the information was published in a book or in some other conventional form. However as noted earlier, the publication of a book involves multiple opportunities to identify and remedy errors and inappropriate content. Web publishing by its very nature is more dynamic and takes place without those traditional checks and balances. Moreover, even after a book is published it might be recalled if an error is found, or if there is some challenge to its content. It is not uncommon for a person who believes he or she has been defamed in a book to bring proceedings seeking to halt sales of the book. In practical terms that opportunity does not exist in relation to information or material published on the internet. It is too late, the cat is out of the bag and removing the offending document from the website that it was first uploaded to does nothing to address the copies held by search engines and the duplicates randomly distributed throughout the web. It is a poetic irony that more salacious material is likely to be duplicated across more websites. It is necessary to assume that from the moment a document is uploaded to the internet, it will remain there permanently in some form or other.

This leads to the problem of material becoming out of date. A good example of this is the situation that occurs when details of a person’s alleged misconduct (such as a record of conviction) are uploaded to the internet, but the allegations are subsequently disproved. Even if the corrected record is then also published online, it is unlikely to be routinely linked to the original record – a search for relevant information about a particular person may show up only the original record, resulting in the wrong information being relied on. There are numerous examples of people who have failed to gain employment positions due to this kind of situation. While it may be incumbent on the prospective employer to rely only on verified information, the reality is that busy employers faced with hundreds of applications for a particular job may not have the time or inclination to double check information that on the face of it appears to be true. However, while there might be something of a grey area around whether a failure to offer employment due to reliance on erroneous information is actionable, there is no doubt that an employer who relies on such information in relation to a current employee, and who dismisses or penalises that employee unfairly, may be liable to damages and other remedies.

Similarly, commercial organisations who rely on information from the internet to make business decisions, or as the basis for representations to clients or prospective clients, run the risk that misrepresentations can and do lead to damages awards and even criminal sanctions. A common misconception is that if the same information is “confirmed” by multiple sources online, that information is probably correct – but this is a fallacy as very often those multiple sources rely on the same original document for their incorrect data.

As more and more information is available only online, and conventional primary sources such as books and printed periodicals become a much smaller part of the information sources pie, we can expect this problem of duplicate information and validation error to increase. To some extent, this situation represents a fundamental flaw in the internet. It is a situation analogous to verbal communications, where facts become distorted as they pass from person to person without reference back to the original (hopefully corrected) source. Extending that analogy, it might be said that the internet is a kind of massive repository of hearsay, but with the added difficulty that it is often hard to tell which are the original sources of information and which are duplicates.

There is no doubt that the internet has enriched our lives, and has revolutionised the distribution of information in a very positive way. However, people and organisations who are careless about the information they publish online take the very real risk of being called to account for misleading a very large audience – the world at large. Similarly, people and organisations who rely on unvalidated information gleaned from online searches take the risk that errors in such information will come back to haunt them later. The short point here is that all online publishing should be subjected to appropriate checks and balances before it is uploaded, and every attempt should be made to double check information sourced online to ensure it is factually correct.

Bouncy Castles and the Legal Risk For Those Who Hire Them

It is difficult to argue that health and safety laws are now eroding the ability that many people have to enjoy themselves and live their lives with the care free attitude of old. The fact is however that personal injury law has evolved and one such case illustrates how the root of the legal principle involved in a particular case should be focused on preventing the same accident or injury occurring again.

A child who suffered a “very serious and traumatic brain injury” when he was accidentally kicked on the left side of his head by another child whilst on an inflatable bouncy castle has won a claim for compensation thought to be worth one million pounds.

A High Court Judge ruled that there had been a “shortfall in supervision” on the part of a couple, who hired the bouncy castle for their children’s birthday party.

The injured child, aged 11 years old at the time of the accident, suffered a fractured skull when a 15 year old accidentally kicked his head whilst they were performing somersaults on the inflatable castle. The High Court was told that constant supervision was required under the terms of the hire contract but that at the time of the accident Mrs Perry had her back to the bouncy castle.

The claimants QC advised after the hearing that the ruling created a legal precedent that “constant 100% supervision” must now be given whenever children play on bouncy castles or other inflatables. Giving the defendants leave to appeal the judge recognised the potential significance of the judgment, not merely for the parents but for others who operate this equipment.

