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ABDUL RAZAK DATUK ABU SAMAH V. SHAH ALAM
PROPERTIES SDN BHD & ANOTHER APPEAL
COURT OF APPEAL, KUALA LUMPUR
GOPAL SRI RAM JCA SITI NORMA YAAKOB JCA HAIDAR MOHD NOOR
JCA
[CIVIL APPEALS NOS: W-03-41-98 & W-03-43-98]
5 APRIL 1999
CONTRACT:
Damages - Assessment - Contract set aside - Measure of damages - Whether on
footing of breach of contract - Whether on basis of rescission of contract -
Whether s. 74 of Contracts Act 1950 applicable - Expenditure reasonably
incurred in consequence of fraudulent misrepresentation
CONTRACT: Misrepresentation - Fraudulent misrepresentation -
Voidability - Rescission - Damages - Assessment - Placing innocent party in
the position as though there was no reliance on fraudulent misrepresentation
CONTRACT: Breach - Condition - Repudiation - Obligations de futuro -
Damages - Whether innocent party can have contract set aside - Distinction
between rescission ab initio and repudiation - Whether repudiatory breach
brings about rescission ab initio
The plaintiff purchaser claimed that he had entered into a sale and
purchase agreement with the defendant vendor in respect of an apartment
building based on the defendant's fraudulent misrepresentation. The High
Court dismissed the claim but on appeal the Federal Court set aside the
agreement and ordered the defendant to, inter alia, refund the purchase
price with interest thereon and pay damages to be assessed by the High
Court. The senior assistant registrar assessed damages at: (i) RM46,000 for
loss of value of appreciation of the property; (ii) RM5,999 for loss of
value of appreciation of the club membership of the property; (iii)
RM142,240.22 being interest paid by the plaintiff to the bank ('the said
interest'); (iv) RM72,790.10 being interest at 8% pa on the said interest;
and (v) RM5,500 for a valuation report on the property. The plaintiff's
claim for loss of rent which he alleged he would have received had the
transaction been completed was disallowed. Both parties appealed against the
SAR's decision but the judge in chambers dismissed them. Before the Court of
Appeal herein, the issue which arose for decision was: what measure of
damages was the plaintiff entitled to recover consequent upon obtaining a
decree of rescission of the agreement he had with the defendant?
Held: Per Gopal Sri Ram JCA
[1] What the Federal Court ordered was a rescission of the contract on the
basis of fraudulent misrepresentation. Therefore, the assessment of damages
should not be on the basis of a breach of contract, which would be to put
the plaintiff in the position as though the contract had been performed, but
on the basis that the contract had been rescinded, which would place the
plaintiff in the position he would have been had he not been induced by the
fraudulent misrepresentation. Hence, the plaintiff was only entitled to
recover expenditure reasonably incurred in consequence of the fraudulent
misrepresentation, whether before or after the rescission.
[2] Consequently, items (i) and (ii) and the claim for loss of rent were not
recoverable as they amounted to damages for breach of contract. Items (iii)
and (iv) were recoverable as they constituted expenditure reasonably
incurred in consequence of the fraudulent misrepresentation. Item (v) was an
expense related to the proof of damages in contract; it was not a reasonable
expense and thus irrecoverable.
[Plaintiff's appeal dismissed; defendant's appeal allowed in part.]
Cases referred to:
Annie Yeo V. Senanayake [1962] 1 LNS 10
Archer v. Brown [1985] 1 QB 401 (refd)
Bowes v. Chaleyer (1923) 32 CLR 159 (refd)
Car & Universal Finance Co Ltd v. Caldwell [1961] 1 QB 525 (refd)
Ching Yik Development Sdn. Bhd. V. Setapak Heights Development Sdn. Bhd.
[1997] 1 CLJ 287
Demetrios v. Gikas Dry Cleaning Industries Pty Ltd (1991) 22 NSWLR 561 (foll)
Dick Bentley Productions Ltd v. Harold Smith (Motors) Ltd [1965] 1 WLR 623 (refd)
Holmes v. Jones (1907) 4 CLR 1692 (foll)
Hongkong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha [1962] 2 QB 26 (refd)
Johnson v. Agnew [1980] AC 367 (foll)
Moschi v. Lep Air Services Ltd [1973] AC 331 (refd)
Oscar Chess Ltd v. Williams [1957] 1 WLR 370 (refd)
Sellars v. Adelaide Petroleum NL (1994) 179 CLR 332 (foll)
Senanayake V. Annie Yeo [1965] 1 LNS 163
Legislation referred to:
Contracts Act 1950, ss. 19(1), (2) ,74
Civil Appeal No: W-03-41-98
Appellant in person
For the respondent - Zainur Zakaria; M/s Zainur Zakaria & CoCivil Appeal No:
W-03-43-98 For the appellant - Zainur Zakaria; M/s Zainur Zakaria &
CoRespondent in personReported by Anne Khoo [Plaintiff's appeal dismissed;
defendant's appeal allowed in part.]
