Know your limits
01/07/2008 The Star ARTICLES OF LAW BY BHAG SINGH
It is possible to make provisions for compensation payable if breaches can
be foreseen, otherwise the relief obtained may be inadequate.
ALL may appear to be well when the buyer of a house meets the seller and the
terms and conditions, including the price of say, RM100,000 are agreed to. A
Sale and Purchase Agreement is then prepared after which it is signed and
duly attested and stamped, and a copy handed to the seller and buyer.
With the deal done, the seller thereafter enters into another agreement to
buy a bigger house for say, RM250,000 and is able to pay the customary 10%
deposit which amounts to RM25,000. Knowing that he can get a loan of
RM175,000 which represents 70% of the purchase price, he pays a deposit of
RM25,000 for the new house.
This he does with the RM10,000 he received from the sale of his smaller
house, plus other savings. After this, in view of the loan, he will only
have to come up with RM50,000 which he feels he can comfortably pay from the
balance of RM90,000 that he will receive following the completion of the
sale of his smaller house.
However, one month after signing the Sale and Purchase Agreement, the buyer
informs him that he is unable to proceed with the purchase as agreed.
Herein lies the problem: If the first sale does not proceed, the seller will
not receive the balance purchase price of RM90,000 and he will not be able
to pay the remaining 20% to the person from whom he is buying the bigger
house. If he cannot raise this differential amount, he will end up losing
the deposit which he paid.
The consequences
Of course, the seller can forfeit the deposit he has received for the sale
of his house to the now delinquent buyer but that deposit is only RM10,000.
On the other hand, the deposit that will be forfeited from him is much more.
Can he hold the buyer responsible for the loss that he will suffer?
On the basis of Sale and Purchase Agreements that are ordinarily in use, the
seller may not be able to recover all the losses that he will incur as a
result of the purchaser in the first transaction backing out.
This is because ordinarily Sale and Purchase Agreements only provide for the
seller to forfeit the deposit if the buyer fails to proceed.
Of course, the aggrieved party is entitled to recover from a delinquent
party that has backed out of his obligations; in this case, it is the
compensation provided by law or compensation that is agreed to. In most such
cases, the parties – taking into account prevailing practice – would have
agreed to compensation. This would usually be an amount equivalent to the
deposit.
However, though such a clause is common, it is not necessarily mandatory. In
law, a seller in such a situation is not necessarily required to limit
himself to damages which are equal to the deposit earlier paid if he so
wishes.
Beyond forfeiting
The law does contemplate and allow an aggrieved party to be compensated for
the actual loss it has suffered. Of course, this is in the absence of the
party having agreed and limited himself to the compensation that he can
otherwise obtain on general principles of the law.
By virtue of the Contracts Act 1950, it is provided in section 74 that “when
a contract has been broken, the party who suffers by the breach is entitled
to receive, from the party who has broken the contract, compensation for any
loss or damage caused to him, which naturally arose in the usual course of
things from the breach, or which the parties knew, when they made the
contract, to be likely to so result”.
The phrase to the effect “which naturally arose in the usual course of
things from the breach” provides an opportunity for the seller to protect
himself. This he can do by informing the purchaser about his need to have
the funds to complete his own purchase and the consequences of not being
able to pay up. If the buyer is made aware of these circumstances, he could
be liable for the seller’s loss of deposit.
Of course, the buyer must be agreeable to assume such a liability should he
breach the contract. To what extent the buyer will agree will no doubt
depend on the relevant advice that he receives and also on how keen he is to
buy the particular property.
If both parties agree, the law allows for such provisions to be
incorporated. This would protect an aggrieved party in terms of ensuring
that adequate compensation is received.
Loss of bargain
There are situations where, after having entered into an agreement, the
seller may refuse to sell. This is likely to happen in situations when
prices have sky-rocketed and the seller would gain by selling the property
to someone else.
In such a case, the buyer who has been deprived of the purchase would want
to know whether he can recover the loss of the bargain which is the
difference between the price at which he agreed to buy it and the much
higher value of the house at the time of the breach.
Here again, if the sale is aborted because the seller refuses to sell in
circumstances where it is for reasons within his control, then on the basis
of common law principles, the buyer would be entitled to a refund of the
deposit and compensation for expenses incurred, plus the difference that
represents the increased value of the house.
However, most of the agreements provide that in the event of such a breach,
the seller will only be liable to refund the deposit and in some cases pay a
similar amount as compensation. Such a clause caps the compensation
recoverable. It is to be noted that the liabilities and obligations continue
to be governed by the general principles in law. However, the application of
these principles is modified by contractual arrangements. Such modification
does not always fully assist a person who has suffered a loss.
Such modifications to general principles are intended to better protect the
party in whose interest these are inserted. Whatever the provisions, these
must be carefully considered so that the desired result may be obtained. |
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