Folio

Authorities

SIM CHIO HUAT v WONG TED FUI [1983] 1 MLJ 151

YEOW KIM PONG REALTY LTD v NG KIM PONG [1962] 1 MLJ 118

SHARIKAT EASTERN PLASTICS INDUSTRY v SHARIKAT LAM SENG

TRADING [1972] 1 MLJ 21

WONG KUP SING v JERAM RUBBER ESTATES LTD OCJ KL

CONTRACTS ACT 1950 (ACT 136), Contracts (Amendment) ACT 1976 (A329)
& Government CONTRACTS ACT 1949

EVIDENCE ACT 1950

TAN SWEE HOE CO LTD v ALI HUSSAIN BROS [1980] 2 MLJ 16

INDUSTRIAL & AGRICULTURAL DISTRIBUTION SDN BHD v GOLDEN

SANDS CONSTRUCTION SDN BHD [1993] 3 MLJ 433

Solid Investments Ltd v Alcatel-Lucent (M) Sdn Bhd (previously known as

Alcatel Network Systems (M) Sdn Bhd)

SABABUMI (SANDAKAN) SDN BHD v DATUK YAP PAK LEONG [1998] 3

MLJ 151

CHING YIK DEVELOPMENT SDN BHD v SETAPAK HEIGHTS

DEVELOPMENT SDN BHD[1996] 3 MLJ 675

HWA CHEA LIN & ANOR v MALIM JAYA (MELAKA) SDN BHD [1996] 4
MLJ 544

TUNKU NORELLA SURIANI BT TUNKU YUSOFF & ANOR V KUMPULAN

SIERRAMAS (M) SDN BHD & ANOR [2011] MLJU 409

PREMIER HOTEL SDN BHD v TANG LING SENG [1995] 4 MLJ 229

CIMB Bank Bhd v Maybank Trustees Bhd and other appeals [2014] 3 MLJ 169

Dato' Ariff Wan Hamzah & Ors v HwangDBS Investment Bank Bhd &
Anor[2013] 1 MLJ 526

Hollier v Rambler Motors (AmC) Ltd [1972] 1 All ER 399

INDEX OF AUTHORITIES

Page

[1983] 1 MLJ 151

SIM CHIO HUAT v WONG TED FUI

FC KUCHING
SUFFIAN LP, LEE HUN HOE CJ (BORNEO) AND SALLEH ABAS FI
FEDERAL COURT CIVIL APPEAL NO 8 OF 1981
11 May 1982, 22 October 1982
Contract Building Contract Time essence of contract Provision for forfeiture Waiver Election to treat
contract as continuing Extra work Delay in delivery of site Claim for damages Interest
In this case the appellant a housing developer undertook to deliver houses to be erected by him for the respondent
within six months in the case of two units of double-storey detached houses and twelve months in the case of two units
of terrace houses from the date of approval of the plans. It was stipulated that time shall be of the essence of the
contract. The agreement contained no provision for extension of the delivery period nor any provision as to alterations
and additional works. The appellant was unable to deliver the houses in time and there was a delay in the delivery.
During the course of constructing the houses at the request of the respondent the appellant carried out extra work at a
total cost of $5,008.00 and also incurred certain expenses amounting to $881.00 on behalf of the respondent. The
appellant sued for the price of the extra work and expenses. The respondent denied liability and counterclaimed a sum
of $28,800 as liquidated damages and also general damages for the failure of the appellant to deliver the houses in
accordance with the stipulated periods. The appellant's reply to the respondent's counterclaim was that the respondent
was not entitled to the damages claimed because there had been a waiver and estoppel on the part of the respondent. The
trial judge Seah J. allowed a sum of $4,424.00 on the appellant's claim for extra work and a further sum of $651.50 for
additional expenses, making a total of $5,075.50. The learned trial judge upheld the respondent's counterclaim and
assessed the liquidated damages under the contract at $28,176.00. He also allowed a further sum of $2,400.00 as general
damages for the failure to construct a temporary house for the respondent to live in whilst the old house was being
demolished and the new houses were being constructed. The appellant appealed against the decision of the learned trial
judge on the counterclaim while the respondent cross-appealed against the decision because the trial judge had not
ordered interest on the damages nor costs in favour of the respondent.
Held:

(1) in this case as time was provided to be of the essence of the agreement, the stipulated periods within which
the houses had to be delivered to the respondent became an essential condition of the agreement. Failure by the
appellant to fulfil this condition entitled the respondent to have an option of treating the agreement either (a) as
having been repudiated and dismissing the appellant or (b) as still continuing;

(2) in this case the respondent did not choose to treat the contract as having been repudiated. By allowing the
delivery dates to pass by and by acquiescing in the work continuing under the agreement and indeed by
ordering extra work to be done for each of the houses, for which the agreement made no provision, the
respondent must be held to have waived his right to rescind the agreemend on account of repudiation and also
the right to treat himself as discharged therefrom. He must be deemed to have elected the agreement as still
continuing;

(3) the stipulation as to time in the agreement ceased to be of the essence of the agreement, not because of the
omission by the respondent to invoke Clause 23 of the agreement, but because of his acquiescence in and
allowing the work to continue under the agreement;

(4) in cases where an agreement contains no clause for extension of time for completion, the acts of prevention
by the employer whether authorised by the contract or whether in breach of it or whether the prevention is a
cause of part or of the whole of the delay invalidate the liquidated damages clause because by such acts time
becomes at large and consequently there is no date from which damages could run and therefore no damages
could be claimed;

(5) in this case the respondent could not succeed in his counterclaim for damages under Clauses 20 and 21 of
the contract as he was responsible for the delay in ordering extra work and for late delivery of the site;

(6) although the respondent failed in enforcing clauses 20 and 21 because of the late delivery of the site to
enable the appellant to commence construction work immediately and also by the extra work ordered by the
respondent, such failure did not prevent him from claiming unliquidated damages and the learned judge was
right in awarding $2,400/- as unliquidated damages against the appellant;

(7) interest is a matter of discretion for the learned trial judge and in this case there was no reason to interfere
with his discretion.

Cases referred to
United Scientific v Burnley Council [1978] AC 904 940 and 944
Trollope and Cells Ltd v NW Hospital Board [1973] 2 All ER 260
Clydebank Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzqierdo Y Castenada & Ors [1905] AC 6
Holme v Guppy (1838) 3 M & W 387; 150 ER 1195
Thornhill v Neats (1860) 8 CB NS 831; 141 ER 1392
Russell v Sa Da Bandeira (1862) 13 CB NS 149; 143 ER 59
Westwood v Secretary of State for India (1863) 7 LT 736
Dodd v Churton [1897] I QB 562
Murdoch v Lockie (1897) 15 NZLR 296
Meyer v Gilmer (1899) 18 NZLR 129
Wells v Army & Navy Co-operative Society (1902) 86 LT 764
Perini Pacific v Greater Vancouver Sewerage (1966) 57 DLR 2d 307
Jones v St John's College, Oxford (1870) LR 6 QB 115
Tew v Newbold-on-Avon School Board (1884) 1C & E 260
Sattin v Poole (1901) Hudson's BC 4th Ed Vol 2 p 306
Yeoh Kim Pong Realty Ltd v Ng Kim Pong [1962] MLJ 118 126
1983 1 MLJ 151 at 152

FEDERAL COURT

Patrick Tan for the appellant.

Chew Pok Oi for the respondent.
SALLEH ABAS FJ
(Judgment of the Court, delivered by Leo Hun Hoe C.J. (Borneo)): In this appeal the facts are as follows:

By an agreement entered on May 15, 1969 the respondent sold 89 housing lots to the appellant for a total consideration
of $301,000.00 of which$133,000.00 was paid in cash and the balance of $168,000.00 was to be set off against the price
of four houses which the appellant was required to build for the respondent on lots 1762, 1772, 1763 and 1771. The
houses which were to be erected on lots 1762 and 1772 were two units of double-storey detached houses, whilst the
houses to be built on lots 1763 and 1771 were two units of terrace houses.
Under clause 8 of the agreement the appellant undertook to deliver these houses in a state of completion, within six
months in the case of the two double-storey detached houses and twelve months in the case of the two units of terrace
houses from the date of the approval of their plans, drawing and specification by the Kuching Rural District Council
(KRDC). State of completion was defined by clause 9 to mean the issuance by KRDC of certificates of fitness for
occupation in respect of these houses.
Clause 24 stipulated that time wherever specified shall be of the essence of the agreement.
Under clauses 20 and 21, it was agreed that if the appellant failed to deliver these houses within the agreed time, he
would be liable to pay to the respondent a sum of $1,080.00 per month in respect of the double-storey detached houses
and a sum of$600.00 per month in respect of the two terrace houses and this liability would continue until the houses
were delivered in a state of completion, i.e. until certificates of fitness were issued.
The agreement also made a provision for a forfeiture clause clause 23 in the following terms:
"23. Notwithstanding anything herein contained to the contrary, it is hereby agreed that if the Developer [appellant] defaults in paying the full sum of
$133,000/- (Dollars One hundred and thirty-three thousand only) to the Owner [respondent] within six (6) months from the date stipulated in Clause 3
(b) hereof and/or if the Developer [appellant] abandons the performance of the present Agreement or fails in execution of the construction work in the
course of erection as aforesaid, then thereupon this Agreement shall ipso facto be null and void and all sums of money paid hereunder by the
Developer [appellant] shall be forfeited to the Owner [respondent] and in such circumstances the Developer [appellant] shall have no claim
whatsoever for the work done or for the cost of materials." (the emphasis is ours)

The agreement contained no provision for the extension of the delivery period, nor any provision as to alterations and
additional works.
The appellant, however, was unable to deliver these four houses in time. In respect of the two double-storey detached
houses on lots 1762 and 1772 the delivery dates were March 16, 1971 and April 4, 1971. The delivery date for the two
terrace houses was July 9, 1971. He did not deliver these houses by their agreed delivery dates, but delivered them all
only on September 9, 1972. He was thus late by 17 months and 20 days in respect of the first double-storey detached
house and by 19 months and 2 days in respect of the second double-storey detached house and by 13 months and 27
days in respect of the two terrace houses.
During the course of constructing these four houses at the request of the respondent the appellant carried out extra work
in respect of each of them for a total cost of $5,008.00 and also incurred certain expenses amounting to $881.00 on
behalf of the respondent.
When sued for the price of extra work and the expenses of $881.00, the respondent denied liability and counterclaimed
a sum of $28,800.00 as liquidated damages under clauses 20 and 21 of the agreement and also general damages because
of the failure of the appellant to deliver the houses in accordance with the stipulated periods.
The appellant's reply to the respondent's counterclaim was that the respondent was not entitled to the damages claimed
because there had been a waiver and estoppel on the part of the respondent.
Seah J., before whom the trial took place, allowed a sum of $4,424.00 as the appellant's claim for extra work and a
further sum of $651.50 as the appellant's additional expenses incurred on behalf of the respondent, thus making a total
of $5,075.50. The learned trial judge upheld the respondent's counterclaim and assessed the
1983 1 MLJ 151 at 153
liquidated damages under clauses 20 and 21 at $28,176.00. He also awarded a further sum of $2,400.00 as general
damages under clause 10 of the agreement for failing to construct a temporary house under clause 10 to enable the

respondent to live in it whilst his old house was being demolished and the new houses were being constructed. Thus the
total damages awarded was $30,576.00.
The appellant appealed against the decision of the learned trial judge on the counterclaim whilst the respondent crossappealed against the decision because the learned trial judge ordered no interest on the sum of $30,576.00 allowed for
counterclaim nor costs in favour of the respondent.
Time being of the essence:
In modern law of contract prima faciea stipulation as to time is not of the essence of a contract, unless the parties agree
that it be so. (See Lord Simon of Glaisdale in United Scientific v Burnley Council [1978] AC 904 940 and 944. In this
case as time was provided to be of the essence of the agreement, the stipulated periods within which these four houses
had to be delivered to the respondent became an essential condition of the agreement. Failure by the appellant to fulfill
this condition would entitle the respondent to have an option of treating the agreement either (a) as having been
repudiated and dismissing the appellant; or (b) as still continuing. (See 9 Halsbury'sLaws of England, 4th ed. para 538,
page 370).
In this case obviously he did not choose to treat the agreement as having been repudiated. By allowing the delivery
dates to pass and by acquiescing in the work continuing under the agreement and indeed by ordering extra work to be
done for each of these houses, for which the agreement made no provision, the appellant must be held to have waived
his right to rescind the agreement on account of repudiation and also the right to treat himself as discharged therefrom.
He must be deemed to have elected the agreement as still continuing.
Forfeiture provision under clause 23:
In his submission before us, counsel for the appellant said that as the respondent had not exercised his right to forfeiture
under clause 23, time was no longer of the essence of the agreement. In our view this submission is completely
misconceived. If clause 23 was invoked, the consequence would be disastrous to the appellant, as he stood to lose all
that he had paid for under the agreement and would also be deprived of making any claim for the work done and
materials supplied. In any case this clause, in the circumstances of this case, if invoked by the respondent, would not be
applicable because the appellant neither abandoned the performance of the agreement, nor failed in the execution of the
construction work the two conditions precedent to the application of this clause. What the appellant failed to do in
this case is not in the execution of the construction work, but in meeting the delivery time set for each of the four
houses. In our view the stipulation as to time in this agreement ceased to be of the essence of the agreement, not because
of the omission by the respondent to invoke clause 23, but because, as we have said earlier, of his acquiescence in, and
allowing the work to continue under the agreement.
Case of the appellant:
It must be observed here that although counsel for the appellant in the court below submitted that extra time was needed
to carry out extra works, it had never been the case of the appellant that the delivery dates of these houses should
accordingly be extended. Indeed, if such had been his case, the agreement having provided for no extension of time
clause the case would be bound to fail. Trollope and Colls v NW Hospital Board [1973] 2 All ER 260. The case for the
appellant simply consists of waiver and estoppel as crystallised in his counsel's submission in the court below and
before us. His counsel submitted that in view of the extra work for which amended plans were submitted to the KRDC
for approval after the houses were completed, the respondent must be deemed to have waived the deadline for the
houses and
"it follows that he had waived clauses 20/21 of the Agreement
Having waived his right the defendant (respondent) is now estopped from claiming damages under clauses 20/21."
(pages 4748 of Appeal Record)

We agree with the submission in so far as the waiver of the delivery dates is concerned but we do not agree that this
waiver also constitutes a waiver of his right to claim liquidated damages under clauses 20 and 21. ( Clydebank
Engineering & Shipbuilding Co Ltd v Don Jose Ramos Yzquierdo Y Castaneda & Ors [1905] AC 6). A waiver by the

respondent of the delivery periods is no more than his election not to treat the agreement as having been repudiated. He
still regarded the agreement as still subsisting and in no sense could
1983 1 MLJ 151 at 154
such a contract be interpreted as indicating a waiver to claim damages.
Question of Damages:
We now come to the question whether the respondent should succeed or not in his claim for damages, under clauses 20
and 21. In dealing with this question we can do no better than be guided by the statement of the law in Hudson's
Building and Engineering Contracts, 10th ed., at p. 624, which is as follows:
"It has been seen that, for the purpose of treating the contract as repudiated, in the rare cases where time is of the essence, the contract time for
completion may cease to be applicable for a variety of reasons, including the ordering of extras or other interference or prevention by the employer. In
the case of damages, it is equally obvious that where the reason is some act of the employer or his architect or engineer preventing completion by the
due date, it cannot be the intention of the parties that liquidated or other damages should be calculated from that date even if the act, such as ordering
extras, is not a breach of contract. Liquidated damages stipulated for at a rate for each day or week of delay in completing the works must begin to run
from some definite date. It follows, therefore, that if the date in the contract has for some such reason ceased to be the proper date for the completion
of the works, and no contractual provision exists for the substitution of a new date, there is in such a case no date from which liquidated damages can
run and the right to liquidated damages will have gone. This, rather than solicitude for the contractor, is the reason for the provision usually known as
the extension of time clause."

(The emphasis is ours)

The learned author gives a list of cases in which the court refused damages and another fist in which it allowed them.
The first list of cases in which damages were refused consists of:

(1) Holme v Guppy (1838) 3 M & W 387; 150 ER 1195

(2) Thornhill v Neats (1860) 8 CB NS 831; 141 ER 1392

(3) Russell v Sa Da Bandeira (1862) 13 CB NS 149; 143 ER 59

(4) Westwood v Secretary of State for India (1863) 7 LT 736

(5) Dodd v Churton [1897] I QB 562

(6) Murdoch v Lockie (1897) 15 NZLR 296

(7) Meyer v Gilmer (1899) 18 NZLR 129

(8) Wells v Army & Navy Co-operative Society (1902) 86 LT 764

(9) Perini Pacific v Greater Vancouver Sewerage (1966) 57 DLR 2d 307

The second list of cases in which damages were allowed is:

(1) Jones v St John's College, Oxford (1870) LR 6 QB 115

(2) Tew v Newbold-on-Avon School Board (1884) 1C & E 260

(3) Sattin v Poole (1901) Hudson's BC 4th Ed Vol 2 p 306

Amongst the conclusions reached by the learned author after considering these cases is that in cases where an agreement
contains no clause for extension of time for completion, the acts of prevention by the employer whether authorised by
the contract or whether in breach of it or whether the prevention is a cause of part or of the whole of the delay invalidate
the liquidated damages clause because by such acts in the words of Parke B. inHolme v. Guppy (supra) and Lord
Denning M.R. in Trollope and Colls ( supra) "the time becomes at large". Consequently there is no date from which
damages could run and therefore no damages could be claimed.
In the present case, not only did the agreement contain no extension clause it also contained no clause authorising extra
work. This extra work must at least have caused part of the delay though it might not have caused the whole delay.
Applying the principle stated above, we are of the opinion that clauses 20 and 21 became invalidated and that no
damages should have been allowed under them.
Delay by extra work:
The learned trial judge held that the principle of Dodd v. Churton ( supra) did not apply to the facts of this case, because
he said:
" the question to be decided is whether the additional works which the landowner [respondent] requested to be done would make it impossible or
impracticable for the contractor [appellant] to complete the work within the stipulated time On the basis of the evidence before the court I cannot
say that these additional works requested by the defendant [respondent] would inevitably result in a delay in the plaintiff [appellant] completing all the
four houses within the stipulated time."
(page 65 of the Appeal Record)

With respect we do not agree, because there is unchallenged evidence given by the appellant that in February, 1971 the
respondent stopped the work on the second double storey detached house, i.e. the one built on lot 1772 after piling work
had been completed and ground beams laid because he objected to the size of one of the rooms of the house, which was
later enlarged. Further, because of the request for extra work on the other double storey detached house, the appellant
was unable to proceed with this extra work until the supervisor of Borneo Housing Corporation (BHC) approved it.
BHC had an interest in the construction of these four houses because the respondent applied for housing loans from
BHC in order to
1983 1 MLJ 151 at 155
finance the sale of these houses to other people. He said:
"I needed a loan from BHC because when I wanted to sell it would be easier for me."
(page 39 of the Appeal Record)

What then is the principle enunciated in Dodd v. Churton ( supra) which the learned trial judge held to be inapplicable
to the facts of the present appeal.
Dodd v. Churton is definitely based on Holme v. Guppy ( supra) and in both these cases, the law applicable was stated to
be that found in Comyns' Digest, Condition L (6). Parke B., who decided Holme v. Guppy, said:
" and there are clear authorities, that if the party be prevented, by the refusal of the other contracting party, from completing the contract within the
time limited, he is not liable in law for the default (1 Roll. Abr. 543; Com. Dig. Condition L (6)) The plaintiffs were therefore left at large; and
consequently they are not to forfeit anything for the delay "

Lord Esher M.R. in Dodd v. Churton said, at p. 566:

" The principle is laid down in Comyns' Digest, Condition L (6), that, where one party to a contract is prevented from performing it by the act of the
other, he is not liable in law for that default; and, accordingly, a well recognised rule has been established in cases of this kind, beginning with Holme

v. Guppy, to the effect that, if the building owner has ordered extra work beyond that specified by the original contract which has necessarily increased
the time requisite for finishing the work, he is thereby disentitled to claim the penalties for non completion provided for by the contract. The reason
for that rule is that otherwise a most unreasonable burden would be imposed on the contractor. Then this further complication arose."

It is clear therefore that the principle enunciated by Dodd v. Churtonis nothing more than the application of the principle
stated in Comyns' Digest, Condition L (6) to extra work ordered by an employer in a building contract.
The passage in which the words "impossible or impracticable" were used in the judgment of Lord Esher M.R. in Dodd
v. Churton ( supra) and in that of Lord Denning M.R. in Trollope and Colls ( supra) should not be interpreted like a
statute to mean that the extra work must be of such a nature that it must delay work, otherwise the builder would not be
excused. These words in our view cannot mean more than that such extra work necessarily delays the completion of the
work or that it occasions its delay as used in the headnote of Dodd v. Churton and in the judgment of Lord Pearson in
Trollope and Coils when his Lordship rejected Lord Denning's judgment in the case to the effect that Dodd
v. Churton was not an authority for the court to fix a new completion date where the agreement makes no such provision
as to extension of time.
The test which should guide us in resolving the question of extra work and delay of completion is simply this: Did the
extra work delay the completion of the building and nothing more?
In Dodd v. Churton( supra) the builder was late by 27 weeks of which only two weeks were attributable to the extra
work ordered by the employer. Yet the Court of Appeal affirming the decision of the county court judge did not allow
the employer to claim damages in respect of the 25 weeks, of which he was in no way to blame. It follows therefore that
the principle derived from this case is that where an employer hinders the completion of work within time, it is
immaterial whether the hindrance is the whole cause or only part of the cause of delay; he cannot afterwards claim
damages unless there is a time extension clause. We think that Dodd v. Churton is applicable to the present appeal and
that the damage under clauses 20 and 21 of the agreement should not be awarded. In fact the present appeal is stronger
because the extra work was not authorised by the agreement, whereas inDodd v. Churton such work was ordered
pursuant to a clause in the contract to the effect.
Delay in delivery of site:
It is also the case of the appellant that the delay was caused by the respondent having delivered the site rather late, thus
leaving little time for the appellant to complete the work. The learned trial judge in reference to this submission said:
"The plaintiff [appellant], however, did not produce any satisfactory evidence at the trial to support this contention and I rule that this defence is
entirely void of merits." (page 63 of the Appeal Record)

With respect we are unable to agree. According to the appellant, whose testimony on this issue was not disputed, the
first double-storey detached house, i.e. the one on lot 1762, was to be built very close to the respondent's old house. The
appellant dared not do piling work on the site towards the construction of this new house until the respondent had
moved out of his old house
1983 1 MLJ 151 at 156
as it is too risky. The respondent only did so, according to his own evidence on December 15, 1970 and the house was
finally demolished in the following month, i.e. January, 1971. As the date of completion (delivery) was fixed for this
double-storey detached house to be on March 16, 1971 (six months from the date of the approval of the plan by KRDC
which was on September 17, 1970), the appellant had in fact only three months to complete the construction. The
shortening of the completion period with the consequent delay in completing the house must necessarily be due to the
delay by the respondent in moving out of his old house. As the appellant was required under clause 7 of the agreement
to carry out the work immediately and without "undue delay" after the housing plans had been approved by KRDC, it
must necessarily follow that there must be a reciprocal obligation on the part of the respondent to move out of his old
house also immediately and without undue delay. Otherwise the performance becomes impossible. His failure to do so
immediately after approval of the plans definitely hindered the completion of the house within the agreed period of six
months. A delay of three months in the context of six months period of completion is too long to entitle the respondent
to this claim for damages. Thus we cannot see how the evidence on this point could be said to be unsatisfactory and
devoid of any merits. Surely this is a case in which the principle stated in Comyn's Digest, Condition L (6) which

became the basis of the decision in Holme v. Guppy (supra) and Dodd v. Churton (supra) applies. At the risk of
repetition we restate the principle in that where one party to a contract is prevented from performing it by the act of the
other, he is not liable in law for the default.
It is true that the respondent's old house only related to the site of the first double-storey detached house and not to the
sites of the other three houses, but it must be remembered that these four houses were to be build together and with
respect to the other houses, whose lots were sold to the appellant, it is a matter of commonsense that the delay would
certainly affect the work's time-table or programmes of the other three houses as well.
For the reasons given above, i.e. extra work and delay in handing over the site, we feel that the appellant should succeed
in the appeal regarding damages under clauses 20 and 21.
Section 56 of Contract Act:
Counsel for the appellant submitted to us that by virtue of section 56 (3) of the Contract Act, the respondent was not
entitled to any compensation unless he had given notice to the appellant that he intended to claim damages. Since he did
not issue the requisite notice he was not therefore entitled to the compensation.
This submission is so far as it was based on the Contract Act was misconceived because the Act only applied to
Sarawak from July 1, 1974, long after the agreement in this case was entered into, i.e. on May 15, 1969.
However, the rules contained in section 56 of the Contract Act are not different from the position arrived at in common
law. Yeoh Kim Pong Realty Ltd v Ng Kim Pong [1962] MLJ 118 126. The position is this: If in a contract in which time
is of the essence, a party fails to perform it by the stipulated time, the innocent party has the right either to rescind the
contract, or to treat it as still subsisting. If he treats it either expressly or by conduct as still continuing, the contract
exists but time ceases to be of the essence and becomes at large. Consequently he cannot claim the liquidated damages
under the contract unless there is a provision as to the extension of time. However, this cessation can be revived and so
time can be restored to be of the essence by the innocent party serving a notice to the party in default giving a new date
of completion. (See Hudson, pp. 604 & 612). If this is done there would be a date from which liquidated damages could
be calculated. In the present appeal, at no time did the respondent give notice to the appellant. Hence clauses 20 and 21
cannot be enforced.
However, even if the contract contains a time extension clause or even if an innocent party serves a notice on the party
in default requiring the latter to complete the work by a certain date, damages are not as a matter of course awarded in
favour of the employer. Only in circumstances in which the employer or his agent is in no way to blame for the delay
would the court be willing to allow damages. If the employer contributes to the delay by ordering extra work or is guilty
of the delay in delivering possession of the site, or of any other cause no damages could be claimed. (See Hudson pp.
624628).
In the circumstances of this case, there is no way in which the court could uphold the res
1983 1 MLJ 151 at 157
pondent's counterclaim for damages under clauses 20 and 21 of the agreement, as the respondent was responsible for the
delay in ordering extra work and late delivery of the site.
Damages under clause 10 of the Agreement:
Although the respondent failed in enforcing clauses 20 and 21 because of the delay occasioned by the late delivery of
the site to enable the appellant to commence construction work immediately and also by the extra work ordered by the
respondent, such failure does not prevent him from claiming unliquidated damages. (See Hudson, p. 633).
The learned trial judge found that the appellant was in breach of clause 10 of the agreement because he did not build a
temporary house required under this clause in order to house the respondent whilst the new houses were being
constructed. Although a hut for the purpose was built, the respondent did not agree to live in it as it was very small with
hardly sufficient room to accommodate his large family and as a result he went to live with his sister at St. Nicholas
School canteen for two years. He paid his sister $200.00 a month for occupation of the canteen. The learned trial judge
therefore assessed the damages at $2,400.00 for two years at the rate of $100.00 per month. Counsel for the appellant
submitted that as the money paid by the respondent was according to his sister (DW 1) meant for water and electricity

charges and that it was paid to her gratuitously, the respondent suffered no damage at all and therefore the learned trial
judge should not have awarded the sum of $2,400.00 as unliquidated damages against the appellant.
With respect to counsel, we disagree with him. We think that the learned trial judge was right. The fact that the money
was paid without his sister asking for it, does not detract from the fact that it was paid because of his sense of obligation
arising out of the occupation of the school canteen. What she did with the money, whether paid for water and electricity
charges or even treated it as her pocket money, is immaterial. There was breach of the agreement and the respondent
was entitled to damages. We think that the appeal on this point fails.
Cross-appeal:
As to the cross-appeal by the respondent, we do not think that there is much substance in it. As we have allowed the
appellant's appeal on the liquidated damages under clauses 20 and 21, the cross-appeal is only limited to the
unliquidated damages of $2,400.00. Interest is always a matter of discretion of the learned trial judge. Although he gave
no reason why he did not order interest on the sums awarded for the appellant's claim and the respondent's
counterclaim, we are not prepared to interfere with his discretion, as we do not think that he was in error. As regards
costs it is also a matter of discretion and should follow the event.
Conclusion:
The order we would propose in this case is therefore as follows:

(a) the appellant's appeal against the liquidated damages under clauses 20 and 21 of the agreement is allowed;

(b) the appeal against unliquidated damages of $2,400.00 is dismissed.

(c) the respondent's cross-appeal is also dismissed.

(d) the appellant is entitled to costs of the proceedings before this court, and in the court below.

Order accordingly.
Solicitors: Yong & Co; Chan, Jugah, Wan Ullok & Co.

[1962] 1 MLJ 118

YEOW KIM PONG REALTY LTD v NG KIM PONG

LORD HODSON, LORD GUEST AND THE RT HON LMD DE SILVA
PRIVY COUNCIL APPEAL NO 6 OF 1960
18 December 1961

Contract Agreement for sale of land Payments to be mode on or before specific dates Non-payment
of Request for extension of time Supplementary agreement Whether binding Whether appellant
entitled to rescind original contract Interpretation of s56(3) of the Contracts (Malay States) Ordinance
The plaintiff (the respondent on this appeal) on March 24, 1956, entered into an agreement with the
defendant (the appellant on this appeal) for the purchase of 22 lots of land. It was one of the terms of the
agreement that an initial payment of $15,000 should be made followed by a further sum of $24,000 on or
before June 28, 1956 and a final payment of $27,000 on or before December 23, 1956. The respondent failed
to pay the stipulated $24,000 by the date specified and the appellant informed the respondent that in
consequence the deposit of $15,000 was forfeited and the contract was at an end. The respondent then asked
for an extension of time to pay the said $24,000. The appellant agreed to an extension of time provided that
certain conditions as laid down in a supplementary agreement were satisfied, namely:
1. To pay $5,000 forthwith and the balance of $19,000 to be paid on or before July 31, 1956;
2. Construction work on the above land to be commenced within one week of the date hereof;
3.Construction must have begun on any land that was sought to be transferred; and
4. Should there be any breach of the above conditions, the $5,000 paid, was to be forfeited and the extension
of time withdrawn.
The respondent having failed to abide by this supplementary agreement, the appellant terminated the contract
by writing on September 1, 1956 and forfeited the moneys paid.
The question then arose as to whether the supplementary agreement was binding on the respondent.
The trial Judge held that the supplementary agreement was binding on the parties, and as the respondent was
in breach of it, he dismissed his action. This decision was reversed by the Court of Appeal.
On appeal to the Privy Council,
Held:
(1) the supplementary agreement was binding on the parties and time was of the essence of this agreement;

(2) there was a breach of this agreement by the respondent and appellant was entitled to rescind the contract
on September 1, 1956 as he did;

Per Curiam: Sub-section (3) of section 56 of the Contracts (Malay States) Ordinance does not place a
limitation upon the freedom of parties to contract when one of them has failed to perform his promise at the
time agreed All the sub-section says is that where a party accepts performance without such agreement
that party may not in a subsequent action claim compensation for non performance at the time agreed unless
at the time of accepting performance he has given notice of his intention to do so.
Decision of the Court of Appeal [1960] MLJ 92 reversed.
PRIVY COUNCIL
John Foster, QC (WW Stabb with him) for the appellant.

JA Wolfe for the respondent.

THERT HON LMD DE SILVA
The judgment of their Lordships was delivered by
This is an appeal from a judgment and decree of the Court of Appeal at Kuala Lumpur Supreme Court which
reversing a judgment of the High Court entered judgment in favour of the plaintiff (the respondent on this
appeal) against the defendant (the appellant on this appeal) for the return of a deposit made by the plaintiff on
an agreement for the purchase by him from the defendant of 22 lots of land and for damages for the breach
thereof by the defendant.
The following recitals and clauses of the agreement are relevant to the matters in dispute between the parties:
"Whereas the Vendor has caused Building Plans prepared by Lee Eng Tong of No. 24, Sultan Street, Klang
(hereinafter called the Architect) which have been approved by the Town Council, Klang, under Plans Nos.
185/55, 185A/55, 185B/55, 185C/55 and 185D/55 for the erection of 21 Terrace Houses on the said Property:
And Whereas the Purchaser intends to erect the said 21 Terrace Houses for sale and agrees to give priority
for such sale to the 36 Tenants of the Vendor of premises known as Nos. 102, 104, 106, 108, 110, 112, 114,
116, 118, 120, 122, 124, 126, 128, 130, 132, 134, 136, 138, 140, 142, 144, 146, 148, 150, 152, 154, 156, 158,
160, 162, 164, 166, 168, 170 and 172 Meru Road, Klang (hereinafter called the Tenants):
And Whereas the Vendor has agreed to sell and the Purchaser has agreed to purchase the said Property for the
sum of Dollars Sixty-six thousand ($66,000.00) only and the Vendor agrees to transfer such lot or lots of the
Property described in the said Schedule to the Purchaser or any of his nominees or assigns free from all
encumbrances as the Purchaser shall elect subject to the terms and conditions as mentioned hereafter:
NOW THIS AGREEMENT WITNESSETH as follows:
1. Now in consideration of the above premises and in consideration of the sum of Dollars Fifteen thousand
($15,000.00) only paid by the Purchaser to the Vendor, the receipt whereof the Vendor hereby acknowledges,
as
1962 1 MLJ 118 at 119
part payment towards the said purchase price it is mutually agreed as follows:
2. The Purchaser shall pay to the Vendor a further portion of the purchase money in the sum of $24,000.00
(Dollars Twenty-four thousand only) on or before the 23rd day of June, 1956, and the balance of the
purchase money in the sum of $27,000.00 (Dollars Twenty-seven thousand only) shall be paid by the
Purchaser to the Vendor on or before the 23rd day of December, 1956.
3. As and when the Purchaser pays to the Vendor each sum of $8,000.00 (Dollars Three thousand only)
forming part of the payments mentioned in Clause 2 above, the Vendor shall transfer to the Purchaser or any
of his nominees or assigns any one lot of the said Property described in the said Schedule provided the
above-mentioned sum of $24,000.00 (Dollars Twenty-four thousand only) shall be paid in full by the
Purchaser to the Vendor on or before the 23rd day of June, 1956, and the balance of the purchase money in
the sum of $27,000.00 (Dollars Twenty-seven thousand only) shall be paid in full by the Purchaser to the
Vendor on or before the 23rd day of December, 1956. Upon payment of the full amount of the purchase
money in the sum of $66,000.00 (Dollars Sixty-six thousand only) the Vendor shall transfer to the Purchaser

the balance or all of the Property as described in the said Schedule to the Purchaser or any of his nominees or
assigns.
6. The Vendor shall produce for the purpose of inspection, when necessary, any or all of the titles in respect
of the said Property to the Purchaser or to any of his nominees or assigns when requested by the Purchaser.
7. Upon signing of this Agreement the Vendor shall inform all his said 36 Tenants regarding the priority
given to them to purchase any of the said 21 Terrace Houses according to the normal terms and conditions of
sale offered by the Purchaser. This priority shall hold good for a period of fourteen (14) days from the date of
this agreement, after which the Purchaser shall reserve his right to sell the said houses to any other
prospective buyers.
9. Within one (1) week from date hereof the Vendor shall give access to the Purchaser to the whole property
described in the said Schedule so that work may be commenced on any of the said 21 building lots as the
Purchaser may think fit.
10. In the event the Purchaser fails to pay the sums of money on the respective dates aforementioned the said
advance money of $15,000.00 (Dollars Fifteen thousand only) paid by the Purchaser to the Vendor shall be
forfeited to the Vendor as liquidated damages and this agreement shall be treated as null and void in so far as
the untransferred lot or lots in the Property are concerned. All constructions made on the untransferred lots
shall become the property of the Vendor."
The plaintiff failed to pay the stipulated 24,000 dollars by the 23rd June, 1956. The defendant by letter of the
25th June pointed this out and said that in consequence the deposit of 15,000 dollars was forfeited and the
contract, as agreed therein, was at an end. They went on to say inter alia:
"We are now instructing our Architect to proceed with the erection of the houses and you are hereby
requested to return to us the building plans and specifications which we have loaned to you."
The plaintiff on the same day wrote to the defendant a letter which contained the following passages:
"I admit that it is my fault for not fulfilling my part of the agreement to pay you $24,000.00 which fell due
on 23rd June, 1956. This is because I was unable to collect my money in time due to most unexpected
circumstances."
"I humbly beg of you to grant me extension of time for one month to pay you the said $24,000.00 otherwise I
am afraid I shall get into serious trouble and lose my reputation as a contractor in Klang and Port
Swettenham. I shall be very grateful, therefore if you would be good enough to grant me my request and give
me a chance to make good. My future career in Klang depends solely on your sympathetic decision."
The defendant, which is a limited liability company, says through its managing director Yeow Kim Joe that
the defendant agreed to give time but only on the conditions appearing in the document P.2 of the 7th July,
1956, which is in the following terms:
"With reference to your letter of the 25th June, 1956, we are prepared to permit you an extension of time
within which to pay the sum of $24,000.00 on the following conditions:
1. To pay us a sum of $5,000.00 forthwith and the balance of $19,000.00 to be paid on or before the 31st
July, 1956.
2. Construction work on the above land must be commenced within one week of the date hereof.