JUDGMENT
Gopal Sri Ram JCA:
Introduction
There are two appeals before us. The appellant in Civil Appeal No
W-03-41- 98 ("the first appeal") was the plaintiff in the court below. The
respondent to the first appeal was the defendant. In Civil Appeal No.
W-03-43-98 ("the second appeal") the roles are reversed. It is the defendant
in the court below who is the appellant while the plaintiff is the
respondent. We heard both appeals on 26 October 1998. Since both appeals
arise from the same action and concern a common issue, we heard them
together. The parties agreed to this course. At the conclusion of argument,
we reserved judgment. We also directed parties to put in written
submissions. This was done. We find it convenient throughout this judgment
to refer to the parties according to the title assigned to them in the court
below.
We said that both appeals raise a common issue. It has to do with the
measure of damages that the defendant is liable to pay the plaintiff. In the
first appeal, the plaintiff complains that he has received too little; in
the second appeal, the defendant complains that it has been ordered to pay
too much. The question at issue is simple enough. It is amply covered by
settled authority. Yet, a brief reference to the factual matrix against
which these appeals rest is necessary to properly appreciate the arguments
raised before us.
Background
The litigation that has led to these appeals has a long and chequered
history. On 26 May 1986, the plaintiff, who was then a serving judge of the
High Court in Malaya, issued a writ against the defendant. His statement of
claim reveals that he had, on 25 May 1982, entered into an agreement with
the defendant, a developer, to purchase an apartment for RM236,000. The
purchase price had been paid in full from loans disbursed to the plaintiff
by two institutional lenders. Interest had been paid on these loans. The
plaintiff complained that he had been induced to enter into the agreement in
question on the basis of a false and fraudulent representation made by the
defendant in its brochure. He claimed that in consequence thereof, he had
lost the value of his investment. He particularised them in his statement of
claim. The amount came to RM299,661.32. This sum was made up of the purchase
price, the interest he had paid and some incidental expenses. At the foot of
his pleaded case, he claimed the following relief:
(1) Rescission of the agreement of the 25th of May, 1982;
(2) The sum of RM299,661.32;
(3) Interest from the date of writ to the date of realisation;
(4) Damages;
(5) Such further or other relief; and
(6) Costs.
The defendant delivered a defence in which it traversed all points of
importance raised by plaintiff in his statement of claim. A reply was then
delivered by the plaintiff.
In due course the plaintiff's action came on for hearing before the High
Court which dismissed it. The plaintiff appealed. The Federal Court allowed
his appeal on 24 November 1995. Although it made several orders, we are only
concerned with the following:
(1) that the agreement dated 25 May 1982 be set aside;
(2) that the sum of RM299,661.32 be refunded by the defendant to
the plaintiff together with interest thereon at 8% per annum from 26 May
1986 until the date of full realisation;
(3) that the defendant do pay the plaintiff damages to be assessed
by the High Court.
We pause to observe that although before us the plaintiff who appeared in
person challenged the Bahasa Malaysia version of the first order, it is
plain from his written submission tendered before the learned judge in the
court below (at p. 33 of the Record in the first appeal) that he accepts
that what the Federal Court ordered was rescission of the agreement in
question.
On 24 February 1997, the defendant paid over to the plaintiff a sum of
RM556,072.89, made up of the judgment sum of RM299,661.32 and interest on
that sum which amounted to RM256,411.57.
Pursuant to the last paragraph of the Federal Court's order, the High
Court proceeded to assess the damages allegedly suffered by the plaintiff.
The assessment was conducted by the senior assistant registrar before whom
the plaintiff claimed a number of items which he said he was entitled to
recover from the defendant, including loss of rent that he might have earned
from the apartment. The senior assistant registrar then assessed the
following damages in the plaintiff's favour:
(1) RM46,000.00 for the loss of the value of the appreciation of
the subject property, representing the difference between the purchase price
and the market value at the date of the Federal Court's decision.
(2) RM5,999.00 for the loss of value of the appreciation of the
club membership representing the difference between the purchase price and
the market value of the club membership at the date of the Federal Court's
decision, together with interest at 8% from April 24, 1985.
