CONTRACT I

GROUP ASSIGNMENT
PREPARED BY
NUR AINNABILA BINTI ROSDI
2011612334
NUR ASILAH BINTI MOHAMED
2011616974
NUR FITRIAH NORDIN
2011612016
CLASS OF LWB01F

PREPARED FOR
MADAM NADIA BINTI OMAR
LECTURER OF CONTRACT LAW I

SUBMISSION DATE: 15 December 2011

QUESTION 4

a) Stam had just found out that the land he purchased from Kaka was formerly used for
mining. Advise Stam whether the contract between him and Kaka could be set aside.
The issues here are whether there was a valid contract between Kaka and Stam,
whether the assurance given by Stam to Kaka is considered as fraud as it was later found out
that the land was used for mining and if so, should the contract entered into by Kaka and
Stam be set aside.
To determine the first issue that is whether the contract entered into by the parties is a
valid contract, first we look at Section 10 of the Contract Act. In Section 10, it gives clear
meaning of what agreements are contract. In subsection (1) of said section, it stated that all
agreements are contract if they are made by free consent of parties competent to contract, for
a lawful consideration and with a lawful object, and are not hereby expressly declared to be
void. Therefore in order to determine the validity of a contract, the contract must be made
with free consent of both parties that are qualified for contracting purpose, with a valid
consideration and the object they contracted must be not of unlawful object.
For the second issue that is whether Stam had committed a fraud when he gives an
assurance to Kaka that the land was not used for mining when in fact it was, the sections
related to this matter are Section 17 and 19 of the Contracts Act 1957. In Section 17 of the
said act, it defines fraud. Fraud is defines as to include certain acts that are committed with
intent to deceive another party or to induce him or her to enter into a contract. The
interpretation of the word 'fraud' under this section included acts committed by a party to
contract, or with his connivance, or by his agent, with intent to deceive another party thereto
or his agent, or to induce him to enter into the contract. Hence, fraud must be by means of
some positive acts as stated before.
In subsection (a) of Section 17, it provides that the suggestion, as to a fact, of that
which is not true by one who does not believe it to be true is a fraud. Hence, in fraud, the
person making the representation does not himself believe in the truth. An important element
of this section is that the act committed as amounting to fraud is made with the intent to
deceive another party to enter into the contract.
At common law, a fraudulent misrepresentation has to be established by positive
proof, that is by showing that a false representation has been made (1) knowingly, or (2)

without belief in its truth, or (3) recklessly, careless of whether it be true or false as illustrated
in the case of Derry v Peek (1889) 14 App Cas 337 ; [1886-90] All ER 1. In Derry v Peek, the
issue was whether a fraudulent misrepresentation can be establish when in fact the person
making the representation was in a good faith that the representation was true. The House of
Lords held that fraud cannot be established when the person making the representation
honestly believed the statement he gave is true.
With regard to Section 17(a), the case of Kheng Chwee Lian v Wong Tak Thong
provide a clear example. In this case, the respondent had bought half a share in a land that he
then built a biscuit factory. Later he was induced by the appellant to enter into a new
agreement that made him to let go his share on the land he built the factory in exchange for
the new land that in fact was smaller. He alleged that the appellant had made a false
representation in inducing him to enter the contract. Federal Court agreed with the trial
judge's finding that the respondent was induced by a fraudulent misrepresentation into the
signing of the second agreements by virtue of Section17 (a) and (d) of the Contracts Act. The
Federal Court quoted the following words of Sir Richard Couch in giving the judgement of
the Privy Council in Pertab Chunder Ghose v Mahendra Purkait (1888/9) 161IA :
"when one party imduces the other to contract on the faith of representation made to
him, any one of which is untrue, the whole contract is, in Court of Equity, considered as
having been fraudulent."
Another related section is Section 19 of the Act. Section 19 must be read together with
Section 17 as it gives the effect of the contract entered into by fraud. Section 19 renders a
contract induced by fraud or misrepresentation 'voidable' at the option of innocent party.
Section 19 makes a contract induced by fraud or misrepresentation voidable at the option of
the representee that is the representee may bring the case before the court for the contract to
be declared void. Rescission restores the the parties the position they were before the contract
was made. Hence, agreement caused by fraud is voidable at choice of the innocent party.
Section 19 also provides an explanation that 'a fraud or misrepresentation which did not
cause the consent to a contract of the party on whom the fraud was practised, or to whom the
misrepresentation was made, does not render the contract voidable.'