3. Construction must have begun on any land that is sought to be transferred.

4. Should there be any breach of the above conditions, the $5,000.00 above mentioned, if paid, will be
forfeited and the extension of time withdrawn.
Further, full payment of the balance of $27,000.00 must be made on or before the 23rd December, 1956.
Yours faithfully,
Yeow Kim Pong Realty
Ltd.
(Sd.) Yeow Kim Joe,
Managing Director.
I, Ng Kim Pong, acknowledge the receipt of the original copy of this letter and agree to the terms as stated.
Ng Kim Pong
5 p.m. 24/7/56."
Kim Joe's version of what happened is that on the 7th July the terms on which further time would be granted
were explained to the plaintiff, that the plaintiff agreed to them and said that as he did not have the money he
would come back with some and sign the document. Kim Joe continued that the plaintiff did not do so but
sent one Quai Pin Siong (one of plaintiff's witnesses) with the money. Kim Joe says he withheld a receipt
until plaintiff had signed the document and that eventually plaintiff came into his office and signed the
document on the 24th July.
The plaintiff's version is that an extension was agreed to on condition that 5,000 dollars were paid at once
and a further 19,000 by the 31st July and that there was then no stipulation as to construction work on the
land. He says that after the 5,000 dollars were paid the defendant insisted on the terms as to construction
work and refused to give a receipt for the money already paid until the plaintiff signed the document in the
form in which it now appears (v. above).
Much of the contest between the parties in the Courts in Malaya appears to have been on the question
whether the terms in P.2 were binding on the plaintiff or not. The trial Judge said:
"If Exhibit P.2 represents the supplementary agreement the action is at an end because plaintiff had admitted
he had done no construction work on the eight lots."
1962 1 MLJ 118 at 120
He went on to say:
"It is right for me to say at this stage that 1 find that Exhibit P.2 does represent the agreement between the
parties and that plaintiff did admit that he had done no building operations on the 8 lots. Therefore, in my
view, the action must fail on this ground alone.
The Court of Appeal took the view that the terms of P.2 were not binding on the plaintiff. The reasons for that
view need not be discussed at this stage as counsel for the plaintiff respondent did not seek to sustain the
view of the Court of Appeal. He said he could not resist the conclusion that the terms of P.2 were binding on
the plaintiff. He argued that time was not of the essence of the contract in the performance of the terms

stipulated in P.2 and that therefore the defendant was not entitled on the 1st September to rescind the contract
as he did by a letter in the following terms:
"Ng Kim Pong, Esq.,
37 Ceylon Lane,
Kuala Lumpur.
Dear Sir,
Lots 382 & 403, Section 24 Town of Klang
We have been instructed by our clients Messrs. Yeow Kim Pong Realty Ltd. that no action has been taken by
you to fulfil your obligations under the contract, or to pay the sum due to our clients.
We are therefore instructed to give you notice that the contract is terminated by reason of your breaches, and
that all monies paid to our clients are forfeit.
In consequence you are requested to vacate the land forthwith since you are now a trespasser thereon.
Yours
faithfully,
(Sd.) Shearn Delamore & Co."
The question whether time is the essence of a contract is one to be determined by ascertaining the real
intention of the parties. This is to be gathered by the examination amongst other things of attendant
circumstances. The argument mentioned in the last paragraph was not raised at the trial and the defendant
could not therefore have felt any necessity for placing before the Court all the material relating to attendant
circumstances (for example, conversations) as could have helped him. The question arises whether the
plaintiff should be allowed to raise this point on appeal. Their Lordships do not find it necessary to decide
this question as in their opinion the material already in evidence satisfies them that time was of the essence.
It is evident from the agreement of the 24th of March that the purchase by the plaintiff was complementary to
a plan whereby the plaintiff was to put up 21-terrace houses on the land purchased. Building plans had
already been prepared at the instance of the defendant. Priority for the purchase of the 21 houses was to be
given to tenants of the defendant whose houses were to be demolished. All this suggests that the times fixed
for carrying out the steps undertaken were of importance. Further the plaintiff having made default
unreservedly admitted his default and "begged" for time. It is difficult to imagine that he did not contemplate
having to observe faithfully any provision as to time which his request might induce. It is difficult also to
imagine that he could have contemplated anything but a strict observance of the condition that "construction
work on the above land must be commenced within one week of the date hereof." Giving evidence in March
1958, referring to his failure to pay 24,000 dollars on the 23rd June, he said that "On 25.6 defendant could
have taken my 15,000 dollars and that would have been the end of the matter." He had therefore
contemplated a strict observance of the times agreed on with regard to the original agreement and that view
persisted in his mind up to, at any rate, March 1958. It is not possible that when he became a party to P.2 in
July 1956, he had anything other than the necessity for the strict observance of times stipulated in his mind.
These reasons suffice to convince their Lordships that time was of the essence in the performance of the
agreement contained in P.2.

Their Lordships will now examine to what extent if any the plaintiff has performed or was excused from
performing the conditions agreed on in P.2. With regard to the payment of 19,000 dollars on the 31st July
solicitors for the plaintiff wrote the following letter to the defendant on the 28th July, 1956:
"Our client has now secured purchasers for 8 of these lots and the purchasers have deposited with Mr. Yong
Kung Lin, their Solicitor, the purchase price, and our client has been so notified.
We are therefore to request you to let us have the titles to the 8 lots Nos. 382389 inclusive, in the course of
the day, so as to enable their being examined by the Solicitor for the purchasers. Our client will thereafter be
able to make payment of the balance due to you in the sum of $19,000 before the 31st July, as agreed.
Please treat this letter as urgent and let us have the titles, by return."
Solicitors for the defendant replied on the 31st July:
"Our clients instruct us that no building operations have commenced upon the land mentioned in your letter
aforesaid, and in accordance with Paragraph 3 of our client's letter of the 27th instant addressed to your
client, and to which your client concurred, there can consequently be no transfer of the land as at present
advised.
Upon information that building operations have commenced upon the lots in question, our client will be
happy to comply with your clients request."
On further pressure the solicitors for defendant wrote on the 10th August that the defendant was prepared to
permit inspection of the titles at any time in their offices. This, in the opinion of the trial Judge with which
their Lordships agree, was the full extent of the obligation of the defendant. The offer was not availed of. It
appears from the letter that has been quoted. above that in their reply of the 31st July the defendant's solicitor
may have understood the word "titles" in the request "let us have the titles" as meaning transfers executed by
the defendant. The Court of Appeal appears to have understood it in the same way because it says "the
defendants were in default from the 28th July in refusing to transfer the eight lots upon request made to them
by the plaintiff to do
1962 1 MLJ 118 at 121
so." If the plaintiff's request meant what the Court of Appeal thought it did then the defendant's resistance
was well-founded and sound.
It is to be observed that according to the plaintiff:
"I did not intend to pay with my own money. The money was tendered I mean the letter from Yong Kung
Lin. I told defendant I had the money. My proposition was that I would pay defendant when the titles were
transferred to Yong Kung Lin's clients. The money was only to be transferred to me when I transferred the
titles to Yong Kung Lin's clients."
It is clear that in any event the plaintiff could not have satisfied condition 1 as to payment of the 19,000
dollars because the defendant was under no obligation to part with their titles in the expectation of receiving
payment after transfer.
Condition 2 of P.2 was "construction work on the above land must be commenced within one week of the
date hereof." This condition was not observed. In a letter from the defendant's solicitors to the plaintiff of the
31st July, 1956, this fact was mentioned, though in another connection, when they said "our clients instruct
us that no building operations have commenced upon the land." The learned trial Judge after a careful

consideration of the evidence held that "no genuine construction work as I think the parties understood the
meaning of the term had been commenced on the land." Their Lordships are of opinion that this view is
correct and should be upheld. The Court of Appeal did not consider the matter as it had held that P.2 was not
binding on the plaintiff.
Condition 3 provided that "construction must have begun on any land that is sought to be transferred." The
learned trial Judge has held that the plaintiff committed a breach of this condition. Clause 3 of the original
agreement provided:
"As and when the Purchaser pays to the Vendor each sum of $3,000.00 (Dollars Three thousand only)
forming part of the payments mentioned in Clause 2 above, the Vendor shall transfer to the Purchaser or any
of his nominees or assigns any one lot of the said Property."
There is much force in the argument that condition 3 made provision that the plaintiff would not be entitled
to ask for a transfer of a block under clause 3 unless he had begun construction work on it and that condition
3 did nothing more. Their Lordships do not feel they need pursue the matter further as they have, as stated
above, formed the view that conditions 1 and 2 have been broken. It follows that the defendant was entitled
to rescind the contract on the 1st September as he has done.
It has been argued that the correspondence between the parties after the 1st September constituted a waiver
of whatever rights the defendant may have had on that date. Their Lordships are unable to find a waiver in
what happened. There were negotiations between the parties but nothing that was binding came out of them
because they never reached final agreement. The learned trial Judge held:
"In my view the negotiations in this case after the rescission were only approaches with a view to settlement
and I would certainly say that nothing concrete emerged from them."
Their Lordships agree. They are of opinion that the plaintiff's action fails.
The Court of Appeal held that P.2 was not binding on the plaintiff. Counsel for the respondent did not seek to
sustain this view and for the purposes of the conclusion arrived at by their Lordships that the plaintiff's action
fails nothing more need be said. Their Lordships however feel that there is an error of law in the judgment of
the Court of Appeal which it is desirable to correct. The Court of Appeal said:
"I think it cannot seriously be denied that Clause 10 did make time for payment of the essence of the
contract, so that on 25th June the defendants could have lawfully rescinded the contract once for all and
forfeited the $15,000 already paid to them. However, in the events that happened, the defendants did reaffirm
the contract by acceptance of the part payment of $5,000, and by so doing it seems to me that the case
thereafter comes within the provisions of sub-section (3) of section 56 of the Contracts Ordinance (supra).
Under that sub-section, 'If the promisee accepts performance at any time other than that agreed, the
promisee cannot claim compensation for any loss occasioned by the non-performance of the promise at the
time agreed, unless at the time of such acceptance he gives notice to the promisor of his intention to do so.'
All that this sub-section gave to the defendants upon their reaffirming the contract was a right to
compensation for any loss occasioned by the non-performance of the promise at the time agreed, and nothing
more."
It went on to say that in consequence the conditions in P.2 were contrary to law. This in their Lordships'
opinion is a wrong view of sub-section (3) of section 56. The sub-section does not place a limitation upon the
freedom of parties to contract when one of them has failed to perform his promise at the time agreed. The
contract could be reaffirmed in its original or a varied form and subject to such conditions as may be agreed

upon by the parties acting with complete freedom to contract. All the sub-section says is that where a party
accepts performance without such agreement that party may not in a subsequent action claim compensation
for non-performance at the time agreed unless at the time of accepting performance he has given notice of his
intention to do so.
For the reasons which they have given their Lordships will report to the Head of the Federation of Malaya as
their opinion that the appeal should be allowed, the judgment of the Court of Appeal set aside and the
judgment of the High Court restored and that the plaintiff should pay the appellant's costs in the Court of
Appeal and on the appeal before the Board.

[1972] 1 MLJ 21
SHARIKAT EASTERN PLASTICS INDUSTRY v SHARIKAT LAM SENG TRADING
OCJ KUALA LUMPUR
MOHAMEDAZMI J
CIVIL SUIT NO 2303 OF 1968
5 July 1971
Contract Breach Failure to deliver goods Time essence of contract Waiver No notice giving reasonable time to
complete
The plaintiff firm claimed damages for breach of contract concerning delivery of certain machinery. In the written contract of
sale, it was stipulated that shipment of the said machinery should be during July 1968. The machinery was not so shipped but
the manager of the plaintiff firm entered into negotiations with the defendants. No notice fixing a reasonable time for the
shipment and delivery of the machinery was given before the plaintiffs brought the action claiming damages for breach of
contract.
Held: the plaintiffs had waived the initial stipulation making time the essence of the contract. If they wanted to make time
again of the essence of the contract they should have given the defendants a notice fixing a reasonable time for the shipment
and delivery of the machinery. As no such notice had been given, the action was misconceived and premature.
Cases referred to
Tan Ah Kian v Haji Hassan [1962] MLJ 400 402 (apprvd) [1963] MLJ 175 (apprvd)
Webb v Hughes (1870) LR 10 Eq 281 at p 286
Wong Kup Sing v Jeram Rubber Estate Ltd [1969] 1 MLJ 245
Charles Rickards Ltd v Oppenheim [1950] 1 All ER 420

CIVIL SUIT

DA Devadason for the plaintiffs.

Peter Yeoh (Chew Biman with him) for the defendants.
MOHAMEDAZMI J
The plaintiff firm claim for damages for breach of contract for non-delivery of one complete set of "CHUBU" Polyethylene
Stretched Tapes Making Machine comprising of the following:

(i) one unit CS40 Extruder with TK650 Take-Up Unit;

(ii) one unit Stretching machine including slitter;

(iii) one unit of 12 Spindles Rewinding machine;

(iv) one unit of "TORRI" Brand 6 Spindle Balling Machine.

The action is based on contract of sale No. LST/ 026 dated May 17, 1968 by which the defendants as the sole agent of Chubu
Machinery & Co. Ltd. of Osaka, Japan (hereinafter referred to as "the Japanese manufacturers") agreed to sell and the
plaintiffs agreed to buy the said machinery at a price of 3,170, which is equivalent to M$23,362.90. On the pleadings it is not
in dispute that on June 12, 1968 pursuant to the said contract and in consideration of the delivery of the said machinery, the
plaintiffs paid a sum of $4,672.58 being twenty per cent of the agreed purchase price of the said machinery at the request and
on the demand of the defendants. It is also not in dispute that the balance of the purchase price of $18,690.32 was to be paid to
the defendants on delivery of the said machinery.
The main issues in this case are:

(1) whether time is of the essence of the contract;

(2) whether there is a breach of the contract by the defendants; and, if so, whether the plaintiffs have suffered
damage in consequence thereof;

(3) whether the contract has been superceded by a new contract and the original contract has been waived and the
defendants discharged from liability.

On the first issue, the general principles as to time being the essence of the contract have been dealt with by Gill J. (as he then
was) in the case of Tan Ah Kian v Haji Hassan [1962] MLJ 400 402 approved and affd [1963] MLJ 175, a decision approved
and affirmed by the Federal Court. The three situations in which his Lordship had considered time to be the essence of the
contract are:

(i) where the parties have expressly stipulated in the contract that it shall be so;

(ii) where it was not originally stated to be but has been made so by one party by giving reasonable notice to the
other, who has failed to perform the contract with sufficient promptitude, and

(iii) where from the nature of the contract or of its subject matter time must be taken to be of the essence of the
agreement.

What is the evidence in the present case? First, there is the C.I.F. contract document itself which
1972 1 MLJ 21 at 22

specifically provides that shipment of the said machinery should be "during July 1968". Secondly, there is the letter dated
April 26, 1968 written before the contract was concluded by the Japanese manufacturers in which it was stated that shipment
of the machinery would take two to three weeks. This was in answer to the query made in Exhibit B1 as to the time taken by
sea from Osaka to Port Swettenham. Finally, there is the admission made by D.W.1 and D.W.2 in their evidence that shipment
of the machinery was supposed to be during July 1968, and that from Japan to Port Swettenham, shipment would take three to
four weeks. Further, in explaining why shipment should be during July 1968 when the contract was made on May 17, 1968,
D.W.2 said:
"Normally it takes two to three months to assemble machines in Japan for shipping. That accounts for the difference in time
between ordering in May and shipping in July 1968."
From the above evidence, I am satisfied that there is a stipulation in the contract itself making time of the essence of the
contract, and from the surrounding circumstances there is no evidence to suggest it was not the intention of the parties to make
time of shipment "during July 1968" and time of delivery some time in August 1968 the essence of the contract.
Having found that time is the essence of the contract, the next issue to be determined by the court is whether there was a
breach of contract by the defendants. For the determination of this issue, it is necessary to pursue the events that took place
after the contract was concluded on May 17, 1968. The evidence of P.W.1, the manager of the plaintiff firm, shows he agreed
that up to September 9, 1968 negotiation was still going on between the parties. This is supported by documentary evidence as
contained in the agreed bundles of documents. The first relevant letter was dated August 10, 1968 from the plaintiffs to the
Japanese manufacturers wherein the plaintiffs asked the actual date of shipment of the machinery and other particulars relating
to the machines. The second letter was dated September 9, 1968 again written by the plaintiffs to the Japanese manufacturers
wherein they stated as follows:
"Messrs. Lam Seng have clearly stated to us that the same Machines which they bought from you was not given them
satisfaction and they now want you to deffer shipment of our Machines, so that you can remodify them to your best ability.
Under such reports from them we think that if the Machines which we ordered are the same as Messrs. Foo Ming Plastic Co.,
we will want you to ship immediately."
The next relevant letter was dated September 23, 1968 from the plaintiffs to the defendants as follows:
"We acknowledged receipt of your letter and we confirmed we wanted the machines as Messrs. Foo Ming Plastic's model.
Therefore, please open the L/C to-day as you promised and let me know the exact date of the machines arrived."
From these correspondence, I find that even up to September 23, 1968 negotiation was still going on between the parties and
also between the plaintiffs and the Japanese manufacturers not only regarding date of shipment and delivery of the machinery
but also the type or model of the machinery to be delivered. In other words, after having stipulated that shipment should be
"during July 1968" and delivery in August 1968, the plaintiffs allowed the time to pass and continued to negotiate. In my view,
the plaintiffs allowed the time of shipment and delivery to pass because they knew that the machines which they had ordered
might be defective and it was only when they sent the letter of September 23, 1968 referred to above (Exhibit C11), that they
finally made up their mind and confirmed that they wanted the machines similar to Messrs. Foo Ming Plastic, presumably
irrespective of whether or not they were satisfactory.
In Webb v Hughes (1870) LR 10 Eq 281 at p 286, Sir R. Malins V.C. said:
"But if time be made of the essence of the contract, that may be waived by the conduct of the purchaser; and if the time is once
allowed to pass, and the parties go on negotiating for completion of the purchase, then time is no longer of the essence of the
contract. But, on the other hand, it must be borne in mind that a purchaser is not bound to wait an indefinite time; and if he
finds, while the negotiations are going on, that a long time will elapse before the contract can be completed, he may in a
reasonable manner give notice to the vendor, and fix a period at which the business is to be terminated."
The above dictum was approved by Raja Azlan Shah J. in Wong Kup Sing v Jeram Rubber Estate Ltd [1969] 1 MLJ 245 where
His Lordship held that "once time for completion was allowed to pass and the parties went on negotiating time was no longer
of the essence of the contract "
Similarly, in the present case, it is clear that there is an initial stipulation making time of the essence of the contract between
the plaintiffs and the defendants, namely, that the said machinery was to be shipped from Japan "during July 1968". Although
there is no stipulated time as to delivery in the contract itself, it is stated in Exhibit B2 that it will take two to three weeks for

shipment from Japan to Malaysia. Taking the time of shipment at the end of July 1968, the two or three weeks period would be
up on or about August 21, 1968 at the latest. The defendants' witnesses, however, alleged that shipment would take three to
four weeks. Whatever might have been the period of shipment is immaterial, for the time of shipment has plainly been
exceeded. The plaintiffs could have cancelled the contract there and then when the machinery was not shipped from Japan by
the end of July 1968, but they did not do so. By indulging in further negotiations and at the same time by pressing for time of
shipment and delivery, they have, in my view, waived the stipulation as to time. The stipulated time having been waived, the
time became at large and that thereupon the defendants' only obligation was to deliver within a reasonable time. In my
opinion, what is a reasonable time is a question of fact to be decided on the circumstances of each case. In Exhibit C11 dated
September 23, 1968 the plaintiffs made enquiry when the machinery would be delivered, but no time was specified within
which shipment or delivery should be made. Taking September 23, 1968 as the relevant date, was the failure of the defendants
to deliver the machinery by November 5, 1968 unreasonable? I do not think it was unreasonable under the circumstances of
the present case. In my view, when time is no longer the essence of the contract, one and a half months cannot constitute delay
on the part of the defendants in the face of the
1972 1 MLJ 21 at 23
unchallenged evidence of D.W.2 that it would normally take two to three months to assemble such machines in Japan for
shipment. I, therefore, find that the defendants have not committed a breach of contract for non-delivery of the machinery. On
the contrary, by issuing the notice of action the plaintiffs were, in fact, technically acting in breach of the contract and, to my
mind, it was unreasonable for the plaintiffs to terminate the contract and to demand damages on November 5, 1968.
The original stipulation in regard to time having been waived by the plaintiffs, in my view, before taking the present action for
breach of contract, the plaintiffs should have given reasonable notice to the defendants requesting delivery within a stated
period. Instead, after confirming by letter dated September 23, 1968 that they wanted the type of machines as supplied to
Messrs. Foo Ming Plastic, the plaintiffs appeared to have negotiated direct with the Japanese manufacturers leaving the
defendants temporarily out of the picture. In my view, Exhibit C11 is insufficient to constitute the requisite notice. The
exchange of letters between the plaintiffs and the Japanese manufacturers between October 8 and November 1, 1968 clearly
indicates that there was a negotiation between them during this period for the plaintiffs to purchase the machinery direct from
the Japanese manufacturers. But, I am satisfied from the evidence that after discovering that the terms of the Japanese offer
were less favourable than those in the original contract the proposed contract was never in fact executed. This is unmistakably
shown in the translation of Exhibit C15 dated October 30, 1968. On this issue, I do not accept the evidence of the defence
witnesses that the plaintiffs had entered into an oral agreement with the Japanese manufacturers some time between 23rd and
27th September, 1968 at Metro Restaurant superceding the original contract between the plaintiffs and the defendants. In my
view, there was no novation in this case. There is insufficient evidence to prove that the Japanese manufacturers had agreed
either verbally or in writing to take over the legal obligation of the defendant firm. The alleged oral agreement at Metro
Restaurant had been vehemently denied by P.W.1 and P.W.2, and as no representative of the Japanese manufacturers had been
called to give evidence, by virtue of section 114(g) of the Evidence Ordinance, I would presume that if Mr. Ikushima or his
representative had been called he would have given evidence against the defendants. Further, if it were true that the plaintiffs
had entered into the alleged new agreement on or about September 23, 1968, why should the plaintiffs on the same date
request the defendants by letter to execute the order as contained in Exhibit C11. On the balance of probabilities, I accept the
plaintiffs' story that the alleged new agreement was merely a proposal by the Japanese manufacturers which was never
accepted.
In the present case, if the plaintiffs had wanted to make time again of the essence of the contract, they should have given the
defendants a notice fixing a reasonable time for the shipment and delivery of the machinery. Thus, in Charles Rickards, Ltd v
Oppenheim [1950] 1 All ER 420, it was held that where there was an initial stipulation making time of the essence of the
contract, the promisee after waiving that initial stipulation was entitled to give a reasonable notice making time of the essence
of the matter, whether the contract was for sale of goods or for work and labour. In the present case, the plaintiffs had not
given any such notice to make time again the essence of the contract. In the absence of such a notice, I find the present action
is misconceived and premature.Claim dismissed.
Solicitors: DA Devadason; Chew Biman & Co

WONG KUP SING v JERAM RUBBER ESTATES LTD

OCJ KL
RAJA AZLAN SHAH J
CIVIL SUIT NO 68 OF 1968
21 March 1969
Contract Agreement for sale of land Time made essence of contract Reasonable notice of abandonment
required Specific performance
The plaintiff claimed specific performance of an agreement of sale of a rubber estate entered into between him and the
defendants or in the alternative for damages or rescission of the contract. Under the agreement time had been made the
essence of the contract, but at the request of the plaintiff the defendants had consented to extension of time for
completion on six separate occasions. Eventually the defendants through their solicitors wrote to the plaintiffs on
November 15, 1967, insisting that the purchase be completed on the same day. As completion was not made on that
day, they wrote to the plaintiff to say that the agreement was terminated. Subsequently the plaintiff offered to
complete the contract but the defendants refused, taking the view that the contract was at an end.
Held:
(1) once the time f the essence of the contract and the defendants must give reasonable notice of their intention to
abandon the contract if the balance is not paid;
(2) in this case the notice of abandonment dated November 15, 1967, was not a reasonable notice and the contract had
not been terminated;
(3) in thcircumstances the plaintiff had made out a case for specific performance ofthe contract.
Cases referred to
Barclay v Messenger (1874) 30 LTR 354
Kilmer v British Columbia Orchard Lands Ltd [1913] AC 319 322
Webb v Hughes (1870) LR 10 Eq 281 286
Stickney v Keeble[1915] AC 386 423
Tilley v Thomas LR 3 Ch D 61
Ardeshir v Flora Sasson AIR 1928 PC 523
Mayson v Clouet[1924] AC 980
Howe v Smith (1884) 27 Ch D 89
In re Dagenham Thames Dock Co LR 6 Ch D 1022
Stockloser v Johnson[1914] 1 QB 476 at p 496
Steedman v Drinkle[1916] AC 276
Richards v Oppenheim [1960] 1 KB 616 at p 622

1969 1 MLJ 245 at 246

CIVIL SUIT
WH Sault ( Thara Singh Sidhu with him) for the plaintiff.
DG Rawson for the defendant.
RAJA AZLAN SHAH J
The plaintiff claims specific performance of an agreement for sale of a rubber estate totalling 607.5 acres comprised in
Lease of State Land No. 1468 for Lot 2813 situate in the Mukim of Sungei Buloh in the District of Kuala Lumpur,
alternatively damages for breach of contract and in the further alternative rescission of the contract and payment of
sums totalling $650,000.
By the said agreement dated 4th June 1966 the defendants, a limited liability company registered in the United
Kingdom with Malayan Estate Agencies Group Limited as their agents (hereinafter referred to as the "defendants'
agents") agreed to sell and the plaintiff, a landed proprietor, agreed to buy the said land at the price of $950,000 on the
terms and conditions set forth in the agreement.
The plaintiff as was required by clause 1 paid a sum of $95,000 i.e., 10% of the purchase price by way of forfeitable
deposit, on or before the execution of the said agreement. The balance of the purchase price was to be paid on 30th
November 1966, the date fixed for completion of the purchase (clause 2) and by clause 17, time wherever mentioned
was expressly made of the essence of the contract.
At the request of the plaintiff the defendants consented to extension of time for completion on six separate occasions
on the following terms and conditions:
(1) In consideration af a further forfeitable deposit of $95,000 (10% of the purchase price) making a total forfeitable
deposit of 20%, the date of completion was extended to 31st January 1967 by an exchange of letters between the
plaintiff's then solicitor and the defendants' solicitors dated 25th November 1966 and 1st December 1966 respectively.
(2) In consideration of the payment of a further forfeitable deposit of $10,000 thereby making a total forfeitable
deposit of $200,000 the date of completion was extended to 31st March 1967 by an exchange of letters between the
plaintiff's then solicitor and the defendants' agents dated 20th February 1967 and 23rd February 1967 respectively.
(3) In consideration of the payment of a further forfeitable deposit of $100,000 thereby making a total forfeitable
deposit of $300,000, the date of completion was extended to 15th May 1967 by an exchange of letters between the
plaintiff's then solicitor and the defendants' agents dated 31st March 1967 an 2nd May 1967 respectively.
(4) The date of completion was later extended to 30th June 1967 vide the defendants' agents' letter dated 26th May
1967.
(5) The date of completion was further extended to 30th September 1967 by an exchange of letters between the
plaintiff's then solicitor and the defendants' agents dated 30th August 1967 and 12th September 1967 respectively.
(6) The date of completion was finally extended to 15th November 1967 by an exchange of letters dated 30th
September 1967 and 2nd October 1967 whereby the balance of the purchase price amounting to $650,000 was to be
paid by four instalments of $100,000 on 30th September 1967, $100,000 on 13th October 1967, $150,000 on 30th
October 1967 and $300,000 on 15th November respectively.
The plaintiff paid the first three instalments amounting to $350,000 by post-dated cheques which were honoured. We
now come to the crux of the matter i.e., the final instalment to complete the purchase. This was also by a post dated
cheque of the above-stated date. On 13th November 1967 the plaintiff's then solicitor made proposals to the
defendants' agents for extension of time up to 31st December 1967 to complete the purchase. The defendants' agents
consulted their principals in the United Kingdom and on 15th November 1967 they wrote to the plaintiff's then
solicitor informing him that their principals were not willing to grant the plaintiff any further extension of time and
insisted that the purchase be completed by noon of that day or the agreement be terminated and his deposits forfeited.

On the same day the plaintiff's then solicitor wrote to the defendants' agents proposing a settlement of the final
payment by giving the plaintiff time till 31st December 1967 on payment of the normal bank interest till that date or
on the date of earlier payment and the defendants taking a mortgage of the said lands for the balance on such term and
such rate of interest as shall be mutually agreed upon on the transfer of the property to the plaintiff and further
drawing their attention to their letter of 4th July 1967 whereby they had agreed to offer an extension of the date of
completion to 31st December 1967 provided the forfeitable deposit was in the sum of $350,000 and the balance of
$300,000 to be paid on or before 31st December 1967. It is of significance to note that the said offer was rejected by
the plaintiff by their letters of 17th July 1967 and 27th July 1967. The defendants' agents replied on the same day
(15th November 1967). They returned the plaintiff's post-dated cheque for $300,000 as the plaintiff had telephoned
them asking them not to pay it into their principal's bank account as there were insufficient funds to meet it and added
"It is now 12.30 p.m. and as your client has not completed the purchase, we are now treating the agreement as
terminated." On 23rd November 1967 the defendants' solicitors by letter refunded the sum of $350,000 (by cheque)
being part of the monies received by the defendants to account of the purchase price which is not forfeitable, but
1969 1 MLJ 245 at 247
retained the sum of $300,000 being the total of forfeitable deposits paid.
On 11th December 1967 the plaintiff engaged his present solicitors who reviewed the legal position and on 23rd
December 1967 they wrote to the defendants' solicitors, inter alia:
"4. On our instructions our client has not banked the $300,000 cheque sent with your letter of the 23rd November,
1967.
5. Under the circumstances we have instructed Mr. W.H. Sault to call upon you on the 29th or 30th to suit your
conveniences and to tender a bankers draft for $300,000, being the balance of the purchase price and to return your
clients' cheque of $350,000. We request you to produce for his inspection all the relevant title deeds and on being
satisfied Mr. Sault will deliver to you the relevant Memorandum of Transfer of the land for your clients' signature and
return.
Kindly let us hear from you by return either by express letter or telephone so as to enable our client to purchase the
banker's draft and hand it over to Mr. Sault in time."
Mr. Sault did call at the defendants' solicitors' office on 30th December 1967. The letter from the plaintiff's solicitors
dated 4th January 1968 confirmed this:
"We confirm Mr. Sault's call upon you on Saturday 30th ultimo, when your Mr. Barrington Baker informed him that
he had instructions to accept the draft for $300,000 without prejudice, and to await instructions from London whether
or not they should complete.
xx

xx

xx

xx

3. Mr. Sault stressed that the purchaser did not require further time, upon receiving a letter from you stating that the
vendor would complete, the $300,000 would be paid forthwith."
The situation on the 15th November 1967 was the defendants' solicitors considered the agreement was at an end and
the discussions which took place between the parties' solicitors constituted a completely new offer to negotiate
without prejudice to the defendants' rights under the terms and conditions of the original agreement.
The question to be considered is, was time originally of the essence of the contract? There can be no doubt that it was.
I do not know how it could have been more strongly expressed than this: "Clause 17. Time wherever mentioned in this
agreement shall be of the essence of the contract." But that had been waived by the conduct of the defendants. The
correspondence and dealings beween the parties down to and including 15th November 1967 confirm this view. Time
then was no longer of the essence of the contract. If I may recapitulate the words of Sir George Jessel in Barclay v
Messenger(1874) 30 LTR 354 :
"It appears to me plain that a mere extension of time, and nothing more, is only waiver to the extent of substituting the

extended time for the original time, and not an utter destruction of the essential character of the time."
ln that case the purchases were obliged to pay the balance of the purchase price on 31st July in default all previous
payments would be forfeited and the agreement considered null and void. It was submitted on their behalf that the
letter of the 16th August written by the vendors to them constituted waiver. The terms of that letter were either
commencing works as promised or paying the balance of the purchase money. The purchasers neither commenced
works nor paid the money. Sir George Jessel expressed the view that it was a qualified waiver, that is, a waiver if the
terms were complied with. In our case it was an extension of time and something more, that is the forfeitable deposit
made from time to time was increased to the extent of $300,000 as compared with $95,000 as stipulated in the original
agreement. It is also of significance to note that in all the six extensions negotiations were continued after the
extended dates fixed for completion and this conduct on the part of the defendants justified the plaintiff in assuming
that he would have some indulgence in making his payments: (Kilmer v British Columbia Orchard Lands Ltd [1913]
AC 319 322). Now two days prior to 15th November 1967 the plaintiff put in new proposals to extend the date to 31st
December 1967. That was not acceptable to the defendants who on 15th November 1967 made their final stand and
abandoned the contract when the plaintiff failed to pay the balance of the purchase money. There were no doubt
further negotiations after 15th November 1967 but they were entered into without prejudice to the defendants' rights
under the original agreement.
Once the time for completion was allowed to pass and the parties went on negotiating, then time was no longer of the
essence of the contract and the defendants must give a reasonable notice of their intention to abandon the contract if
the balance of the purchase money was not paid: (Webb v Hughes (1870) LR 10 Eq 281 286, Stickney v Keeble
[1915] AC 386 423). If the defendants had on the very day of 30th November 1966 i.e., the original date for
completion, made their stand, their decision would have been that time was of the essence and it would have been
proper for them to give notice on the day fixed for completion that they would abandon the contract; but after going
on negotiating they should have given a reasonable notice: (Tilley v Thomas LR 3 Ch D 61).
In my opinion since time was no longer of the essence, the notice of abandonment dated 15th November 1967 was not
a reasonable notice. The net result is that the contract was never terminated and it would follow that the plaintiff was
not in default.
1969 1 MLJ 245 at 248
Has the plaintiff made out a case for specific performance? I say he has. It must be remembered that the ground upon
which a court of equity enforces specific performance of a contract affecting land is that it acts upon the equities
arising out of the changed position caused by the acts of the parties done in execution of the contract and not upon the
contract itself. The defendants by their indulgence in extending the date for completion on not less than six occasions
have lulled the plaintiff into a sense of false security and have justified him in assuming that he would be given
reasonable time to complete the contract. It would therefore be inequitable, in view of the dealings which had taken
place between the parties, to allow the defendants to enforce his strict legal rights against the plaintiff which he had
been led to believe would not be enforced against him. Another factor in his favour is that he has averred and proved a
continuous readiness and willingness to perform the contract from the date of the contract to the time of hearing:
(Ardeshir v Flora Sasson AIR 1928 PC 523). This is confirmed by the negotiations between the parties down to and
including 30th December 1967. Mr. Sault from the Bar did say on the date of hearing that his client was ever ready,
and willing to deposit the balance of the purchase money into court on any day specified. In my view this further
confirms the plaintiff's continuous readiness and willingness to perform the contract.
In the circumstances I will order specific performance.
Specific performance ordered.
Solicitors: Sault, Keith Sellar & Co; Shearn, Delamore & Co

CONTRACTS ACT 1950 (ACT 136), Contracts (Amendment) ACT 1976 (A329) &
Government CONTRACTS ACT 1949

Effect of failure to perform at fixed time, in contract in which

time is essential
56. (1) When a party to a contract promises to do a certain thing at
or before a specified time, or certain things at or before specified
times, and fails to do any such thing at or before the specified time,
the contract, or so much of it as has not been performed, becomes
voidable at the option of the promisee, if the intention of the parties
was that time should be of the essence of the contract.

