BECA (M) SDN. BHD V. TANG CHOONG KUANG & ANOR.
SUPREME COURT, KOTA
KINABALU
LEE HUN HOE CJ (BORNEO),
WAN SULEIMAN SCJ, GEORGE SEAH SCJ
[FC CIVIL APPEAL NO.
280 OF 1984]
30 SEPTEMBER 1985
CONTRACT: Housing developers
- Sale and purchase of flats - Deposit or "booking fee" - Rule 10(2) of Housing
(Control and Licensing of Developers) Rules 1980 - Provisional agreement - Licence
- Validity - Void - Section 66 of Contracts Act 1950 - Sections 5, 20 of Housing
(Control and Licensing of Developers) Enactment 1978.
JUDGMENT
Lee Hun Hoe CJ (Borneo):
This appeal is against the dismissal by the learned Judge
of an appeal from the decision of the Sessions Court, Kota Kinabalu.
Breifly, the appellants are a company incorporated in Malaysia
with its registered office at Tingkat 5, Wisma Central, Jalan Ampang, Kuala
Lumpur. They are housing developers. One of their ventures was the development
of an area of land in Sandakan at Mile 2, Leila Road, Tanah Merah into a commercial
and residential complex known as Leila Komplex. The respondents agreed to buy
3 units of flats consting RM703,685 from the appellants and on 1 May 1981 paid
a deposit of RM20,000. It was common ground that the deposit was made before
the issuance of the Developer's Licence and the Sale Advertisement Permit on
26 September 1981. The respondents were asked to sign the Sale and Purchase
Agreement on 23 May 1981. They did not sign it. Instead, through their solicitors,
they claimed for the refund of the deposit on the ground that the deposit was
collected illegally under r. 10(2) of the Housing (Control and Licensing of
Developers) Rules 1980 (herinaftaer referred to as "the Rules"). These Rules
were made under the Housing (Control and Licensing of Developers) Enactment
1978 (hereinafter referred to as "the Enactment") on 23 January 1980 and which
were gazetted on 15 May 1980 to come in force on 1 July 1980.
The respondents claimed that the payment of the deposit was
intended to be a "booking fee". On the other hand the appellants maintained
that the deposit was in actual fact part payment towards the purchase price
of the three units of flats. They said that the payment was not illegal by reason
of or prohibited under the said r. 10(2). They counterclaimed for the deposit
to be forfeited. Rule 10 reads as follows:
10 (1) A purchaser of housing accommodation including the
land shall not be required to pay a booking fee of a sum exceeding 2.5 per
centum of the purchase price of such housing accommodation including the land.
(2) Notwithstanding para. (1) of this Rule, no purchaser
of a housing accommodation including the land shall be required to pay a booking
fee of a sum exceeding one thousand ringgit.
(3) For purposes of this Rule the term `booking fee' shall
include any payment by whatever name called which payment gives the purchaser
an option or right to purchase the housing accommodation including the land.
The learned President of the Sessions Court held that the
deposit was meant to be a booking fee and not part payment. At the time of collecting
the deposit the appellants had not as yet obtained the licence and permit. Without
the proper licence they were not authorised to collect deposit. He, therefore,
ordered the refund of the deposit and dismissed the counterclaim. In dismissing
the appeal the learned Judge stated at p. 8 of the Appeal Record:
... Rule 10(1) and 10(2) limits the amount of booking fee
which may be collected by a housing developer from a purchaser. Rule 10(3)
is clearly enacted to prevent any attempt by a housing developer to contract
out of its provisions ........
Having set out r. 10(3) the learned Judge went on:
The payment of the deposit in my judgment was caught by
the provisions of the above rule. It was not disputed that such payment had
given the respondents in this case the option or right to purchase the 3 units
of flats. To hold that the deposit was part payment and not booking fee would
render its provisions a dead letter and to reinstate the mischief which the
rule was designed to remedy.
Before us the same arguments in the lower Courts were used.
We agree with the learned Judge that the main issue is really what is the effect
of the provisional agreement entered into by the parties before the issuance
of the licence to the developers. It is the submission of the appellants that
a contract which does not comply with the said Enactment and Rules made thereunder
is not invalid and should be enforceable according to its terms. The Singapore
case of Mary-Ann Arrichiello v. Tanglin Studio Pte. Ltd. [1981] 2 MLJ
60 and Daiman Development Sdn. Bhd. v. Mathew Lui Chin Teck & Anor. [1978]
1 LNS 42 were cited in support. The appellants said that relevant provisions
of the Singapore Housing Developers (Control and Licensing) Act (Cap. 250) and
the Housing Developers Rules 1976 are substantially similar to the Sabah Enactment
and Rules. The only difference is that in the Singapore case the developers
had a licence whereas in the instant case the developers had no licence. It
was submitted that there was no difference whether the developers had the licence
or not before the agreement was entered into.