(3) RM143,240.22 being the interest paid by the plaintiff to The
Hongkong and Shanghai Banking Corporation Limited since May 1986 to April,
1997.
(4) RM72,790.10 being interest at 8% per annum on each of the
monthly interest payments made by the plaintiff to The Hongkong and Shanghai
Banking Corporation Limited from the date of payment in May 1986 to April
30, 1997 and continuing up to the date of judgment.
(5) RM5,500 being the cost of the valuation report prepared by C.
H. Williams Talhar & Wong.
The senior assistant registrar did not, however, allow the claim for the
loss of rent which the plaintiff said he would have received if the
transaction had proceeded to completion.
Both the defendant and the plaintiff appealed against the senior
assistant registrar's decision to the judge in chambers who dismissed both
appeals. It is against those orders of dismissal that the present appeals
have been brought.
The Issue
We have at the outset identified the sole question that lies at the heart
of these appeals. We will now reformulate it. The question is this. What
measure of damages is the plaintiff entitled to recover consequent upon
obtaining a decree of rescission of the agreement that he had with the
defendant?
In order to deal with and resolve this issue it is necessary to advert to
some of the relevant principles that govern the subject at hand. And we
apprehend that much of the confusion in these appeals has arisen because of
a failure to properly appreciate the terminology that is often employed in
that area of the law of contract with which we are concerned in the present
appeals. We therefore consider it desirable to re-state some of the
fundamental principles.
The Law
Having regard to the relevant provisions of the Contracts Act 1950 and
the authorities upon the subject, we consider the following propositions to
be settled and beyond argument.
1. Since the consequences for a statement made by a party to a
contract depends upon the stage at which the statement is made, the law
recognises a division between contractual and pre-contractual statements.
2. Pre contractual statements are called "representations".
However, contractual statements are obligations actually undertaken by the
party making them. They are referred to by lawyers as "the terms of a
contract".
3. Whether a particular statement made in the course of
negotiations leading to the making of a contract is a representation or a
term depends upon the intention of the parties and is to be deduced from the
totality of the evidence. While decided cases suggest differing approaches,
it is clear that no single criterion is conclusive. See, for example,
Oscar Chess Ltd. v. Williams [1957] 1 WLR 370; Dick Bentley
Productions Ltd. v. Harold Smith (Motors) Ltd. [1965] 1 WLR 623.
4. The traditional method of classifying the terms of a contract
is according to the degree of their importance. Stipulations that are
essential are called "conditions", while those of a secondary nature are
referred to as "warranties". The breach of a condition entitles the innocent
party to repudiate the contract, that is, to treat it as at an end as to
future obligations, and to sue for damages. On the other hand, the breach of
a warranty sounds only in damages. Whether a particular term is a condition
or a warranty is a matter of judicial impression, ie, it is a question of
law. See, Ching Yik Development Sdn. Bhd. V. Setapak Heights Development
Sdn. Bhd. [1997] 1 CLJ 287.
5. An alternative method of classification of the terms of a
contract is according to, not their relative importance, but the
consequences of their breach. This approach is especially useful in cases of
synallagmatic contracts. Under the alternative method, if the breach of a
particular term goes to the root of the contract so as to affect its very
substratum, then, the remedy of the innocent party lies in repudiation and
damages. However, if its breach produces lesser consequences, the remedy of
the innocent party lies in damages only. See, Bowes v. Chaleyer
[1923] 32 CLR 159; Hongkong Fir Shipping Co Ltd v. Kawasaki Kisen Kaisha
[1962] 2 QB 26. 6. The courses open to an innocent party in a case where
there is a breach of an essential term of the contract does not include a
right to have the contract set aside and to return to the status quo ante.
Any termination by the innocent party only has effect upon the performance
of future obligations.
7. The right of an innocent party to put an end to future
obligations under a contract is sometimes referred to as "the right to
rescind" and the act of termination as "rescission". This terminology is
erroneous and misleading. True rescission is specific relief. It is
available to a litigant either as self-help upon satisfaction of certain
conditions (see, Car & Universal Finance Co. Ltd. v. Caldwell [1961]
1 QB 525) or as a judicial remedy obtainable in an action. It was invented
by the Court of Chancery and now finds its place in Chapter IV of our
Specific Relief Act 1950. It has the effect of setting at naught the
contract ab initio and not merely as to obligations de futuro.
It places the parties on a footing as though a contract had never been made.
The difference between the so-called "rescission" which is in truth nothing
more than the act of terminating future obligations under a contract and
rescission in its true sense is brought out in the following passage in the
speech of Lord Wilberforce in Johnson v. Agnew [1980] AC 367, at p.