Effect of acceptance of performance at time other than that

agreed upon
(3) If, in case of a contract voidable on account of the promisors
failure to perform his promise at the time agreed, the promisee
accepts performance of the promise at any time other than that
agreed, the promisee cannot claim compensation for any loss occasioned
by the non-performance of the promise at the time agreed, unless, at
the time of the acceptance, he gives notice to the promisor of his
intention to do so.

EVIDENCE ACT 1950

Admissibility of documents produced by computers, and of
statements contained therein

90A. (1) In any criminal or civil proceeding a document produced

by a computer, or a statement contained in such document, shall be
admissible as evidence of any fact stated therein if the document was
produced by the computer in the course of its ordinary use, whether
or not the person tendering the same is the maker of such document
or statement.

[1980] 2 MLJ 16
TAN SWEE HOE CO LTD v ALI HUSSAIN BROS
FC JOHORE BAHRU
RAJA AZLAN SHAH CJ (MALAYA), WAN SULEIMAN & SALLEH ABAS FJJ
FEDERAL COURT CIVIL APPEAL NO 169 OF 1978
11 December 1979
Landlord and Tenant Written agreement of tenancy Oral agreement to allow tenants to occupy premises for so long as
they wished on payment of tea money Dispute as to rent Action by landlord for possession Tenants entitled to stay in
premises as long as they wished Whether evidence of oral agreement can be given Evidence Act, 1950, ss. 91 & 92
Evidence Written agreement of tenancy Earlier oral agreement that tenants could occupy premises for as long as they
wished on payment of tea money Whether admissible Collateral contract Evidence Act, 1950, ss. 91 & 92
Contract Written contract Collateral oral contract Proof of Evidence Act, 1950, ss. 91 & 92
In this case on the facts found by the learned trial judge the appellants had orally agreed to allow the respondents to occupy
the premises for as long as they wished on payment of $14,000 as tea money. Two written agreements of tenancy were later
executed but they did not refer to the appellants' promise. A dispute arose as to payment of rent and the appellants eventually
sued for vacant possession, arrears of rent, mesne profits and damages. In their defence the respondents claimed that under the
oral agreement they were entitled to stay in the premises as long as they wished and so long as they paid the rent regularly.
The learned trial judge dismissed the appellant's claim and ordered the appellants to register a lease in favour of the
respondents for 28 years. He assessed the rent at $293.40 per month in the light of the increase of assessment. The appellants
appealed and the question that arose was whether the evidence of the oral promise could be given in view of sections 91 and
92 of the Evidence Act.
Held:

(1) an oral promise, given at the time of contracting which induces a party to enter into a contract overrides any
inconsistent written agreement. The device of collateral contract does not offend the extrinsic evidence rule because
the oral promise is not imported into the main agreement. Instead it constitutes a separate contract which exists side
by side with the main agreement;

(2) in this case the learned trial judge was correct in giving effect to the oral agreement and in interpreting it to give
the respondents a lease of 28 years from the date of the agreement.

Although it is trite law that parol evidence is not admissible to add to, vary or contradict a written agreement, a technical way
of overcoming the rule is by invoking the doctrine of collateral contract or collateral warranty. Chitty on Contracts (24th
edition) (paragraph 674) put it this way:
"An assurance given in the course of negotiation may therefore give rise to a contractual obligation, provided that an intention to be bound can be
shown. The rules of evidence, however, frequently prevent such an assurance from being incorporated as part of a subsequent written agreement, since

extrinsic evidence is as a general rule not admissible to vary or add to the terms of a written contract. As a result, the courts have been prepared in
some circumstances to treat the assurance as a separate contract, collateral to the main transaction. In particular, they will do so where one party
refuses to enter into the contract unless the other gives him an assurance on a certain point."

In our view there is a growing body of authority which supports the proposition that a collateral agreement can exist side by
side with the main agreement which it contradicts. The classic statement on collateral contract was made by Lord Moulton
in Heilbut Symons & Co v Buckleton [1913] AC 30 47. "It is evident, both on principle and on authority, that there may be a
contract the consideration for which is the making of some other contract. 'If you will make such and such a contract I will
give you one hundred pounds', is in every sense of the word a complete legal contract. It is collateral to the main contract, but
each has an independent existence, and they do not differ in respect of their possessing to the full the character and status of a
contract." The case of City and Westminster Properties (1934) Ltd v Mudd [1959] Ch 129 and the subsequent applications of
it has, in our opinion, fortified this not unfamiliar doctrine. We think Lord Denning M.R. summarised it in Dick Bentley
Productions, Ltd v Harold Smith (Motors), Ltd [1965] 2 All ER 65 67 : "Looking at the cases once more, as we have done so
often, it seems to me that if a representation is made in the course of dealings for a contract for the very purpose of inducing
the other party to act on it, and it actually induces him to act on it by entering into the contract, that isprima facie ground for
inferring that the representation was intended as a warranty. It is not necessary to speak of it as being collateral. Suffice it that
the representation was intended to be acted on and was in fact acted on."
Appeal dismissed.
Solicitors: Goh Soot Hwang & Co; Singham & Co.

[1993] 3 MLJ 433

INDUSTRIAL & AGRICULTURAL DISTRIBUTION SDN BHD v GOLDEN

SANDS CONSTRUCTION SDN BHD
HIGH COURT (KUALA LUMPUR)
VISU SINNADURAI J
CIVIL SUIT NO C 2295 OF 1982
17 August 1993
Contract Breach of contract Unsuitability for particular purpose Whether buyer's refusal to
proceed due to misconstruction of contract or erroneous belief amounted to repudiation Contracts Act
1950 s 40
Contract Breach of contract Anticipatory breach Whether seller could treat buyer's request to
take back goods sold and delivered before payments were due as anticipatory breach of contract Sale
of Goods Act 1957 s 60
Contract Collateral warranty Whether oral representation was a collateral warranty or collateral
contract Whether buyer could rely on oral collateral contract to terminate main contract Whether
buyer only entitled to damages for breach of oral collateral contract
Contract Damages Measure of damages No proof of damage Nominal damages
Evidence Burden of proof Oral collateral contract
The defendant purchased two units of excavators from the plaintiff and used them on its worksite. After
two months, the defendant requested the plaintiff to take back the excavators, on the ground that they
were not suitable for the purpose for which were bought. The defendant sought to rely on an 'oral
collateral warranty' given by the plaintiff to the effect that if the excavators were found to be unsuitable,
they could be returned to the plaintiff without incurring any financial liability. There was a dispute as to
whether such a collateral condition actually existed, and the plaintiff brought an action for damages for,
inter alia, the depreciation in value of the excavators as a result of the defendant's use of the excavators
during the two-month period.
Held, granting only nominal damages to the plaintiff:

(1) Here, the defendant was not suing for damages based on the oral statement allegedly made by
the plaintiff but was seeking the right to terminate the contract. Therefore, the term could not be
interpreted to mean a collateral warranty but should be taken to mean a collateral contract. An oral
collateral warranty is merely a term of a contract, the breach of which only entitles the party to sue
for damages, and does not give the party the right to repudiate the contract. Similarly, the breach of
a collateral contract only gives rise to an action for damages and not a right to repudiate the main
contract.

(2) A cautious approach is adopted by the courts in recognizing the existence of a collateral
contract, especially in cases where it
1993 3 MLJ 433 at 434
contradicts the terms of a written contract. The burden of proving the existence of a
collateral contract is on the party alleging its existence and the mere fact that the

defendant deemed it rightful for him to return the two excavators to the plaintiff did not
establish the existence of such a collateral contract.

(3) Moreover, a collateral contract, by its very nature exists side by side with the main contract. It
does not have the effect of substituting the main contract. A collateral contract merely confers other
rights which are not incorporated in the main contract, but such rights must be related to the rights
and obligations of the parties under the main contract. Therefore, any representation made by a
party to the contract which has the effect of destroying the main contract, cannot become a
collateral contract. Here, there was clearly an agreement between the parties for the sale and
purchase of the two excavators. However, if the defendant's contention was accepted, the effect of
the alleged collateral contract would be to obliterate the main contract of sale or to convert it into a
conditional contract. There cannot be a collateral contract without the main contract being in
existence. If the defendant was allowed to return the excavators without incurring any financial
obligation to the plaintiff, the main contract becomes meaningless as the defendant would no longer
be under any obligation to buy the excavators under the main contract.

(4) There was insufficient evidence to establish that the excavators which were supplied by the
plaintiff were unsuitable for the defendant's purpose. The defendant had not established any other
evidence, other than his own bare assertion that it was unsuitable. The defendant knew the nature
and capability of the excavators that were ordered by it. What in fact was supplied to him was the
exact model of the excavators as ordered.

(5) The action of the defendant when it indicated to the plaintiff that it did not wish to proceed with
the purchase of the two excavators and requesting the plaintiff to take them back, clearly went to
the root of the contract of sale and amounted to a repudiation of the contract as it evinced an
intention not to proceed with the contract for sale. The act of the defendant clearly amounted to one
which the plaintiff could treat as an anticipatory breach of the contract.

(6) There was no proof of any actual depreciation of the machines and therefore, the court was
unable to grant any damages except by way of nominal damages.

Obiter:
It would have been different, if the defendant had alleged, as often is the case in collateral contracts, that
the plaintiff gave an assurance that the two excavators were capable of bearing the weight of the 1.8 cu
yd buckets as well as the 1.2 cu yd buckets. In such a case, the defendant may bring an action against the
plaintiff for misrepresentation, or breach of condition or warranty under the collateral contract.
1993 3 MLJ 433 at 435
Notes
For a case on collateral contracts, see 3 Mallal's Digest (4th Ed) para 952.
For cases on anticipatory breach of contracts, see 3 Mallal's Digest (4th Ed) paras 833 and 834.
For cases on damages, see 3 Mallal's Digest (4th Ed) paras 1044-1046.
Cases referred to
Esso Petroleum Co Ltd v Mardon [1976] 2 All ER 5; [1976] QB 801; [1976] 2 WLR 583 (refd)
J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd [1976] 2 All ER 930 (refd)

Howard Marine & Dredging Co v Ogden & Sons (Excavations) [1978] 2 All ER 1137; [1978] DEFAUL
QB 574; [1978] 2 WLR 515 (refd)
Tan Chong & Sons Motor Co Sdn Bhd v Alan McKnight [1983] 1 MLJ 220 (refd)
Tan Swee Hoe Co Ltd v Ali Hussain Bros [1980] 2 MLJ 16 (refd)
Gillespie Brothers & Co v Cheney, Eggar & Co [1896] 2 QB 59 (refd)
Hoyt's Pty Ltd v Spenser (1919) 27 CLR 133 (refd)
Lysnar v National Bank of New Zealand Ltd [1935] NZLR 129 (refd)
City and Westminster Properties (1934) Ltd v Mudd [1958] 2 All ER 733; [1959] Ch 129; [1958] 3 WLR
312 (refd)
Kandasami v Mohamed Mustafa [1983] 2 MLJ 85 (refd)
Heilbut, Symons & Co v Buckleton [1913] AC 30 (refd)
Cullinane v British 'Rema' Manufacturing Co Ltd [1953] 2 All ER 1257; [1954] 1 QB 292; [1953] 3
WLR 923 (folld)
Commission Car Sales (Hastings) Ltd v Saul [1957] NZLR 144 (folld)
Sio Koon Lin & Anor v SB Mehra [1981] 1 MLJ 225 (distd)
FC Shepherd & Co Ltd v Jerrom [1986] 3 All ER 589; [1987] QB 301; [1986] WLR 801 (refd)
Federal Commerce and Navigation Ltd v Molena Alpha Inc & Ors [1979] 1 All ER 307; [1979] AC 757;
[1978] 3 WLR 991 (folld)
Federal Commerce and Navigation Ltd v Molena Alpha Inc & Ors [1978] 3 All ER 1066; [1978] 3 WLR
309; [1978] QB 927 (folld)
Woodar Investment Development Ltd v Wimpey Construction UK Ltd [1980] 1 All ER 571; [1980] 1
WLR 277 (refd)
Charter v Sullivan [1957] 1 All ER 809; [1957] 2 QB 117; [1957] 2 WLR 528 (folld)
Luna Park (NSW) Ltd v Transways Advertising Pty Ltd (1938) 61 CLR 286 (folld)
1993 3 MLJ 433 at 437

ET Low (MP Rajah & ET Low)for the plaintiff.

Gurbakhash Singh and Sheena Gurbakhash (Gurbakhash & Tan) for the defendant.
VISU SINNADURAI J
Facts
The plaintiff's action against the defendant is for damages for breach of contract arising from the sale of
two new units of excavators sold by the plaintiff to the defendant. The plaintiff's claim is for the loss of
the depreciated value of the two excavators which were recovered by the plaintiff from the defendant as
a result of the repudiation of the contract by the defendant for the sale of the excavators.

The plaintiff's claim against the defendant is also for the recovery of rentals for two other units of
excavators, namely, one new unit of the 115CL Poclain excavator and one used unit of the 90CL Poclain
excavator which the plaintiff alleges were rented to the defendant.
1993 3 MLJ 433 at 438
The plaintiff in its statement of claim avers that by two agreements dated 23 August 1982, the plaintiff
agreed to sell two new units of the Poclain hydraulic excavator, model 160CK at the price of RM290,000
each. A discount of RM20,000 was given by the plaintiff to the defendant towards the cost of the price of
the two units of excavators. On 21 September 1982, the plaintiff delivered to the defendant one unit of
the excavator, and on 28 September 1982, the second unit was delivered to the defendant. Both the
excavators were delivered to the worksite of the defendant.
Pursuant to a letter written by the defendant to the plaintiff, whereby the defendant informed the plaintiff
to take the machines back from the defendant's site, the plaintiff removed the two excavators from the
defendant's site on 14 November 1982. The defendant in his letter to the plaintiff, informed the plaintiff
that the new excavators were found to be unsuitable for its purpose.
The plaintiff alleged that as a result of the failure of the defendant to pay the cost of the two new units of
excavators and the rentals for the other two units of excavators, the plaintiff had suffered loss and
damage. In its statement of claim, the plaintiff particularizes the damage suffered as a consequence of the
defendant's breach.
The defence
The defendant, in its defence, had not disputed the fact that it had agreed to purchase the two new
excavators and that the excavators were in fact delivered to the defendant as stated by the plaintiff. The
defendant, however, contends that the two excavators delivered by the plaintiff were not suitable for the
purpose for which they were purchased as, amongst other reasons, the two excavators were not capable
of bearing the weight of the 1.8cu yd buckets which had been fitted to the excavators. The defendant
alleged that acting under an oral collateral warranty given by the plaintiff to the defendant to the effect
that if the defendant found the excavators delivered to it to be unsuitable, the defendant could return
them to the plaintiff without incurring any financial obligations, the defendant requested the plaintiff to
take the excavators back, without having to pay the plaintiff any sum of money.
The issues
The issues before the court are rather straightforward and they are as follows:
(i) whether the defendant has established that the plaintiff did make the oral collateral
warranty as asserted to by the defendant;
(ii) whether, if it has been established that there was such an oral warranty, the
defendant was justified in returning the excavators to the plaintiff and in refusing to
pay the purchase price;
(iii) whether, if there was no evidence of the existence of such a warranty, the
defendant's refusal to pay for the excavators amounted to a repudiation of the contract;
(iv) whether, the plaintiff is entitled to receive rentals for the two other machines; and
1993 3 MLJ 433 at 439
(v) the quantum of damages the plaintiff is entitled to, if there has been a breach of the
contracts.

The trial
The plaintiff commenced the present action against the defendant sometime in late 1982. However, the
request to set down the action for trial was made only on 12 June 1987. In September 1988, the senior
assistant registrar of the High Court informed the parties that the action had been entered in the trial
book. The case was set down for trial on 15 February 1993, before this court, and the trial was fixed for
20, 22 and 23 April 1993. At the trial, the court was informed that there had been a change of solicitors
and that the plaintiff was now represented by Messrs MP Rajah & ET Low. The trial proceeded as
scheduled during the three days.
I state this background as to the chronology of events leading to this trial to explain the delay of almost
ten years before this trial was heard. It appears that because of this delay, the parties had difficulty in
locating their key witnesses. As a result, the plaintiff only produced two witnesses and the defendant
only one.
The plaintiff's witnesses were Mr Santhasekran (PW1) and Mr Balakrishnan (PW2), whereas the
defendant's only witness was Mr Wong Siam Shin who was then the managing director of the defendant
company.
Plaintiff's witnesses
The plaintiff's first witness, Mr Santhasekran (PW1) said that he was the workshop manager of the
plaintiff's company at the material time of the sale of the excavators. His job functions were to look after
the after-sales operation of the excavators sold by the plaintiff. This witness informed the court that two
work orders were issued for the sale of the excavators to the defendant. He said that the excavators were
initially fitted with 1.2cu yd buckets and that, at the request of the defendant and after consultation with
the suppliers in France, a bigger bucket of 1.8cu yd was fitted to each of the excavators. The witness said
that certain after-sales services were done on these two excavators, and that at no time did the defendant
inform him as to the unsuitability of the excavators. He admitted that there were a number of
breakdowns of the excavators and that a special team had been assigned by the plaintiff to be located at
the defendant's site to rectify any technical problems to the excavators. He said there were no major
defects to the excavators and that only the hydraulic oil and hose had to be replaced.
During cross-examination, the witness said he was unaware of any discussion between the defendant and
the sales manager of the plaintiff's company, one Mr Ang. He said he was not aware whether Mr Ang had
given any oral warranty to the defendant.
The plaintiff's next witness, Mr Balakrishnan was an administrative executive in the plaintiff's company
at the material time. He was then the administrative and credit controller. He merely confirmed that the
sale documents and invoices were forwarded to his department for collection.
1993 3 MLJ 433 at 440
Defendant's witness
The defendant only called one witness, namely Mr Wong Siam Shin who was then the managing director
of the defendant company. Mr Wong said in his evidence, that he negotiated the sale for the purchase of
the two excavators with one Mr Ang who was then the sales manager of the plaintiff company. Mr Wong
said that he ordered two excavators fitted with buckets with the capacity of 1.8cu yd and that the terms
of payment were as stated in the order forms (D1 and D2). Mr Wong said that the sales manager, Mr Ang
had told him that if the excavators could not be fitted with 1.8cu yd buckets, the plaintiff would take the
excavators back. When asked whether the excavators were fit for the purpose for which they were
bought, Mr Wong said that the excavators could not bear the weight when the 1.8cu yd buckets were
fitted to them. Mr Wong then added that when the plaintiff was aware that the excavators could not take
the weight of the 1.8cu yd buckets, they took the excavators back.

As for the payment for the excavators, Mr Wong said that no payment had been made by the defendant's
company, as the time for payment had not been due then. He said that the plaintiff took back the
excavators before the due date. During cross-examination by the plaintiff's counsel, Mr Wong said that
when the excavators were first delivered, they were fitted with 1.2cu yd buckets and not with the 1.8cu
yd buckets which had been ordered. However, he then said that the 1.8cu yd buckets which had been
ordered were fitted to the excavators some ten days after they were delivered to the defendant. Again
under cross-examination, Mr Wong said that he wrote the letter to the plaintiff to take the excavators
back only two months after it was delivered because he had verbally told Mr Ang earlier about its
unsuitability. He admitted, however, that though the excavators were not suitable, they were, in fact,
used by the defendant at its worksite. During re-examination, Mr Wong said that he had not used the
excavators since 11 October 1982.
Undisputed evidence
The evidence before the court appears to have established the following facts: (i) the defendant agreed to
purchase the two excavators; (ii) the plaintiff delivered the said excavators; (iii) before the delivery of
the said excavators, the plaintiff had delivered two other units of excavators for the use by the defendant
until the new excavators were delivered; (iv) the defendant did use the old excavators as well as the new
ones for their operations; (v) the defendant then informed the plaintiff that the new excavators were not
suitable and therefore requested the plaintiff to take them back; and (vi) the plaintiff did take back the
two new excavators.
Sale of the new excavators
I shall first deal with the plaintiff's claim regarding the sale of the two new excavators. In this regard, one
fact is clearly not disputed by both the parties: the plaintiff agreed to sell the two excavators and that the
defendant agreed to purchase the two excavators. What, however, is disputed is
1993 3 MLJ 433 at 441
whether the excavators that were supplied by the plaintiff were in accordance with the specifications
requested for by the defendant.
The plaintiff asserts that the excavators that were supplied were in accordance with the terms that were
agreed upon by the parties. The defendant, however, alleges that the excavators were not suitable for the
purpose for which the defendant had bought them and, as such, it was entitled under the oral collateral
warranty given by the plaintiff to return the excavators without having to pay anything for them.
I now consider the issue as to whether there was an oral collateral warranty.
(i) Whether the defendant has established the existence of a oral collateralwarranty

The question as to whether the defendant has established the existence of an oral collateral warranty as to
the suitability of the machines is relevant in determining whether the defendant had a right to return the
two machines to the plaintiff.
At this juncture, it must be emphasized that the oral collateral warranty alleged by the defendant is that
the plaintiff's then sales manager, Mr Ang, had informed the defendant that if the excavators were found
to be unsuitable, the defendant was at liberty to return them to the plaintiff without incurring any
financial obligation.
I should, perhaps point out that the use of the term 'oral collateral warranty' by the defendant, in its
pleadings as well as in court, is not a happy one. Traditionally, an oral collateral warranty, is merely a
term of a contract, the breach of which only entitles the party to sue for damages and does not give the
party the right to repudiate the contract. Lord Denning MR in Esso Petroleum Co Ltd v Mardon 1 stated
(at p 13):

Ever since Heilbut Symons & Co v Buckleton [1913] AC 30, we have had to contend with the law as laid
down by the House of Lords that an innocent misrepresentation gives no right to damages. In order to escape
from that rule, the pleader used to allege that the misrepresentation was fraudulent, or alternatively a
collateral warranty there have been many cases since I have sat in this court where we have readily held a
representation which induces a person to enter into a contract to be a warranty sounding in damages.

In J Evans & Son (Portsmouth) Ltd v Andrea Merzario Ltd 2, an oral assurance was held to be an
enforceable contractual promise; whereas in Howard Marine & Dredging Co v Ogden & Sons
(Excavations) 3, the oral representations were held not to be contractual warranties. See also the
observations of Salleh Abas LP in the Federal Court decision of Tan Chong & Sons Motor Co Sdn Bhd v
Alan McKnight 4, where his Lordship highlighted the confusion caused by the loose use of the term
collateral warranty and collateral contracts.
In the present case, the defendant is not suing for damages based on the oral statement allegedly made by
the plaintiff but is seeking the right to terminate the contract. Therefore, the term cannot be interpreted to
mean a collateral warranty as stated by Lord Denning MR, above. I, therefore, take the use of the term
by the defendant to mean a collateral contract.
1993 3 MLJ 433 at 442
A collateral contract is defined by 1 Chitty on Contracts(25th Ed) para 734 as follows:
the courts are prepared in some circumstance to treat a statement intended to have contractual effect as a
separate contract or warranty collateral to the main transaction.

See also 41 Halsbury's Law of England(4th Ed) para 681 n 7.

Similarly, Raja Azlan Shah CJ (as his Majesty then was) in the leading case on collateral contracts in
Malaysia, Tan Swee Hoe Co Ltd v Ali Hussain Bros5 said [at p 19]:
In our view those cases are strong authority for the proposition that an oral promise, given at the time of
contracting which induces a party to enter into the contract, overrides any inconsistent written agreement.
This device of collateral contract does not offend the extrinsic evidence rule because the oral promise is not
imported into the main agreement. Instead it constitutes a separate contract which exists side by side with
the main agreement.

I do not intend to give a full discourse on the principles governing collateral contracts, except to say that
a cautious approach is adopted by the courts in recognizing the existence of a collateral contract,
especially in cases where it contradicts the terms of a written contract. The objective, however, of using
the device of the collateral contract is usually to enforce a promise made prior to the making of the main
contract, and but for which the main contract would not have been made.
It is an established principle of law that the burden of proving the existence of a collateral contract is on
the party alleging its existence. In Gillespie Brothers & Co v Cheney, Eggar & Co 6, Lord Russell of
Killowen CJ said [at p 62]: ' when the parties arrive at a definite written contract the presumption is
that [the writing was] intended to contain all the terms of their [contract; but] it is a presumption only,
and either of the parties may allege an antecedent express stipulation intended to continue in
force with the written [contract] ', and may contend that the written contract was not intended to
include all the terms.
It is sometimes said that a collateral contract may merely add, but not contradict the main agreement: see
Lewison, Interpretation of Contracts(1989) para 2.07; and the Australian case of Hoyt's Pty Ltd v
Spenser 7. In Lysnar v National Bank of New Zealand Ltd 8, Lord Wright, in delivering the advice of the
Privy Council said:

Though the collateral contract must, inevitably, it seems, add to the written contract, it must not vary it in the
sense of being inconsistent with or contradictory of, the written contract to which it is collateral

Such a view, however, is no longer accepted as the general rule: see City and Westminster Properties
(1934) Ltd v Mudd 9. Raja Azlan Shah CJ (as his Majesty then was) in Tan Swee Hoe 5, said [at p 18]:
In our view there is a growing body of authority which supports the proposition that a collateral agreement
can exist side by side with the main agreement which it contradicts.
1993 3 MLJ 433 at 443

Similarly, Lord Brightman, in the Privy Council decision of Kandasami v Mohamed Mustafa10, on
appeal from Malaysia, said [at p 88]:
If parties put their names to a document, and one party represents and the other party agrees that the
document shall not, as between themselves, have any legal effect so that it exists only to answer some other
purpose, the law will give effect to that collateral agreement and deny the document whatever legal effect it
might otherwise have had.

The question that needs to be addressed now is whether the defendant has adduced sufficient evidence to
establish that the plaintiff made the oral statement, amounting to a collateral contract to the defendant
that if the defendant found the excavators to be unsuitable, the defendant could return them to the
plaintiff. It should be borne in mind that no such term was incorporated into the sales invoices. The sales
invoices clearly indicated that the two excavators were an outright sale to the defendant by the plaintiff.
The invoices expressly provided for the description of the goods, and the mode of payment, viz 60 days'
credit with payment over four monthly instalments. However, the defendant relies on the alleged oral
representation made by the plaintiff, specifically by Mr Ang, that the plaintiff was prepared to treat the
delivery of the two excavators to the defendant on a trial basis.
As stated earlier, the onus of establishing the existence of a collateral contract is, of course, on the
defendant. The defendant has to establish sufficient evidence to show that the plaintiff and the defendant
agreed to the making of a collateral contract independent of the main contract. The main contract in this
case is for the sale and purchase of the two excavators. The collateral contract, the existence of which as
alleged by the defendant, is that the parties agreed that if the excavators were found unsuitable by the
defendant, the defendant could return them without any financial obligations to the plaintiff.
In the present case, there appears to be no sufficient evidence adduced by the defendant to satisfy the
court as to the existence of such a collateral contract. The only evidence is the mere assertion by the
defendant that such a contract was in existence as a result of the representation made by the plaintiff's
sales manager, Mr Ang. Mr Ang was not called as a witness, nor for that matter, was any other witness
called to establish the existence of such a warranty. The mere fact that the defendant deemed that it was
rightful for him to return the two excavators to the plaintiff, does not in itself establish the existence of
such a collateral contract. In any case, I am unable to accept the evidence of Mr Wong alone as sufficient
to establish the existence of a collateral contract. As it is often said, 'such collateral contracts must from
their very nature be rare': per Lord Moulton in Heilbut, Symons & Co v Buckleton 11. (But see the
observation of Lord Denning MR in Howard Marine v Ogden & Sons3.)
Therefore, in the absence of any evidence, this court finds that the defendant has failed to establish the
existence of any oral collateral contract, or for that matter, even a collateral warranty.
Even if I am wrong in so holding, the argument that the defendant has a right to terminate the contract by
virtue of the oral collateral contract is
1993 3 MLJ 433 at 444
misconceived. A collateral contract, by its very nature, exists side by side with the main contract. It does

not have the effect of substituting the main contract. A collateral contract merely confers certain other
rights which are not incorporated in the main contract. But such rights must be related to the rights and
obligations of the parties under the main contract.
In the present case, there is clearly an agreement between the parties for the sale and purchase of the two
excavators. However, if the defendant's contention is accepted, the effect of the alleged collateral
contract is to obliterate the main contract of sale or to convert it into a conditional contract. There cannot
be a collateral contract without the main contract being in existence. If the defendant is allowed to return
the excavators without incurring any financial obligation to the plaintiff, the main contract becomes
meaningless as the defendant is no longer under any obligation to buy the excavators under the main
contract.
It would have been different, if the defendant had alleged, as often is the case in collateral contracts, that
the plaintiff gave an assurance that the two excavators were capable of bearing the weight of the 1.8cu
yd buckets as well as the 1.2cu yd buckets. In such a case, the defendant may bring an action against the
plaintiff for misrepresentation, or breach of condition or warranty under the collateral contract. To say
that the promise made by the plaintiff that the defendant could return the excavators, tantamounts to the
cancellation of the fundamental term of the main contract. To invoke the concept of collateral contract to
cover such a situation is to stretch the scope of collateral contracts beyond their legitimate limits. Any
representation made by a party to the contract which has the effect of destroying the main contract,
cannot become a collateral contract. It may be anything else, but certainly not a collateral contract, as a
collateral contract normally relates to a warranty and not to a fundamental term of the main contract.
Furthermore, it should be pointed out that, in any case, a breach of a collateral contract only gives right
to an action for damages for its breach and not a right to repudiate. As Chitty on Contracts, quoted
above, states (at para 735):
Breach of the collateral contract will give rise to an occasion for damages for its breach, but not to a right to
treat the main contract as repudiated.

As the defendant's contention based on the collateral contract or warranty is misconceived, the defence
must necessarily fail. However, for purposes of completeness, I move on to consider whether the
excavators were unsuitable.
(ii) Whether the excavators were suitable for the defendant's purpose

Even if the defendant could establish the existence of the oral collateral contract, the defendant may only
be able to invoke the oral collateral contract, if the defendant can also establish that the excavators
supplied by the plaintiff were in fact unsuitable for the defendant's purpose.
The plaintiff's witness, Mr Santhasekran (PW1) who was the workshop manager said in evidence that he
consulted the principal manufacturer in France who had assured him that the excavators were capable of
being fitted with 1.8cu yd buckets, as required by the defendant. He also said that
1993 3 MLJ 433 at 445
the two excavators were serviced on a routine basis and that the breakdowns of the excavators as alleged
by the defendant were not major. They merely related to the change of the hydraulic hose and the
hydraulic oil. He also said that to his knowledge there were no major defects in the excavators, nor did
the defendant complain to him of the unsuitability of the excavators.
The witness also said that because the defendant was a potential customer which the directors of the
plaintiff company intended to have more business with, a special after-sales service team was assigned to
the defendant's worksite to ensure that good service to the defendant was provided and also to rectify
immediately any mechanical problems to the excavators. He expressly denied during cross-examination
that the excavators could not be fitted with 1.8cu yd buckets. He admitted, however, because of the extra
load factor, some problems were anticipated with regard to the hydraulic system of the excavators, none,

however, which would deprive the defendant of the use of the excavators for any significant period.
The defendant, although alleging that the excavators were unsuitable, tendered no evidence to
substantiate its allegation. Much of the evidence given by the only witness for the defence, centred
around the issue as to whether the oral collateral warranty (contract) was made by the plaintiff. When
asked during examination-in-chief whether the excavators that were delivered were fit for the purpose
for which they were purchased, he merely said, 'No, because the excavators could not bear the weight of
the 1.8cu yd buckets'. When asked during cross-examination whether he had personal knowledge of the
unsuitability of the excavators, he could not give a firm answer. Furthermore, he admitted that the
excavators were used by the defendant for over a period of two months, even though he maintained that
he found the excavators unsuitable from the time they were fitted with the 1.8cu yd buckets.
In considering the totality of the evidence, I find that there is insufficient evidence to establish that the
excavators which were supplied by the plaintiff were unsuitable for the defendant's purpose. The
defendant has not established any other evidence, other than his own bare assertion that it was
unsuitable. The defendant knew the nature and capability of the excavators that were ordered by it. The
defendant wanted the capacity of the buckets to be changed from the standard 1.2cu yd to 1.8cu yd so as
to minimise the cost of the operation of his business. What in fact was supplied to him was the exact
model of the excavators as ordered, and in accordance with its own specifications, fitted with 1.8cu yd
buckets.
The defendant was not supplied with an entirely different model of the excavators nor for that matter, a
totally different machine which could not be used for the purpose for which it was ordered the
excavators were still capable of excavating sand, though probably in lesser quantity. It is not a question
of peas being delivered for beans ordered.
Even if the plaintiff gave an assurance that the 1.8cu yd buckets could be fitted to the excavators, and the
excavators did not function as well as the defendant wanted them to, the defendant's recourse against the
plaintiff, as pointed out earlier, would be for damages for breach of warranty. As Sir Evershed MR (as he
then was) said in Cullinane v British 'Rema' Manufacturing Co Ltd 12 [at p 1261]:
1993 3 MLJ 433 at 446
As a matter of principle again, it seems to me that a person who has obtained a machine which was
mechanically in exact accordance with the order given, but was unable to perform a particular function
which it was warranted to perform, may adopt one of two courses. He may, when he discovers its incapacity
and that it is not what he wanted and is useless to him, claim to recover the capital cost he has incurred less
anything he can obtain by disposing of the material that he got. A claim of that kind puts the plaintiff in the
same position as though he had never made the contract at all. Alternatively, he may, where the warranty
in question relates to performance, make his claim on the basis of the profit he has lost, because the machine
as delivered fell short in its performance of that which it was warranted to do.
(iii) Breach of contract by the defendant

The action of the defendant when it indicated to the plaintiff that it did not wish to proceed with the
purchase of the two excavators and requesting the plaintiff to take them back, clearly went to the root of
the contract of sale and amounted to a repudiation of the contract as it evinced an intention not to
proceed with the contract for sale. In Commission Car Sales (Hastings) Ltd v Saul 13, the Supreme
Court of New Zealand held that the buyer who returned the car which he had promised to buy and
intimated that he would not pay for it, had repudiated liability for its purchase, and the seller, by
accepting the car, was taken to have treated the contract as discharged by breach. On a repudiation of the
contract, the plaintiff has the choice either to accept the repudiation or to affirm the contract: see s 40 of
the Contracts Act 1950 and the cases referred to on this section in Sinnadurai, Law of Contract in
Malaysia and Singapore (2nd Ed). In the present case, when the plaintiff took possession of the two

excavators, it in fact accepted the defendant's repudiation of the contract.

The argument by the defence that the defendant could not have repudiated the contract at that stage
(when they wrote the letter to the plaintiff), since on that date none of the payments were then due, is
unacceptable as the act of the defendant clearly amounted to one which the plaintiff could treat as an
anticipatory breach of the contract. The decision of the Federal Court in Sio Koon Lin & Anor v SB
Mehra 14, which was referred to by counsel is, therefore, not only irrelevant but clearly distinguishable.
As Mustill LJ (as he then was) said in FC Shepherd & Co Ltd v Jerrom 15, at p 600:
If the promisor renounces the contract, or disables himself from performing it, the promisee may elect to
treat the contract as broken by anticipation, and may sue for damages without waiting for the time for
performance to arrive: see Hochster v De la Tour (1853) 2 E & B 678; [1843-60] All ER Rep 12, and many
subsequent cases.