At p. 63 of the Singapore case, Chua J stated:
The buying and selling of houses or flats is not a prohibited
activity under the law. Anyone (except foreigners in certain cases) can buy
and sell houses and flats in Singapore. The Act seeks to control housing development
not the sale and purchase of properties ... Section 21 of the Act is merely
seeking to control, amongst other things, the mode of performance of the contract
of sale by housing developers and it seeks to do this through a licence guaranteed
to the developer. It does not in any way prohibit the formation of an agreement.
Certain procedures are provided for certain activities, for example, in advertising,
in raising a loan on the property and in agreements for sale. The so-called
legal impediment exists on the face of the licence only. Each licence could
have its own limitations. Whether or not a developer is under an impediment
is personal only to the developer.
The Act is merely prescribing a method of performance by the
housing developer for the protection of a class of persons - to protect purchasers
as far as possible from the risk of exploitation. The Act does not in any way
prohibit the making of a contract for sale and purchase of flats. The licence
that the Act requires is a lience to develop.
Chua J then referred to Daiman's case (supra),
particularly when Suffian, then LP said that the pro forma was a firm
contract. He therefore concluded that "the contract between the plaintiff and
the defendants is not illegal and is enforceable."
In Daiman's case (supra) Sir Garfield Barwick,
after referring to rr. 10 and 12 which are the same as the Sabah Rules, stated
at p. 59 onwards:
Rule 17 provides that contravention by a licensed housing
developer of any of the rules shall be an offence and render the developer
liable on conviction to a fine mr, for a second or subsequent offence, a fine
or imprisonment or both. Nothing in the rules expressly purports to invalidate
a contract which does not comply with the provisions of the rules.
The rules impose no penalties on a purchaser who enters into
a contract which does not conform to the requirements of the rules. Clearly
r. 12 does not exclude the possibility of the contract of sale containing terms
and conditions other than such as are designed to effectuate the requirements
of the rules. Rule 12 requires a contract to contain within its terms the stipulated
provisions. It is observable that r. 12 does cover much of the relationship
of vendor and purchaser in relation to the purchase and is mandatory so far
as the appellant is concerned.
By r. 10(3) the RM20,000 is clearly meant to be "booking fee".
It makes no difference by whatever name such payment is called. Such payment
gives the purchaser an option or right to purchase the three flats. If the purchaser
fails to exercise the option or right then he would forfeit such payment. Thus
it seems that the parties appear to concede that if the provisional agreement
is held to be good only RM3,000 can be forfeited by the developers. If the agreement
is to be regarded as illegal, void and unenforceable the developers would have
to refund the deposit as under s. 66 of the Contracts Act it is provided that:
When an agreement is discovered to be void ... any person
who has received any advantage under the agreement or contract is bound to restore
it, or to make compensation for it, to the person from whom he received it.
In the recent case of Kin Nam Development Sdn. Bhd. v.
Khau Daw Yau [1984] 1 CLJ 181 (Rep) the developers
proposed to develop two pieces of land in Kuantan into a housing estate. One
of the pieces belonged to the Futo Trading Co. All the lots were booked before
approval for conversion and subdivision of the land was obtained. Later, the
conversion and subdivision were approved but subject to the condition that a
certain number of lots should be reserved for bumiputras. The developers decided
not to build any of the houses. Those who had booked the lots sued the developers
for specific performance. At the trial the developers contended that they were
not liable as the booking did not constitute a binding contract and that even
if it did so, the contract was rendered not only impossible of performance but
also illegal by the imposition of the special condition. The learned Judge rejected
the developers' contention and gave judgment for the purchasers, in the form
of damages. In dismissing the appeal the Federal Court, inter alia, held
that the fact that the developers would no doubt incur a heavy financial burden
as a result of the special condition imposed but that was not a relevant factor
in involving the doctrine of frustration. In delivering the judgment of the
Court, Salleh Abas CJ, as he then was, left open the question whether Malaysian
r. 11(1) of the Housing Developers (Control and Licensing) Rules 1970 would
render a contract illegal by virtue of s. 24 of the Contracts Act as this was
not pleaded by the appellants and also there was no factual basis upon which
a ruling could be made. Nevertheless, he also stated at p. 259,:
In any case there is nothing illegal about the consideration
or object of the contracts because they are only contracts for the sale and
purchase of houses, and neither do they come within any of the paragraphs
of s. 24 quoted above although the appellant may well be guilty of an offence
under r. 17 for contravening r. 11(1) of the Housing Developers (Control and
Licensing) Rules 1970. In other words, the Rules do not affect the validity
or otherwise of the contracts which the developer has signed with the purchasers.