In Abdul Razak bin Datuk Abu Samah v Shah Alam Properties Sdn Bhd & Anor
Appeal [1999] 2 MLJ 500 CA, the Court of Appeal found that there had been fraudulent
misrepresentation on the part of the defendant which had induced the plaintiff to enter into a
sale purchase agreement for an apartment. The Court granted rescission of the contract. In the
case of Kheng Chwee Lian v Wong Tak Thong discussed above, the court also granted the
respondent a rescission of the contract as provided in Section 19 of the Contracts Act.
.

In the case of Stam and Kaka, the contract entered into by them is a valid contract. By

virtue of Section 10, the contract between Stam and Kaka had satisfied all the elements of a
valid contract. This is because the contract between them is made with the free consent of
both parties competent to a contract as both Kaka and Stam qualified to be a contractual
parties, there was also a lawful consideration that is the land and its purchase value of RM1
million, and the object they contracted that is the land is not unlawful by law. Therefore, the
contract between Kaka and Stam was at first, a valid contract.
Regarding the issue whether Kaka has made a fraudulent misrepresentation when he
gives assurance to Stam that the land was never used for mining with the sentence "Don't
worry, I can assure you that it was not mining land and was perfectly suitable for housing
development", Section 17 will be applicable in determining whether there is a fraud
committed by him. In this said section, it was explained that a fraud can be committed when a
party making the representation himself does not believe the representation to be true.
Therefore, it is intentional that the person who knows about the truth does not want the fact to
be known to the other party and consequencely committed a fraud to cover it up. In Stam
case, it is irrelevant if Kaka did not know about the nature of the land that he is going to vend
to Stam. This is because, Kaka is the vendor, who should have the information regarding the
stipulated land. Furthermore, he was actually asked by Stam whether or not the land was a
former mining land. Hence, if he does not have sufficient information as to answer the
question by his client, he should not at all replied it with assurance as such. So, when Kaka
gives assurance to Stam that the land was never used for mining, it amounted to a fraudulent
misrepresentation as he does not himself believe it to be true.
As in the case of Derry v Peek , fraud was not establish as the maker of the statement
himself believe in what he said was true, Stam must then prove that Kaka does not himself
believes that the land was not used for mining. The case that fall plumb with this matter is
Kheng Chwee Lian v Wong Tak Thong where the trial judge had acquired sufficient proof that

the contract was indeed induced by a fraudulent misrepresentation as the appellant himself
does not believe it to be true because the appellant actually know the actual area of the
stipulated land. Hence, as Kaka is the vendor, he would have the information on the nature of
the land, but as he did provide wrong information, his act amounted to a fraud.
If fraud can be established by Stam, he then can proceed to make a rescission of the
contract, by virtue of Section 19 of the Contracts Act. Section 19 had provided remedies for
contract ab initio that is with lack of consent. In Stam's cases, he is said to be induced into the
contract with a fraudulent statement. Therefore, when he entered into the contract, his consent
is lacking. When this happen, Stam, as the party whose consent was induced by fraud, can
apply for rescission of the contract to the court.
In addition, Stam must also comply with the requirement provided in the explanation
for Section 19 that is the contract happened because of the fraud in order to make the contract
voidable. In this case, Stam had obviously entered the contract because of the fraud made by
Kaka, as stated in the question. Moreover, when Stam asked the question whether or not the
land was used for mining, it proved that the answer to that question by Kaka is important to
Stam as the land he wanted to purchase is for housing development purpose.
Remedies provided under Section 19 is being applied in Malaysian's case of Abdul
Razak bin Datuk Abu Samah and Kheng Chwee Lian as the court granted both the innocent
party a rescission of the contract. Although a contract made based on fraudulent can be
rescinded, the option to rescind it lies on the innocent party. Hence, only Stam has power to
rescind the contract in the above case. However, the contract is still a valid contract until it is
rescinded.
In a conclusion, Stam is advised that if he want to set aside the contract, he must
prove that there was actually a valid contract at first, but then a fraud was made as to induced
him to enter into the contract and lastly, he must prove that he had entered into the contract
because of the fraud committed by Kaka. As those issues had been discussed above, it is
recommended to Stam that he file for a rescission of the contract as he may had qualified to
do so. This is because the contract entered into by them is a valid contract, a fraud was
committed by Kaka and therefore the option to make the contract voidable is at him.
(15 marks)