A recent government survey estimated that there were between 3,500 and 4000 accidents on bouncy castles last year. Equipment is in most cases manufactured to the highest standard and hire companies work hard to comply with current legislation but it is now absolutely imperative that inflatable play equipment is constantly supervised and that all operating instructions are complied with.

Blogging – Are You Exposing Yourself To Legal Liabilities?

In November 2006, Blogging Asia: A Windows Live Report released by Microsoft’s MSN and Windows Live Online Services Business revealed that 46% or nearly half of the online population have a blog [Blogging Phenomenon Sweeps Asia available at PRNewswire.com].

Blogging Asia: A Windows Live Report was conducted online on the MSN portal across 7 countries in Asia namely Hong Kong, India, Korea, Malaysia, Singapore, Taiwan and Thailand. Interestingly, the report found that 56% of Malaysians blogged to express their views, while 49% blogged to keep friends and family updated.

This article focuses on Malaysian law however as the Internet transcends boundaries and jurisdictions therefore the laws of many countries may apply. In Malaysia, bloggers face legal risks that carry civil or criminal liabilities such as;
(a) copyright;
(b) trademark;
(c) defamation; and
(d) sedition.

Other than the above, a blogger must consider other legal risks such as fraud, breach of confidentiality and misrepresentation which will not be addressed in this article.

Copyright protects the way artists or authors express their idea or fact on a piece of work but not the underlying idea or fact itself. Copyright protects originality of the work and prohibits unauthorised copying. Copyright protection is eligible for the following works refer to Section 7 (1) of the Copyright Act, 1987:-
(a) literary works, such as written works, novels, source codes in computer program and web pages and content in multimedia productions;
(b) musical and dramatic works, such as musical score, plays and television scripts;
(c) artistic works, such as drawings, sculptures and photographs; and
(d) sound recordings and films, such as films (traditional celluloid and various video formats), records, tapes and CDs of music, drama or lectures.

Unfortunately, much of the copyright infringement occurring on the Internet goes undetected. New blogs at times use existing blogs for its content and this is done through copying or linking. Apart from that, posting copyrighted photographs, designs, product photos or product packaging from another website is also illegal.

There are “rules of thumb” to follow when creating or posting contents such as:- (a) create one’s own original image, graphic, code and words; (b) use licensed works within the scope of permitted use laid down by the owner; and (c) use free images off the Internet as long as the terms of the creator of the image are followed.

The same “rules of thumb” apply when posting programming scripts as it is normally a violation of copyright law to appropriate programming scripts from third parties. With regards to postings on one’s blog by third parties, the blog owner may receive an implied licence to the postings made by third parties. When offering podcast i.e. recorded and dowloadable audio file to be downloaded from blogs it is best that the podcast do not contain any copyrighted music belonging to others thus protecting oneself from any copyright infringement suits.

If copyright protects the way ideas or facts are expressed, trademark on the other hand protects words, designs, phrases, numbers, drawings or pictures associated with products and services.

A trademark owner enjoys exclusive right to use his mark in relation to his products and services refer Section 35 (1) of the Trademark Act, 1976. Trademark protection grants right to the trademark owner to prevent others from using identical trademark with identical goods or similar goods that is likely to cause confusion to the public refer Section 19 (1) and 19 (2) of the Trademark Act, 1976.

How does a blogger infringe trademark belonging to another? One example is when a blogger posts links on logos belonging to a trademark owner. When a visitor clicks on the trademark it will directly lead the visitor to the blogger’s blog instead of directing the visitor to the trademark owner’s website.

Such linking may cause confusion or deception as it raises serious risk that the blog is in some way connected with or related to the trademark owner’sproducts and services.

Generally, the term defamation refers to a false statement made about someone or an organization that is damaging to their reputation. The person publishing the statement must have known or should have known that the statement was false. While the Internet provides the arena in which defaming statement can be made or published, there is no specific legislation that deals with defamation on the Internet in Malaysia.

In Malaysia, the Defamation Act, 1957 applies to publications in printed materials and broadcasting through radio or television. Since the law applies to published or broadcast materials, hence in principle it applies to materials such as blogs and websites published on the Internet.

As defamation law is complex there is a need to distinguish whether a defamatory statement is a libel (written form) or slander (spoken words). In a case of libel, if it is determined that the statement is defamatory then there are presumptions against the author or the publisher. In the case slander, there is often the requirement to proof actual damages or special damages suffered due to the defamatory statement. Hence, slander law does not apply to blogs as it does not fall within the ambit of broadcasting the slanderous words by means of radio or television.