In Mary-Ann Arrrichiello's case (supra) the
developers wanted to increase the price of maisonette earlier agreed at RM129,600
to RM135,000 by providing "better tiling". When the purchaser refused to pay
the increase and sued for specific performance the developers sought to escape
liability by pleading his own illegality to defeat the contract. In Daiman's
case (supra) the same thing happened. The developers sought to increase
the purchase price earlier agreed at RM26,000 to RM35,000 by "amendments to
the building plans and increase of material and construction." The purchasers
did not agree to the increase and applied for specific performance which was
granted. In Kin Nam's case (supra) the developers sought to avoid
their liability because of the special condition imposed by the Pahang State
Government by not building the houses which were already booked. Here the purchasers
were awarded damages instead of specific performance. The developers in the
three cases cited had the necessary licences and there was no evidence that
when the agreements were entered into any provisions of the Act or Rules had
been infringed. Nevertheless, to avoid liabilities the developers pleaded illegality
on one ground or another. In the instant case the developers not only had no
licence when the provisional agreement was entered into but also had collected
deposit far in excess of that allowable under the said Rules. Section 5(1) of
the Enactment provides that no housing developer shall engage in, carry on or
undertake housing development without (a) being in possession of a licence issued
under the Enactment, and (b) having made a deposit with the Controller of a
sum equivalent to 5% of the estimated costs of the development. Failure to comply
with s. 5(1) is an offence punishable under s. 20 which carries a fine not exceeding
RM20,000 or imprisonment for a term not exceeding 5 years or both. It was only
after the Peguam Negeri wrote to the developers on 29 May 1981, pointing out
the above that the developers took the trouble to obtain a licence.
The respondents pointed out that the appellants had not only
contravened the provisions of the Enactment but also r. 10(2) which allows a
maximum of RM1,000 as deposit. They submitted that the provisional agreement
was therefore rendered illegal and void. Yeep Mooi v. Chu Chin Chua & Ors.
[1981] 1 MLJ 14; John B. Skilling & Ors. v. Consolidated Hotels Ltd. [1978]
1 LNS 75 and Curragh Investment Ltd. v. Cook [1974] 3 All ER 658
were cited in support. They submitted the learned Judge was right.
The learned Judge was aware that "there is no lack of authorities
which support the view that not in all cases where contracts were made in contravention
of some statutory provisons such contracts would be considered to be illegal
and uneforceable." However, he took the view that "for a contract to be illegal
there must be a sufficient nexus between the statutory requirements and the
contract and only where the statutory requirements breached were sufficiently
linked to the contract then the question of its illegality would arise." He
relied on a passage in the judgment of Megarry J in Curragh's case (supra).
After referring to Chitty on Contracts,23rd Edn. (1968), pp. 428 and
429 which discussed the cases in which a transaction in breach of a statutory
prohibition was struck with illegality even though the statute did not in term
say so but only imposed some criminal sanction for the breach, Megarry J expressed
his views in the passage cited by the learned Judge. The relevant passage reads:
I accept of course, that where a contract is made in contravention
of some statutory provision then, in addition to any criminal sanctions, the
Courts may in some cases find that the contract itself is stricken with illegality.