Question 4 (b)
The issue is whether Kakas silent when he was asked whether the land was formerly
used for mining constitutes a fraud.
The law applicable here are the explanation to section 17 of the Contract Acts which
provide that mere silent as to facts likely to affect the willingness of a person to enter into a
contract is not fraud, unless the circumstances of the case are such that, regard being had to
them, it is the duty of the person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech. As a general rule, fraud is not committed simply by keeping silent about
a certain fact that could affect the decision or willingness of another to enter into the contract.
In short, silence is not fraud and this general rule is explained in illustration (d). A and B,
being traders, enter upon a contract. A has private information of a change in prices which
would affect Bs willingness to proceed with the contract. A is not bound to inform B.
however, there are two exceptions to this general rule, that is, silence can amount to fraud if
there exists a duty for the person to speak the silence in itself, is equivalent to speech. The
first exception is where the circumstances of the case are such that it is the duty of the person
keeping silent to speak. This can occur in sale and purchase transactions were the relationship
is more than the ordinary relationship of seller and buyer. This can be seen by contrasting
illustration (a) with illustration (b).
(a) A sells, by auction, to B, a horse which A knows to be unsound. A says nothing to B
about the horses unsoundness. This is not fraud in A.
(b) B is As daughter and has just come of age. Here, the relation between the parties
would make Aduty to tell B if the horse is unsound.
In illustration (a), the ordinary relationship of seller and buyer does not require A to
inform B about the unsoundness of the horse. As silence is not fraud. However, in illustration
(b), as the buyer is As daughter who has just reached the age of majority, A has a duty to
inform B if the horse is unsound. Unlike illustration (a) where there is no such duty to speak,
the circumstances in illustration (b) makes it a duty to speak. In Lau Hee Teah v Hargill
Engineering Sdn Bhd & Anor, the appellant had entered into an agreement to take a loader
on hire-purchase as hirer, with the first respondent as dealer and the second respondent as
owner. The first respondent which is the seller did not inform the hirer of the year of
manufacture of the machine and the fact that it had previously been involved in an accident.
The federal court held that this did not amount to misrepresentation as there was no active

duty on the part of the seller to inform the hirer of these matters. Then, the second exception
is when silence is, in itself, equivalent to speech as can be seen in illustration (c) to sec 17.
B says to A, if you do not deny it, I shall presume that the horse is sound. A says
nothing. Here, silence is equivalent to speech. In this situation, the content of the speech from
B to A require a response from A. if A does not deny it, B is entitled to assume that the horse
is sound. It should be noted that being silent is not the same as the active concealment of a
fact under section 17(b). The former involves merely keeping quiet which is not considered
as fraudulent unless for the two abovementioned circumstances whereas the latter refers to
positive action of concealing certain facts.
In applying these to the fact of the question, according to the explanation of section
17, Kakas act which he had remained silent when he was asked whether the land was
formerly used for mining does not constitute fraud. In this situation, Kakas act of silence,
although he had information about the land that was formerly used for mining has induced
Stams willingness to enter into the contract, is not a fraud. It is because, according to the first
exception and in the illustration (a), the ordinary relationship between Kaka and Stam does
not require Kaka to disclose about the condition of the land. This situation can be compared
with the case Lau Hee Teah v Hargill Engineering Sdn Bhd & Anor. The court held that this is
not amount to fraud as there is no active duty on the part of the seller to inform the hirer
about the matters. Apart from that, the second exception which silent is, in itself equivalent to
speech can be seen in the content of the speech from Stam to Kaka that requires a response
from Kaka. If Kaka does not deny it, Stam can reasonably assume that the land was not
formerly used for mining.
In conclusion, Kakas silent does not amount to fraud and the contract is valid.