Due to rapid changes to the Internet and the convergence of technologies, one will wonder whether the courts will apply the libel law or slander law when blogs converted from text to speech format are transmitted on the Internet. However, all this depends on proving defamation and finding the identity of the blogger which can be an enormous task due to the anonymity of the Internet and its worldwide scope.

Another legal risk is when blogs are used to disseminate false,incomplete or misleading information regarding racial disturbances or contents that cause hatred or contempt towards the government or the ruler. In Malaysia, various offences are provided for in the Sedition Act 1948 such as it is an offence for any person to print, publish or distribute any seditious publication- see Section 4 of the Sedition Act, 1948 for other offences. Whether the provisions in the Act apply to publications on the Internet have not been judicially determined.

In Singapore the sedition law was applied in 2005 where the Singapore court jailed two users for posting seditious remarks on the Internet- Two jailed for ‘sedition’ on internet, South China Morning Post, Saturday, October 8, 2005. The South China Morning Post reported that the case is considered a landmark case underscoring the government’s attempts to regulate online expression and crack down on racial intolerance. The two cases represented the first time Singaporeans had been prosecuted and convicted for racist expression under its Sedition Act.

Arising from the case of the racist bloggers, on 8 November 2006 the Singapore Government proposed changes to its Penal Code taking into account the impact of technology such as the Internet and mobile phones- refer to Singapore Ministry of Home Affairs, Consultation Paper on the Proposed Penal Code Amendments at page 2. The amendments cover offences committed via electronic medium such as Section 298 (uttering words, etc with deliberate intent to wound the religious feelings of any person) to cover the wounding of racial feelings as well, Section 499 (defamation) and Section 505 (statements conducing to public mischief) to expand and include those “published in written, electronic or other media” see Singapore Penal Code (Amendment) Bill at pages 8 and 20. These amendments when passed empower the police and state prosecutors to prosecute those with offending blogs- Cf.Sections 298, 499 and 505 of the Malaysian Penal Code (Revised 1997).

There are reasons why the authorities are taking blogging seriously as half of the people that took part in the Blogging Asia: A Windows Live Report survey believe that blog contents are as trustworthy as traditional media and a quarter of the respondents believe blogs to be the quickest way to learn about news and current affairs.

With such reliance on blogs, contents containing false, incomplete or misleading information posted on blogs not only may cause panic, anger, contempt or political scandals; it may also cause political and economic instability.

The Internet presents challenges to existing laws that are slow to provide adequate protection to a party with respect to the use and content of blogs. Currently, codes of practice for Internet users including bloggers have not been proposed as part of the Internet regulatory regime currently operating in Malaysia.

Instead, bloggers need to practise self-regulation and understand the legal implications of blogging to ensure that their blogs are written in a responsible and lawful manner. In order to protect themselves, bloggers may provide terms of use and proper disclaimer to offer some degree of comfort and protection from third parties postings on their blogs.

7 Key Legal Business Musts

The short answer to the question “Why must you know these 7 things?” can be summed up by the words of Justice Spender, in TPC v British Building Society & Ors (1988) ATPR 40-880 at 49,545, when considering the need for a corporation to have an effective trade practices compliance program, he said:

“… (B)usiness men, particularly at senior levels, who remain in ignorance of the Competition and Consumer Act, 2010 1974 do so at their peril.”

The peril stems from the substantial criminal, pecuniary and other penalties that apply under various statutes that require businesses to comply with.

The key 7 areas of law to know are:

1. Competition and Consumer Laws (eg under the Competition and Consumer Act, 2001);

2. Environmental laws (eg Contaminated Land Management Act, 1997, and the Dangerous Goods (Road and Rail Transport) Act 2008;

3. Intellectual Property (eg Trade Marks Act, 1995, and the Copyright Act, 1968);

4. Asset Protection (Corporations Act, 2001, Succession Act, 2006 and theTrust Act, 1925);

5. Tax (Taxation Administration Act, 1953 and the Income Tax Assessment Acts of 1936 and 1997);

6. Industrial Relations (Fair Work Act, 2009, Anti-Discrimination Legislation and Employment Legislation, such as, Workers’ Compensation, Long Service Leave Act, and Holiday Pay Act);

7. Occupational Health & Safety Acts;

The penalties that spur businesses to adhere to the prescribed minimum standards of behaviour are various. For instance:

Breaches of the Australian Consumer Law can be as high as $1.1m for corporations and $220,000 for individuals. The penalties for competition breaches can be $10m.