As to anticipatory breach, see s 60 of the Malaysian Sale of Goods Act 1957 and generally,
41 Halsbury's Laws of England(4th Ed) para 867 andBenjamin's Sale of Goods(3rd Ed) paras 13071308.
It should further be pointed out that a refusal by a party to proceed with the contract based upon a
misconstruction of the contract or on the erroneous belief that he was justified in terminating the
contract, may amount to a repudiation of the contract, especially so, if the party evinces an intention to
perform only in accordance with his construction of the
1993 3 MLJ 433 at 447
contract. Such was the situation in Federal Commerce and Navigation Ltd v Molena Alpha Inc &
Ors 16, where, because of their erroneous construction of the contract, the shipowners threatened to act
in a way which was substantially inconsistent with their obligations. The conduct of the shipowners in so
acting was held by the House of Lords to amount to a repudiation of the contract. Lord Denning MR in
the Court of Appeal in Federal Commerce and Navigation Ltd v Molena Alpha Inc & Ors 17, said (at p
1082):
I have yet to learn that a party who breaks a contract can excuse himself by saying that he did it on the
advice of his lawyers; or that he was under an honest misapprehension I would go by the principle that
if the party's contract, objectively considered in its impact on the other party, is such as to evince an intention
no longer to be bound by his contractual obligations, then it is open to the other party to accept his
repudiation and treat the contract as discharged from that time onwards.

In this regard, the minority view of the House of Lords in Woodar Investment Development Ltd v
Wimpey Construction UK Ltd 18, is to be preferred.
(iv) Measure of damages

The plaintiff, as stated earlier, has claimed for loss and damage suffered as a consequence of the
defendant's breach. In particularizing its loss, the plaintiff claims for the depreciated value of the
excavators. The plaintiff did not claim for the loss of profit nor for any loss resulting from a subsequent
resale of the excavators to a third party. The claim is basically for depreciation loss of the two
excavators. Of course, in a normal situation such as this, the seller would have claimed for the difference
between the market price, when the goods were subsequently sold in the market, and the contract price.
However, this is not the situation in the present case. The plaintiff in claiming for the depreciation loss of
the two excavators, did not adduce any proof of any such loss. No evidence was adduced to show that
the excavators had depreciated in value by 20% when they were recovered from the defendant.
Counsel for the plaintiff urges this court to take judicial notice of the fact that any vehicle or machine
depreciates in value after it had been sold to another person. In the absence of any authority to support

this proposition, this court is unable to concede to the plaintiff's contention.

It should be further remembered that damages are not meant to be punitive in nature but rather
compensatory, that is, to put the plaintiff in the same or similar position, as far as possible, as he would
have been had the contract not been breached by the other party. It is, therefore, important for the
plaintiff to establish his loss, and not, so much as what the defendant had gained from the breach.
Therefore, the court, cannot, in the absence of any proof of actual loss by the plaintiff, grant the plaintiff
any sum by way of damages. Even if the court were to concede that there was an element of depreciation
of the value of the excavators, in the absence of any proof to show the actual loss, the plaintiff's claim
must fail. There may be a situation where the plaintiff may have sold the excavators, subsequently, to a
third party at a profit. In such a case, the plaintiff would have suffered no loss.
1993 3 MLJ 433 at 448
Therefore, this court is unable to grant any sum of money by way of damages to the plaintiff except by
way of nominal damages. In Charter v Sullivan19, nominal damages were granted as the seller was
unable to produce any evidence of loss of profit as a consequence of a buyer's refusal to complete the
purchase. Similarly, the High Court of Australia in the case of Luna Park (NSW) Ltd v Transways
Advertising Pty Ltd 20 also granted nominal damages, even though there was a breach of a condition of
the contract. I, therefore, grant a sum of RM100 by way of nominal damages to the plaintiff.
As for the other claims by the plaintiff, loss of use of the said machines at RM15,000 per machine, again
in the absence of any proof by the plaintiff of this loss, the plaintiff's claim under this head also fails.
As for the plaintiff's claim for transport and possession charges, these stand on a different footing, as
these have been substantiated by documentary evidence, and as such, I allow RM1,000 under this head:
see Benjamin's Sale of Goods(3rd Ed) para 1313.
I also allow the claim for RM2,485 being charges for repairs and services of the two excavators during
the period when they were used by the defendant, as the defendant was contractually bound to pay for
these items.
Rental of the two other machines
The entire trial centered on the sale of the two excavators, and except as stated in the statement of claim,
the plaintiff gave no evidence as to any rental arrangement between the plaintiff and the defendant
regarding the other two excavators. In the absence of evidence, it appears that these two machines were
lent to the plaintiff for the defendant's use until the new machines arrived.
I, therefore, hold that, as the plaintiff has not made out its case with regard to the rental of the two other
excavators, the claim is dismissed.
As the plaintiff has succeeded substantially in its action against the defendant, I order that costs be
awarded to the plaintiff.
Order accordingly.

Reported by S Radhakrishnan

Solid Investments Ltd v Alcatel-Lucent (M) Sdn Bhd (previously known as Alcatel Network Systems
(M) Sdn Bhd)
FEDERAL COURT (PUTRAJAYA)
RAUS SHARIF PCA, HASHIM YUSOF, ABDULL HAMID EMBONG, HASAN LAH AND
JEFFREY TAN FCJJ
CIVIL APPEAL NO 02(f)-6108 OF 2012(W)
30 October 2013
Civil Procedure Remedy of account Action founded on contract Fiduciary relationship Alleged
fiduciary relationship between appellant and respondent Whether dependent on terms of contract
Whether justification for fiduciary duty to account exists Whether fiduciary relationship can be
superimposed upon contract
Civil Procedure Remedy of account Application allowed by trial judge Appeal against Obligation
to pay consultancy fees Consultancy agreements Whether appellant and respondent's contractual
relationship established Fiduciary relationship Whether existed between appellant and respondent
Whether fiduciary duty to account arose
Civil Procedure Trial Defence Defendant failing to offer any evidence Whether evidence given by
plaintiff ought to be presumed to be true Whether appellate court precluded from interfering with
determination of fact by judge Whether principle in Takako Sakao v Ng Pek Yuen & Anor applicable
Companies and Corporations Lifting of corporate veil Remedy of account Relationship between
appellant and respondent Whether appellant an associated company Whether fraud proven Whether
absence of any justification to lift corporate veil
Contract Terms Entire agreement clause Whether agreement included an entire agreement clause
Whether entire agreement clause precluded consideration of collateral contract
The appellant/plaintiff's claim was for an account from the respondent/defendant based on ten consultancy
agreements entered into between the plaintiff and Alcatel Standard SA ('Standard'), acting on behalf of its
associated company namely, Alcatel CIT and Alcatel-Lucent Italia/Alcatel
3 MLJ 785 at 786
Italia (the 'Consultancy Agreements'). The purpose of the consultancy agreements was for the plaintiff to
provide consultancy services to the associated company and the defendant in securing contracts with
Telekom (M) Bhd ('Telekoms') and Celcom Bhd ('Celcom'). The defendant was not a contracting party to the
consultancy agreements. The contracts were all entered into between the plaintiff and Standard. The
obligation to pay the plaintiff's consultancy fees under the consultancy agreements laid with Standard,

Alcatel CIT and Alcatel Italia. The consultancy agreements constituted the entire agreement between the
parties. The plaintiff claimed that the mode and manner of payment as provided under the consultancy
agreements were never followed from day one. Instead, by way of a collateral agreement between the
plaintiff and the defendant, it was agreed that the defendant would notify the plaintiff of the value of all
deliveries that had been made to Celcom and Telekoms, after which the plaintiff would send the invoices to
the defendant whereupon payment would be made by the defendant on the invoices. The plaintiff alleged that
based on this collateral agreement the plaintiff was paid in excess of USD 7m from the year 2000. This
carried on until the defendant terminated the services of the plaintiff in 2009 at which point the defendant
stopped rendering proper accounts and details of the deliveries to Celcom and Telekoms to enable the
plaintiff to compute the payment due. The plaintiff thus in this suit sought from the defendant, inter alia,
statement of accounts of all monies received by the defendant from Celcom and Telekoms. The defendant
denied that it was the ultimate beneficiary of services rendered by the plaintiff. The defendant also denied the
existence of the alleged collateral contract. At the close of the plaintiff's case the trial judge refused an
application for adjournment by the defendant on the ground that its witness was not available. The case was
therefore closed without the defence offering any evidence. The trial judge allowed the plaintiff's claim on
the grounds that the defendant was an accounting party because the defendant, Standard and Alcatel CIT
were a group enterprise rather than a separate legal entity of each company within the group included in the
operation of the agreements and thus a fiduciary duty to account arose. The Court of Appeal allowed the
defendant's appeal. Leave to appeal to the Federal Court was granted to the plaintiff on the following
questions: (i) whether in ascertaining whether parties stand in a fiduciary relationship, a court is to have
regard to the course of dealings between the parties in addition to any express agreement between them; (ii)
whether in view of the decision of the Federal Court in Takako Sakao(f) v Ng Pek Yuen(f) & Anor [2009] 6
MLJ 751 (Takako Sakao), the Court of Appeal was precluded from interfering with a determination of fact by
a judge of the High Court at trial where the sole defendant had elected not to lead evidence; and (iii) where
an agreement includes an 'entire agreement'
3 MLJ 785 at 787
clause, whether such clause on as a matter of course precluded the consideration of a collateral contract.
Held, dismissing the appeal with costs:

(1)

It had not been established that some payments were made by the defendant to the plaintiff for the services
rendered. Furthermore the invoices for payment were not addressed to the defendant but were addressed
either to Alcatel CIT or Alcatel Italia which was in accordance with the term of the consultancy agreements.
As the plaintiff failed to establish that it was entitled to some sum from the defendant, the plaintiff was not
entitled to the order of taking of account against the defendant under the common law (see paras 2627).

(2)

The trial judge erred in lifting the corporate veil of the defendant to make the defendant liable to account to
the plaintiff. There must be evidence either of actual fraud or some conduct amounting to fraud in equity to
justify the lifting of corporate veil (see para 46).

(3)

The business relationship between the plaintiff and the defendant did not fall under the accepted traditional
categories of fiduciary relationship. Even applying the flexible approach to the circumstances of the case,
such fiduciary relationship did not exist in the case. This is because commercial transactions often do not
give rise to fiduciary duties because they do not meet the criteria for characterisation as fiduciary in nature.
The circumstances of the relationship in the instant case could not give rise to a relationship of trust and
confidence (see paras 4748).

(4)

The notes of proceeding showed that the defendant did take part in the trial. The trial judge refused the
adjournment and the case was therefore closed without the defence offering any evidence. The facts of this
case could be distinguished from the facts in Takako Sakao. The principles in Takako Sakao did not apply
under the circumstances (see paras 5657).

(5)

The trial judge failed to evaluate the evidence relating to the alleged collateral contract and make any finding
on the existence of the alleged collateral contract (see para 64).

(6)

The Court of Appeal erred in failing to appreciate that entire agreement clauses operated only as between the
contracting parties. The defendant was not a party to the consultancy agreements and as such the alleged
collateral contract between the plaintiff and the defendant should be treated as a separate and distinct contract
and could not fall under the scope of the consultancy agreements. The entire agreement clause did not
preclude the plaintiff from setting up the alleged collateral agreement between the plaintiff and defendant
(see para 68).

(7)

Even if the plaintiff had succeeded in establishing the existence of the

3 MLJ 785 at 788
collateral contract, such contract was void for want of consideration. There was nothing to show that
consideration was given by the plaintiff for the defendant to furnish the required information. Under the
consultancy agreements the plaintiff was required to provide consultancy services for the benefit of the
defendant. But that was the consideration for the consultancy agreements and not for the alleged collateral
agreement and also the consultancy services were not rendered at the defendant's request (see para 71).
Tuntutan perayu/plaintif adalah untuk akaun dari responden/defendan berdasarkan sepuluh perjanjian
perundingan yang dimasuki antara plaintif dan Alcatel Standard SA ('Standard'), yang bertindak bagi pihak
syarikat bersekutunya iaitu Alcatel CIT dan Alcatel-Lucent Italia/Alcatel Italia ('Perjanjian Perundingan').
Tujuan perjanjian perundingan itu adalah untuk plaintif menyediakan perkhidmatan perundingan kepada
syarikat bersekutu tersebut dan defendan dalam mendapatkan kontrak dengan Telekom (M) Bhd ('Telekom')
dan Celcom Bhd ('Celcom'). Defendan bukan pihak yang berkontrak dengan perjanjian perundingan itu.
Semua kontrak tersebut telah dimasuki antara plaintif dan Standard. Obligasi untuk membayar yuran
perundingan plaintif di bawah perjanjian perundingan itu terletak pada Standard, Alcatel CIT dan Alcatel
Italia. Perjanjian perundingan itu membentuk keseluruhan perjanjian antara pihak-pihak. Plaintif mendakwa
bahawa kaedah dan cara membuat pembayaran sebagaimana yang diperuntukkan di bawah perjanjian

perundingan itu tidak pernah diikuti dari hari pertama. Sebaliknya, melalui perjanjian kolateral antara plaintif
dan defendan, telah dipersetujui bahawa defendan akan memberitahu plaintif tentang nilai semua
penghantaran yang telah dibuat kepada Celcom dan Telekom, selepas itu plaintif akan menghantar invoisinvois kepada defendan yang mana pembayaran akan dibuat oleh defendan berdasarkan invois-invois itu.
Plaintif mendakwa berdasarkan perjanjian kolateral ini plaintif telah dibayar lebihan USD 7 juta dari tahun
2000. Ini berterusan sehingga defendan menamatkan perkhidmatan plaintif pada tahun 2009 yang mana
mulanya defendan berhenti memberikan akaun dan butiran penghantaran yang sepatutnya kepada Celcom
dan Telekom bagi membolehkan plaintif untuk mengira pembayaran yang perlu dibayar. Plaintif dengan itu
dalam saman ini memohon daripada defendan, antara lain, penyata akaun untuk semua wang yang diterima
oleh defendan daripada Celcom dan Telekom. Defendan menafikan bahawa ia adalah benefisiari utama untuk
perkhidmatan yang diberikan oleh plaintif. Defendan juga menafikan kewujudan kontrak kolateral yang
dikatakan itu. Di akhir kes plaintif hakim perbicaraan menolak permohonan penangguhan oleh defendan atas
alasan bahawa saksinya tidak boleh didapati. Kes itu oleh itu ditutup tanpa pembelaan yang menawarkan
apa-apa keterangan. Hakim perbicaraan membenarkan tuntutan plaintif atas alasan bahawa defendan
merupakan sebuah pihak perakaunan kerana
3 MLJ 785 at 789
defendan, Standard dan Alcatel CIT merupakan kumpulan perusahaan dan bukan satu entiti yang sah yang
berasingan bagi setiap syarikat di dalam kumpulan yang dimasukkan ke dalam operasi perjanjian dan dengan
itu wujud kewajipan fidusiari kepada akaun itu. Mahkamah Rayuan membenarkan rayuan defendan.
Kebenaran untuk merayu kepada Mahkamah Persekutuan telah diberikan kepada plaintif berdasarkan soalansoalan berikut: (i) sama ada dalam menentukan jika pihak-pihak mempunyai hubungan fidusiari, mahkamah
hendaklah mengambil kira pengendalian urusan antara pihak-pihak ditambah dengan apa-apa perjanjian
nyata antara mereka; (ii) sama ada berdasarkan keputusan Mahkamah Persekutuan dalam kes Takako
Sakao(f) v Ng Pek Yuen(f) & Anor [2009] 6 MLJ 751 (Takako Sakao), Mahkamah Rayuan dihalang daripada
mengganggu penentuan fakta oleh hakim Mahkamah Tinggi semasa perbicaraan di mana satu-satunya
defendan telah memilih untuk tidak mengemukakan keterangan; dan (iii) di mana perjanjian memasukkan
fasal 'keseluruhan perjanjian', sama ada fasal tersebut sebagai perkara yang sudah tentu menghalang balasan
kontrak kolateral.
Diputuskan, menolak rayuan dengan kos:

(1)

Tidak dibuktikan bahawa beberapa bayaran telah dibuat oleh defendan kepada plaintif bagi perkhidmatan
yang diberikan. Tambahan pula invois untuk pembayaran itu tidak dialamatkan kepada defendan tetapi telah
dialamatkan sama ada kepada Alcatel CIT atau Alcatel Italia yang menurut tempoh perjanjian perundingan
itu. Memandangkan plaintif gagal membuktikan bahawa ia berhak untuk sejumlah wang tersebut daripada
defendan, plaintif tidak berhak kepada perintah pengambilan akaun terhadap defendan di bawah common
law (lihat perenggan 2627).

(2)

Hakim perbicaraan terkhilaf dalam menyingkap tabir korporat daripada defendan itu untuk menjadikan
defendan bertanggungjawab menjelaskan akaun itu kepada plaintif. Perlu ada bukti sama ada penipuan
sebenar atau beberapa perilaku yang boleh dianggap penipuan dalam ekuiti untuk mewajarkan tabir korporat
disingkap (lihat perenggan 46).

(3)

Hubungan perniagaan antara plaintif dan defendan tidak termasuk di bawah kategori tradisional diterima
hubungan fidusiari. Walaupun menggunakan pendekatan yang fleksibel kepada hal keadaan kes itu,
hubungan fidusiari sebegini tidak wujud dalam kes itu. Ini kerana urus niaga komersial sering tidak
menimbulkan tugas fidusiari kerana tidak memenuhi kriteria untuk pencirian sebagai suatu yang bersifat
fidusiari. Keadaan hubungan dalam kes ini tidak mungkin menimbulkan hubungan kepercayaan dan
keyakinan (lihat perenggan 4748).

(4)

Nota prosiding menunjukkan bahawa defendan tidak mengambil bahagian dalam perbicaraan itu. Hakim
perbicaraan menolak
3 MLJ 785 at 790
penangguhan dan kes oleh itu tertutup tanpa pembelaan yang menawarkan apa-apa keterangan. Fakta kes ini
boleh dibezakan daripada fakta-fakta dalam kes Takako Sakao. Prinsip dalam kes Takako Sakaotidak terpakai
di bawah keadaan ini (lihat perenggan 5657).

(5)

Hakim perbicaraan gagal menilai keterangan berhubung kontrak kolateral yang dikatakan dan membuat apaapa penemuan berhubung kewujudan kontrak kolateral itu (lihat perenggan 64).

(6)

Mahkamah Rayuan terkhilaf apabila gagal untuk memahami bahawa seluruh fasal perjanjian beroperasi
hanya antara pihak yang berkontrak. Defendan bukan pihak kepada perjanjian perundingan dan oleh itu
kontrak kolateral yang dikatakan antara plaintif dan defendan hendaklah dianggap sebagai kontrak yang
berasingan dan berlainan dan tidak boleh terangkum di bawah skop perjanjian perundingan. Perjanjian
keseluruhan fasal tidak menghalang plaintif daripada membuat perjanjian kolateral yang dikatakan antara
plaintif dan defendan (lihat perenggan 68).

(7)

Walaupun plaintif berjaya membuktikan kewujudan kontrak kolateral, kontrak itu tidak sah kerana ketiadaan
pertimbangan. Tiada apa-apa yang menunjukkan bahawa balasan telah diberikan oleh plaintif untuk defendan
memberi maklumat yang diperlukan. Di bawah perjanjian perundingan plaintif itu dikehendaki untuk
menyediakan perkhidmatan perundingan bagi manfaat defendan. Tetapi itu adalah balasan bagi perjanjian
perundingan dan bukan untuk perjanjian kolateral yang dikatakan itu dan juga perkhidmatan perundingan itu
tidak diberikan atas permintaan defendan (lihat perenggan 71).
Notes
For a case on action founded on contract, see 2(3) Mallal's Digest (4th Ed, 2014 Reissue) para 7451.
For a case on application allowed by trial judge, see 2(3) Mallal's Digest (4th Ed, 2014 Reissue) para 7452.
For a case on entire agreement clause, see 3(3) Mallal's Digest (4th Ed, 2013 Reissue) para 4647.
For a case on remedy of account in general, see 3(1) Mallal's Digest (4th Ed, 2013 Reissue) para 480.

Cases referred to
Baboo Janokev Doss v Bindabun Doss [1843] Moore Ind App 175, PC (refd)
Bristol and West Building Society v Mothew [1998] Ch 1, CA (refd)
Cyril Sharpe, Re [1992] FCA 616, FC (refd)
English v Dedham Vale Properties Ltd [1978] 1 All ER 382, Ch D (refd)
Frame v Smith and Smith (1987) 42 DLR (4th) 81, SC (refd)
Heilbut, Symons & Co v Buckleton [1913] AC 30, HL (refd)
3 MLJ 785 at 791
Hospital Products Limited v United States Surgical Corporation & Ors (1986) 156 CLR 41, HC (refd)
Inntrepreneur Pub Co v East Crown Ltd [2000] 3 EGLR 31, Ch D (folld)
John Alexander's Clubs Pty Ltd v White City Tennis Club Ltd Matter No S309/2009 [2010] HCA 19 (refd)
Law Kam Loy v Boltex Sdn Bhd [2005] MLJU 225; [2005] 3 CLJ 355, CA (folld)
Master Strike Sdn Bhd v Sterling Height Sdn Bhd [2005] 3 MLJ 585, CA (distd)
Petroleum Nasional Bhd v Kerajaan Negeri Terengganu [2004] 1 MLJ 8, CA (distd)
Takako Sakao (f) v Ng Pek Yuen (f) & Anor [2009] 6 MLJ 751; [2010] 1 CLJ 381, FC (not folld)
Tengku Abdullah Ibni Sultan Abu Bakar & Ors v Mohd Latiff bin Shah Mohd & Ors and other
appeals [1996] 2 MLJ 265; [1997] 2 CLJ 607, CA (folld)
Legislation referred to
Contract Act 1950 s 26
Appeal from: Civil Appeal No W-02 (NCVC)-764 of 2011 (Court of Appeal, Putrajaya)

Malik Imtiaz Sarwar (Renu Zechariah and SC Ho with him) (Rosley Zechariah) for the appellant
Mohd Arief Emran (Elaine Yap with him) (Wong & Partners) for the respondent.
Hasan Lah FCJ (delivering judgment of the court):
INTRODUCTION
[1] This is an appeal by the appellant against the decision of the Court of Appeal on the 27 June 2011, in
allowing the respondent's appeal against the decision of the High Court. Leave to appeal was granted by this
court on 13 August 2012 and the questions of law framed for determination in this appeal are as follows:
Question 1

Whether in ascertaining whether parties stand in a fiduciary relationship, a court is to have regard to the
course of dealings between the parties in addition to any express agreement between them;
Question 2
Whether in view of the decision of this honourable court in Takako Sakao v Ng
3 MLJ 785 at 792
Pek Yuen & Anor [2010] 1 CLJ 381, the Court of Appeal is precluded from interfering with a determination
of fact by a judge of the High Court at trial where the sole defendant has elected not to lead evidence; and
Question 3
Where an agreement includes an 'entire agreement' clause, whether such clause on as a matter of course
precludes the consideration of a collateral contract.
[2] The appellant is the plaintiff and the respondent is the defendant. For convenience, parties will be referred
to as the plaintiff and the defendant as in the High Court.
BACKGROUND FACTS
[3] The facts which form the background of this appeal can be briefly set out as follows.
[4] The plaintiff's claim was for an account from the defendant based on ten consultancy agreements entered
into between the plaintiff and Alcatel Standard SA ('standard'), acting in the name and on behalf of its
associated company namely, Alcatel CIT and Alcatel-Lucent Italia/Alcatel Italia between 27 October 2000 to
20 June 2007 ('consultancy agreements'). The purpose of the consultancy agreements was for the plaintiff to
provide consultancy services to the associated company and the defendant in securing contracts with
Telekom (M) Bhd ('Telekoms') and Celcom Bhd ('Celcom') with regard to telecommunication network
system in Malaysia.
[5] The common terms and features of the consultancy agreements were as follows:

(a) the defendant was not a contracting party to the consultancy agreements. The contracts were all
entered into between the plaintiff and standard;

(b) the obligation to pay the plaintiff's consultancy fees under the consultancy agreements laid with
standard, Alcatel CIT and Alcatel Italia;

(c) except for the first two consultancy agreements bearing Nos 532G29049 and 532H39371 which
dated back to 2000 and 2001 respectively, consultancy fees payable were to be calculated based on
invoices issued by Alcatel CIT/Alcatel Italia to the defendant and not based on the amount invoiced
by the defendant to any of its client in Malaysia ie Telekoms or Celcom.

(d) the consultancy agreements constituted the entire agreement between the parties; and

3 MLJ 785 at 793

(e) any dispute would have to be disposed of by way of arbitration in Geneva.

[6] The plaintiff claimed that the mode and manner of payment as provided under the consultancy
agreements were never followed from day one. Instead, by way of a collateral agreement between the
plaintiff and the defendant (by conduct and documents evidencing the same) it was agreed that the defendant
would notify the plaintiff of the value of all deliveries that had been made to Celcom and Telekoms, be it by
the defendant or any other company in the Alcatel Group, in the implementation of the projects and thereafter
inform the plaintiff of the manner of computation of payment after which the plaintiff would send the
invoices in the format as required by the defendant to the defendant whereupon payment would be made or
arranged by the defendant on the invoices.
[7] The plaintiff alleged that based on this collateral agreement the plaintiff was paid in excess of USD7m
from the year 2000. This carried on until the defendant effectively terminated the services of the plaintiff in
2009 at which point the defendant stopped rendering proper accounts, details of all orders received by them
from Celcom and Telekoms and the value of deliveries to Celcom and Telekoms to assist and enable the
plaintiff to compute the amount due to it for work done and yet to be invoiced.
[8] The plaintiff averred that despite repeated requests by the plaintiff for an account of the deliverables the
defendant refused to furnish any information.
[9] By this action the plaintiff sought the following reliefs against the defendant:

(a)

a statement of account or accounts (such statement/accounts certified by the person primarily responsible for
the financial management of the defendant) be ordered to be given by the defendant to the plaintiff together
with copies of all documents evidencing the value of deliveries issued by the defendant to Celcom and
Telekoms for the entire duration of the projects, together with full details of all monies received by the
defendant from Celcom and Telekoms, together with all certified and relevant supporting documents
evidencing the same and if such documents were not in the defendant's possession that the defendant be
compelled to obtain copies of the same from Celcom or Telekoms or any other party in possession of the
same, to comply with this order;

(b)

that the plaintiff's appointed auditor be entitled to conduct an independent audit of the said accounts and
documents rendered by the defendant, to verify the same and be allowed access to all the relevant and
supporting documents inclusive of the defendant's detailed project
3 MLJ 785 at 794
account with regards to the projects in the defendant's office or at any place where such documents were
maintained, and to thereafter prepare an audit report as soon as possible.
[10] In its defence the defendant denied that it was the ultimate beneficiary of services rendered by the
plaintiff. The defendant stated that it was not a party to, nor a beneficiary under the consultancy agreements.
The defendant denied the existence of the alleged collateral contract. The defendant said that it was involved
in the invoicing process in connection with the consultancy agreements in a facilitative capacity at the
request of the associated companies or Alcatel-Lucent Trade International AG. The defendant further stated
that no consideration passed from the plaintiff to the defendant in the assistance rendered under the aforesaid
capacity and there was no intention between the parties to create any legal relations by virtue thereof.

[11] The defendant also stated that the plaintiff's action was an abuse of process as the plaintiff had
commenced arbitration proceedings against Alcatel-Lucent Trade International AG pursuant to the
consultancy agreements seeking payment of alleged dues. Further the defendant averred that the plaintiff had
disclosed no reasonable cause of action against the defendant.
[12] At the close of the plaintiff's case the learned trial judge refused an application for adjournment by the
defendant on the ground that its witness was not available. The case was therefore closed without the defence
offering any evidence.
DECISION OF THE HIGH COURT
[13] The learned trial judge allowed the plaintiff's claim with costs. The reasons given by the learned trial
judge for coming to the decision are as follows:

(a) the defendant was an accounting party because the defendant, standard and Alcatel CIT which are
described as associated co in the consultancy agreements are a group enterprise rather than a separate
legal entity of each company within the group included in the operation of the agreements;

(b) the contracts were for the benefit of the defendant;

(c) the fiduciary duty to account arises; and

(d) as no witnesses had been called from the defendant to testify as to its role in the consultancy
agreements and its relationship with standard the court was left to draw its own inferences.

3 MLJ 785 at 795

DECISION OF THE COURT OF APPEAL
[14] Dissatisfied with the decision of the learned trial judge the defendant filed an appeal against the said
decision to the Court of Appeal. After hearing both parties, the Court of Appeal unanimously allowed the
defendant's appeal.
[15] As reflected in its judgment, the Court of Appeal allowed the defendant's appeal on the following main
grounds:

(a) the learned trial judge had gone beyond the pleaded case when he decided to lift the corporate
veil to find that the defendant was bound by the consultancy agreements. There was no justification
to lift the corporate veil;

(b) the learned trial judge had also gone beyond the pleaded case when he made a finding that the
defendant was an accounting party on the basis that there was an alleged fiduciary relationship
between the plaintiff and the defendant;

(c) the entire agreement clause appearing in the consultancy agreements precluded the existence of
any collateral contract between the plaintiff and the defendant;

(d) the plaintiff's claim was a misconceived action for discovery of information and documents to
enable it to institute proceedings against standard, Alcatel CIT and Alcatel Italia under the
consultancy agreements for consultancy fees.

FIDUCIARY RELATIONSHIP
[16] The learned trial judge made a finding that based on the facts and the clauses in the consultancy
agreements the defendant, standard and Alcatel Italia belonged to one entity and as such there was an
accounting duty on the part of the defendant to disclose the purchase orders on which the plaintiff's
compensation was calculated. Hence the learned trial judge found that the fiduciary duty to account arises.
[17] The plaintiff's claim was brought on the basis of a common law duty to account. This required the
parties to be in a fiduciary relationship. Learned counsel for the plaintiff contended that the Court of Appeal
did not consider the possibility of there being a fiduciary relationship in common law that gave rise to an
accounting relationship. In support of that learned counsel for the plaintiff referred to the following passage
from the judgment of the Court of Appeal:
3 MLJ 785 at 796
it is a strong principle of law that in the context of contractual relationship, unless specifically provided
for in the terms of the contract, no fiduciary relationship is owed by one party to the other
[18] It is pertinent to note that the observation by the Court of Appeal was based on a passage from the
judgment of Mason J in Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at p
97 of the report which reads as follows:
That contractual and fiduciary relationships may co-exist between the same parties has never been doubted.
Indeed, the existence of a basic contractual relationship has in many situations provided a foundation for the
erection of a fiduciary relationship. In these situations it is the contractual foundation which is all important
because it is the contract that regulates the basic rights and liabilities of the parties. The fiduciary
relationship, if it is to exist at all, must accommodate itself to the terms of the contract so that it is consistent
with, and conforms to, them. The fiduciary relationship cannot be superimposed upon the contract in such a
way as to alter the operation which the contract was intended to have according to its true construction.
[19] Learned counsel for the plaintiff submitted that the Court of Appeal ought to apply a more flexible
approach as the learned trial judge had done to ascertain whether there existed a fiduciary relationship
between the plaintiff and the defendant in the instant case.
[20] We will deal with the issue of duty to account under the common law first. On the action for taking of
accounts the Court of Appeal, after considering several authorities on the subject, made the following
observation:
31. From the above authorities, for there to exist a complete cause of action for taking of accounts, the
respondent has to plead and prove the following:

(a) the appellant (as the defendant) must be liable to pay a certain sum of monies to the respondent
(as the plaintiff); and

(b) the appellant (as the defendant) is an accounting party to the respondent (as the plaintiff).

[21] In Baboo Janokev Doss v Bindabun Doss [1843] Moore Ind App 175, Dr Lushington of the Privy
Council at p 197 said:
Again, it must be remembered that the Decree cannot stand unless it be first clearly proved that the
appellants are, if anything should be found due to the respondents arising from the acts and dealings of

Ramchund, liable to answer that demand; we cannot make a Decree, ordering them to account, without first
determining that they are liable to pay if anything be found due.
3 MLJ 785 at 797
A Decree for an account is not, as appears to have been assumed, a mere direction to inquire and report. It
proceeds, and must always proceed, upon the assumption that the party calling for it is entitled to the sum
found due. It is a Decree affirming his rights, only leaving it to be inquired into, how much is due to him
from the party accounting.
[22] In Re Cyril Sharpe [1992] FCA 616, the Federal Court of Australia through Drummond J opined:
The taking of an account is only appropriate once it has been established that the parties involved are in an
accounting relationship with each other, that is, only once it has been established that one party is liable to
pay to the other anything that is found, on the taking of the account, to be due to that other
[23] Under the consultancy agreements the parties liable to pay compensation to the plaintiff for the
consultancy services rendered were standard, Alcatel Italia and Alcatel CIT and not the defendant.
[24] The learned trial judge made a finding that there was evidence that payments to the plaintiff were paid
by the defendant. The Court of Appeal, on the other hand, made a finding that no claims for payment were
ever issued by the plaintiff to the defendant under any of the consultancy agreements. The plaintiff's only
witness, Mr Khalifa Abdel Rahman Mohamed Khalifa ('PW1'), in his testimony, testified under examinationin-chief (pp 100 and 101 of the appeal record) as follows:
After such instruction from the defendant, the plaintiff will send the invoice in the format as required by the
defendant to the defendant whereupon payment will be made and/ or arranged by the defendant on the
invoices.
[25] However, under cross-examination he testified as follows (pp 162 and 163 of the appeal record):

Q:

And I put it to you that in all of these contracts, all this consultancy contracts the payments were made by
Alcatel CIT or Alcatel France or Alcatel Italia?

A :Irrelevant.

Q : No do you agree or disagree?

A : I say it is irrelevant to who pays your bill. That's my answer.

Q : No answer whether you agree or this agrees (disagree)?

A : That's my answer.

Court : Q : You have received payment haven't you?

3 MLJ 785 at 798

A : Yes we have.

Q : Who do you get the payment from?

A : From any Alcatel related group or bank.

Court : Answer, payment came from Alcatel related group.

[26] In our view, it had not been established from PW1's evidence that some payments were made by the
defendant to the plaintiff for the services rendered. Furthermore it was clear from the evidence that the
invoices for payment were not addressed to the defendant but were addressed either to Alcatel CIT or Alcatel
Italia which was in accordance with the term of the consultancy agreements.
[27] As the plaintiff failed to establish that it was entitled to some sum from the defendant, we agree with the
Court of Appeal that the plaintiff was not entitled to the order of taking of account against the defendant
under the common law.
[28] We now come back to the issue of fiduciary relationship. As mentioned earlier the Court of Appeal
found that there was no fiduciary relationship between the plaintiff and the defendant. In its judgment the
Court of Appeal held:
25 In the present case, we find that the allegation of the existence of a contractual relationship between the
appellant and the respondent and that the appellant received consideration in the form of benefit of the
consultancy agreements (which was denied), do not make the appellant a fiduciary vis-a-vis the respondent.
The learned Judge should not have found the existence of any fiduciary duty to account between the
appellant and the respondent. By doing so, the court had interpreted the terms and conditions contrary to the
express terms appearing in the consultancy agreements.
[29] The class of fiduciary relationships is never closed (English v Dedham Vale Properties Ltd [1978] 1 All
ER 382, per Slade J). As can be seen from the English cases, the English judges have never attempted to
formulate a comprehensive definition of who is a fiduciary. Certain relationships are well known to be
fiduciary. In Snell's Equity (32nd Ed) [2010] Thompson Reuters at pp 172 to 178, the learned author stated
that the accepted categories in which the courts presume the existence of a fiduciary relationship are as
follows:

(a) director vis-a-vis their companies;

(b) solicitor-client relationships;

(c) agent-principal relationship; and

3 MLJ 785 at 799

(d) partnerships.