392:
At this point it is important to dissipate a fertile source of confusion
and to make clear that although the vendor is sometimes referred to in the
above situation as 'rescinding' the contract, this so-called 'rescission' is
quite different from rescission ab initio, such as may arise for
example in cases of mistake, fraud or lack of consent. In those cases, the
contract is treated in law as never having come into existence. (Cases of a
contractual right to rescind may fall under this principle but are not
relevant to the present discussion.) In the case of an accepted repudiatory
breach the contract has come into existence but has been put an end to or
discharged.
Whatever contrary indications may be disinterred from old authorities,
it is now quite clear, under the general law of contract, that acceptance of
a repudiatory breach does not bring about 'rescission ab initio'.
So much for contractual statements that become incorporated into a
contract.
8. Pre-contractual statements or representations are divided into
either:
(a) representations that do not induce the making of a contract which are
called "mere representations"; or
(b) representations that induce the making of a contract.
The former are not ordinarily actionable because the law treats them as
purely harmless. The latter type may however give rise to liability. 9.
Representations that do in fact induce the making of a contract fall into
three categories, namely:
(a) representations that amount to collateral contracts;
(b) misrepresentations; and
(c) statements that give rise to an estoppel against the maker.
10. Misrepresentations in turn are of three types, depending upon
the state of mind of the maker. That state of mind may be fraudulent,
negligent or innocent, in the sense that it is truly free of any
blameworthiness or inadvertence. The existence of a particular state of mind
on the part of the representor determines, in the absence of acquiescence,
the range of remedies available to the representee.
11. Fraudulent or negligent misrepresentation renders a contract
voidable at the instance of the representee. See, Contracts Act 1950, s.
19(1). The representee is therefore entitled to apply to a court for a
decree of rescission from a court and also to an award of damages. See,
Archer v. Brown [1985] 1 QB 401. Damages are available in addition to
rescission because an action for fraudulent misrepresentation is grounded
upon the tort of deceit, and in the case of negligent misrepresentation upon
the tort of negligence.
The contrary view expressed by the Court of Appeal of Singapore in
Annie Yeo V. Senanayake [1962] 1 LNS 10 does not, in our opinion,
represent the law. In that case, Rose CJ, said:
We were referred by learned counsel for the defendant to Mr Snell's
little book on Equity which is often useful in that it sets out
briefly the effect of the authorities. In the 25th Ed at page 569, I think
it was, it is stated that a person who rescinds his contract is entitled to
be restored to the position he would have been in had the contract not been
made; and his property must be returned and so on. No damages are
recoverable since the purpose of damages is to place the party recovering
them in the same position, so far as money can do it, as he would have been
in had the contract been carried out. It stands to reason in the present
case that there would have been great difficulty in assessing what the
damages would be. If you begin to assess the damages in a case where a
person thinks he has got a good investment and finds that he has a bad one,
the assessment must be a very hit and miss affair. It seems to me in the
circumstances of this case that in view of the shortness of time which
elapsed between the purchase of the shares and the resiling from the
transaction, the appropriate remedy is for the parties to be restored to the
same position that they were in before the plaintiff purchased the shares
upon the false representation of the defendant. (emphasis added.)
When the case reached the Privy Council (Senanayake V. Annie Yeo
[1965] 1 LNS 163), counsel for the respondent/plaintiff informed the
Board that he proposed to argue the appeal on the footing that there had
been only an innocent misrepresentation for which rescission may be had. The
Judicial Committee accordingly confined itself only with the questions
whether the circumstances relied upon by the appellant/defendant made
restitutio in integrum substantially impossible and whether rescission
was timely and just and fair. Consequently, the point under present
discussion became moot.
12. An innocent representation - one that is neither fraudulent
nor negligent - entitles the representee to merely rescission, although, in
certain cases (not relevant for present purposes) he may also obtain an
indemnity. He may not however have damages. It is also important to
recognise that relief by way of an indemnity is not made on the same footing
as damages.
13. An action for rescission may be met by any of the equitable
defences available against claims for other forms of specific relief, eg, a
plea of affirmation or of laches or a plea that damages are an adequate
remedy. Rescission may also be refused by a court on the ground that
restitutio in integrum is not possible because, eg, an innocent third
party's rights have intervened in the interim.
14. Where damages are awarded for fraudulent misrepresentation -
and we consider the principle to be the same to a case of negligent
misrepresentation - the assessment of damages must take into account any sum
recovered as restitution under the claim for rescission so as to prevent
double recovery. Damages for fraud are awarded on the basis that the
innocent representee is put, so far as money can do so, in the position
which he would have occupied had there been no reliance on the fraudulent
inducement. See, Holmes v. Jones [1907] 4 CLR 1692, at p. 1709;
Demetrios v. Gikas Dry Cleaning Industries Pty. Ltd. [1991] 22 NSWLR
561, at p. 575; Sellars v. Adelaide Petroleum NL [1994] 179 CLR 332.