Under Environmental legislation, the penalties involve criminal sanctions such as jail terms besides pecuniary fines.

There are various levels of liability to contend with. Breaches of the competition provisions are in the nature of strict liability. There is no due diligence defence for engaging in prohibited anti-competitive conduct under the Competition and Consumer Act, 2010.

Due diligence can be a defence for the purposes of the Environmental Protection Act.

Despite the strict liability or otherwise of particular legislation, effective compliance programs play a role. Hence, knowing what to not do is critical for business survival. The Courts have consistently said that a business that has an effective compliance program may raise this in mitigation of a penalty that can be imposed by a Court, either as a means of reducing a fine where there is strict liability or raising an outright defence, where due diligence operates as a defence. In TPC v CSR Limited (1991) ATPR 40-076, Justice French pointed to the need for corporations to have a training program to achieve compliance with the Trade Practices Act

Since a breach of an act may, in some instances, occur regardless of whether there was any intention to engage in prohibited conduct (eg under the Competition and Consumer Act, 2010), to demonstrate compliance with the requirements of legislation, Corporations need to show that they have instituted effective and efficient procedures of managerial control “designed in recognition of human frailties of a proportion of their employees”: Eva v Preston Motors Pty Limited (1977) ATPR 40-048.

As prevention is better than cure, it is good business practice to know what you must know and implement and use a compliance program. Court cases such a Universal Telecasters (QLD) Limited v Guthrie (1978) ATPR 40-062 clearly demonstrate that the establishment of a compliance program assist in preventing: breaches of the relevant legislation and goes to the question of mitigation of damage.

12 eCommerce Legal Issues to Consider in Operating an Online Business

The following article provides a high-level summary of some key eCommerce law issues online business operators face in running a website or other eCommerce business. Conducting business online or maintaining a website may subject companies and individuals to unforeseen legal liabilities. The following is a brief survey of 12 key eCommerce law issues to consider:

1. Internet Business & eCommerce

A good starting point is analyzing a company’s online presence and auditing their procedures to determine how to grow their brand and online influence. As part of this, the company’s agreements and websites should comply with the myriad of laws and regulations affecting websites and online businesses, such as COPPA.

2. Domain Name Acquisition

Domains are often the key to an online business, but can present a number of problems. Domain name issues include securing a domain name initially, as well as protecting domain names from adverse parties that attempt to trade off the goodwill associated with the company’s brand. Sometimes, the company needs defense, retrieval, and protection of domain names on the Internet.

3. Digital Millennium Copyright Act (“DMCA”) Compliance

Companies operating websites, particularly where third-party content may be uploaded directly, should consider adopting agreements and procedures to shield themselves against claims of liability and copyright infringement. This procedure is sometimes referred to as a “copyright policy” or “DMCA takedown” procedure. Compliance with the DMCA can provide the online operator with a safe harbor from liability.

4. Online Privacy

Online privacy continues to become a bigger issue. With the spread of mobile devices, tablets, and apps, privacy issues are becoming more complex. Companies should consider composing or updating their privacy policies as well as adopting internal security protocols aimed at protecting the online privacy of customers and website users.

5. Social Media Law

While a powerful vehicle to build brand strength and interact with customers, social media can create a number of legal issues for online businesses. A social media policy provided to employees as well as guidelines can be effective steps to reduce risk. A few key areas to consider are employment related use of social media, confidentiality, sponsorship, and branding guidelines.

6. Privacy Policies

Privacy policies should not be copied from online templates or rival companies. They should be drafted comprehensively to address unique issues of a specific online business and to accommodate future growth. Whether a company looks to collect analytics or more personalized information, the company should focus on its specific business needs and risk factors. Privacy policies should be updated as a business evolves.

7. Terms of Use Agreements

Terms of Use (TOU) agreements can limit liability for companies that maintain an Internet presence. These agreements should be optimized to address a company’s specific business and should not be simply cut and pasted from the Internet. What works for one company may not work for another company.