[30] Notwithstanding that there are authorities to say that fiduciary duties may be owed where the
circumstances justify the imposition of such duties. In this connection the learned author of Snell's
Equity stated at pp 175 and 176 as follows:
(c) Ad hoc fiduciary relationships

(1) PRINCIPLES.30 The categories of fiduciary relationship are not closed.31 Fiduciary duties may
be owed despite the fact that the relationship does not fall within one of the settled categories of
fiduciary relationships, provided the circumstances justify the imposition of such duties. Identifying
the kind of circumstances that justify the imposition of fiduciary duties is difficult because the courts
have consistently declined to provide a definition, or even a uniform description, of a fiduciary
relationship,32 preferring to preserve flexibility in the concept. Numerous academic commentators
have offered suggestions,33 but none has garnered universal support. Thus, it has been said that the
'fiduciary relationship is a concept in search of a principle.'34 There is, however, growing judicial
support for the view that:

'a fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in
circumstances which give rise to a relationship of trust and confidence.'35
The concept encaptures a situation where one person is in a relationship with another which gives rise to a
legitimate expectation, which equity will recognise, that the fiduciary will not utilise his or her position in
such a way which is adverse to the interests of the principal.36
The expectation is assessed objectively, and so it is not necessary for the principal subjectively to harbor the
expectation.
[31] In Bristol and West Building Society v Mothew [1998] Ch 1 at p 18, Millet LJ made the following
observation on the question of who is a fiduciary:
A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in
circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a
fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary.
This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his
trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for
his own benefit or the benefit of a third person without the informed consent of his principal. This is not
intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are
the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations
(1977), p 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to
them that he is a fiduciary.
3 MLJ 785 at 800
[32] It is to be noted that the plaintiff and the defendant were involved in commercial dealings relating to the
telecommunication network system in Malaysia. Case law shows that the courts are quite reluctant to find a
fiduciary relationship between businessmen who enter into commercial dealings. In Snell's Equity at pp 176
and 177 the learned author said:
It has been said to be 'of the first importance not to impose fiduciary obligations on parties to a purely
commercial relationship,'39 but 'it is altogether too simplistic, if not superficial, to suggest that commercial
transactions stand outside the fiduciary regime.'40 It is clear that it is possible for fiduciary duties to arise in
commercial settings.41 Agency, which is frequently a relationship between two commercial actors, provides
a clear example42: the primary source of duty between principal and agent is a matter of contract law, often
applied in a commercial setting, and yet fiduciary duties will be owed by the agent unless they have been
excluded.43 The reason fiduciary duties do not commonly arise in commercial settings outside the settled
categories of fiduciary relationships is that it is normally inappropriate to expect a commercial party to

subordinate its own interests to those of another commercial party.44 But if that expectation is not
inappropriate in the circumstances of the relationship between the parties then fiduciary duties will arise.
[33] In Tengku Abdullah Ibni Sultan Abu Bakar & Ors v Mohd Latiff bin Shah Mohd & Ors and other
appeals [1996] 2 MLJ 265 at p 294 [1997] 2 CLJ 607 at p 636 the Court of Appeal said:
The flexible approach adopted by the Courts when according recognition to a particular relationship as being
fiduciary in nature is, of course, one of judicial impression dependent upon the fact pattern of a given case.
Flexibility of approach is the hall-mark of equity. For, when we deal with the principles governing equitable
intervention, we enter a domain comprising, not rigid rules, but broad and liberal doctrines that are aimed at
achieving a just result according to the facts of a particular case.
Equity has, in keeping with the purpose of its origin, therefore, refrained from laying down any strict rules
for determining whether a particular relationship is fiduciary in nature or gives rise to fiduciary obligations,
leaving the development of its jurisprudence to a case by case basis. The maxim: 'The categories of fiduciary
relations are never closed' exemplifies the approach that a Court of Equity adopts in this sphere of human
activity. See, English v Dedham Vale Properties Ltd [1978] 1 WLR 93.
[34] In that case one of the main issues to be decided was whether a fiduciary relationship existed on the
basis that the appellants were promoters of the Raintree Club of Kuala Lumpur. In order to answer that
question the Court of Appeal, through Gopal Sri Ram JCA (as he then was), had to consider a number of
decisions from other jurisdictions on the matter. One of the cases referred to by the Court of Appeal was the
decision of the High Court of Australia in Hospital Products Limited v United States Surgical Corporation &
3 MLJ 785 at 801
Ors (1986) 156 CLR 41. As stated by the Court of Appeal in its judgment the case concerned a
distributorship agreement between the parties. The primary judge, McLelland J, found a fiduciary duty to
exist on the facts as found by him. His finding was affirmed by the New South Wales Court of Appeal. On
further appeal, the High Court was divided in its opinion. The majority (Gibbs CJ, Wilson and Dawson JJ)
held that in the particular circumstances of the case there was no fiduciary duty. They found liability on the
footing that there had been a breach of contract. The minority (Mason and Deane JJ) took the view that the
facts disclosed a fiduciary duty.
[35] For the purpose of this appeal we find it useful to refer to two of the passages in the judgment of the
High Court of Australia which were referred to by the Court of Appeal it its judgment. The first passage is
from the judgment of Gibbs CJ at p 68 of the report which reads:
The authorities contain much guidance as to the duties of one who is in a fiduciary relationship with another,
but provide no comprehensive statement of the criteria by reference to which the existence of a fiduciary
relationship may be established. The archetype of a fiduciary is of course the trustee, but it is recognised by
the decisions of the Courts that there are other classes of persons who normally stand in a fiduciary
relationship to one another eg partners, principal and agent, director and company, master and servant,
solicitor and client, tenant-for-life and remainderman. There is no reason to suppose that these categories are
closed. However, the difficulty is to suggest a test by which it may be determined whether a relationship, not
within one of the accepted categories, is a fiduciary one.
[36] The second passage is from the judgment of Mason J at p 102:
The categories of fiduciary relationships are infinitely varied and the duties of the fiduciary vary with the
circumstances which generate the relationship. Fiduciary relationships range from the trustee to the errand

boy, the celebrated example given by Fletcher Moulton LJ in his judgment in In re Coomber [1911] 1 Ch
723, in which, after referring to the danger of trusting to verbal formulae, he pointed out that the nature of the
curial intervention which is justifiable will vary from case to case. In accordance with these comments it is
now acknowledged generally that the scope of the fiduciary duty must be moulded according to the nature of
the relationship and the facts of the case: Phipps v Boardman[1967] 2 AC 46; New Zealand Netherlands
Society 'Oranje' Inc v Kuvs [1973] 2 NZLR 163; Canadian Aero Service Ltd v O'Mai lev [1973] 40 DLR (3d)
371. The often repeated statement that the rule in Keech v Sandford [1726] 25 ER 223, applies to fiduciaries
generally tends to obscure the variable nature of the duties which they owe. The rigorous standards
appropriate to a trustee will not apply to a fiduciary who is permitted by contract to pursue his own interests
in some respects. Thus, in the present case the so-called rule that the fiduciary cannot allow a conflict to arise
between duty and interest (Kuys) cannot be usefully applied in the absolute terms in which it has been stated.
3 MLJ 785 at 802
[37] In its judgment the Court of Appeal also referred to the judgment of Wilson J in Frame v Smith and
Smith (1987) 42 DLR (4th) 81 at p 99:
Yet there are common features discernible in the contexts in which fiduciary duties have been found to exist
and these common features do provide a rough and ready guide to whether or not the imposition of a
fiduciary obligation on a new relationship would be appropriate and consistent. Relationships in which a
fiduciary obligation have been imposed seem to possess three general characteristics:

(1) the fiduciary has scope for the exercise of some discretion or power;

(2) the fiduciary can unilaterally exercise that power or discretion so as to affect the beneficiary's
legal or practical interest;

(3) the beneficiary is peculiarly vulnerable to or at the mercy of the fiduciary holding the discretion
or power.

[38] At p 300 (MLJ); p 643 (CLJ) of its judgment the Court of Appeal opined:
A review of the authorities reveals that the characteristics referred to by Wilson J are present in the wellestablished categories of relationships in which the duty has been held to arise. These include the
relationships of spiritual adviser and penitent, doctor and patient, agent and principal, solicitor and client,
company directors, partners and joint venturers. It is noteworthy that the fiduciary doctrine has even been
extended to those in negotiation for a partnership or a joint venture. The concatenation of cases in which
these relationships have been dealt with may be found in any standard textbook upon the subject, and for that
reason we find it unnecessary to refer to all of them in this judgment.
[39] As regards the issue of whether the fiduciary doctrine was applicable to the promoters of proprietary
clubs, the Court of Appeal opined at p 301 (MLJ); p 644 (CLJ) of the report as follows:
In our judgment, the instant case is merely an illustration of equitable protection being extended to fiduciary
undertakings by analogy with well-established fiduciary relationships. And that, as we have pointed out, is
entirely in keeping with equity jurisprudence. Further, the factual analysis carried out by the learned Judge,
with which we are entirely in agreement, reasonably supports the inclusion of promoters of a club within the
scope of the fiduciary doctrine.

[40] It is also useful to refer to the following observation made by the Court of Appeal in the same case at p
293 (MLJ); at pp 637 and 638 (CLJ) of the report:
Whether a particular set of circumstances ought to attract a fiduciary duty is a question of judicial policy. It
depends upon the standard of commercial morality that the Courts of a particular jurisdiction may choose to
impose upon parties to a
3 MLJ 785 at 803
transaction, having regard to the cultural background and circumstances of the society in which they
function. And, as in so many other areas of the law, the views which our Courts entertain may differ from
those expressed by the Courts of other jurisdictions in respect of the circumstances in which a fiduciary duty
may be declared to exist. For this reason, our Courts may impose a fiduciary duty in circumstances in which
the Courts of another jurisdiction may decline to find the existence of such a duty. Often, the standards
imposed may be the same as those in other jurisdictions. But it is open to our Courts to find the existence of a
fiduciary duty in order to reflect our own standards which, in particular cases, may prove to be higher than
those imposed by judges in other jurisdictions. This is a necessary consequence of the policy differences of
which we spoke a moment ago.
That there may be a marked difference in judicial opinion even within the same jurisdiction when
determining whether a fiduciary duty exists in a given set of circumstances is well illustrated by the decision
of the High Court of Australia inHospital Products Limited v United States Surgical Corporation &
Ors (1986) 156 CLR 41
[41] We agree with the above observation.
[42] Based on the authorities mentioned above we agree with the submission of learned counsel for the
plaintiff that a fiduciary could be found on the facts rather than a contract and the court ought to apply a
flexible approach in ascertaining whether a fiduciary relationship exists in a given circumstance.
[43] For the reason given our answer to the first question of law posed in this appeal has to be in the
affirmative.
[44] By answering the first question of law it does not dispose of the issue of whether there existed a
fiduciary relationship between the plaintiff and the defendant. It is therefore necessary for us to determine
based on the evidence adduced and the law as discussed above whether in law there existed a fiduciary
relationship between the plaintiff and the defendant.
[45] As mentioned earlier, the learned trial judge made a finding that the defendant, standard, Alcatel CIT
and Alcatel Italia belonged to one entity. In order to arrive at that decision the learned trial judge had to lift
the corporate veil to find that the defendant was bound by the consultancy agreements even though the
defendant was not a party to the consultancy agreements.
[46] We agree with the Court of Appeal that the learned trial judge erred in lifting the corporate veil of the
defendant to make the defendant liable to account to the plaintiff. The reason given by the learned trial judge
was that it was in the interest of justice to prevent associated companies of Alcatel Group including the
defendant from darting in and out with the corporate labyrinth
3 MLJ 785 at 804

before the court. We also agree with the Court of Appeal that there must be evidence either of actual fraud or
some conduct amounting to fraud in equity to justify the lifting of corporate veil. The position of the law on
this subject had been clearly stated by Gopal Sri Ram JCA (as he then was) in Law Kam Loy v Boltex Sdn
Bhd [2005] MLJU 225; [2005] 3 CLJ 355 at p 362 as follows:
In my judgment, in the light of the more recent authorities such as Adams v Cape Industries Plc, it is not
open to the courts to disregard the corporate veil purely on the ground that it is in the interests of justice to do
so. It is also my respectful view that the special circumstances to which Lord Keith referred include cases
where there is either actual fraud at common law or some inequitable or unconscionable conduct amounting
to fraud in equity
[47] In the instant case the business relationship between the plaintiff and the defendant did not fall under the
accepted traditional categories of fiduciary relationship. Even if we were to apply the flexible approach to the
circumstances of the case we are of the view that such fiduciary relationship did not exist in the case. This is
because commercial transactions often do not give rise to fiduciary duties because they do not meet the
criteria for characterization as fiduciary in nature (see John Alexander's Clubs Pty Ltd v White City Tennis
Club Ltd (Matter No S309/2009] [2010] HCA 19 High Court of Australia). We also find it useful to refer to
the judgment of the High Court of Australia in Hospital Products Limited v United States Surgical
Corporation & Ors at p 69 where Gibbs CJ said:
On the other hand, the fact that the arrangement between the parties was of a purely commercial kind and
that they had dealt at arm's length and on an equal footing has consistently been regarded by this Court as
important, if not decisive, in indicating that no fiduciary duty arose: see Jones v Bouffier (1911) 12 CLR
579; Dowsett v Reid (1912) 15 CLR 695; Para Wirra Gold & Bismuth Mining Syndicate NL v Mather [1934]
51 CLR 582; Keith Henry & Co Ptv Ltd v Stuart Walker & Co Ptv Ltd (1958) 100 CLR 342. A similar view
was taken in Canada in Jirna Ltd v Mister Donut of Canada Ltd (1971) 22 DLR (3d) 639.
[48] The circumstances of the relationship in the instant case could not, in our view, give rise to a
relationship of trust and confidence. It was not appropriate to expect a commercial party to subordinate its
own interests to another commercial party as they had dealt with each other at arm's length and on equal
footing.
[49] For the reasons given above we agree with the Court of Appeal's decision, but on a different ground, that
the plaintiff and the defendant were not in a fiduciary relationship.
3 MLJ 785 at 805
SECOND QUESTION TAKAKO SAKAO V NG PEK YUEN & ANOR
[50] In Takako Sakao (f) v Ng Pek Yuen (f) & Anor [2009] 6 MLJ 751; [2010] 1 CLJ 381, the appellant, a
Japanese national, and the first respondent were partners in the business of a restaurant. They decided to
acquire the building in which their restaurant had its business. Both the appellant and the first respondent
were to contribute towards the purchase price. The appellant claimed that there was a mutual understanding
between her and the first respondent that the building, when acquired, was to be purchased and registered in
the joint names of herself and the first respondent in equal shares. The appellant subsequently provided a
sum of RM194,610 towards the purchase. However, the first respondent purchased the property for
RM950,000 and registered it solely in her name. Later, the first respondent sold the property to the second
respondent, a private limited company owned by her husband. The appellant then commenced proceedings to
enforce a trust she claimed had arisen in her favour. The appellant claimed that she and the first respondent

were co-owners and the latter held the appellant's share under a trust. The first respondent did not attend
court nor give evidence nor take any part in the case.
[51] The Federal Court, in allowing the appellant's appeal, held inter alia that when the first respondent, who
was fully conversant with the facts studiously refrained from giving evidence two consequences inevitably
followed from that. Firstly, the evidence given by the appellant ought to have been presumed to be true. The
judge was under a duty to accept the appellant's evidence as true in the absence of any evidence from the first
respondent going the other way. Secondly, the court ought to have drawn an adverse inference against the
first respondent on the amount of the appellant's contribution to the purchase price as well as the existence
and the terms of the mutual understanding or agreement that she had with the first respondent.
[52] At p 759 (MLJ); p 398 (CLJ) of the judgment the Federal Court opined:
[4] In our judgment, two consequences inevitably followed when the first respondent who was fully
conversant with the facts studiously refrained from giving evidence. In the first place, the evidence given by
the appellant ought to have been presumed to be true. As Elphinstone CJ said in Wasakah Singh v Bachan
Singh [1931] 1 MC 125 at p 128:
If the party on whom the burden of proof lies gives or calls evidence which, if it is believed, is sufficient to
prove his case, then the judge is bound to call upon the other party, and has no power to hold that the first
party has failed to prove his case merely because the judge does not believe his evidence. At this stage, the
truth or falsity of the evidence is immaterial. For the purpose of testing whether there is a case to answer, all
the evidence given must be presumed to be true.
3 MLJ 785 at 806
Now, what the trial judge did in the present case is precisely what he ought not to have done. He expressed
dissatisfaction with the appellant's evidence without asking himself that most vital question: does the first
defendant/respondent have a case to answer? This failure on the part of the trial judge is a serious nondirection amounting to a misdirection which occasioned a miscarriage of justice. The trial judge was at that
stage not concerned with his belief of the appellant's evidence. She had given her explanation as to the
discrepancies in the figures. And her evidence does not appear to be either inherently incredible or inherently
improbable. In these circumstances it was the duty of the judge to have accepted her evidence as true in the
absence of any evidence from the first respondent going the other way. He however failed to direct himself in
this fashion thereby occasioning a serious miscarriage of justice.
[53] Learned counsel for the plaintiff submitted that based on the plaintiff's evidence the learned trial judge
found it was sufficient to shift the legal burden to the defendant. The defendant elected not to lead any
evidence to rebut the case of the appellant and took the position that there was no case to answer. Learned
counsel for the plaintiff submitted that it was on this basis, and by reference to the applicable legal principles,
that the trial judge found as he did. It was therefore contended by learned counsel for the plaintiff that the
Court of Appeal had misdirected itself when it failed to appreciate the significance of the election on the part
of the defendant. In other words, the Court of Appeal did not apply the law as stated in Takako Sakao v Ng
Pek Yuen & Anor.
[54] Learned counsel for the plaintiff further submitted that the case for the plaintiff was also premised on
there being a collateral agreement and, in any event, a relationship that at common law obliged the defendant
to deliver an account. The learned trial judge found there was a case to answer and therefore the burden
shifted to the defendant. Applying the principles in Takako Sakao's case, learned counsel for the plaintiff

submitted that the Court of Appeal was constrained to conclude that there was a collateral agreement under
which the defendant was obliged to deliver the account.
[55] In response to that learned counsel for the defendant submitted that the Court of Appeal was entitled to
set aside the order of the High Court as the learned trial judge had decided the case based on issue that was
not pleaded. Secondly, it was submitted that in reversing the decision of the High Court the Court of Appeal
did not interfere with the finding of facts made by the learned trial judge. Thirdly, it was submitted that as the
learned trial judge did not make any finding of facts on the existence of the alleged collateral contract, the
Court of Appeal was therefore entitled to draw inference of facts and make its own finding based on the
evidence before it.
[56] In the instant case the notes of proceeding showed that the defendant did take part in the trial. The
plaintiff's sole witness was thoroughly
3 MLJ 785 at 807
cross-examined by the defence counsel. The trial went on and at the close of the plaintiff's case the
defendant's counsel sought an adjournment to another date for the defendant's witness to attend. The learned
trial judge refused the adjournment and the case was therefore closed without the defence offering any
evidence. In our view the facts of this case can be distinguished from the facts in Takako Sakao's case.
[57] In our view the question of whether the parties were in accounting relationship involved a mixed
question of fact and law. In its judgment the Court of Appeal had extensively dealt with the law relating to
the duty to account under the common law. Having carefully considered the authorities on this issue the
Court of Appeal came to the conclusion that on the evidence adduced by the plaintiff at the trial it was not
sufficient in law to establish the case for duty to account. The Court of Appeal therefore did not interfere with
the determination of fact by the learned trial judge. The learned trial judge's decision on this issue was
reversed on a point of law and as such we agree with the submission of learned counsel for the defendant that
the principles in Takako Sakao's case did not apply under the circumstances.
[58] With regard to the issue of whether there was a collateral contract the plaintiff pleaded in para 8 of the
statement of claim as follows:
In line with the above consultancy agreements and to give effect to the same, and by way of a collateral
agreement (Collateral Agreement) between the plaintiff and the defendant (by conduct and documents
evidencing the same) it was agreed that the defendant would notify the plaintiff of the value of all deliveries
that have been made to the customers of the defendant, be it by the defendant or any other company in the
Alcatel Group involved in the transactions and the implementation of the Projects and thereafter inform the
plaintiff of the manner of computation of payment to the plaintiff after which the plaintiff will send the
invoice in the format as required by the defendant to the defendant whereupon payment will be made and/or
arranged by the defendant on the invoices
[59] In his testimony PW1 testified that by way of a collateral agreement between the plaintiff and the
defendant by conduct, practice and documents evidencing the same, it was agreed that the defendant would
give instruction and notify the plaintiff of the value of what was supposed to be deliveries that had been
made to the end customers of the defendant namely, Celcom and Telekoms and thereafter inform and instruct
the plaintiff of the figures based on the supposed value of deliveries. PW1 also testified that initially the
defendant only rendered a list of the purchase orders and informed the plaintiff of the amount that was due to
them and requested the plaintiff to raise their invoice for payment.

[60] The plaintiff was paid the sum of USD7,937,219.58 towards their said
3 MLJ 785 at 808
invoices for consultancy services rendered to August 2008. PW1 further testified that at all times, the
plaintiff sought the accounts and breakdown from the defendant to show how they had arrived at the amount
due to the plaintiff, but this information was never given by the defendant.
[61] From the evidence adduced by the plaintiff, the defendant only provided the plaintiff with information
as to the value of deliveries that it had made to its customers only for Consultancy Agreement No
532G29049 and Consultancy Agreement No 532H39371. It was also established in evidence that accounts
for the two agreements were already rendered and closed.
[62] It is to be observed that only in the first two agreements ie No 532G29049 and No 532H39371 was it
provided that the plaintiff's compensation was to be calculated based on the amount invoiced by the
defendant to the client. For the other eight agreements the compensation was to be calculated based on the
relevant invoices in a form acceptable to the associated company As mentioned earlier the obligation to pay
the plaintiff in the consultancy agreements did not lie on the defendant.
[63] As regards the issue of the collateral contract the Court of Appeal, inter alia, made the following
observations:
36. There is no evidence that the appellant had provided the respondent with the value of deliveries that it
had made to its customers throughout the validity period of all, but for the first and second consultancy
agreements. In respect of the said two agreements above, it was established in evidence that accounts as
required were already rendered and closed vide the appellant's letter dated 23 July 2004 to the respondent.
Therefore the conduct and practice relied upon by the respondent to prove the existence of the so called
collateral agreement was not consistent with what the respondent set out to prove.
37. Even if there existed an alleged separate collateral agreement (as pleaded by the respondent) the alleged
agreement did not amount to a valid contract enforceable under the law as no consideration passed from the
respondent to the appellant based on the requirement of s 26 of the Contract Act 1950.
38. As the statement of claim stood, no consideration for the agreement was pleaded and no consideration
could be discerned from the bundle of pleadings. The purported collateral contract is therefore void for want
of consideration. (seeSouth East Asia Insurance Bhd v Nasir Ibrahim [1992] 1 CLJ (Rep) 295 Supreme
Court).
[64] We have carefully considered the judgment of the learned trial judge and we agree with learned counsel
for the defendant that the learned trial judge failed to evaluate the evidence relating to the alleged collateral
contract and make any finding on the existence of the alleged collateral contract. The learned trial judge, as
mentioned earlier, found that there was fiduciary
3 MLJ 785 at 809
relationship between the plaintiff and the defendant and that the defendant was an accounting party on the
ground that the defendant and the associated companies, as well as Alcatel CIT belonged to one entity and
that the contracts were also for the benefit of the defendant. The relevant passages of the judgment of the
learned trial judge are as follows:

When the Agreements are looked at in totality (see Bundle B1 p 24), the defendant ALCATEL STANDARD
SA and ALCATELCIT are all described as Associated Company. Further, the benefits of the contracts were
for the defendant. Applying the test of one entity as far as these companies were concerned, it was open to
the court to deem them as such

Based on this approach where the court were prepared to in the interest of justice pierce the corporate veil to
prevent associated companies of ALCATEL including the defendant from darting in and out within the
corporate labyrinth before this court. Therefore, it is not open for the defendant to take a simplistic approach
that they are not a party to the various agreements when in fact they were all associated companies involved
in the operation of the agreements. See the case of Re a Company [1986] BCLC 333.
[65] For the reasons given we find it unnecessary to answer the second question posed in this appeal.
ENTIRE AGREEMENT CLAUSE
[66] The Court of Appeal made the following observations:
39. In all the consultancy agreements between the respondents and Alcatel Standard SA, there existed what is
termed as the entire agreement clause to the effect that This Agreement constitutes the entire agreement
between the parties as to the subject matter hereof, it sets forth all intended rights and obligations and
supersedes any and all previous agreements and understandings between the parties with respect to the
subject matter hereof.

41. The effect of the entire agreement clause in all the consultancy agreements, is that the respondent (as a
party to the consultancy agreements) was bound by the terms of the consultancy agreements with regard to
all the matters mentioned in the said agreements, particularly on matters relating to the terms of payments of
the consultancy fees and manner in which such payments were to be made. Such entire agreement clause, in
our judgment does not permit any term to be implied or to import any other considerations not in the
contract, including any other collateral agreements with another party (not a party in the consultancy
agreements). All matters relating to the payment of consultancy fees to be paid by Alcatel Standard SA and
the respondent (both are parties to the consultancy agreements) as well the manner of computation of the fees
must be read within the four walls of the
3 MLJ 785 at 810
consultancy agreements themselves. (See Court of Appeal's decisions in Master Strike Sdn Bhd v Sterling
Height Sdn Bhd [2005] 2 CLJ 596; and Petroleum Nasional Bhd v Kerajaan Negeri Terengganu & Another
Appeal [2003] 4 CLJ 337).
[67] Learned counsel for the plaintiff submitted that the Court of Appeal had erred in failing to appreciate
that such clauses were operative only as between contracting parties. They did not impede a separate and
distinct contract being entered into between a party and a non-party in respect of matters that fall within the
scope of the primary agreement. In support of that learned counsel cited the following cases:

(a)

Inntrepreneur Pub Co v East Crown Ltd [2000] 3 EGLR 31; and

(b)

Heilbut, Symons & Co v Buckleton [1913] AC 30.

[68] We agree with the submission of learned counsel for the plaintiff that the Court of Appeal erred in
failing to appreciate that such clauses operated only as between the contracting parties. The defendant was
not a party to the consultancy agreements and as such the alleged collateral contract between the plaintiff and
the defendant should be treated as a separate and distinct contract and could not fall under the scope of the
consultancy agreements. In our view the entire agreement clause did not preclude the plaintiff from setting
up the alleged collateral agreement between the plaintiff and the defendant. The cases referred to by the
Court of Appeal namely, Master Strike Sdn Bhd v Sterling Height Sdn Bhd [2005] 3 MLJ 585 and Petroleum
Nasional Bhd v Kerajaan Negeri Terengganu [2004] 1 MLJ 8 dealt with issue involving the same parties to
the principal agreement unlike our case. On this issue, suffice for us to rely on the following observation by
Lightman J in Inntrepreneur Pub Co v East Crown Ltd:
The purpose of an entire agreement clause is to preclude a party to a written agreement from threshing
through the undergrowth and finding, in the course of negotiations, some (chance) remark or statement (often
long-forgotten or difficult to recall or explain) upon which to found a claim, such as the present, to the
existence of a collateral warranty. The entire agreement clause obviates the occasion for any such search, and
the peril to the contracting parties posed by the need that may arise in its absence to conduct such a search.
For such a clause constitutes a binding agreement between the parties that the full contractual terms are to be
found in the document containing the clause and not elsewhere, and that, accordingly, any promises or
assurances made in the course of the negotiations (which, in the absence of such a clause, might have effect
as a collateral warranty) shall have no contractual force, save in so far as they are reflected and given effect
in that document. The operation of the clause is not to render evidence of the collateral warranty inadmissible
in evidence, as is suggested in Chitty on Contract (28th Ed), Vol 1 paras 12102; it is to denude what would
otherwise constitute a collateral warranty of legal effect.
3 MLJ 785 at 811
[69] It is to be observed that the third question posed in this appeal did not say whether the collateral contract
was between the contracting parties to the principal agreement or otherwise. For the reason given above our
answer to the third question is as follows:
Such an 'entire agreement clause' does not preclude the consideration of a collateral contract made between a
party and a non-party to the principal contract.
[70] The Court of Appeal gave three main grounds as to why it found that the plaintiff had failed to prove the
alleged collateral agreement. Firstly, on the evidence the Court of Appeal found that the
informations/accounts were given by the defendant for the first two agreements only and the accounts for the
two had been closed. Secondly, there was no consideration given by the plaintiff to the defendant and as such
the agreement was void. Thirdly, the entire agreement clause in the consultancy agreements prevented the
plaintiff and the defendant from entering into a collateral agreement.
[71] We agree with the Court of Appeal that even if the plaintiff had succeeded in establishing the existence
of the collateral contract as alleged, such contract was void for want of consideration. Under s 26 of
theContract Act 1950 it is provided that agreement without consideration is void unless it comes under one of
the exceptions. From PW1's evidence there was nothing to show that consideration was given by the plaintiff
for the defendant to furnish the required information. We are aware that under the consultancy agreements
the plaintiff was required to provide consultancy services for the benefit of the defendant. But that was the

consideration for the consultancy agreements and not for the alleged collateral agreement and also the
consultancy services were not rendered at the defendant's request.
CONCLUSION
[72] For the reasons given, we dismiss the appeal with costs and affirm the decision of the Court of Appeal.
Reported by Kanesh Sundram

[1998] 3 MLJ 151

SABABUMI (SANDAKAN) SDN BHD v DATUK YAP PAK LEONG
FEDERAL COURT (KUALA LUMPUR)
LAMIN PCA, PEH SWEE CHIN AND ZAKARIA YATIM FCJJ
CIVIL APPEAL NO 02-16 OF 1996(S)
20 May 1998
Contract Illegality Contravention of law Turf club granted licence to conduct betting
Turf club cannot assign or transfer rights under licence Appellant granted exclusive rights
Whether contract amounted to do a forbidden act Whether contract illegal Contracts Act 1950
s 24(a)
Contract Terms Implied terms Inference of intention of parties to include term The
officious bystander test and the business efficacy test Whether the parties had intended to
commit to each other on a long term basis Whether High Court was correct in implying term
The Sandakan Turf Club ('the club'), formed to carry out gaming activity, granted a licence to
operate 3-Digit and 4-Digit lotteries. Gaming was prohibited by the Sabah Gaming Ordinance (Cap
50) ('the Ordinance') but the club was exempted from the provisions of the Ordinance pursuant to s
27(a). On 26 November 1987, written agreement ('the agreement') was concluded between the club
and the appellant. Under the agreement, the appellant was to buy 100 acres of land and to construct

a racecourse on the land at its own expense. The club in turn agreed to sublease the land and the
racecourse to the appellant for a period of 20 years. The appellant was given the exclusive rights to
conduct and manage all bettings on the races at the racecourse and to conduct and manage all 3-D
and 4-D operators throughout the state of Sabah. The appellant was to pay 2% of its gross sale
takings to the club on a joint venture basis.
The Pool Betting Act 1967 was later extended to Sabah and on 14 April 1992, the Sabah authorities
cancelled the licence. On the date the licence was cancelled, the Sabah authorities issued an
amended licence. The Ordinance was subsequently repealed by the Modification of Laws (Common
Gaming Houses, Lotteries, Betting, Betting and Sweepstake Duties and Racing (Totalisation Board)
(Extension to the States of Sabah and Sarawak)) Order 1991 which contained a proviso that the
exemption and licence granted earlier under the Ordinance remained in force. In January 1995, the
federal Ministry of Finance issued a new licence to the club under the Pool Betting Act 1967. The
appellant continued to carry on off-course betting activities after the 1995 licence was issued.
However, its activities were stopped by the police.
The High Court declared that the 1995 licence was within the scope of the agreement by way of an
implied term. The Court of Appeal reversed this decision and set aside the order of the High Court
(see [1997] 1 MLJ 587). On appeal, this court had to decide on the issues of the implied term and
the illegality of the agreement.
1998 3 MLJ 151 at 152
Held, dismissing the appeal:
(1) (Per Peh Swee Chin and Zakaria Yatim FCJJ) The court may infer an implied term from
evidence that the parties to a contract must have intended to include it in the contract though it has
not been expressly set out in the contract. Intention is determined by the officious bystander test and
the business efficacy test. In the agreement, the essence of the intention for both parties was for the
club to grant an exclusive right to the appellant to conduct off-course and on-course betting or
gaming for 20 years in consideration of payment to the club of 2% of all gross takings from such
betting activities. Both parties had decided to commit to each other in regard to such business on a
long-term basis. At the time of negotiating for the agreement or signing the agreement, if the
officious bystander had asked the question whether such exclusive right to operate off-course and
on-course betting for 20 years would continue if the licences and the exemption were issued or
granted by any other laws, both parties would have answered 'Oh, of course'. The answer to the
officious bystander would also give business efficacy to the business between the parties, ie it
would give the desired result of both parties under the agreement. Therefore, the High Court was
correct in implying such a term (see pp 169A, 170H-I and 171C-E).
(2) (Per Lamin PCA, Peh Swee Chin and Zakaria Yatim FCJJ) Under s 24(a) of the Contracts Act
1950, an agreement is illegal and unenforceable when either the consideration or the object of the
agreement is to do an act forbidden by law. In this case, the illegal or prohibited act was the breach
of condition 23 of the said federal licence, which prohibited the assignment of rights. The
agreement assigned wholly or partly the rights of the club granted by the federal licence, by
granting the appellant the exclusive right to conduct the off-course and on-course betting. As such,

the agreement amounted to a contract to do an act forbidden or prohibited by s 21 of the Pool

Betting Act 1967. This contradicted s 24(a) of the Contracts Act 1950 and the agreement was
therefore illegal and void (see pp 176E, I and 177E-G).
(3) (Per Lamin PCA, dissenting on the issue of implied term) There were material differences
between the conditions of the original licence and the amended licence issued by the state authority
and those contained in the federal licence of 1995. Some of the conditions were absent in both the
original and the amended licences. Further, upon the issuance of the 1995 federal licence under the
Pool Betting Act 1967, it remains valid only for one year as condition 1 so stipulates; the previous
two licences had no time limit. Under the federal licence, is the Minister who approves the
appointment of any agent whereas under the 1987 agreement, the appellant had the exclusive rights
to conduct and manage all bettings. Therefore, the Federal Minister's powers under the federal
licence were beyond the contemplation of
1998 3 MLJ 151 at 153
parties to the 1987 agreement. The implication of the term by the judge was therefore wholly
unjustified (see pp 156I and 157A-C).
Notes
For cases on implied terms, see 3 Mallal's Digest (4th Ed, 1994 Reissue) 2218-2241.
For cases on contravention of law, see 3 Mallal's Digest (4th Ed, 1994 Reissue) paras 1749-1757.
Cases referred to
BP Refinery (Westernport) Pty Ltd v Hastings Shire Council(1977) 16 ALR 363 (refd)
Kammins Ballrooms Co Ltd v Zenith Instruments (Torquay) Ltd[1970] 2 All ER 871 (refd)
Liverpool City Council v Irwin & Anor[1977] AC 239 (refd)
Lo Su Tsoon Timber Depot v Southern Estate Sdn Bhd[1971] 2 MLJ 161 (refd)
Luxor Eastbourne) Ltd & Ors v Cooper[1941] AC 108 (refd)
Moorcock, The (1889) 14 P 64 (refd)
Shirlaw v Southern Foundries (1926) Ltd[1939] 2 KB 206 (refd)
Reigate v Union Manufacturing Co (Ramsbottom) & Anor[1918] 1 KB 592 (refd)
St John Shipping Corp v Joseph Rank Ltd[1957] 1 QB 267 (refd)
Sundang Timber Co Sdn Bhd v Kinabatangan Development Co Sdn Bhd[1977] 2 MLJ 200 (refd)

Vita Food Products Inc v Unus Shipping Co Ltd (In liquidation)[1939] AC 277 (refd)
Yap Nyo Nyok v Bath Pharmacy Sdn Bhd[1993] 2 MLJ 250 (refd)
Legislation referred to
Contracts Act 1950 ss 24
Evidence Act 1950 s 92(e)
Gaming Ordinance 1930 [Sabah] s 27(a)
Malaysia Act 1963
1998 3 MLJ 151 at 156
Modification of Laws (Common Gaming Houses, Lotteries, Betting, Betting and Sweepstake Duties
and Racing (Totalisation Board) Extension to the States of Sabah and Sarawak)) Order 1991 para 12
Pool Betting Act 1967 ss 5 21
Rules of the Federal Court 1995 r 108(1)
Sale of Goods Act 1957
Societies Act 1966

Appeal from
Civil Appeal No S-02-275 of 1995 (Court of Appeal, Kuala Lumpur)
Tommy Thomas (CL Wong and Roderic Fernandez with him) (Shelley Yap Leong Tseu Chong Chia
& Co) for the appellant.
Cecil Abraham (Colin Lau and Dhinesh Bhaskaran with him) (Colin Lau & Co) for the respondent.
LAMIN PCA
I have had the privilege of reading the draft judgment of my brother judge Peh Swee Chin FCJ and
with respect, I entirely agree with him as to the result in that we uphold the order of the Court of
Appeal and that the appeal is therefore dismissed. The High Court below at Kota Kinabalu decided
in favour of the appellants who brought this action as plaintiffs before the said court by way of an
originating summons.