But for this to occur there must be a sufficient nexus between the statutory
requirement and the contract. If the statute prohibits the making of contracts
of the type in question, or provides that one of the parties must satisfy
certain requirements (e.g. by obtaining a licence or registering some particulars)
before making any contract of the type in question, then the statutory prohibition
or requirement may well be sufficiently linked to the contract for questions
to arise of the illegality of any contract made in breach of the statutory
requirement. But it seems to me a far cry from that to the breach of statutory
requirements which are not linked sufficiently or at all to the contract in
question. There are today countless statutory requirements of one kind or
another, yet I cannot believe that an individual or a company who is in breach
of any of these requirements (for example, under the Factories Acts) is thereby
disabled from making a legal contract for the sale of land or validly entering
into covenants for title. To take an example that was mentioned in argument,
I do not think that it could seriously be contended that every contract made
by an English company, whether for the sale of land or otherwise, is illegal
if, when it is made, the company is liable to prosecution and fine for failing
to comply with some provision of the (Companies) Act of 1948, for example,
for not filing its annual returns in due time. Such doctrine, for which I
can see no justification, would result in chaos. If in the present case I
assume that the vendor is in demonstrable breach of ss. 407 and 416, I am
still quite unable to see how this provides any ground for contending that
the convenants for title that the vendor must give will be impaired by illegality.
The breach of the law and the convenants for title seem to me to be wholly
unconnected.
In Skilling's case (supra) the appellants were
partners in a firm of consultant engineers practising in the United States.
They sought to claim for their professional fee under an agreement. They were
however not registered as required under ss. 18 and 19 of the Singapore Professional
Engineers Act (Cap. 225). Held the agreement was illegal as it infringed the
provisions of ss. 18 and 19 of the said Act. In an earlier Singapore case of
Raymond Banham & Anor. v. Consolidated Hotels Ltd. [1975] 1 LNS 141 Winslow
J disallowed the plaintiff engineer's claim for professional services rendered
on the ground of non-registration which infringed the provisions of the Singapore
Professional Engineers Act (Cap. 225). These two cases are concerned with the
effecct of non-registration of professional engineers under that particular
legislation.
It is useful to bear in mind the distinction between an agreement
and a contract. The word "contract" has at times been loosely used in the past.
We do not see why we should perpetuate such loose use of the words. The reason
is simply that we are used to the English common law which does not make the
distinction between the two terms as does our s. 2 of the Contracts Act. Our
s. 2 is word for word the same as the equivalent section of the Indian Contracts
and Specific Relief Acts. Pollock & Mulla on the Indian Contracts And Specific
Relief Acts, 9th Edn., p. 54 observes that:
The distinction between `agreement' and `contract' made
by sub-s. (h) is apparently original; it is convenient, and has been adopted
by some English writers. The distinction is apparent from s.2. By clause (e)
every promise and every set of promises forming the consideration for each
other is an agreement and by clause (h) an agreement enforceable by law is
a contract. By clause (g) an agreement not enforceable by law is said to be
void...
We have referred to the transaction as a provisonal agreement.
What the learned Judge decided was that the "provisional agreement", although
"contract" was used, is illegal.
In considering the effect on the agreement consequent upon
the breach of the Enactment it is necessary to examine the object of the Enactment.
The long Title says clearly that Enactment was to provide for the control and
licensing of housing developers and for matters connected therewith. The main
purpose was to protect the public from exploitation by unscrupulous developers.
We are only concerned in this case with the position of the housing developers
going into business without first obtaining a proper licence. Section 5 of the
Enactment is clear on this. The law says a housing developer must obtain a licence
and pay a certain sum as deposit to the Controller before he can engage in,
carry on or undertake the business of housing development. Not every breach
of a statutory prohibition would render an agreement illegal or void though
such breach may attract criminal penalty. The fundamental question is whether
the Enactment means to prohibit the agreement. It is important that the Courts
should be slow to imply the statutory prohibition of agreements, and should
do so only when the implication is clear. Whether an agreement is implicity
forbidden depends upon the construction of the statute, and for this purpose
no one test is decisive. Persons who deliberately set out to break the law cannot
expect to be aided in a Court of justice. It would be a different matter when
the law is unwittingly broken. An agreement for the sale of, say, frozen food,
is not to be considered illegal or void merely because the premises in which
the frozen food is sold does not comply with the law. We recognise that each
case must be decided by reference to the relevant statute.
At the height of the housing boom the purchasers of houses
were at the mercy of unscrupulous housing developers. These developers collected
excessive deposits and delayed in building the houses. Invariably the purchasers
had to agree to increase in prices by the developers for one reason or another.
The situation became so bad that the law had to step in to protect the house
buyers. One of the means is to require a housing developer to obtain a licence
and to deposit certain sum of money with the Collector before he can carry on
business as a housing developer. Another way is to make rules to ensure that
no excessive deposit is collected from would-be house buyers.