8. eCommerce Agreements

eCommerce agreements come in many forms such as licensing, advertising agreements, and payment processor agreements. eCommerce agreements should be drafted to address the primary legal risks involved in a particular eCommerce contract or business transaction.

9. Online Sweepstakes & Games

Online sweepstakes, contests, and games create a number of legal pitfalls. Depending on the sweepstake, contest, or game, compliance with the laws of all 50 states as well as the federal government may be required. Registration in specific states may also be required. Online businesses may benefit from guidance as to whether a particular new initiative is considered a sweepstake, contest, or game.

10. Domain Theft

Recovering hijacked domains can often be difficult and time-consuming. Typically, avoiding domain theft in the first place is much easier than attempting to recover a stolen domain. While difficult, it is possible to recover a hijacked domain.

11. Website Agreements

Website agreements can be customized to limit legal liability and reduce risks of disputes by analyzing an online business’s intellectual property portfolio, business processes, and brand objectives. Website agreements can be used for mobile applications in addition to websites.

12. Impersonation and Username Squatting

Impersonation and username squatting can occur when a third party registers a social media account using someone else’s identity. This can result in harmful posts and information being published in social media. Username squatting can also prevent a trademark or brand owner from controlling their trademark. Typically, registering usernames in advance is the best strategy to avoid impersonation or username squatting.

Blogging – Are You Exposing Yourself To Legal Liabilities?

In November 2006, Blogging Asia: A Windows Live Report released by Microsoft’s MSN and Windows Live Online Services Business revealed that 46% or nearly half of the online population have a blog [Blogging Phenomenon Sweeps Asia available at PRNewswire.com].

Blogging Asia: A Windows Live Report was conducted online on the MSN portal across 7 countries in Asia namely Hong Kong, India, Korea, Malaysia, Singapore, Taiwan and Thailand. Interestingly, the report found that 56% of Malaysians blogged to express their views, while 49% blogged to keep friends and family updated.

This article focuses on Malaysian law however as the Internet transcends boundaries and jurisdictions therefore the laws of many countries may apply. In Malaysia, bloggers face legal risks that carry civil or criminal liabilities such as;
(a) copyright;
(b) trademark;
(c) defamation; and
(d) sedition.

Other than the above, a blogger must consider other legal risks such as fraud, breach of confidentiality and misrepresentation which will not be addressed in this article.

Copyright protects the way artists or authors express their idea or fact on a piece of work but not the underlying idea or fact itself. Copyright protects originality of the work and prohibits unauthorised copying. Copyright protection is eligible for the following works refer to Section 7 (1) of the Copyright Act, 1987:-
(a) literary works, such as written works, novels, source codes in computer program and web pages and content in multimedia productions;
(b) musical and dramatic works, such as musical score, plays and television scripts;
(c) artistic works, such as drawings, sculptures and photographs; and
(d) sound recordings and films, such as films (traditional celluloid and various video formats), records, tapes and CDs of music, drama or lectures.

Unfortunately, much of the copyright infringement occurring on the Internet goes undetected. New blogs at times use existing blogs for its content and this is done through copying or linking. Apart from that, posting copyrighted photographs, designs, product photos or product packaging from another website is also illegal.

There are “rules of thumb” to follow when creating or posting contents such as:- (a) create one’s own original image, graphic, code and words; (b) use licensed works within the scope of permitted use laid down by the owner; and (c) use free images off the Internet as long as the terms of the creator of the image are followed.

The same “rules of thumb” apply when posting programming scripts as it is normally a violation of copyright law to appropriate programming scripts from third parties. With regards to postings on one’s blog by third parties, the blog owner may receive an implied licence to the postings made by third parties. When offering podcast i.e. recorded and dowloadable audio file to be downloaded from blogs it is best that the podcast do not contain any copyrighted music belonging to others thus protecting oneself from any copyright infringement suits.

If copyright protects the way ideas or facts are expressed, trademark on the other hand protects words, designs, phrases, numbers, drawings or pictures associated with products and services.

A trademark owner enjoys exclusive right to use his mark in relation to his products and services refer Section 35 (1) of the Trademark Act, 1976. Trademark protection grants right to the trademark owner to prevent others from using identical trademark with identical goods or similar goods that is likely to cause confusion to the public refer Section 19 (1) and 19 (2) of the Trademark Act, 1976.