The facts of the case have been gone into in some length by the Court of Appeal in its judgment and
to some extent by my brother judge Peh Swee Chin FCJ and so I do not propose to repeat them
unless when I find it necessary to do so. The High Court declared that the federal licence of January
1995 was within the scope of the 1987 agreement. In other words, the 1987 agreement remained
valid and enforceable even in the face of the terms of the said federal licence on the ground that the
terms of the licence could be implied into the agreement. However, the Court of Appeal did not
agree with the finding of the High Court and after dealing extensively with the legal principles
relating to implied terms, it came to the conclusion that the 1987 agreement could not further subsist
and be enforceable. The Court of Appeal also struck down the said agreement on the ground of
illegality, an issue not canvassed before the High Court but taken for the first time before it (see
[1997] 1 MLJ 587).
On the issue of implied term, with respect, my brother judge Peh Swee Chin FCJ found himself at
variance with the Court of Appeal. He said that with the issuance of the federal licence of 1995, the
club was to carry on with the on-course and off-course betting 'a sort of old wine in new bottle' and
so the decision of the High Court should be upheld. For my part, on whichever principles relating to
implied terms as discussed by the Court of Appeal, the order of the High Court cannot be upheld. I
therefore agree with the finding of the Court of Appeal on this issue. If I may mention very briefly
only on certain aspects of the arguments regarding the said issue. There were some material
differences between the conditions of the original licence and the amended licence both issued by
the state authority on the one hand and on the other those contained in the federal licence of 1995.
1998 3 MLJ 151 at 157
As observed by the Court of Appeal, some of them were absent in both the original and the
amended licences. For example, conditions 9, 25 and 26 of the federal licence are not found in both
the original and the amended licence. Conditions 9, 25 and 26 read:
9 The licensee shall produce a list and details of agents that are appointed by him for the Minister's
approval. The agents whose appointment has not or was not approved by the Minister cannot
operate.
25 The Minister can at any time add, vary or cancel any condition or restriction that is stated in this
licence.
26 The Minister can at any time cancel this licence without giving any reason.
Further upon the issuance of the 1995 federal licence under the Pool Betting Act 1967, it remains
valid only for one year as condition No 1 so stipulates. The previous two licences had no time limit.
Again under the federal licence, it is the Minister who approves the appointment of any agent.
Under the 1987 agreement, the company (the appellants) has the exclusive rights to conduct and
manage all bettings. Clearly, therefore, the Federal Minister's powers under the federal licence are
beyond the contemplation of parties to the 1987 agreement. In this regard, I need only quote the
words of the Court of Appeal appearing at p 613A-C:
We are entirely satisfied; adopting the objective test suggested by Lord Radcliffe in [Davis

Contractors Ltd v Fareham UDC[1956] AC 696 ], that the farthest thing operating upon the minds
of the present litigants, they made their bargain, having regard to all the facts and circumstances in
existence at the time when they made it, was the repeal of the Ordinance and its replacement by the
Act. Nor can they be said to have had within their contemplation, the cancellation of the original or
the amended licence issued under the Ordinance and the issuance of the 1995 licence containing all
those far reaching conditions to which we have already referred. These are the only conclusions that
may be drawn when the agreement is construed as a whole. It matters not whether one applies the
officious bystander test or that propounded by Lord Simon of Glaisdale in [BP Refinery
(Westernport) Pty Ltd v Hastings Shire Council (1977) 16 ALR 363 ]. The result is the same. The
implication of the term by the judge was wholly unjustified.
On the issue of illegality, the Court of Appeal found that the circumstances of this case had
attracted s 24 of the Contracts Act 1950. We agree.
The illegality, as far as the Court of Appeal is concerned, is founded under s 24(b). We think,
however s 24(a) is more appropriate. At p 621H-I, it says:
So too, in the present case, the agreement, if countenanced, would defeat the Act. The agreement
therefore falls squarely within s 24(b) of the Contracts Act 1950 and is, by reason thereof, illegal
and void.
My brother judge Peh Swee Chin FCJ says this:
It is illegal and unenforceable under s 24(a) aforesaid because it is a contract involving consent of
both contracting parties to do the very act prohibited or forbidden by statute.
1998 3 MLJ 151 at 158
To him the prohibited or the forbidden act is 'the breach of condition 23 of the aforesaid federal
licence issued under the said statute for the following reasons'. If we may recall, condition 23
prohibits the assignment or the transfer of rights, etc as provided in the licence. In the present case,
the breach has taken place in that the agreement has purportedly assigned wholly or partly of the
rights of the said turf club granted by the federal licence. By virtue of cl 3(b) of the agreement,
company (the appellants) is granted 'exclusive rights to conduct and manage' both the on-course and
off-course bettings. The appointment of agents to operate those bettings shall only be made by the
company (cl 17 of the agreement). My brother judge Peh Swee Chin FCJ said that it 'would be
impossible to say that the obtaining of such exclusive right to operate the off-course and on-course
betting is not an assignment wholly or partly of such rights granted to the said turf club by the said
federal licence'. The agreement is therefore illegal and void as it violates condition 23 of the federal
licence. As the licence was granted under s 5 of the Pool Betting Act 1967, a breach of any of its
conditions would be an offence and punishable under s 21 of the said Act. In the result, I am also of
the view that this has the effect of directly offending s 24(a) of theContracts Act 1950.
As I have indicated earlier that this appeal is to be dismissed and it is so dismissed with costs here
and in the Court of Appeal. Normally in a similar situation, the respondents should get their costs
before the High Court as well. But in view of the fact that the issue of illegality was brought up by

the respondents for the first time before the Court of Appeal and not at first instance and carried on
before us, each party shall pay their own costs in respect of proceedings before the High Court. The
deposit for the purpose of this appeal shall be paid out to account of taxed costs.
PEH SWEE CHIN FCJ
: This appeal raises two interesting but complicated questions of law, one relating to the implied
terms of a contract and the other, illegality of contract.
The matter originated in the High Court at Kota Kinabalu, where the appellant before us filed an
originating summons, claiming as follows:
(a) a declaration that the licence dated January 1995 issued by the relevant authority to the
defendant under the Pool Betting Act 1967, and any renewals thereof, is within the scope of the
agreement between the plaintiff and the defendant dated 26 November 1987 ('the 1987 agreement');
(b) a declaration that the plaintiff has the exclusive right to conduct and manage all 3-Digit ('3-D')
and 4-Digit ('4-D') operations in and throughout the state of Sabah pursuant to and in accordance
with the said licence dated January 1995 issued to the defendant under the Pool Betting Act 1967,
and any renewals thereto;
(c) a declaration that the plaintiff has the exclusive right to appoint all 3-D and 4-D operations
agents in the state of Sabah on behalf of the defendant;
(d) an account of the gross sale takings derived from all the 4-D operations and bettings undertaken
by the defendant or its agents in breach
1998 3 MLJ 151 at 159
of the 1987 agreement and for payment of 98% of the said gross sale takings to the plaintiff;

(e) an injunction to restrain the defendant whether by itself or through its officers, servants, agents
or nominees or otherwise howsoever, save and except through the plaintiff, from appointing any
agents in respect of 3-D and 4-D operations in the state of Sabah pursuant to the said licence dated
January 1995 granted to the defendant under the Pool Betting Act 1967 or any renewals thereof;
(f) an injunction to restrain the defendant whether by itself or through its officers, servants, agents,
nominees or otherwise howsoever interfering in any way with the plaintiff's conduct and
management of all 3-D and 4-D operations in Sabah pursuant to the said licence dated January 1995
issued to the defendant under the Pool Betting Act 1967, or any renewals thereof, and/or the
plaintiff's right to conduct and manage the same;
(g) damages;

(h) interest;
(i) costs; and
(j) such further or other orders and relief as this honourable court deems just and proper.
[Dated 17 February 1995]
The licence mentioned in para (a) above which was issued in January 1995 was of course in Bahasa
Malaysia but an English translation of it was referred to and accepted by both parties as being a
correct translation which is set out below and this licence is henceforth referred to as 'the said
federal licence'.
Treasury: KK/BP(J)/8.00/4/3/3-1 JD 1(4)
Licence Payment: RM250,000
Pool Betting Act 1967
LICENCE
(SECTION 5)
This licence is issued by the Finance Minister, hereinafter known as 'the Minister', under s 5 Pool
Betting Act 1967, hereinafter known as 'Act 384' to the Sandakan Turf Club, hereinafter known as
'the licensee', whose registered office is at 1st Floor, Block A, Lot No 3, Bandar Tong Huat, North
Road, Sandakan, Sabah for the purposes of collecting, operating or developing pool betting that is
pool betting Empat Nombor (4D) forecast governed by ss 10, 16, 17 and 28 of Act 384 and the
conditions and prohibitions which is fixed in this licence.
CONDITIONS AND RESTRICTIONS
1 This licence is valid for the period of one (1) calendar year starting from 1 January 1995 and shall
be in force in Sabah only.
2 The premises of the licensee is at the Sandakan Turf club, Gelanggang Lumba Kuda, Jalan
Sibuga, Sandakan, Sabah and it cannot be changed without the approval of the Minister.
1998 3 MLJ 151 at 160
3 The licensee must display a distinct notice board at a conspicuous place in the premises, as
specified by the second paragraph of this licence, that displays and shows the type of business.
4 The licensee shall pay a licence fee in accordance with the rate fixed under the Pool Betting
(Licence Fee) Rules 1995.

5 The licensee shall deposit with the government a sum of Ringgit Malaysia one million
(RM1,000,000) in the form of treasury bills or government securities that are approved as guarantee
for monies won. The licensee must complete a letter of irrevocable power of attorney to the
Minister which gives the Minister absolute discretion to sell or dispose other treasury bills or
government securities that are approved without referring to the licensee and also to use the
proceeds to pay monies that are won which the licensee has failed to pay due to some dispute or
other reasons. Any amount that is used by the Minister must be compensated by the licensee
immediately so that the deposited amount remains at Ringgit Malaysia one million (RM1,000,000)
at all times.
6 The licensee shall pay gambling tax of 7% and pool betting monies of 11.5%, in accordance with
the rate that is determined by the Minister from time to time, other than payments of taxes on
income, company, development and others as required by the relevant laws.
7 The licensee shall produce, for the Minister's approval, the scheme for every type of pool betting
and variations that is promoted and organized by him. The type of pool betting and variations where
a scheme has not or was not approved by the Minister cannot be promoted or organized by the
licensee.
8 The Minister has the right to determine the amount and time for having the draw from time to
time depending on the type of pool betting scheme that has been approved.
9 The licensee shall produce a list and details of agents that are appointed by him for the Minister's
approval. The agents whose appointment has not or was not approved by the Minister cannot
operate.
10 The licensee shall only allow his agents to carry out their operations from 10am to 7pm only.
11 The licensee shall ensure that his agents abide by all conditions and prohibitions that is fixed by
the Minister from time to time.
12 The licensee shall maintain and prepare an updated registration book that contains a list of agents
and one registration book that contains a list of workers including his agent's workers in accordance
with the details fixed by the Minister from time to time.
13 The licensee cannot allow any person, other than his workers or his agent's workers to carry out
any businesses relating to the abovesaid pool betting.
14 The licensee cannot carry out any financial dealings relating to the abovesaid pool betting save in
the premises in para 2 of this licence.
15 The licensee cannot carry out any business or other activities except in relation to the abovesaid
pool betting at the premises that is specified in para 2 of this licence.
16 The licensee can only sell the abovesaid pool betting tickets in Sabah only.

1998 3 MLJ 151 at 161

17 The licensee is fully responsible for the payment of monies that were won and not his agents.
18 All tickets that are sold to the public shall contain the following words
'GAMBLING IS ILLEGAL IN ISLAM' and 'ALL PRIZES ARE FULLY GUARANTEED'.
19 The licensee is also governed by the Unclaimed Moneys Act 1965. Any money that is not
claimed, as provided in the relevant pool betting scheme, shall be put into the government's
revenue.
20 The licensee shall allow any public officer that is given the proper power by the Minister to
inspect any accounts or balance sheets of the licensee or his agents.
21 The licensee shall give, within the specific time fixed, any statement or information that is
required by my officer from the Malaysian Treasury as stated in a written notice that is issued by the
said officer.
22 Membership of licensees or its management bodies cannot be changed or replaced without the
consent of the Minister.
23 The licensee cannot assign or transfer, whether wholly or part of, any rights, duties or obligations
that is provided in this licence.
24 Any public officer that is properly appointed by the Minister, has the right to attend and take part
in any meeting or dealings relating to the abovesaid pool betting that is promoted or organized by
the licensee or his management body.
25 The Minister can at any time add, vary or cancel any condition or restriction that is stated in this
licence.
26 The Minister can at any time cancel this licence without giving any reason.
Made in Kuala Lumpur on January 1995
Signed
(Yusof bin Salleh)
Secretary, Administration Division
On behalf and in the name of,
Finance Minister

The agreement dated 26 November 1987, also referred to in para a) above, has been at the heart of
this case with its construction or interpretation being highly controversial; it is set out below in full
for ease of reference as follows and is also referred to hereafter as 'the said agreement':
THIS AGREEMENT is made this 26 November 1987 BETWEEN KELAB LUMBA KUDA
SANDAKAN (SANDAKAN TURF CLUB) PO Box 519, 90007 Sandakan in the state of Sabah,
Malaysia, a society duly registered under the Societies Act (hereinafter called 'the club' which
expression shall include its successors and assigns) of the one part, and SABABUMI
(SANDAKAN) SDN BHD of Lot 8, 1st Floor, Towering Industrial Centre, 7km, Jalan Penampang,
PO Box 13803, 88844 Kota Kinabalu, in the state of Sabah, Malaysia, a limited company
incorporated under the Companies
1998 3 MLJ 151 at 162
Act 1965 (hereinafer called 'the company' which expression shall include its successors and assigns)
of the other partWHEREAS the club intends to acquire a piece of land in the district of Sandakan
for the setting up of a racecourse with racing and betting facilities.
AND WHEREAS the club has been granted exemption from the provision of the Gaming
Ordinance (Sabah Cap 50) by the relevant authority in respect of any totalisator or pari-mutual to be
promoted or operated by it on the proposed racecourse (hereinafter referred to as 'the said
exemption').
AND WHEREAS the club has also been granted the necessary licence to promote and organize
public lotteries (including sweepstakes 3-D and 4-D) in any part of Sabah under the Gaming
Ordinance (Sabah Cap 50) (hereinafter referred to as 'the said licence').
AND WHEREAS the parties hereto have agreed to co-operate in the construction of the racecourse
and the management of racing facilities in Sandakan and the setting up of the betting facilities in
accordance with the terms and conditions hereinafter provided.
NOW THIS AGREEMENT WITNESSETH as follows:
1998 3 MLJ 151 at 163
1 In consideration of the terms and conditions hereinafter contained, the parties hereto hereby agree
to co-operate with each other in the construction of a racecourse and the management of racing
facilities in Sandakan and the setting up of betting facilities.
1998 3 MLJ 151 at 164
2 The company hereby undertakes with the club as follows:
(a) To acquire for the club 100 acres of land from the Sandakan Municipal Council or state
government situated at a prime and freely accessible location in Sandakan (hereinafter referred to as
'the said land') and to arrange for its proper survey and to pay all survey fees and incidental costs,

land costs or premium, and costs of issue and registration of the title deed for the said land in the
name of the club or its trustees.
(b) To construct on the said land a racecourse of a standard approved by the relevant authorities, and
complete with grandstand, and other facilities and amenities which are necessary for the conduct of
pony and thoroughbred horse racing, and in accordance with such plans and specifications which
may be approved by the local authority or the Ministry concerned, and to pay all costs and expenses
related thereto.
(c) To set up the betting machines at the racecourse and also betting facilities off course, as may be
permitted under the licence granted to the club, and to pay all costs and expenses related thereto.
(d) To manage and maintain in good conditions the racecourse and all buildings, structures and
fixtures thereon and all betting machines and facilities related thereto.
(e) To operate and manage all pony and thoroughbred horse racing on the racecourse in accordance
with the rules of racing of the club or as may be adopted or approved by the club from time to time.
(f) To pay to the club as its share of the revenue in the joint venture herein 2% of the gross sale
takings derived from all bettings on the races, 3-D and 4-D operations and other bettings undertaken
by the company or its authorized agents, on the races.
3 The club hereby undertakes with the company as follows:
(a) To grant to the company the exclusive rights to run all poly and thoroughbred horse racings on
the said racecourse.
(b) To grant to the company the exclusive rights to conduct and manage all bettings on the races at
the racecourse and to conduct and manage all 3-D and 4-D operations related to such races
throughout the state of Sabah.
(c) To sublease the said land to the company for a term of twenty (20) years commencing from the
date of completion of the racecourse thereon, at the nominal annual rent of Ringgit Malaysia one
only (RM1) for the purposes set out in paras (a) and (b) aforesaid.
(d) The club shall undertake public relations, study tours, promote the breeding of ponies and
horses, grow and produce suitable animal feeds, create racing interests and do all things to support
the pony and horse racing industry, and provide sporting activities, playing fields and arenas for the
members of the club and the general public and give donations to patriotic. charitable educational
and benevolent purposes, and to employ and pay personnels engaged in these activities.
4 Upon the expiration of the twenty (20) years sublease under cl 3(a) aforesaid the company shall
deliver up vacant possession of the said land and the racecourse and all buildings, structures and
fixtures thereon, together with all on-course and off-course betting machines, and all other
amenities and facilities forming part of the racecourse and racing and betting operations, reasonably
good repairs and conditions, natural wear and tear being excepted. The company and its agents and

employees shall also cease all 3-D, 4-D and other betting operations connected with the racecourse.
The company shall have no claim whatsoever against the club for capital outlays expended by the
company on the racecourse and the betting facilities.
5 The company in carrying out its undertakings under cl 2(a), 2(b) and 2(c) shall maintain constant
consultations with the club in order to ensure that all constructions and installations are acceptable
to all parties concerned.
6 The club shall co-operate closely with the company in the acquisition of the said land, and sign all
documents and forms which may be necessary, provided that all expenses and fees related thereto
shall be borne by the company.
7 Subject to the provisions of cl 8 herein the 2% gross sale takings payable by the company to the
club under cl 2(f) aforesaid shall be paid weekly and the payment date shall be the first business day
one week after the close of the previous week's account, with a grace period of not more than seven
(7) days. If the company defaults again after the grace period then the payment date shall be
extended for not more than one (1) month subject to the payment of interest on the amount due and
payable at the rate of 1% per month with daily rests. If the company defaults again after the one (1)
month extension then the club shall be entitled to give a three (3) month notice in writing to the
company and determine this agreement and upon such termination the company shall comply with
all the terms as provided in cl 4 aforesaid as if the twenty (20) years sublease has duly expired,
without any claim whatsoever against the club for loss and damages suffered or for capital outlays
expended by the company on the racecourse and the betting facilities.
8 The company may defer payment of the aforesaid 2% gross sale takings during the first three
months of operation and commence actual payment after the third month, provided that the said 2%
sale taking for the first year shall be fully paid before the end of the year, all payments thereafter
shall be in accordance with cl 7 aforesaid.
9 In carrying out all 3-D, 4-D and other betting operations whether on-course or off-course, the
company, its agents and employees shall at all times comply with the laws for the time being in
force in Sabah, and the terms and conditions set out in the licence granted to the club and with all
orders and directions which may be issued by the licensing authority or the police from time to
time. In the event of any defaultor offence being committed the company shall pay and settle all
fines and penalties which may be imposed and indemnity and keep indemnified the club its officials
and members against the same.
10 The company shall keep proper and up to date accounts of all betting operations and shall make
them available for inspection by the club or its officials or agents at all times. The company shall
appoint as its auditors the firm of Yap Lean & Co, Certified Accountants of Kota Kinabalu.
11
(i) If the said exemption granted to the club under the Gaming Ordinance is cancelled by the
authority concerned due to no fault of either the club or the company, then this agreement shall be
determined forthwith. If this event happens after the company has been in operation of the

racecourse and betting facilities for ten (10) years or more, the said land and together with the
racecourse and all buildings structures and fixture thereon, together with all on-course and offcourse betting machines, and all other amenities and facilities forming part of the racecourse and
racing and betting facilities shall revert back to the club as is sole properties and the company shall
have no claim whatsoever against the club for capital outlays expended by the company on
racecourse and the betting facilities. If this event happens after the company has been in operation
of the racecourse and betting facilities for less than ten (10) years then the parties shall negotiate for
the take over to the said land and the racecourse and all betting facilities with the view of fair
compensation to the company or the loss of the capital outlay. If negotiations should break down
then this matter shall be submitted to arbitration in accordance with the laws for the time being in
force in Sabah.
(ii) However, if the said licence issued to the club under the Gaming Ordinance is cancelled by the
parties concerned due to no fault of either club or the company, in such event the company shall still
be entitled to operate and manage the ponies and thoroughbred horses racing on the racecourse as
permitted under the said exemption and in accordance with the terms and conditions of this
agreement which are applicable thereto.
12
(i) If the said exemption is cancelled because of the fault of the club, then this agreement shall be
determined forthwith and upon such determination the club shall compensate the company for the
loss of capital outlays expended in the racecourse and betting facilities.
(ii) If only the said licence is cancelled because of the fault of the club, then this agreement shall
still subsist and be valid and binding upon the parties in so far as the same relates to the operation
1998 3 MLJ 151 at 165
management of the ponies and thoroughbred horses racing on the racecourse provided however that
in such event the club shall compensate the company for the loss of capital outlays expended on the
racecourse and betting facilities.
13
(i) If the said exemption is cancelled because of the fault of the company, then this agreement shall
be determined forthwith and upon such determination the said land together with the racecourse and
all building, structures and fixtures thereon, together with all on-course and off-course betting
machines and all other amenities and facilities forming part of the racecourse and racing and betting
facilities shall revert back to the club as its sole properties.
(ii) If only the said licence is cancelled because of the fault of the company, this agreement shall
still subsist and be valid and binding upon the parties in so far as the same relates to the operation
and management of the ponies and thoroughbred horses racing on the racecourse provided however
that in such event the company shall compensate the club an amount equivalent to the prevailing
market value of the buildings, structures and fixtures on the racecourse, together with all on-course

and off-course betting machines and all other amenitiese and a facilities forming part of the
racecourse and racing and betting facilities. Such valuation shall be based upon a valuation carried
out by a chartered valuer to be agreed by the parties hereto.
14 Officials of the club shall attend and supervise at all race meetings conducted or managed by the
company and such club officials shall be paid such allowance by the company as may be agreed
upon from time to time.
15 The company shall be solely liable for all claims for losses and damages which may be made by
members of the public arising out of the race meetings conducted or managed by the company, and
to indemnify and keep indemnified the club its officials and members against the same. The
company shall take out such public liability insurance as may be suitable.
16 A representative of the club shall be appointed a director to sit at the board of directors of the
company, with no voting power.
17 All the 3-D, 4-D and the other betting operations agents whether on-course or off-course, shall be
appointed by the company on behalf of the club, the licence holder. The appointment letter for each
agent shall be signed by the company which shall be entitled to hold such deposit which may be
made by the agents, and to be solely liable for all losses arising out of such 3-D, 4-D or other
betting operations, and to indemnify and keep indemnified the clubs its officials and members
against the same.
18 The company shall at all times pay all government duty and gaming tax which may be imposed
or assessed by the authorities concerned on the racing and betting operations, and indemnity and
keep indemnified the club, its officials and members against the same.
19 The company shall not involve the club in any financial liability whatsoever while in the
development of the racecourse or in the subsequent management to the racecourse and racing and
betting operations, any loan obtained for the development shall be the sole liability company of the
company.
1998 3 MLJ 151 at 166
20 This agreement shall commence on the date of its execution and the company shall enter into
such agreement which may be necessary to secure the said land for the club within seven (7) years
thereafter, and shall complete the construction of the racecourse and other racing and betting
facilities within two (2) years after the approval of all development plans by the local authority or
Ministry concerned.
21 In the event of any dispute arising out of the construction or operation of this agreement the
parties hereto shall endeavour to negotiate a settlement initially and if a settlement cannot be
reached the dispute shall be submitted to arbitration in accordance with the laws for the time being
in force in Sabah.
IN WITNESS WHEREOF the parties hereto have hereunto set their hands the day and year first

above written.
It will have been noticed that the appellant ('the said operator') was to build the racecourse and its
buildings at its cost practically from scratch by acquiring or buying the necessary land and in
consideration therefor, the said operator would be given the exclusive right to operate and manage
all the gaming facilities for the Sandakan Turf Club, hereafter called 'the said turf club'. The cost,
said to be about RM18m, can be said to be fairly enormous but the duration of the exclusive right
would be for about 20 years, a fairly long-term project as contemplated by both parties as shown in
the clauses of the said agreement.
The gaming that was subsequently carried on or operated was in pursuance of a licence issued by
the Sabah government under Sabah's own Gaming Ordinance of 1930, and also by way of the
granting of certain exemptions from the provisions of the Gaming Ordinance in favour of the said
turf club on or shortly after 14 February 1984 in respect of 'on-course' betting (by way of the said
exemption) which comprised pari-mutual and totalisator betting. The said turf club was also
permitted by the government to carry on off-course betting by means of the licence mentioned just
now comprising public lotteries, including 3-Digit and 4-Digit draws. The said Gaming Ordinance
is hereafter called 'the said Gaming Ordinance of Sabah'.
On 14 April 1992, the government of Sabah, under the said Gaming Ordinance of Sabah cancelled
the licence dated 14 April 1984 in respect of the off-course betting and issued a new licence which
apparently differed from the cancelled licence with a new condition which said:
This licence shall be personal to the licensee or shall not be transferred in any manner whatsoever.
On the heels of this new licence ie on 15 April 1992, 'Modification of Laws (Common Gaming
Houses, Lotteries, Betting, Betting and Sweepstake Duties and Racing (Totalisation Board)
(Extension to the States of Sabah and Sarawak)) Order 1991' came into force for the state of Sabah
by virtue of which, the said Gaming Ordinance of Sabah was repealed and all federal statutes
dealing with gaming or betting or racing mentioned in the Order applied to Sabah. This Order of
1991 was made possible by certain provisions of the Malaysia Act 1963. The new licence dated 14
April 1992 issued under the Gaming Ordinance of Sabah was saved by para 12 of the
1998 3 MLJ 151 at 167
said Order of 1991 (hereafter called 'the said Order of 1991') which read as follows:
Provided that any exemption, permit or licence issued or granted under the Gaming Ordinance
Sabah or the Gambling Ordinance, Sarawak on or before the commencement of this Order, shall
continue to remain in full force and effect under the respective Ordinances under which it was
made, and shall continue in force until it expires, is varied, amended or revoked under the said laws.
For these purposes only, the respective Ordinances shall continue to be in full force and effect.
Business was however carried on as usual between the said turf club and the said operator and I
have ascertained from both parties that the said condition of the new licence dated 14 April 1992
about the personal nature of the licence did not affect such business in any way or in such a way as

to give rise to any controversial claim as contended in the proceedings between the two parties. I
have mentioned all this to show the preparedness of both parties to commit themselves to the said
agreement for the purpose of dealing with the question of implied terms later.
Relations nonetheless between the parties came to a head when the federal government decided to
implement the federal statutes in Sabah as extended by the said Order of 1991 when the federal
Ministry of Finance wrote to the said turf club on 12 December 1994, informing the said turf club
that its gaming activities should cease by 31 December 1994 and thereafter they were to be carried
on under a federal licence. The federal Ministry of Finance, the said turf club and the said operator
began a flurry of activities among themselves in regard to such a federal licence.
Tripartite meeting and correspondence ensued and in January 1995, the said federal licence as set
out above was issued to cover all the gambling activities of the said turf club.
After the said federal licence was issued, differences between the parties arose leading to the said
originating summons being filed as set out earlier.
After a hearing on merits, the High Court gave judgment for the said operator and a copy of the
order of High Court dated 15 April 1995, yet unsealed but apparently acceptable to both parties, is
set out below:
UPON THE APPLICATION of the plaintiff abovenamed AND UPON READlNG the originating
summons dated 17 February 1995 and the affidavit of Tuan Foo Fat affirmed on 17 February 1995
and the affidavit in opposition of Datuk Yap Pak Leong affirmed on 8 March 1995 and the affidavit
in reply of Tuan Foo Fat affirmed on 28 March 1995 and all filed herein AND UPON READING
Roderic Fernandez Esq of counsel for the plaintiff and Valentine Willie Esq of counsel for the
defendant IT IS DECLARED AND ORDERED as follows:
1 that the licence dated January 1995 being the reference KK/BP(J)8.00/4/3/3-1 JD 1(4) issued by
the federal Minister of Finance of the government of Malaysia to the Kelab Lumba Kuda Sandakan
(Sandakan Turf Club) under the Pool Betting Act 1967 and any renewals thereof is within the scope
of the agreement between the Kelab Lumba Kuda Sandakan (Sandakan Turf Club) and Sababumi
(Sandakan) Sdn Bhd dated 26 November 1987;
1998 3 MLJ 151 at 168
2 that the Kelab Lumba Kuda Sandakan (Sandakan Turf Club) was and still is in breach of the
provisions of the said agreement which confer exclusive right to Sababumi (Sandakan) Sdn Bhd to
conduct and manage all 3-Digit (3-D) and 4-Digit (4-D) operations in and throughout the state of
Sabah;
3 that the Kelab Lumba Kuda Sandakan (Sandakan Turf Club) do pay Sababumi (Sandakan) Sdn
Bhd damages to be assessed by the High Court, Kota Kinabalu in respect of the said breach; and
4 that the Kelab Lumba Kuda Sandakan (Sandakan Turf Club) do pay Sababumi (Sandakan) Sdn
Bhd costs of this action to be taxed.

Dated 15 April 1995

The said turf club appealed to the Court of Appeal. The issues were identified and accepted by both
parties as the crucial issues and after hearing arguments on such issues, the appeal was allowed,
hence the further appeal before us by the said operator (see [1997] 1 MLJ 587).
The Federal Court on 14 December 1996, in granting leave to appeal, framed the questions or issues
which ought to be heard as follows:
(3) questions or issues which ought to be heard in the appeal shall be:
(i) whether the Court of Appeal was correct in law and on the evidence in holding that the High
Court was wrong in implying a term in the 1987 agreement in the manner it did;
(ii) whether the Court of Appeal was correct in law and on the evidence in holding (if it did) that the
1987 agreement was tainted with illegality by reason of breaches of the Gaming Ordinance of
Sabah, the Pool Betting Act 1967 or otherwise;
(iii) if the 1987 agreement was so tainted with illegality, what were its consequences in civil law
generally and on the 1987 agreement particularly?
(4) The costs of this motion shall be costs in the cause.
GIVEN under my hand and the seal of the court this 14 November 1996.
With regard to the first question set out above, it will be remembered that the High Court by its
order had declared that the said federal licence issued in 1995 was within the scope of the said
agreement made in 1987 by way of an implied term, which may be summarized as that so long as
the said turf club was allowed or licenced under whatever laws to conduct off-course and on-course
betting, the said operator could continue to have the exclusive right to conduct and manage such
off-course and on-course betting for the periods as provided in the said agreement. The said
operator submitted that such an implied term applied and the said turf club submitted to the
contrary. The High Court agreed with the said operator in implying the term but the Court of Appeal
agreed with the said turf club and reversed the decision of the High Court on this point. Now it is
for us in the Federal Court to decide this question of implied term.
The background of this case has been described at length by the judges of both the High Court and
the Court of Appeal, and I will not repeat in extenso what they have said except to refer to said parts
of the facts as and when necessary. I will give my own view too on the law of implied terms.
1998 3 MLJ 151 at 169
Implied terms are of three types. The first and most important type is an implied term which the
court infers from evidence that the parties to a contract must have intended to include it in the
contract though it has not been expressly set out in the contact. The implied term contended for in
this appeal belongs to this type and much more about this later.

The second type of implied term is one by operation of law, and not based on the inference just
explained. By operation of law, I mean that a large number of specific implied terms have been held
in to arise from previous decided cases on certain specific facts. Such ratio decidendi in respect of
such decided implied terms are normally adopted by courts in subsequent cases on similar facts as a
matter of course without the necessity of any court to decide afresh whether it ought to draw the
inference as explained above. Thus, such implied terms come from decided cases exclusively. Thus,
in a contract of employment, there is an implied term that the employee will serve his employer
faithfully, and not to act against the employer's interest, and again there is another implied term that
the employer will provide a safe system of work. Many of such decided and specific implied terms
have been incorporated into statutes such as the Sale of Goods Act 1957 and others; it is not
necessary to discuss it further except to emphasize that such an implied term of this particular type
may sometimes be excluded by parties by an agreement to the contrary and more importantly, it is
not dependent on the court having to draw an inference explained above.
The third kind of an implied term is one that is implied by custom or usage of any market or trade
which is reasonable, and again it is not dependent on a court's inference explained above but by
virtue of such a custom or usage from the market or trade. Interestingly, s 92(e) the Evidence Act
1950seems to be custom-made to provide logistical support for this particular type of implied term.
It will be remembered that s 92(e) aforesaid is one of the exceptions to the rule against evidence to
contradict or vary any terms of a written contract.
Reverting to the first type of implied term which is dependent on a court drawing an inference as
explained above, there are two tests to fix the parties with such an intention, ie that the parties must
have intended to include such an implied term in the contract. The first test is a subjective test, as
stated by MacKinnon LJ in Shirlaw v Southern Foundries (1926) Ltd[1939] 2 KB 206 at p 227,
that such a term to be implied by a court is 'something so obvious that it goes without saying, so that
if, while the parties were making their bargain, an officious bystander were to suggest some express
provision for it in the agreement, they would testily suppress his with a common "Oh, of course".'
The second test is that the implied term should be of a kind that will give business efficacy to the
transaction of the contract of both parties. The test was described by Lord Wright in Luxor
(Eastbourne) Ltd & Ors v Cooper[1941] AC 108 at p 137, that in regard to an implied term, ' it
can be predicated that "It goes without saying", some term not expressed but necessary to give the
transaction such business efficacy as the parties must have intended'. Business efficacy in my
opinion, simply means the desired result of the business in question. Thus, in Shirlaw's case,
1998 3 MLJ 151 at 170
Shirlaw who was appointed the managing director by the defendant company for 10 years, sued for
and obtained damages for breach of agreement. It was held that it was an implied term that the
defendant company would not alter its articles of association to create a right for itself to remove the
plaintiff before the 10 year term expired. The implied term inferred by the court there was to let
both parties achieve the desired result that the post of the managing director would continue to be
available for 10 years to Shirlaw as both parties must have intended it at the time when making the
agreement.