So far we have been dealing with cases where the existence
of the licence was not in dispute. In the instant case the developers had no
licence when they entered into the provisional agreement with the buyers. We
think the distinction is most important in deciding the effect on the provisional
agreement. The consensus of the authorities would suggest that the contravention
of any of the Rules only renders the developers liable to a penalty but does
not invalidate any agreement entered into by the developers and the buyers.
The question is whether there is any difference in effect on the provisional
agreement consequent upon the breach of the Enactment itself. The language of
any provision of the Enactment shows clearly that the legislature intends to
protect the house buyers from exploitation by the housing developers through
the issuance of a licence. In this way the Enactment seeks to control both the
housing developers and the mode of their performance. Although the Enactment
does not expressly prohibit the making of such an agreement any developer who
enters into an agreement without first obtaining a licence would run the risk
of such agreement being declared illegal, void, or unenforceable by one party
only.
Under the provisions of the Contracts Act 1950 where the consent
to an agreement has been caused by coercion, fraud, misrepresentation or undue
influence, the contract is rendered voidable at the instance of the innocent
party. On the effect of non-compliance with statutory requirements, Chitty
on Contracts (General Principles) 24th Edn., para. 223 at p. 222 states:
Non-compliance with such statutory requirements may produce
various effects. It may make the contract void, or unenforceable, or unenforceable
by one party or enforceable only on an order of the court.
And para. 1022 at p. 1023 says:
Statutes which prohibit certain contracts often impliedly
recognise, for example by punishing only one of the parties, that the parties
are not equally at fault, and therefore on their true construction only one
of the parties to the contract is prevented from suing upon it. Accordingly
`when the policy of the Act is question is to protect the general public or
a class of persons by requiring that a contract shall be accompanied by certain
formalities or conditions, the contract and its performance without those
formalities or conditions is illegal, and cannot be sued upon by the person
liable to the penalties.' But the other party to the contract is not deprived
of his civil remedies because of the criminal default of the guilty party.
The appellants as developers should know that they could not
carry on the business of housing development unless they had obtained a licence.
Yet, they acted as if they had the necessary licence by collecting deposit from
and entering into the provisional agreement with buyers who had no reason to
doubt the bona fide of the developers. The buyers could not be expected
to know that the developers had no licence at the time. It would be expecting
too much of the buyers to say that they "had the means of discovering the truth
with ordinary diligence" to quote the words of s. 19 of the . The learned President
was very careful in dealing with the matter. After referring to the various
authorities and reviewing the law he came to the conclusion that "the provisional
agreement was a binding contract between the parties here; however as the developers
did not have the necessary licences when they signed the agreement and collected
the deposit, the binding contract is voidable and can be avoided by the innocent
party."
Having regard to the scope and purpose of the Enactment and
the Rules made thereunder, they are clearly made for the benefit of a class
of people, namely, the house buyers. The duty of observing the law is firmly
placed on the housing developers for the protection of the house buyers. Hence,
any infringement of the law would render the housing developers liable to penalty
on conviction. Although the developers have to comply with a number of statutory
requirements we are unable to find anything in the Enactment or the Rules which
would invalidate an agreement or contract as a result of any breach of the Enactment
or the Rules. On the facts of this case we are of the view that the transaction
is valid until it is avoided. The buyers had elected to avoid the agreement
and claimed for the return of the deposit.
We agree with the dismissal of the appeal from the learned
President by the learned Judge but for different reasons. We also agree that
the subsequent granting of the licence and the permit by the Controller could
in no way rectify the provisional agreement without the consent or knowledge
of the buyers. However, with respect, we are unable to agree with the learned
Judge that the provisional agreement is illegal. We prefer the approach adopted
by the learned President rather than that of the learned Judge on the matter.
Since the Enactment is meant to be for the benefit of the house buyers it would
seem, in our view, proper and right to regard the provisional agreement as binding
but voidable at the instance of the house buyers. They should be given the option
of either enforcing or repudiating the agreement depending upon the market situation
of the housing development in the country. If the provisional agreement were
to be declared illegal it might in a given situation prove profitable to the
devlopers, for instance, when there is a housing boom. In which case it would
be absurd to say that the Enactment is to protect the buyers from exploitation
when it is actually aiding the developers to enrich themselves. So the avoidance
of the agreement would cause inconvenience and injury to innocent members of
the public. To declare the agreement binding but voidable at the instance of
the buyers would provide no incentive to the developers to do any act before
obtaining a proper licence. Accordingly, we would dismiss the appeal with costs.
Deposit to the respondents on account of taxed costs.