How does a blogger infringe trademark belonging to another? One example is when a blogger posts links on logos belonging to a trademark owner. When a visitor clicks on the trademark it will directly lead the visitor to the blogger’s blog instead of directing the visitor to the trademark owner’s website.

Such linking may cause confusion or deception as it raises serious risk that the blog is in some way connected with or related to the trademark owner’sproducts and services.

Generally, the term defamation refers to a false statement made about someone or an organization that is damaging to their reputation. The person publishing the statement must have known or should have known that the statement was false. While the Internet provides the arena in which defaming statement can be made or published, there is no specific legislation that deals with defamation on the Internet in Malaysia.

In Malaysia, the Defamation Act, 1957 applies to publications in printed materials and broadcasting through radio or television. Since the law applies to published or broadcast materials, hence in principle it applies to materials such as blogs and websites published on the Internet.

As defamation law is complex there is a need to distinguish whether a defamatory statement is a libel (written form) or slander (spoken words). In a case of libel, if it is determined that the statement is defamatory then there are presumptions against the author or the publisher. In the case slander, there is often the requirement to proof actual damages or special damages suffered due to the defamatory statement. Hence, slander law does not apply to blogs as it does not fall within the ambit of broadcasting the slanderous words by means of radio or television.

Due to rapid changes to the Internet and the convergence of technologies, one will wonder whether the courts will apply the libel law or slander law when blogs converted from text to speech format are transmitted on the Internet. However, all this depends on proving defamation and finding the identity of the blogger which can be an enormous task due to the anonymity of the Internet and its worldwide scope.

Another legal risk is when blogs are used to disseminate false,incomplete or misleading information regarding racial disturbances or contents that cause hatred or contempt towards the government or the ruler. In Malaysia, various offences are provided for in the Sedition Act 1948 such as it is an offence for any person to print, publish or distribute any seditious publication- see Section 4 of the Sedition Act, 1948 for other offences. Whether the provisions in the Act apply to publications on the Internet have not been judicially determined.

In Singapore the sedition law was applied in 2005 where the Singapore court jailed two users for posting seditious remarks on the Internet- Two jailed for ‘sedition’ on internet, South China Morning Post, Saturday, October 8, 2005. The South China Morning Post reported that the case is considered a landmark case underscoring the government’s attempts to regulate online expression and crack down on racial intolerance. The two cases represented the first time Singaporeans had been prosecuted and convicted for racist expression under its Sedition Act.

Arising from the case of the racist bloggers, on 8 November 2006 the Singapore Government proposed changes to its Penal Code taking into account the impact of technology such as the Internet and mobile phones- refer to Singapore Ministry of Home Affairs, Consultation Paper on the Proposed Penal Code Amendments at page 2. The amendments cover offences committed via electronic medium such as Section 298 (uttering words, etc with deliberate intent to wound the religious feelings of any person) to cover the wounding of racial feelings as well, Section 499 (defamation) and Section 505 (statements conducing to public mischief) to expand and include those “published in written, electronic or other media” see Singapore Penal Code (Amendment) Bill at pages 8 and 20. These amendments when passed empower the police and state prosecutors to prosecute those with offending blogs- Cf.Sections 298, 499 and 505 of the Malaysian Penal Code (Revised 1997).

There are reasons why the authorities are taking blogging seriously as half of the people that took part in the Blogging Asia: A Windows Live Report survey believe that blog contents are as trustworthy as traditional media and a quarter of the respondents believe blogs to be the quickest way to learn about news and current affairs.

With such reliance on blogs, contents containing false, incomplete or misleading information posted on blogs not only may cause panic, anger, contempt or political scandals; it may also cause political and economic instability.

The Internet presents challenges to existing laws that are slow to provide adequate protection to a party with respect to the use and content of blogs. Currently, codes of practice for Internet users including bloggers have not been proposed as part of the Internet regulatory regime currently operating in Malaysia.

Instead, bloggers need to practise self-regulation and understand the legal implications of blogging to ensure that their blogs are written in a responsible and lawful manner. In order to protect themselves, bloggers may provide terms of use and proper disclaimer to offer some degree of comfort and protection from third parties postings on their blogs.

For those bloggers who are not self-aware of the legal risks, efforts should be made to educate and raise awareness to those bloggers. Perhaps the social responsibility lies on the Internet service providers and website service providers to create a blogger’s code of ethics to educate its bloggers to be ethical towards their readers, the people they write about and the legal ramifications of their actions.