The testy answer to the question of the officious bystander of 'Oh, of course' spoken of by
Mackinnon LJ was described equally elaborately by Scrutton LJ in Reigate v Union Manufacturing
Co (Ramsbottom) Ltd & Anor[1918] 1 KB 592 at p 605 as ' of course, so and so will happen, we
did not trouble to say that, it is too clear'.
Both tests in my opinion must be satisfied before a court infers an implied term. Thus, Lord
Wilberforce in Liverpool City Council v Irwin & Anor [1977] AC 239 at p 254 spoke of an implied
term as a matter of necessity, so that the element of 'business efficacy is inseparable'. Lord Simon of
Glaisdale inBP Refinery (Westernport) Pty Ltd v Hastings Shire Council (1977) 16 ALR
363 described both tests as conditions the compliance of which the court must be satisfied, in
addition to what I may describe as other requirements, of existing law. Closer to home, Chong Siew
Fai J (as he then was) in Yap Nyo Nyok v Bath Pharmacy Sdn Bhd [1993] 2 MLJ 250 held that
both tests must be satisfied. If the implied term was not necessary to give business efficacy, the
answer to the officious bystander, would have been a testy answer of 'Oh, don't talk rubbish'.
The two tests referred to earlier are to enable the court to decide as to whether it should or should
not infer that the implied term contended for is a term which parties to a contract must have
intended to include in the contract. Such being the case, the intention of both parties from the
contract in question ought to be ascertained. In doing so, I will not set out the evidence below in
detail except to refer to such parts of it as and when necessary, as after all, this matter is not likely at
all to go elsewhere from this court, as long as the parties and their counsel and the courts below are
apprised of detailed facts.
The essence of the intention for both parties in the said agreement is for the said turf club to grant
an exclusive right to the said operator to conduct off-course and on-course betting or gaming for 20
years in consideration of payment to the said turf club of 2% of all gross takings from such betting
activities (not 2% of gross profit or net profit after tax) by the said operator, and in further
consideration of the promise by the said operator, at its cost to buy or acquire 100 acres of land to
build a racecourse, construct buildings for the purpose, and to manage and operate such gaming
activities.
In view of which has been stated, it was not surprising that learned counsel for the said operator was
referring to the business of the parties as a joint venture.
1998 3 MLJ 151 at 171
There can be no doubt that both parties had decided to commit to each other in regard to such
business on a long-term basis, apparently 20 years as the land to be acquired or bought at a
presumably enormous cost in Kota Kinabalu was to be transferred to the name of the said turf club
virtually gratis which would then execute a lease to the said operator for 20 years also virtually
gratis at an annual rent of RM1. The contribution of the said turf club comprised the licence and
exemption from the provisions of the said Gaming Ordinance of Sabah obtained by or granted to the
said turf club respectively.
Thus, at the time of negotiating for the said agreement or signing the said agreement, in view of the
circumstances pointed out above, if the officious bystander had asked the question whether such

exclusive right to operate off-course and on-course betting for 20 years would continue if the
licences and the said exemption were issued or granted by any other laws, ie by any law other than
the said Gaming Ordinance of Sabah, both parties would have answered 'Oh, of course'.
Further, the answer to the officious bystander would give business efficacy to the said business
between the parties in view of what has been stated above, ie it would give, in other words, to both
the parties, the desired result of both parties under the said agreement so that the said business could
carry on on that contemplated long-term basis at virtually no cost to the said turf club but at
tremendous cost to the said operator.
The court below, after setting out the cases on the point of implied term including Shirlaw's
case, Reigate's case and BP Refinery's case, held that the High Court was wrong in implying such
an implied term, stating what appears to be the gist of its reasoning in its judgment at p 612C-E:
In our judgment, the learned judge adopted a wholly erroneous approach to the case. This is not a
case where detailed terms were omitted. On the contrary, the parties here have spelt out their rights
and obligations very clearly and made provisions for certain contingencies.
The fact that an event has occurred for which the parties made no provision in the agreement is not
a valid reason in law for the court to interfere and imply a term into their contract. In the words of
Mason J in [Codelfa Construction Pty Ltd v State Rail Authority of New South Wales (1982) 149
CLR 337 ], this is a case where each party was 'prepared to take his chance in relation to an
eventuality for which no provision is made'.
Yet the judge acted to provide for an event which the parties were content to leave untouched
because they had specifically made provisions for cancellation of the licence if another contingency
arose. (See cl 11 of the agreement.) This is precisely what the law forbids.
It is true that an event which has occurred for which the parties made no provisions in an agreement
containing nonetheless careful and detailed obligations set out therein, is not a valid reason for a
court to interfere with and imply a term into this agreement, however, with great respect, it could
very well be also such a factual situation that will prompt one party to the contract to contend for
such an implied term whereupon the court would have to decide whether it should imply such a
term by employing the two
1998 3 MLJ 151 at 172
tests which will have to be satisfied to determine the contention. Let it be remembered that the most
careful of men sometimes may overlook something that should have been very obvious.
The mention by the Court of Appeal of express provisions in the said agreement for cancellation of
licence in the above passage seems to suggest, if I may conjecture, that such express provisions
already cover the present situation in this appeal, ie the issuance of the said federal licence in place
of the earlier licence issued under the said Gaming Ordinance of Sabah which must have been
cancelled by the federal government to make way for the said federal licence. Therefore, it will
necessarily militate against the inclusion of such an implied term contended for. I will now examine

this suggestion.
Such provisions in the said agreement provide for: (a) cancellation of the licence and for that matter,
cancellation of the exemption by the government or authority, through no fault of either the said turf
club or the said operator; (b) cancellation of the same because of the fault of the said turf club; and
(c) cancellation of the same because of the fault of the said operator.
Courts often and generally, look at the real nature of the transaction rather than the form of the
transaction unless prevented to do so by judicial precedent or any statutory provision. The word
'cancellation' referred to above refers to a decision by the licensing authority not to allow to go on to
do something which the parties concerned have earlier agreed or arranged to do or to be done; this
is the ordinary meaning of the word 'cancellation'. In other words, the same word refers to a
decision not to allow to carry on on-course and off-course betting which the parties had agreed or
arranged to do or to be done earlier. The real nature of the transaction is that both parties had agreed
or arranged for the conduct of off-course and on-course betting.
Thus, cancellation of the licence in connection with the express provisions for the cancellation of
licence in the said agreement can only mean the decision of the government or the licensing
authority not to allow to go on with the off-course and on-course betting which has been going on
hitherto, either through the fault of the said operator, or the fault of the said turf club, or through no
fault of either the said turf club or the said operator.
The situation described in the immediately preceding paragraph, ie the situation envisaged in the
said agreement as contained in those express provisions for cancellation of licence has not occurred.
What the Minister of Finance wanted was for the said turf club to carry on the on-course and offcourse betting under the said federal licence a sort of old wine in new bottle, and not to stop or
disallow such betting. Therefore, these express provisions could not any way be inconsistent with or
inhibitory against the implied term contended for. Thus, the express provisions for cancellation of
licence also do not cover the situation arising from this appeal as explained above and are thus
immaterial for the purpose of considering the question of the implied term.
1998 3 MLJ 151 at 173
On the point of implied term, the Court of Appeal, in my view, with respect, has gone wrong and the
decision on the same point by the High Court should be upheld. This is of course not the end of this
case as the point of illegality remains to be considered.
It may not be out of place at this juncture to deal with a preliminary objection of learned counsel for
respondent to the effect that certain issues or grounds raised in the memorandum of appeal, viz
ground (1)(d) and ground (2)(h) of the said memorandum, outside the scope of the questions or
issues in respect of which leave to appeal was granted by the Federal Court. These two grounds or
subsidiary grounds refer to an 'identical, if not substantially similar rights' given to a third party, viz
Everise Ventures Sdn Bhd to operate gaming activities as previously operated by the said operator
until the said agreement was terminated by the said turf club. The matter concerning the said
Everise Ventures Sdn Bhd was in evidence before the High Court which the Court of Appeal, by the
said grounds (1)(d) and 2(h) was said to be wrong in failing to consider. Parties were told then that

the decision on the preliminary objection would be reserved till the delivery of the judgment of the
court on this appeal. I now give my decision on it.
The issues or questions for which leave to appeal was granted by Federal Court have been set out
earlier, viz implied terms and illegality of contract.
Under r 108(1)(c) of the Rules of the Federal Court 1995, the Federal Court may determine or frame
the questions or issue which ought to be heard in the appeal; in my view, this discretionary power
given statutorily must be given effect to. In other words, only the issues or questions thus framed
would be heard or entertained.
The approach I would adopt when it is disputed whether any stated ground in the said memorandum
of appeal is outside or not the scope of issues that the Federal Court framed in granting leave is
whether such ground is, prima facie, necessary to enable the court to decide the said issue with
precision. If it is not, the ground is thus outside the scope.
The matter of another similar agreement or arrangements between the said turf club and Everise Sdn
Bhd though seemingly relevant factually, does not however satisfy this test. An illegality, if
established, does not become less than an illegality when the perpetrator commits another illegality.
Further, the question of lack of bona fide on the part of the said turf club, arising from that other
illegality is not a point which the court would have to consider in this appeal. A defendant, like the
said turf club in the originating summons filed in the High Court, is always entitled to defend an
action by setting up the plea of illegality of contract even though he participated in it, or even if he
has masterminded it. The question of bona fide for setting up such a plea cannot arise.
I therefore would uphold the preliminary objection and the court would therefore strike out ground
(1)(d) and ground (2)(h) from the memorandum of appeal herein.
1998 3 MLJ 151 at 174
Dealing with the point of illegality, the argument of the parties and the reasoning of the court below
in regard thereto, a modicum of relevant issues or facts would have to be set out.
When the said agreement was made on 26 November 1987, in relation to off-course and on-course
betting, apart from the said exemption granted to the said turf club from the compliance of certain
provisions of the said Gaming Ordinance of Sabah, the licence issued pursuant to the said Gaming
Ordinance of Sabah contained no restriction at all as regards its assignment or even transfer. There
was a change on 14 April 1992 and the said licence was amended to include, inter alia, a condition
which provided that ' licence shall be personal to the licensee and shall not be transferable in any
manner whatsoever'. The condition, in the event that had happened, did not preclude the parties to
the said agreement from carrying on the business like before when there was no such condition.
From my inquiry of both learned counsel, it would appear that no dispute or claim had arisen which
would require this court's adjudication, respect of the business between the parties for the period
after the date of 14 April 1992 aforesaid up to the issue of the federal licence in January 1995. It
would be therefore academic for this court to determine whether the said agreement had become
illegal and unenforceable against the said turf club in respect of the amendment to the licence issued

under the said Gaming Ordinance of Sabah. I turn my mind therefore to the said federal licence.
Under condition 23 of the said federal licence, states that: 'The licensee can not assign or transfer
whether wholly or part of any rights, duties or obligations that are provided in the licence'. The
condition is significant.
The said federal licence was issued under the Pool Betting Act 1967 with the licence thus issued, as
a matter of common ground before us, covering both the on-course and off-course betting of the
said turf club.
In connection with the common ground aforesaid, I believe both learned counsel seemed to assure
me in effect or to the effect that the validity of the said federal licence was never in doubt and it was
not an issue with all parties concerned and their concern was the enforceability or otherwise of the
said agreement due to alleged illegality. The Pool Betting Act 1967 is hereafter called 'the said
statute'.
I now turn my attention to some of the principles of illegality for the purpose of this appeal which I
will now discuss and in the light of such discussion, I will make my own decision on the factual
mould before the court.
For reasons which will be apparent later, I refer to s 24 of the Contracts Act 1950, the source of
Malaysian law on illegality of contract:
What considerations and objects are lawful, and what not
The consideration or object of an agreement is lawful, unless
(a) it is forbidden by a law;
(b) it is of such a nature that, if permitted, it would defeat any law;
(c) it is fraudulent;
1998 3 MLJ 151 at 175
(d) it involves or implies injury to the person or property of another; or
(e) the court regards it as immoral, or opposed to public policy.
In each of the above cases, the consideration or object of an agreement is said to be unlawful. Every
agreement of which the object or consideration is unlawful is void.
Section 24 appears to me to have been drafted after some fine tuning of the common law on which
it is based. At common law, contracts fitting in with the said s 24(a) and (b) for contravening any
law would be illegal for being against public policy, but in our Contracts Act 1950, same contracts
are covered by s 24(a) and (b), ie under two separate subsections so that s 24, which also refers to

public policy elsewhere in the section, deals with other contracts against public policy such as, as
we know, contracts which interfere with administration of justice, contracts in restraint of trade and
contracts other than in these two groups. Please see in this connection Lord Wright's observation
in Vita Food Products Inc v Unus Shipping Co Ltd (In liquidation) [1939] AC 277, about public
policy being the basis for the non-enforceability of contracts rendered illegal by statutes.
It would be necessary to set out s 5 and s 21 of the said statute which all parties have heavily relied
on. They are set out below:
5
(1) Unless there is established a Board under section 6, the Minister may issue a licence to a person
for the collection, operation or promotion of pool betting.
(2) The Minister may refuse to issue or renew a licence to any person without assigning any reason
and his decision shall be final.
(3) A licence issued under subsection (1)
(a) shall be in such form as the Minister may think fit;
(b) shall be subject to the payment of such fee for its issue or renewal as may he prescribed;
(c) shall be valid for one calendar year only and may be renewed from year to year from the date of
expiration of the licence;
(d) shall be subject to such conditions or restrictions as the Minister may impose from time to time
or during the currency of the licence;
(e) may be revoked by the Minister during the currency of the licence without assigning any reason.
21
(1) Any person who
(a) makes or enters into a bet upon the result of a prescribed event, whereby he agrees to pay the
other party to the said bet, if the latter should win the bet, a sum of money the amount of which is
dependent upon the result of the working of the totalisator on the said event;
(b) sells or offers for sale, or who purchases from any person referred to in paragraph (a), any ticket,
coupon, card or thing entitling or purporting to entitle the purchaser or holder thereof to any interest
in the result of the working of the totalisator on any presribed event; or
1998 3 MLJ 151 at 176
(c) makes any contract or bargain of any kind to pay or receive money upon any event determined

or to be determined or to be determined by the result of the working of the totalisator on any

prescribed event,
shall be guilty of an offence and shall be liable on conviction to imprisonment for a term not
exceeding one year or a fine not exceeding one thousand ringgit or to both.
(2) Subsection (1) shall not apply to the licensee or the Board or any officer, agent or employee of
the licensee or the Board while engaged in the lawful conduct of any totalisator for pool betting or
of pool betting as such in accordance with this Act, the licence issued under section 5 or an
approved scheme.
What has been in serious dispute is whether the said agreement is illegal and unenforceable, the said
turf club says it is but the said operator takes the opposite view. I will further discuss my view.
At common law, a contract may be illegal by common law or by statute, in either case the contract
is unenforceable. It is to be borne in mind that s 24(a) of the Contracts Act 1950 involves the
consideration and/or object of a contract being forbidden by law, and 'law' means common law or
any statute. Thus, under s 24(a) aforesaid, an agreement is illegal and unenforceable when either the
consideration or the object of the agreement is to do an act forbidden by law, and this, in my view, is
the culled essence of some part of the common law on illegality of contract, which says in a nutshell
that a contract to do an act illegal by statute or prohibited or forbidden by statute is unenforceable
and illegal. It is very important to remember that it is distinguishable from another aspect or
question as to whether a statute prohibits any contract. It is illegal and unenforceable under s 24(a)
aforesaid because it is a contract involving consent of both contracting parties to do the very act
prohibited or forbidden by statute. This position obtains as well when the terms of the contract
amount inevitably to the same situation. Thus, an agreement to commit an offence as set out in the
Penal Code is the simplest of examples of an agreement to do an act prohibited by statute.
To decide if s 24(a) makes a contract illegal and unenforceable in connection with a statute, and this
bears repeating, one must find out first if the statute prohibits or forbids the act which the parties
have contracted to do by the contract in question, and not whether the statute prohibits the contract
or the making of the contract in question by the parties. This difference is real, though very subtle.
In my view, the failure to bear in mind this fine distinction has given rise to some difficulties.
Which then is the illegal act or forbidden act (if any) under the said statute that the said agreement is
or could be said to be an agreement to do?
One can almost immediately pin-point from the facts and learned counsel's arguments the forbidden
act or the illegal or prohibited act it is the breach of a condition 23 of the said federal licence
issued under the said statute for the following reasons. The attributive words of 'forbidden, illegal
and prohibited' all mean the same thing, being mere variations of one another.
1998 3 MLJ 151 at 177
Now the said federal licence must have been issued under s 5 of the said statute which authorizes
the Minister (of Finance) to issue it, subject to such conditions or restrictions the Minister may

impose.
Now, s 21 of the said statute provides for the betting activities which, is common ground, cover the
off-course and on-course betting in the said agreement and it also provides for the offences for said
activities unless covered by a licence issued under s 5 of the said statute. It provides further the said
offences shall not apply to a licensee, his agent or employee if they conduct such betting activities
lawfully in accordance with the provisions of the said licence, among other things. If they do not so
conduct such betting activities, they, or any of them commit an offence under the said s 21.
The act forbidden or prohibited by the said statute or made illegal by the said statute is therefore not
conducting the off-course betting and on-course betting in accordance with the provisions of the
said federal licence and the word 'provisions' of the licence means, of course, the conditions of the
licence. Thus, a breach of any condition, including condition 23 of the said federal licence is the
forbidden act under the said statute, a punishable offence under s 21 as stated just now.
It has been submitted that the breach of condition 23 has occurred because the said agreement
purportedly assigned wholly or partly the rights of the said turf club granted by the federal licence.
It will be remembered that the said operator was granted the exclusive right to conduct the offcourse and on-course betting by the said operator authorized under the said federal licence which
was granted to the said turf club. It would be quite impossible to say that the obtaining of such
exclusive right to operate the off-course and on-course betting is not an assignment wholly or partly
of such rights granted to the said turf club by the said federal licence. On what amounts to
assignment of the rights of a licence, the number of authorities is legion, and just to name two cases
in the Federal Court, see Sundang Timber Co Sdn Bhd v Kinabatangan Development Co Sdn Bhd
[1977] 2 MLJ 200 and Lo Su Tsoon Timber Depot v Southern Estate Sdn Bhd[1971] 2 MLJ 161.
Thus, I come to the conclusion that the said agreement is a contract or amounts inevitably to a
contract to do an act forbidden or prohibited by s 21 under the said statute.
Such being the case, there is no need to go into the question (hereafter called 'the distinguishable
question') of whether the said agreement is a contract prohibited impliedly by the said statute on
the distinguishable question, all the parties concerned have concentrated so much of their energies.
Out of deference to so many arguments advanced, allow me to make just a few observations as
follows on that distinguishable question.
Where any contract is not a contract or does not amount inevitably to a contract to do an act
forbidden by a statute, then, what in practice often triggers off the distinguishable question is, when
one of the contracting parties has contravened some statutory requirement in the performance of the
contract and one of the parties in court this time defends the action against him by raising this point
of contravention of that statutory
1998 3 MLJ 151 at 178
requirement. To determine this distinguishable question, it then becomes a matter of trying to
discover the intention of the legislature by the interpretation of the statute, almost always by
employing, as a major rule of interpretation, with other rules, the rule of purposive approach as

explained and adopted by Lord Diplock in Kammins Ballrooms Co Ltd v Zenith Instruments
(Torquay) Ltd[1970] 2 All ER 871. I need not set out those numerous cases, except one case to be
mentioned below later, which all sought to find out the intention of statutes in order to find out
whether a contract was impliedly prohibited. Incidentally, when a contract is expressly prohibited
and this is not so often enacted, there is no need to discover the particular legislative intention at all.
To revert to implied prohibition, the civil remedies or civil consequences following from the
aforesaid contravention of some statutory requirement (ie from the commission of some statutory
offence) are very far removed from the mind of any legal draftsman who often must have been very
much preoccupied with drafting the statutory requirements and offences of the statute or who could
have considered such civil remedies or consequences as being outside the perimeter of his task. By
such civil consequences or civil remedies, I mean, for the purpose of this appeal, whether the
contract is impliedly prohibited thereby.
I will end my reasoning by citing the leading case of St John Shipping Corp v Joseph Rank Ltd
[1957] 1 QB 267 concerning the distinction between a contract to do an illegal act (ie s 24(a) of
the Contracts Act 1950) on the one hand, and a contract which does not do so but which or the
making of which is expressly and impliedly prohibited by a statute, the distinction I sought to
emphasize earlier. Delvin J said at p 283 in this connection:
The first is that a contract which is entered into with the object of committing an illegal act is
unenforceable. The application of this principle depends upon proof of the intent, at the time the
contract was made, to break the law; if the intent is mutual the contract is not enforceable at all, and,
if unilateral, it is unenforceable at the suit of the party who is proved to have it. This principle is not
involved here. The second principle is that the court will not enforce a contract which is
expressly or impliedly prohibited by statute. If the contract is of this class it does not matter what
the intent of the parties is; if the statute prohibits the contract, it is unenforceable whether the parties
meant to break the law or not. A significant distinction between the two classes is this. In the former
class you have only to look and see what acts the statute prohibits; it does not matter whether or not
it prohibits a contract; if a contract is deliberately made to do a prohibited act, that contract will be
unenforceable In the latter class, you have to consider not what acts the statute prohibits, but what
contracts it prohibits; but you are not concerned at all with the intent of the parties; if the parties
enter into a prohibited contract, that contract is unenforceable.
I, therefore, uphold the order of the Court of Appeal made herein, though for somewhat different
reasons and would further dismiss the appeal with costs, with the sum deposited in court to be paid
out to account of taxed costs. The appellant do further pay costs in the Court of Appeal, but each
party herein is to bear its own costs in the High Court when the appellant herein succeeded but was
therefore removed from its judgment seat by a new but permissible point of illegality on appeal to
the Court of Appeal.
1998 3 MLJ 151 at 179
ZAKARIA YATIM FCJ
There are two issues for the decision of this court. They are:

(1) (i) whether the Court of Appeal was correct in law and on the evidence in holding that the High
Court was wrong in implying a term in the 1987 agreement in the manner it did;
(2)(ii) whether the Court of Appeal was correct in law and on the evidence in holding (if it did) that
the 1987 agreement was tainted with illegality by reason of breaches of the Gaming Ordinance of
Sabah, Pool Betting Act 1967 or otherwise;
(ii) if the 1987 Agreement was so tainted with illegality, what were its consequences in civil law
generally and on the 1987 agreement particularly?
Before considering these issues, I propose to refer briefly to the facts. On 25 November 1983, the
Sandakan Turf Club ('the club') was registered under the Societies Act 1966. It was formed to carry
out gaming activity. At that time, gaming was prohibited by the Sabah Gaming Ordinance (Cap 50).
On 14 February 1984, the club was exempted from the provisions of the Ordinance pursuant to s
27(a). On the same date, the club was granted a licence to operate 3-Digit and 4-Digit lotteries. On
26 November 1987, a written agreement was concluded between the club and the appellant,
Sababumi (Sandakan) Sdn Bhd ('Sababumi'). On 21 September 1989, the Pool Betting Act 1967
was extended to Sabah. On 14 April 1992, the Sabah authorities cancelled the licence issued on 14
February 1984. On the date the licence was cancelled, the Sabah authorities issued an amended
licence. On 15 April 1992, the Ordinance was repealed by the Modification of Laws (Common
Gaming Houses, Lotteries, Betting, Betting and Sweepstake Duties and Racing (Totalisator Board)
(Extension to the States of Sabah and Sarawak)) Order 1991. The Order however contained a
proviso that the exemption and licence granted earlier under the Ordinance remained in force. In
January 1995, the federal Ministry of Finance issued a new licence to the club under the Pool
Betting Act 1967. Sababumi continued to carry on off-course betting activities after the 1995
licence was issued. But its activities were stopped by the police.
Sababumi applied to the High Court in Kota Kinabalu for declaratory reliefs. It claimed that the
1995 licence was within the scope of the agreement. The High Court gave judgment for Sababumi.
The club appealed to the Court of Appeal. The Court of Appeal allowed the appeal and set aside the
order of the High Court (see [1997] 1 MLJ 587). Sababumi now appeals to this court.
In considering the appeal, I shall first refer to the agreement. The full text of the agreement has been
reproduced in the judgment of the Court of Appeal and in the judgment of my learned brother Peh
Swee Chin FCJ.
Under cl 2 of the agreement, Sababumi was to buy 100 acres of land and to construct a racecourse
on the land at its own expense. The land was to be registered in the name of the club. The club in
turn agreed to sublease the land and the racecourse to Sababumi for a period of 20 years. Sababumi
was given the exclusive rights to conduct and manage all bettings on the races at the racecourse and
to conduct and manage all
1998 3 MLJ 151 at 180
3-D and 4-D operators throughout the state of Sabah. Sababumi was to pay 2% of its gross sale
takings to the club on a joint venture basis. Clause 11(i) states that if 'the said exemption granted to

the club under the Gaming Ordinance is cancelled by the authority due to no fault of either the
club or the company, then the agreement shall be determined forthwith. Clause 11(ii) states that if
the 'licence issued to the club under the Gaming Ordinance is cancelled by the parties concerned
due to no fault of either the club or the company, the company shall still be entitled to operate
horse racing in accordance with the terms and conditions of this agreement'.
I shall now consider the issue of implied term.
The Court of Appeal said that there are two categories of cases when determining whether a term
ought to be implied in a contract, viz category 1 and category 2. Category 1 comprises those
relationships in which the court more readily implies a term in the contract when there is evinced a
contrary intention. The test to be applied when implying a term in the relationships within category
1 is necessity. Category 2 consists of cases not falling within category 1, ie where no special
relationship such as those recognized by the law exists.
The category test may be applied to determine an implied term. But I prefer to adopt the test laid
down in The Moorcock (1889) 14 P 64; Reigate v Union Manufacturing Co (Ramsbottom) Ltd
[1918] 1 KB 592; and Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206. In The
Moorcock, Bowen LJ said at p 68:
and I believe if one were to take all the cases, and they are many, of implied warranties or
covenants in law, it will be found that in all of them the law is raising an implication from the
presumed intention of the parties with the object of giving to the transaction such efficacy as both
parties must have intended that at all events it should have. In business transactions such as this,
what the law desires to effect by the implication is to give such business efficacy to the transaction
as must have been intended at all events by both parties who are business men; not to impose on one
side all the perils of the transaction, or to emancipate one side from all the chances of failure, but to
make each party promise in law as much, at all events, it must have been in the contemplation of
both parties that he should be responsible for in respect of those perils or chances. (Emphasis
added.)
In Reigate's case, Scrutton LJ said at p 605:
The first thing is to see what the parties have expressed in the contract; and then an implied term is
not to be added because the court thinks it would have been reasonable to have inserted it in the
contract. A term can only be implied if it is necessary in the business sense to give efficacy to the
contract; that is, if it is such a term that it can confidently be said that if at the time the contract was
being negotiated someone had said to the parties, 'What will happen in such a case,' they would both
have replied, 'Of course, so and so will happen; we did not trouble to say that; it is too clear'. Unless
the court comes to some such conclusion as that, it ought not to imply a term which the parties
themselves have not expressed. (Emphasis added.)
In Shirlaw's case, MacKinnon LJ said at pp 227-228:
1998 3 MLJ 151 at 181

For my part, I think that there is a test that may be at least as useful as such generalities. If I may
quote from an essay which I wrote some years ago, I then said: 'Prima facie that which in any
contract is left to be implied and need not be expressed is something so obvious that it goes without
saying; so that, if, while the parties were making their bargain, an officious bystander were to
suggest some express provision for it in their agreement, they would testily suppress him with a
common "Oh, of course!".'
At least it is true, I think, that, if a term were never implied by a judge unless it could pass that test,
he could not be held to be wrong.
Applying that in this case, I ask myself what would have happened if, when this contract had been
drafted and was awaiting signature, a third party reading the draft had said: 'Would it not be well to
put in a provision that the company shall not exercise or create any right to remove Mr Shirlaw
from his directorship, and he have no right to resign his directorship?' I am satisfied that they would
both have assented to this as implied already, and agreed to its expression for greater certainty. Mr
Shirlaw would certainly have said: 'Of course that is implied. If I am to be bound by this agreement,
including the barring of my activities under cll 11 and 12 when I cease to be managing director,
obviously the company must not have, or create, the power to remove me at any moment from the
board and so disqualify me from that post' and the company, which must be presumed to have been
then desirous of binding him to serve them as managing director for 10 years, would, I think, with
equal alacrity have said: 'Of course that is implied. If you were tempted by some offer elsewhere, it
would be monstrous for you to be able to resign your directorship and, by so disqualifying yourself
from being managing director, put an end to this agreement'. (Emphasis added.)
From the passages quoted above, there are two elements to be satisfied, namely, the business
efficacy of the transaction, and the officious bystander test.
I shall deal with the first element.
The last recital to the agreement states that both parties to the agreement agreed to co-operate in the
construction of a racecourse and the management facilities. The agreement was for a period of 20
years. I agree with Mr T Thomas, counsel for Sababumi, that the agreement was a co-operation
agreement between two commercial bodies for a period of 20 years. Under the agreement,
Sababumi was to acquire 100 acres of land and to construct on the land a racecourse. All costs and
expenses were to be borne by Sababumi. Sababumi would pay the club 2% of the gross sale takings
derived from all bettings. The business of operating all bettings on the races at the racecourse and
all 3-D and 4-D is described in the agreement as a joint venture business. Clause 2(f) states:
To pay to the club as its share of the revenue in the joint venture herein 2% of the gross sale takings
derived from all bettings on the races, 3-D and 4-D operations and other bettings undertaken by the
company or its authorized agents, on the races. (Emphasis added.)
In my view, when the parties were negotiating the agreement, they intended to give the joint venture
agreement business efficacy for a period of 20 years.
1998 3 MLJ 151 at 182

The second element is the officious bystander test. When the agreement was being negotiated, the
officious bystander would ask the following question:
Betting and lotteries are Federal matters under item 4 of the Ninth Schedule of the Federal
Constitution. What will happen if the Sabah Gaming Ordinance is repealed by a Federal Order and
the Pool Betting Act 1967 extended to Sabah?
The parties who had the benefit of the advice of their lawyers would have answered 'Of course we
know that. We have made some provisions in cl 11 with regard to the cancellation of the licence in
different situations. We anticipate the changes in the law and there is no need to make any express
provision in the agreement'.
In my opinion, both elements have been satisfied. The Court of Appeal has erred on the issue of
implied terms. I agree with my learned brother Peh Swee Chin FCJ that the decision of the High
Court in implying a term in the agreement should be upheld.
With regard to the issue of illegality, I agree with the learned President of the Court of Appeal and
my learned brother Peh Swee Chin FCJ that the agreement violates condition 23 of the licence
issued by the Ministry of Finance in January 1995. Condition 23 prohibits the assignment or the
transfer of rights. Under the agreement, the club had assigned to Sababumi all rights to manage all
bettings on the races on the racecourse and to operate all 3-D and 4-D lotteries. A breach of
condition 23 is an offence punishable under s 21 of the Pool Betting Act 1967. This is contrary to s
24(a) of theContracts Act 1950 and the agreement is therefore illegal and void.
For the reasons stated above, I dismiss the appeal with costs here and in the Court of Appeal. Each
party shall bear its own costs in the High Court.
Appeal dismissed.

Reported by David Lai

[1996] 3 MLJ 675

CHING YIK DEVELOPMENT SDN BHD v SETAPAK HEIGHTS DEVELOPMENT SDN
BHD
COURT OF APPEAL (KUALA LUMPUR)
GOPAL SRI RAM, NH CHAN AND AHMAD FAIRUZ JJCA
CIVIL APPEAL NO W-02-262-94
9 December 1995
Contract Breach Fundamental breach Sale and purchase of land Balance of purchase
price not paid on the ground that respondent failed to deliver executed memorandum of transfer
Whether payment of purchase price in sale of land was a fundamental term Whether delivery of
executed memorandum of transfer was a fundamental term Whether party who terminates a
contract upon breach of non-fundamental term is himself guilty of breach Remedies for breach of
fundamental term and subsidiary term
In October 1991, the respondent an owner of a certain piece of property ('the property') entered
into an agreement with the appellant for the sale and purchase of the property at a purchase price of
RM4,990,000 ('the first agreement'). Clause 5 of the first agreement required the respondent to deliver
up duly executed memorandum of transfer to the appellant's solicitors to be held by them pending the
conclusion of the sale. The appellant paid the respondent a sum of RM250,000 as a deposit and
entered a private caveat against the property. In December 1991, the parties entered into a second
agreement which stipulated for an increase in the purchase price of RM3m. In October 1992, the
appellant sent a cheque in the sum of RM4,740,000 in purported payment of the balance of the
purchase price. However, the cheque was dishonoured because the payment on the cheque was
stopped by the appellant on the ground that the respondent had failed to comply with cl 5 of the first
agreement. In July 1993, the appellant commenced proceedings against the respondent for specific
performance. The respondent applied to strike out the action under O 18 r 19 of the Rules of the High
Court 1980. The judicial commissioner granted the respondent's application and ordered the
appellant's action to be struck out. The appellant appealed. Counsel for the appellant submitted that
the judicial commissioner had erred in holding that the appellant was without a cause of action. He
argued that the respondent had breached its obligation to deliver the memorandum of transfer in
accordance with the provisions of cl 5 of the first agreement and that the appellant was therefore
entitled to withhold the payment of the balance of the purchase price.
Held, dismissing the appeal:

(1) In every contract, be it for the sale of land or any other commodity, there are some terms
that are of fundamental importance and others of less or minor importance. Where the term
that has been flouted is fundamental to the contract, the innocent party is

1996 3 MLJ 675 at 676

entitled to treat himself as being discharged from further obligations under it. But where the
obligation that has been breached is only subsidiary or minor in nature, the innocent party may not
treat himself as being free of his obligations under the contract, although he may sue and recover
damages for the non-performance of the subsidiary term (see p 681G-H).

(2) A party who terminates a contract or treats it as having come to an end in reliance upon

[1996] 4 MLJ 544

HWA CHEA LIN & ANOR v MALIM JAYA (MELAKA) SDN BHD
HIGH COURT (MELAKA)
SURIYADI J
CIVIL SUIT NO 22-49-1988
19 January 1996
Contract Sale and purchase of land Fundamental breach of contract Building was delivered with
serious defects Whether breach went to root of contract Whether implied warranty existed that house
was to be built in an efficient and workmanlike manner Whether defect liability period clause excludes
fundamental breach
Contract Rescission Sale and purchase of land Whether rescission valid Whether unilateral act of
plaintiffs to terminate contract sufficient and in accordance with requirements of the law Whether
plaintiffs acquiesced to contract Whether defendant rebuilding the house without plaintiffs' consent
supported rescission
On 11 September 1984, the plaintiffs entered into an agreement with the developer ('the defendant') for the
purchase of a single-storey terrace house ('the building') for the purchase price of RM62,950. A notice dated
3 June 1986 was sent to the plaintiffs by the defendant to take delivery of vacant possession of the building.
In 1987, the plaintiffs orally complained to the defendant regarding the defects found in the building.
Remedial works were done but in an unsatisfactory manner. Upon further complaint by the plaintiffs, further
remedial works were carried out in 1988. The plaintiffs were still dissatisfied with the repairs and
complained vide a letter dated 4 April 1988. On 28 May 1988, the plaintiffs through their solicitors sent a
letter rescinding the agreement. On 18 November 1988, the plaintiffs filed the present action. The plaintiffs
alleged there was a fundamental breach of the agreement as the house they received on 3 June 1986 was
1996 4 MLJ 544 at 545
not what they had bargained for and therefore the rescission was correct in law. They prayed for the refund of
all the monies already paid together with interest and certain other reliefs. The defendant argued that they had
carried out the construction of the building in a manner as specified in the second schedule to the agreement
and that the plaintiffs had acquiesced to the contract. Aside from that, there was no evidence to suggest that
the requirements of s40 of the Contracts Act 1950 ('the Act') had been fulfilled and the defendant claimed
that the rescission was bad and that the contract was still good. The court had to consider whether (a) the
defective liability period clause, which was only valid for a year, was relevant in this case; (b) whether a
fundamental breach existed to justify rescission by the plaintiffs; and (c) whether the letter of rescission
dated 28 May 1988 constituted a good rescission.
Held, allowing the plaintiffs' claim and ordering a refund of the purchase price paid:

(1) From the evidence adduced, a fundamental breach had occurred as the building that was
delivered to the plaintiffs in 1986 was not what they had bargained for. The evidence adduced clearly
showed that the said building when delivered to the plaintiffs was in a terrible shape that required
massive remedial works and eventually had to be rebuilt. Since what was delivered was not what had

been agreed upon, the breach was a breach that went to the root of the contract. In a contract with
builders for the purchase of a house to be erected there is an implied warranty by the vendors that the
house would be built in an efficient and workmanlike manner, and with proper materials and fit for
habitation (see p 552B-H; Hancock & Ors v Brazier (BW) (Anerley) Ltd [1966] 2 All ER 901, Miller
v Cannon Hill Estates Ltd [1931] 2 KB 113and Teh Khem On & Anor v Yeoh & Wu Development
Sdn Bhd & Ors [1995] 2 MLJ 663 followed).

