In the complex tapestry of Malaysian commercial and property law, the doctrine of due diligence serves as the primary arbiter between a party’s right to legal redress and their own “carelessness and negligence”. As a legal practitioner, I often remind clients that the law does not exist to insure against a lack of prudence. Whether you are a purchaser in a multi-million ringgit land deal, a director making a business judgment, or a professional advisor, the “doing of an act, showing that ordinary prudence has been exercised according to the standards of a reasonable man” is your only true shield.
I. Conveyancing and the High Threshold of “Good Faith”
The most common arena for due diligence disputes is land law, particularly under the National Land Code (NLC). While the Torrens system generally promotes the “Mirror Principle”—where the register reflects all relevant details—and the “Curtain Principle”—where one need not look behind the title—these are not absolute protections for a negligent purchaser.
In the landmark majority judgment of Setiakon Engineering Sdn Bhd v. Mak Yan Tai & Anor [2024] 5 MLRA 791 FC, the Federal Court clarified the evidentiary burden for a subsequent purchaser claiming indefeasibility under Section 340(3) of the NLC. The Court held:
“[106] In proving good faith and for valuable consideration under s 340(3), obviously it cannot be done just by looking at the register document of title… the purchaser must not only show the absence of fraud, deceit or dishonesty but also that it had taken the ordinary precautions that a reasonably prudent purchaser would have taken in the circumstances”.
Furthermore, the principle of caveat emptor (let the buyer beware) remains a formidable hurdle. In Joanna Haywan Ling v. Lq Residential 1 Sdn Bhd [2025] MLRHU 1821 HC, a purchaser attempted to sue a developer for misrepresentation after the High-Speed Rail (HSR) project was cancelled. The Court dismissed the claim, stating:
“[44] … The rule is caveat emptor; a purchaser should make inspection and inquiry as to that which he is proposing to buy… Patent defects are such as are discoverable by inspection and ordinary vigilance on the part of the purchaser”.
Similarly, in QVC Rock Products Sdn Bhd v. Pohmix Kuari Sdn Bhd [2024] 3 MLRA 657 CA, the Court of Appeal ruled that the “failure of the appellant to carry out its physical visual inspection… is hence fatal to its pleaded claim based on negligent misrepresentation”.
II. The Professional Standard: Solicitors and Auditors
When a client retains a professional, they are paying for a specialized level of due diligence. A solicitor’s failure to investigate “red flags” can strip them of the protection of a disclaimer. This was precisely the case in Ng Siew Lan v. John Lee Tsun Vui & Anor [2017] 2 MLRA 173 FC, where a lawyer failed to verify a forged Power of Attorney (PA) despite a clear discrepancy in the land title numbers. The Federal Court held:
“Had the 1st defendant discharged his duty in a manner expected of a solicitor of seven years’ experience in conveyancing, the fraud… would have been discovered before the sale and purchase agreement was executed”.
In the capital markets, the burden on “sophisticated actors” is even higher. In Maybank Trustees Berhad v. Amtrustee Berhad & Ors & Other Cases [2019] MLRAU 310 FC, the Court found that auditors (EY) and lead arrangers (MIBB) had an independent duty to disclose material changes to the structure of a bond programme to the Securities Commission. The Court rejected the defense that the investors were “sophisticated,” noting that even they are “entitled to the truth in terms of the investment they are about to embark upon”.
III. Corporate Governance and s 215 of the Companies Act 2016
For directors, the standard for due diligence is found within the “Independent Assessment” requirement. Under Iris Corporation Bhd v. Tan Sri Razali Ismail & Ors [2025] MLRAU 300 CA, the Court of Appeals explored Section 215(2)(b) of the CA 2016, noting:
“Independent assessment does not mandate comprehensive due diligence or sceptical inquiry, but rather an unbiased analysis of information provided, having regard to the director’s knowledge of the company and complexity of its operations”.
However, this does not permit “gaji buta” or “sleeping directors.” In Bester Malaysia Sdn Bhd v. Tan Tee Kung & Ors [2025] MLRHU 1688 HC, a CEO was held liable for a breach of fiduciary duty because he “presented no evidence indicating that he had exercised due care, skill and diligence” in fraud detection while overseeing company payouts.
IV. The Limitation Trap: “Reasonable Diligence”
Finally, the concept of due diligence determines when a party loses their right to sue. Under the Limitation Act 1953, time for fraud or negligence typically begins to run when the breach is discovered or “could with reasonable diligence have been discovered”.
In the Federal Court decision of Julian Chong Sook Keok & Anor v. Lee Kim Noor & Anor [2024] 4 MLRA 132 FC, the Court emphasized that inquiring with one’s solicitors about a land search is the “most reasonable course of action or conduct that anyone similarly circumstanced would have taken”. If a party fails to make these basic inquiries, they may find their claim time-barred before it is even filed.
Conclusion
As the Court observed in Malayan Banking Berhad v. Mohd Affandi Ahmad & Anor And Another Appeal [2024] 1 MLRA 23 CA, it is “gravely unjust to allow [a party] to feign innocence in the face of its own glaring omissions, failure of enquiry and insufficient due diligence”. Due diligence is more than a checklist; it is an active, ongoing obligation to act with “honest intent free from taint of fraud”. In the eyes of the law, the “Nelsonian eye” or wilful blindness is no defense at all.
Disclaimer: This post is for informational purposes only and does not constitute legal advice. Please consult a qualified lawyer for your specific legal needs.