The assessment of damages would therefore include all expenditure incurred
reasonably and properly in consequence of and flowing directly from the
deceit, whether before or after the date of the rescission. It may, where
appropriate, include exemplary and aggravated damages. See Archer v.
Brown (ibid).
15. The assessment of damages in an action for breach of contract
rests upon a basis that is materially different from one that is founded
upon fraud. In the former, the duty of the guilty party to perform the
primary obligations under the particular contract is by implication of law
substituted with a duty to pay damages in lieu of such performance,
although, in assessing those damages, the court must have regard to the
terms of the contract in order to ascertain the performance promised in it,
including performance which would have fallen due after the date of the
discharge. See, Moschi v. Lep Air Services Ltd. [1973] AC 331. The
object of damages for breach of contract is to place the innocent party in
the same position as though the contract had been performed. But, in an
action for fraudulent misrepresentation, the object of the law is to place
the representee in the position he would have been had he not been induced.
Hence, the rule as to remoteness of damage contained in s. 74 of the
Contracts Act 1950 has no application whatsoever to an action for damages in
the tort of deceit.
16. A representee who is the victim of a fraud may, at his
election, abandon his right to rescind and may instead insist that the
contract be performed and that he be put in the position in which he would
have been if the representations made had been true. See, Contracts Act
1950, s. 19(2).
With that we now turn to consider the application of the relevant
principles to the appeals before us.
The Present Appeals
The rival contentions of the parties before us are directed at the
approach that is to be adopted in the assessment of damages pursuant to the
order of the Federal Court. The plaintiff contends that damages should be
assessed upon a contractual basis, ie, on the footing that the defendant had
breached the bargain that had been struck.
Encik Zainur Zakaria, of counsel for the defendant however submits that
it is an error in principle to approach the assessment of damages in the
present on the footing of a breach of contract because the agreement of 25
May 1982 has been set aside by the Federal Court and the plaintiff has
received reimbursement of all sums specified in the order of that Court. He
argues that damages should be assessed on the footing that the contract had
been rescinded.
After careful reflection we find ourselves persuaded by these arguments
of Encik Zainur.
Although the Federal Court gave no written reasons, it is plain that it
found for the plaintiff on the basis of his pleaded case that there had been
a fraudulent misrepresentation. That is why it granted rescission, set aside
the contract and restored the plaintiff to his original position. Had the
Federal Court found for the plaintiff on the basis that there had been a
breach of contract, it would have refused rescission (as that is not the
appropriate remedy) and merely directed an assessment of damages. Since the
damages awarded to the plaintiff were in addition to the remedy of
rescission, the basis of compensation set out in the first and second limbs
of s. 74 of the Contracts Act 1950 has no application to the present
instance. The plaintiff is therefore only entitled to recover all
expenditure reasonably and properly incurred in consequence of and flowing
directly from the fraudulent misrepresentation, whether before or after the
date of the rescission.
That brings us to the heads of damage assessed by the senior assistant
registrar.
As to items (1) and (2), these are irrecoverable as they are losses
suffered in consequence of a breach of contract which is not the case in the
present instance. However, the reimbursement of interest paid by the
plaintiff under items (3) and (4) constitute expenditure which the plaintiff
reasonably and properly incurred in consequence of the defendant's
fraudulent misrepresentation. They are therefore recoverable by the
plaintiff. They total RM216,030.32. Item (5) is an expense related to the
proof of damages in contract. It is not a reasonable expense and is
therefore not recoverable. The plaintiff's claim for loss of rent which
forms the subject matter of the first appeal is equally irrecoverable since
it amounts to damages for breach of contract.
In the circumstances, we would dismiss the first appeal. We would however
allow the second appeal in part and vary the order of the High Court by
reducing the award of damages to RM216,030.32. This sum shall carry interest
at 8% per annum from the date of the order of the senior assistant registrar
until the date of realisation.
Now for costs. The plaintiff will pay the costs of the first appeal to
the defendant. Since the second appeal succeeds in part, we order the
plaintiff to pay the defendant one third the taxed costs of the second
appeal. The deposit lodged in the first appeal shall be paid out to the
defendant to account of its taxed costs. The deposit lodged in the second
appeal is refunded to the defendant. The orders for costs made in the court
below are affirmed.
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