(2) On a plain interpretation, the defect liability period clause merely laid down the responsibility of
the vendor over minor defects within one year of the delivery of vacant possession. The defect
liability period provision was silent as to the ousting of fundamental breaches. Therefore, it was not
relevant here (see p 553C-D).

(3) After considering all the evidence and the subsequent actions of the defendant, an effective
rescission had been proved by the plaintiffs and the defendant had also accepted the repudiation of
the contract. In any event, the unilateral act of the plaintiffs to terminate the agreement was sufficient
and in accordance with the requirements of the law. The subsequent activity of the defendant in
rebuilding the houses including the said building without securing any prior permission from the
plaintiffs supported the plaintiff's assertion (see pp 554I, 555A-B; Sim Chio Huat v Wong Ted
Fui [1983] 1 MLJ 151 distinguished).

(4) The consequential effect of delivering a defective house unfit for human habitation and unsafe
was that the defendant had also breached cl 7 of the agreement. Clause 7 clearly provided that time
shall be of the essence of the agreement (see p 555B-C).

[ Editorial Note: The defendant has applied for leave to appeal to the Court of Appeal.]
Notes
For cases on breach of building contract, see 3 Mallal's Digest (4th Ed, 1994 Reissue) paras 1252-1268.
For a case on recession of building contract, see 3 Mallal's Digest (4th Ed, 1994 Reissue) para 2020.

Cases referred to
Choo Yin Loo v Visuvalingam Pillay [1930] 7 FMSLR 135
Chua Ngah Chin v Ng Kie En [1986] 1 MLJ 267
Chye Fook & Anor v Teh Teng Seng Realty Sdn Bhd [1989] 1 MLJ 308
George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 1 All ER 108
Hancock & Ors v Brazier (BW) (Anerley) Ltd [1966] 2 All ER 901
Harbutts 'Plasticine' Ltd v Wayne Tank and Pump Co Ltd [1970] 1 QB 447
Miller v Cannon Hill Estates Ltd [1931] 2 KB 113
Sim Chio Huat v Wong Ted Fui [1983] 1 MLJ 151
Suisse Atlantique Societe D'Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361

Teh Khem On & Anor v Yeoh & Wu Development Sdn Bhd & Ors [1995] 2 MLJ 663
UGS Finance Ltd v National Mortgage Bank of Greece and National Bank of Greece [1964] 1 Lloyd's Rep
446
Legislation referred to
Contracts Act 1950 ss 40 47
Housing Developers (Control and Licensing) Act 1966

Lai Kuan Jean (KS Das & Co) for the plaintiffs.
H D'Cruz (Nik Hussain & Partners) for the defendant.
1996 4 MLJ 544 at 548
SURIYADI J
On 11 September 1984, the plaintiffs entered into an agreement with the developer (the 'defendant') for the
purchase of a single-storey terrace house identified as No 126, Jalan Zahir 18, Taman Malim Jaya, Jalan
Malim, 75250 Melaka ('the said building') on Lot PT No 1279, HS (M) 1015/82, Mukim Bacang, District of
Melaka Tengah, Melaka. The purchase price was RM62,950 only. Under cl 18 (B1-11), the said building was
to be completed by the vendor and vacant possession delivered to the purchasers within 24 calendar months
from the date of the agreement. The defendant later served a notice dated 3 June 1986 (B79) to the plaintiffs
to take delivery of vacant possession even though the supposed delivery date was 7 September 1986. The
plaintiffs, sometime in 1987, orally complained to the defendant as to the defects found in the building.
Remedial works were done in the same year albeit unsatisfactorily. The plaintiffs undeterred further
complained to one Mr Ng, who was the manager of the defendant, and was assured that further repairs would
be carried out after the Chinese New Year in 1988. The defendant kept their words but the plaintiffs were still
dissatisfied with the repairs done. Unhappy with the situation, the first plaintiff complained vide letter dated
4 April 1988 (B83). From the evidence, it was adduced that the plaintiffs subsequently employed certain
experts, amongst them an engineer who visited the site in 1988 who later prepared the relevant report in
September 1988 and an architect. On 28 May 1988, the plaintiffs through their solicitors sent P1, ie a letter
rescinding the contract. On 18 November 1988, the plaintiffs filed this action. Evidentially it is not disputed
that the defendant literally tore down four rows of houses including the said building sometime in February
1990 and completed the rebuilding at the end of 1991.
The plaintiffs alleged in para 7 of the statement of claim that there was a fundamental breach of the
agreement as the house they received on 3 June 1986 was not what they had bargained for and therefore the
rescission was correct in law. The plaintiffs, therefore, prayed for the refund of all the monies already paid
inclusive of interest and certain other reliefs.
The defendant in the statement of defence asserted that at all material times the defendant had carried out the
construction of the said single- terrace house in a good and workmanlike manner and in accordance with the
specifications described in the second schedule to the said agreement. The defendant also alleged that the
plaintiffs could not have rescinded the agreement as they had acquiesced to the contract. Aside from that,
there was no evidence of the requirements of s 40 of the Contracts Act 1950 ('the Act') being fulfilled,

namely that the defendant had refused or was incapable of fulfilling the contract. In para 5 of the amended
statement of defence and counterclaim, the defendant had averred that the massive cracks, foundation faults,
sinking and other major structural defects alleged by the plaintiffs were beyond the control of the defendant
as the defects complained of were entirely that of the act of nature but no evidence was adduced to support
this contention. In fact, the defendant had persisted
1996 4 MLJ 544 at 549
on the defence that the rescission was bad and that the contract was still good.
To support the plaintiffs' case four witnesses were called, namely PW1 the first plaintiff himself, PW2 an
architect, PW3 a neighbour of the plaintiffs who was in the same predicament as the plaintiffs and PW4 an
engineer. PW1 in his evidence admitted that on 3 June 1986 he received B79, a notice requesting him to take
vacant possession. He did not take the keys as the house was in an unsatisfactory state. He subsequently
informed Mr Ng of the state of the house and he in return promised that remedial works would be done later.
The remedial works were completed in 1987 but were still not up to the mark and PW1 lodged a similar
complaint. Repairs were again undertaken after the Chinese New Year in 1988 but with the same negative
results. Bitter with the situation, he voiced out his unhappiness vide a letter dated 4 April 1988 (B83) which
contained among others his complaints regarding cracks, sinking and other defects in the house. He asserted
that the defects were major defects involving the structure and foundation of the building. Aside from
recording his extreme dissatisfaction in the manner in which the house was constructed, he ventilated his
fears of his personal safety, hence causing him not to be able to occupy the house. PW1 also said before his
lawyer's rescission letter was forwarded to the defendant he did request from Mr Ng a new house as a
replacement. He also gave evidence that a few years later the said building was literally torn down and
rebuilt.
PW2, an architect by profession who investigated into the condition of the said building, evinced that he saw
first hand on 9 August 1988 that the ground on which the building was built had sunk at different parts. The
substantial differential settlement on the land led to the cracks and tear of the building. He concluded that the
construction was no longer safe for habitation and therefore required a major repair to be undertaken. PW4, a
qualified engineer on instruction of PW1, inspected the said building on 31 January 1988. He too found
many sink holes when the repairmen hacked the concrete leaving a void wherever the earth had subsided. In
fact, he found that the ground floor slabs had not followed the British Code of Practice emulated by the
Malaysian practices as the ground floor slab was a mere 11 2 in and not 4in. The cement content was low and
piling had not been properly carried out. He similarly concluded that overall the workmanship was poor and
the house was unsafe to stay in.
PW3, who is the neighbour of PW1, was one of the purchasers of the lot of houses built by the defendant.
His house is immediately to the right of PW1's house as one faces away from the row of buildings. He
moved in into his unit in September 1987 but moved out in February 1990 when the house was dismantled.
He confirmed that the plaintiffs' house too was rebuilt and completed at the end of 1991.
Aside from the evidence adduced from these witnesses, photographs were tendered which lucidly highlighted
the poor condition of the relevant building. The pictures spoke for themselves. Besides highlighting the
serious defects, they confirmed the subsequent actions of the defendant
1996 4 MLJ 544 at 550

after 1990 when the defendant literally tore down and rebuilt the building. The defendant in their submission
admitted of the literal rebuilding but justified the necessity of the dismantling of the walls and the roof in
order to redress the foundation and the structure of the building.
The relevant questions begging to be considered by the court, inter alia, would be:
(1) whether cl 23 which provided for a defect liability period is relevant in this case;
(2) whether there was a fundamental breach which justified a rescission on the part of the plaintiff; and
(3) whether there was a good rescission when the plaintiffs through his lawyer sent the letter of rescission on
28 May 1988 (P1).
To have a better understanding of the above problems and before disseminating in detail the legal intricacies
involved, perhaps it would not be inappropriate to touch briefly on the contention of the defence. The
defendant submitted that since vacant possession had taken place on 3 June 1986 and a year had passed, the
plaintiffs could not now invoke cl 23. This clause provided a mere one year for the defect liability period.
Further, the plaintiffs could not have rescinded the contract as there was no evidence that the defendant had
refused or was unable to perform the contract what with the conduct and attitude of the plaintiffs before or
after 28 May 1988 showing acquiescence to contract.
The plaintiffs have asserted that they had rescinded the contract on the solitary ground of fundamental breach
on the part of the defendant. To fully understand the plaintiffs' stance perhaps it would be better if I discuss
the expression of 'fundamental breach of contract' briefly. 1 Chitty on Contracts(24th Ed) at p 367 elucidated:
The expression 'fundamental breach of contract' is used in two quite different senses. In one sense, it denotes
a breach by one party which is sufficiently serious to entitle the other party, not merely to claim damages, but
to elect to treat himself as discharged from further performance under the contract In another sense,
however, fundamental breach expresses a supposed principle of law that there are certain breaches of
contract which are so totally destructive of the obligations of the party in default that liability for such a
breach cannot be limited or excluded by means of an exemption clause.
In Suisse Atlantique Societe D'Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361,
the House of Lords held that even though there was a breach that went to the root of the contract but as they
had affirmed the contract 'they cannot escape from the consequences of the demurrage clause, unless as a
matter of construction, they can show that it has no application to the events of this case' (per Lord Upjohn).
Therefore, if the innocent party had elected to affirm the contract he would thus be bound by the terms of the
contract including the exemption clause. If the innocent party had elected to treat the breach as discharging
himself from further performance of the contract 'the whole contract has ceased to exist including the
exclusion clause, and I do not see how that
1996 4 MLJ 544 at 551
clause can be used to exclude action for loss which was suffered by the innocent party after it has ceased to
exist ' (per Lord Reid at p 398B; see alsoChua Ngah Chin v Ng Kie En [1986] 1 MLJ 267).
Pearson LJ on this point in UGS Finance Ltd v National Mortgage Bank Of Greece and National Bank of
Greece [1964] 1 Lloyd's Rep 446 at p 450 had this to say:
As to the question of 'fundamental breach,' I think there is a rule of construction that normally an exception
or exclusion clause or similar provision in a contract should be construed as not applying to a situation

created by a fundamental breach of the contract This is a rule of construction based on the presumed
intention of the contracting parties This rule of construction is not new in principle but it has become
prominent in recent years in consequence of the tendency to have standard forms of contract containing
exception clauses drawn in extravagantly wide terms, which would produce absurd results if applied literally.
In George Mitchell v Finney Lock Seeds [1983] 1 All ER 108, the court too was of the view that exclusion
clauses which purported to exclude all liability were to be construed more narrowly than those which sought
to limit liability.
In another landmark case but many years earlier, the court in Harbutts 'Plasticine' Ltd v Wayne Tank and
Pump Co Ltd [1970] 1 QB 447 affirmed that where a fundamental breach occurred and further performance
of the contract was impossible and the plaintiff had no option but to treat the contract as at an end, the
defendant was precluded from relying on the exemption clause limiting his liability.
In Malaysia, the terminology of fundamental breach, which is a concept of the common law, though not in
exact term terms has become a creature of statute (see Choo Yin Loo v Visuvalingam Pillay (1930) 7 FMSLR
135). The relevant provision which is now enshrined in s 40 of the Act reads:
When a party to a contract has refused to perform, or disabled himself from performing, his promise in its
entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct his
acquiescence, in its continuance.
For the innocent party to rescind, two situations must prevail, namely that the offending party had refused to
perform or disabled himself from performing his promise. (The relevant contract as indicated by para 3 of the
statement of claim comes under the Housing Developers (Control and Licensing) Act 1966.) The defendant's
counsel had consistently argued that there was absolutely no evidence that the defendant had refused or had
disabled itself from performing its promise. On the contrary, the defendant was not only willing but was in
the process of fulfilling its obligation as provided by s 47 of the Act. The defendant further submitted that the
plaintiffs by conduct or words had acquiesced in the continuance of the agreement. This point will be
discussed in detail later. Now is the right time to decide whether a fundamental breach or a non-performance
of the contract as envisaged by s 40 of the Act had occurred which entitled the plaintiffs to rescind.
(Henceforth, I shall maintain the terminology of
1996 4 MLJ 544 at 552
'fundamental breach' since I am fully satisfied that the provision of s 40 is the direct descendant of the
common law concept.) Further, even if the court is satisfied that a fundamental breach had occurred the
further question to be answered is whether the plaintiffs had elected to discharge the contract or had
acquiesced to the contract. From the evidence adduced, I must conclude that a fundamental breach had
occurred as the building that was delivered to them in 1986 was not what they had bargained for (see Pollock
& Mulla on Indian Contract and Specific Relief Actsat p 397). On perusal of the sale and purchase agreement
dated 11 September 1984 (B1-B11), the vendor agreed to sell the plaintiffs a single-storey terrace house with
the details provided in the second and third schedules. The evidence adduced during the hearing clearly
showed that the said building when delivered to the plaintiffs was in a terrible shape that required massive
remedial works and eventually had to be rebuilt. Since what was delivered was not what had been agreed
upon surely the breach was a breach that went to the root of the contract. I also find solace in the writings
of Cheshire and Fifoot's Law of Contract(8th Ed) at p 566 which reads:
Of what nature, then, must a breach be before it is to be called 'fundamental?' There are two alternative tests
that may provide the answer. The court may find the decisive element either in the importance that the parties

would seem to have attached to the term which has been broken or to the seriousness of the consequences
that have in fact resulted from the breach. We have already suggested that the former is the happier approach
to the matter
According to this test, the governing principle is that everything depends upon the construction of the
contract in question. The court has to decide whether, at the time when the contract was made, the parties
must be taken to have regarded the promise which has been violated as of major or of minor importance. In
the words of Bowen LJ:
'There is no way of deciding that question except by looking at the contract in the light of the surrounding
circumstances, and then making up one's mind whether the intention of the parties, as gathered from the
instrument itself, will best be carried out by treating the promise as a warranty sounding only in damages, or
as a condition precedent by the failure to perform which the other party is relieved of his liability.'
Since the plaintiffs did not get delivery of a house in the accepted sense clearly a fundamental breach had
occurred. Case law too has clearly come to the forefront to affirm that in a contract with builders for the
purchase of a house to be erected there is an implied warranty by the vendors that the house would be built in
an efficient and workmanlike manner, and with proper materials and fit for habitation (see Miller v Cannon
Hill Estates Ltd[1931] 2 KB 113; Teh Khem On & Anor v Yeoh & Wu Development Sdn Bhd & Ors [1995] 2
MLJ 663; Hancock & Ors v Brazier (BW) (Anerley) Ltd [1966] 2 All ER 901).
I now come to another related issue, namely whether on a proper construction of cl 23 this defect liability
period clause did exclude a fundamental breach. Clause 23 reads:
(23) Any defect, shrinkage or other faults in the building which shall become apparent within a period of 12
calendar months after the date of delivery
1996 4 MLJ 544 at 553
of vacant possession to the purchaser and which are due to defective workmanship or materials or the said
building not having been constructed in accordance with the said specifications and plans as approved by the
appropriate authority (amended or unamended as the case may be) shall be repaired and made good by the
vendor at his own cost and expense within one month of its having received written notice thereof from the
purchaser and if the said defects, shrinkage or other faults in the said building have not been made good by
the vendor, the purchaser shall be entitled to recover from the vendor the costs of making good the same and
the purchaser may deduct such costs from any sum which has been held by the vendor's solicitor as
stakeholder for the vendor.
Having perused this clause on a plain interpretation, it merely laid down the responsibility of the vendor over
minor defects within one year of the delivery of vacant possession and of his subsequent liability were there
to be discovered new ones. Definitely this defect liability period provision is silent as to the ousting of
fundamental breaches. To use the words under para 3 of the headnote in George Mitchell (Chesterhall) Ltd v
Finney Lock Seeds Ltd[1983] 1 All ER 108:
Those breaches could not have occurred without negligence on the part of the defendants. Accordingly (Lord
Denning MR dissenting), on its true construction the limitation clause did not exempt the defendants from
liability because there was nothing in it which protected them from the consequences of their own negligence
and (per Oliver LJ) because what was delivered was wholly different in kind from that which the plaintiffs
had ordered.

The fact that the defendant, sometime in 1990, rebuilt the building lends credence to the court's findings that
what was delivered to the plaintiffs in 1986 was not the unit of property agreed and expected by the latter.
Had the building been built in line with all the required specifications and in accordance with all legal
requirements surely the building would not have been torn down and rebuilt.
The next relevant point that is to be considered is whether after having realized that a fundamental breach
had occurred whether the plaintiffs had acquiesced to the continuance of the contract or had elected to
rescind it. If the rescission was good in law then they had extricated themselves from the agreement
consequenting in the termination of the contract. Several events were highlighted by the defendant to prop up
the argument that the plaintiffs had acquiesced in the continuance of the contract, viz:
(i) the charge and loan documents executed in 1986 (B12-24);
(ii) legal fees paid in August/September 1986 (B28);
(iii) after having taken vacant possession in June 1986 the plaintiff had visited one Mr Ng, a representative of
the defendant's company, requesting that remedial works be carried out. In fact, in 1987, PW1 again asked
for a second remedial works be carried out. He was promised that further remedial works would be carried
out after the 1988 Chinese New Year;
(iv) the employment of an architect in April 1988;
(v) the preliminary reports prepared by PW4 in September 1988 and photos taken in April 1988;
1996 4 MLJ 544 at 554
(vi) photographs taken in February, June and December 1990 (B111-134);
(vii) a loan taken by the plaintiffs from 7 October 1986 all the way up to 13 October 1993;
(viii) payments of quit rents from 1987 to 1991 (B29/B31);
(ix) assessments paid by the plaintiffs from July 1988 until January 1992 (B32/B34); and
(x) PW1's continual reference to the house as his house and his acceptance of the house as his.
The sum total of these factors, the defendant submitted, would lead to the irresistible conclusion that the
plaintiffs wanted the defendant to rectify the defects as indicated by their conduct especially the continued
monitoring of the repairs, visits to the scene, taking of photographs and employing of experts. The
defendant's counsel submitted that surely, all these factors support the contention that the plaintiffs had
acquiesced to the continuance of this contract. If the court were to agree with the issue of the acquiescence,
the dicta of Salleh Abbas FJ (as he then was) in Sim Chio Huat v Wong Ted Fui [1983] 1 MLJ 151 would be
relevant especially at p 153 para G-H left which reads:
By allowing the delivery dates to pass and by acquiescing in the work continuing under the agreement and
indeed by ordering extra work to be done for each of these houses, for which the agreement made no
provision, the appellant must be held to have waived his right to rescind the agreement on account of
repudiation and also the right to treat himself as discharged therefrom. He must be deemed to have elected
the agreement as still continuing.
It would appear in the current case, which is at variance with Sim Chio Huat,that the plaintiffs had elected to
treat themselves as discharged from further performance of the contract as they had sent a letter of rescission
on 28 May 1988. The plaintiffs, on the other hand, were not reluctant to admit that they had acquiesced up to

28 May 1988 but not thereafter. Post 28 May 1988, the plaintiffs showed no further interest in the said
building. The fact that the plaintiffs did not join the other seven purchasers to demand that the developers
carry out remedial works held testimony to his lack of interest. It was not disputed that the plaintiffs had not
occupied nor taken the keys to the house. The subsequent photographs taken in 1990 were merely to support
the legal action when this present suit was filed on 18 November 1988. The plaintiffs' counsel too gave
reasonable answers as to why payments had to be continued whether in the form of quit rents, assessments or
the monthly instalments as these were legal and contractual payments to third parties. Aside from these
factors which were justified by the plaintiffs, the court was affected by these nagging questions namely:
(i) did the defendant accept the rescission? and
(ii) if the rescission was not accepted why did the defendant rebuild the relevant premises without obtaining
prior permission from the plaintiffs?
After considering all the evidence and the subsequent actions of the defendant, I was satisfied that an
effective rescission had been proved by the plaintiffs and that the defendant had also accepted the repudiation
of
1996 4 MLJ 544 at 555
the contract. Notwithstanding this factor of acceptance by the defendant, I was satisfied too that the unilateral
act of the plaintiffs to terminate the agreement was sufficient and in accordance with the requirements of the
law. The subsequent activity of the defendant to literally rebuild the four rows of houses including the said
building without securing any prior permission from the plaintiffs merely supported the correctness of the
plaintiffs' assertion.
The consequential effect of delivering a defective house unfit for human habitation and unsafe, the defendant
thus too, had breached cl 7 of the agreement. Clause 7 clearly provided that 'time shall be the essence of the
contract' in relation to all the provisions of the agreement.
Perhaps it is quite timely to refer to the case of Chye Fook & Anor v Teh Teng Seng Realty Sdn Bhd [1989] 1
MLJ 308 at p 309 para C-D as regards damages where Abdul Malek J (as he then was) said:
Now, it is pertinent to examine the law on this point. In Mayson v Clouet & Anor [1924] AC 980, Lord
Dunedin had said 'the law is quite plain. If one party to a contract commits a breach then if that breach is
something that goes to the root of the contract, the other party has his option. He may still treat the contract
as existing and sue for specific performance; or he may elect to hold the contract as at an end, that is, no
longer binding on him while retaining the right to sue for damages in respect of the breach committed.'
As it was in this case, the plaintiffs did not treat the contract as subsisting entitling him the right to sue for
damages in respect of the breach but to completely repudiate the contract. For some reason or other, the
plaintiffs did not succeed in proving certain relevant claims such as the differences in expenses for buying a
new house. On the other hand, I was satisfied that the plaintiffs did prove to the satisfaction of the court the
following prayers which had to be refunded by the defendant, viz:
(1) the purchase price of RM62,950 as illustrated in the sales and purchase agreement (B1-B11) paid through
a RM50,000 loan and the balance from his own savings (B50);
(2) interest on loan at 10% (B14);
(3) expenses incurred for processing fee (B36);

(4) stamp duties at RM630 (B28);

(5) relevant assessments (B32-B34);
(6) all quit rents (B29-B31);
(7) proven costs of RM300 to experts (B35); and
(8) legal fees RM1,276 (B28).
For this action, I ordered cost against the defendant. The counterclaim of the defendant was dismissed.
Application allowed. Reported by CK Ong

[2011] MLJU 409

TUNKU NORELLA SURIANI BT TUNKU YUSOFF & ANOR V KUMPULAN SIERRAMAS (M)
SDN BHD & ANOR
HIGH COURT (KUALA LUMPUR)
ROSILAH YOP, JC
GUAMAN NO S6-22-979-2006
18 April 2011

S. Sekhar (Joel Lim with him) (Sekhar & Suaran) bagi pihak Plaintif-Plaintif
Abdullah Omar (Hisham Sobri & Kadir) bagi pihak Defendan Pertama
Gunaseelan (Gunaseelan & Associates) bagi pihak Defendan Kedua
ROSILAH YOP JC
1. Brief Facts:
[1] The Plaintiffs are at all material times, house owners and/or residents at Jalan Keruing Kipas, Sierramas
West, Sungai Bulbh, Selangor.
The 1st Defendant is the Developer of the said Sierramas West residential estate. The 2nd Defendant is the
house owner at Lot 136, Jalan Keruing Kipas, Sierramas West.
The Plaintiffs' homes are in close proximity to the 2nd Defendant whereby 1st and 2nd Plaintiffs are his
immediate neighbours at Lots 135 and 137 respectively. They have entered into Deeds of Mutual Covenants,
P1 (DMC) with the 1st Defendant by reason of the fact that it was condition to the sale and purchase of their
houses in Sierramas West.
The DMC provides for, amongst others the purchaser acknowledges the intention of the 1st Defendant of
developing Sierramas West into a well-planned, regulated and exclusive residential estate with recreational
facilities/amenities embracing a new community style living in harmony with the existing natural landscape
and environment.
The Sierramas West Property Development and Construction Guidelines (Construction/Property
Development Guidelines) which are annexed to the DMC as the Second Schedule are intended to, among
others, ensure that any buildings constructed pay due respect to both their neighbours and the surrounding
open spaces in the interest of a harmonious community.
DMC was drafted by the 1st Defendant. The 1st Defendant acts as the custodian and enforcer of the terms
therein. The Plaintiffs complained about the 2nd Defendant breaches to the 1st Defendant but the 1st
Defendant refused to act on the complaints.
2. Issues To Be Tried :
The Issues to Be Tried in respect of the Claim are as follows:

(a)

Between Plaintiffs and the 1st Defendant:

(i)

whether the 1st Defendant has the responsibility or duty of care in tort against the Plaintiffs to ensure that the
terms of DMC and / or the Guidelines are complied with by all house owner in Sierramas West;
o

(ii)

whether the 1st Defendant have full discretion in enforcing the terms of the DMC and / or the Guidelines on
all house owner in Sierramas West.

(b)

The Agreed Issues To Be Tried Between Plaintiffs and the 2nd Defendant:
o

(i)

"Samada Defendan 2 telah melakukan perkara-perkara yang diplidkan oleh Plaintif di dalam perengganperenggan 12, 12.1, 12.2, 12.3, 12.4,12.5, 16.2, 16.3, 16.4, 16.5, 16.6, 16.7, 16.8, 16.9,16.10,
16.11,16.12,16.13, 16.14 dan16.15 Pernyataan Tuntutan bertarikh 27.09.2006.
o

(ii)

Sekiranya jawapan kepada isu no. 1 iaiah 'ya\ samada Defendan 2 telah melanggar terma-terma Suratikatan
Waad-Waad Bersama dah Garis Panduan Pembangunan dan Pembinaan Hartanah Sierramas West dan
samada terma-terma Suratikatan Waad-Waad Bersama dan Garis Panduan Pembangunan dan Pembinaan
Hartanah Sierramas West boleh dikuatkuasakan terhadap Defendan 2.
o

(iii)

Sekiranya jawapan kepada no. 1 iaiah 'ya', samada Defendan 2 telah melakukan tort perbuatan-perbuatan
kacau ganggu persendirian dan mengganggu kenikmatan secara aman hak-hak berkaitan hartanah PlaintifPlaintif.
o

(iv)

Sekiranya jawapan kepada isu no. 1 ialah 'ya>' samada kelakuan Defendan 2 adalah tidak konsisten dengan
pembangunan Sierramas West sebagai gaya hidup kediaman komuniti secara harmoni.
o

(v)

Samada Plaintif-Plaintif adalah berhak kepada relif-relif yang dipohon terhadap Defendan 2, di dalam
Pernyataan Tuntutannya."
Alleged contravention of the DMC and/or Guideline by the 1st Defendant:
The 1st Defendant had failed, refused and/or neglected to take any or any appropriate action in respect of the
various complaints against the 2nd Defendant.
Alleged acts or conduct in contravention of the DMC and/or Guideline by the 2nd Defendant.

(i)

had conducted noxious activities on his property, including but not limited to, undertaking regular and
frequent open burning of offering;

(ii)

had let and/or permitted noise or sound of cracking of the whip, of which is similar to that of letting off fire
crackers;

(iii)

appeared to have allowed his premised to be used for purpose other than for single family residential
purpose;

(iv)

allowed number of vehicles to be parked at or around the Common facility Area in such a manner as to
impede or obstruct the free movement of vehicles of some of the house owners and/or residents, including
the Plaintiffs herein; and/or

(v)

had constructed a prayer altar in an obtrusive location.

5. Evidence and Findings :
The Plaintiffs gave evidence through PW1, PW2, PW3 and PW4. The Defendants on the other hand gave
evidence through DW1, DW2, DW3 and DW4.
The evidence for the Plaintiffs on the material issues as adduced by its witnesses was clear and generally not
challenged in cross examination. I will scrutinize the evidence against the 2nd Defendant first.
i. Whether the 2nd Defendant had conducted noxious activities on his property, including but not
limited to, undertaking regular and frequent open burning of offering
PW1 testified that the 2nd Defendant practiced open burning at his house which caused unpleasant and
noxious smells of smoke which also caused ashes to be blown to neighbouring houses. On certain occasions
the burning was from a drum which was placed out in the open area under his porch whereby paper were
thrown in, resulting in smoke and ashes blown to neighbouring lots. This evidence of PW1 was corroborated
by the evidence of PW2, PW3 and PW4. PW2 testified that ashes landed in her kitchen, her porch and even
on her cars. The Plaintiffs' witness were cross-examined about dates, times and particulars of this burning
when all the while these particulars were within the full knowledge of the 2nd Defendant, which are on the
1st and 15th of every Chinese calendar month in a year.
Further, the 2nd Defendant admitted during cross examination that he burns paper in a bin twice a month, on
the 1st and 15th of every Chinese calendar month for offering. This fact is a matter within the specific
knowledge of the 2nd Defendant.
I find as a fact that the 2nd Defendant had admitted burning papers on the 1st and 15th of every Chinese
calendar month. Therefore the facts that he practiced open burning of offering were proven.
The 2nd Defendant agreed in cross-examination that smokes and ashes did escape from the burning bin and
fall about 2 to 3 meters away from the bin. He also admitted that after the burning he covered the bin and
went back into his house.He did not go to any of the Plaintiffs' lots to see if ashes have been blown to their
lawn.

Therefore the eye witness testimony of the Plaintiffs' witness is more credible as she had personally
witnessed the said ashes in her compound. It was never put to the Plaintiffs' witness that they may have seen
wrongly or ashes from other sources or that they are not telling the truth. On a balance of probabilities, it is
the Plaintiffs' testimonies that are more probable.
The Plaintiffs' witnesses were not examined on the above material evidence and as such I would have to
accept their evidence as truthful evidence. The Court of Appeal case of Aik Ming (M) Sdn Bhd & Ors
v. Chang Ching Chuen & Ors & Another Case [1995] 3 CLJ 639 at p. 658 had this to say:
... It is essential that a party's case be expressly put to his opponent's material witness when they are under
cross examination. A failure in this respect may be treated as an abandonment of the pleaded case...It is quite
wrong to think that this rule is confined to the trial of criminal cases. It applies with equal force in the trial of
civil cases.
The Court of Appeal case of Sivalingam v. Periasamy [1996] 4 CLJ 545; [1995] 3 MLJ 395 where the Court
held that "It is essential that a party's case be expressly put to his opponent's material witness when they are
under cross-examination. A failure in this respect may be treated as an abandonment of the pleaded case and
if a party in the absence of valid reasons refrain from doing so, then he may be barred from raising it in
argument It is quite wrong to think that this rule is confined to the trial of criminal causes. It applies with
equal force in the trial of civil causes as well."
Clause 3.1(e) of DMC reads as follows:
No noxious, offensive or illegal activities shall be carried on upon the said property, nor shall anything be
done thereon which is or may become an annoyance or nuisance to the other purchasers.
It is clear from the evidence adduced that the 2nd Defendant had failed to comply with Clause 3.1(e) of
DMC and thus, committed breach of contract by the Defendant 2.
Whether the 2nd Defendant practiced of open burning at his house which caused unpleasant and noxious
smells of smoke which escaped and caused ashes to be blown to neighbouring houses is a private nuisance?
The tort of private nuisance was considered in the case Hunter v. Canary Wharf Ltd [1997] 2 All ER 426,
where Lord Lloyd of Berwick, after stating at p. 441 c-d that private nuisances are of the following three
kinds, namely:
(1) nuisance by encroachment on a neighbour's land; (2) nuisance by direct physical injury to a neighbour's
land; and (3) nuisance by interference with a neighbour's quiet enjoyment of his land,
said at p. 442: 10
... It has been said that an actionable nuisance is incapable of exact definition. But the essence of private
nuisance is easy enough to identify, and it is the same in all three classes of private nuisance, namely
interference with land or the enjoyment of land. In the case of nuisances within class (1) or (2) the measure
of damages is, as I have said, the diminution in the value of the land. Exactly the same should be true of
nuisances within class (3). There is no difference of principle. The effect of smoke from a neighbouring
factory is to reduce the value of the land. There may be no diminution in the market value. But there will
certainly be loss of amenity value so long as the nuisance lasts. If that be the right approach, then the
reduction in amenity value is the same whether the land is occupied by the family man or the bachelor.

The Court of Appeal in the case of Arab Malaysian Finance Bhd v. Steven Phoa Cheng Loon & Ors (2003) 1
ML J 567) had accepted the illustration of "smoke from a neighbouring factory" to amount to such a
nuisance.
PW1, PW2, PW3 and PW4 testified that there were smokes and ashes with unpleasant and noxious smells
escaped and caused ashes to be blown to the Plaintiffs' houses especially PW1 and PW2 house. These had
caused interference with a neighbours' quiet enjoyment of their land.
The open burning as conducted by the 2nd Defendant falls within nuisance by interference with a neighbour's
quiet enjoyment of his land. As such the 2nd Defendant has breached Clause 3.1(e) of DMC and also
committed the tort of private nuisance.
Applying the law to the facts of this case, I conclude that the emission of smoke and/or noxious substances
via the 2nd Defendant open burning falls within the said illustration and amounts to a private nuisance. It
cannot be denied that this interference with the Plaintiffs' quiet enjoyment of their land and inevitably
reduces the amenity value of their land.
ii. The 2nd Defendant had let and/or permitted noise or sound of cracking of the whip, of which is
similar to that of letting off fire crackers :
The Plaintiffs had pleaded at Para 12.2 in the Statement of Claim as follows:
"12.2 had let and/or permitted noise or sound of cracking of the whip, of which is similar to that of letting off
firecrackers;"
The Plaintiffs' witness testified that they had all heard loud sound akin to fire crackers. According to the
Clause 3.2 states as follows:
Clause 3.2
The Purchaser shall not permit any noise or sound from the letting off of fire crackers, talking, singing.....
Clause 3.2 of the DMC is very specific. The clause only prohibits noise or sound from the letting off of fire
crackers. There is no provision against noises "akin to firecrackers". No evidence was led by the Plaintiffs to
show that the 2nd Defendant had been letting off firecrackers. Thus, this item of claim remains unproven.
iii. The 2nd Defendant appeared to have allowed his premised to be used for purpose other than for
single family residential purpose.
There was no direct and credible evidence from the Plaintiffs' witnesses to establish that the 2nd Defendant
had used his premise for purposes other than for single family residential purpose. The Plaintiffs rely on
Clause 3.1(a) of DMC which provides that uthe said property shall be used for single family residential
purposes only..... "
Apart from the fact that the Plaintiffs failed to prove this allegation, the 2nd Defendant in his evidence said
that occasionally his parents will come and stayed with him. This does not mean that the 2nd Defendant has
contravened Clause 3.1(a) of DMC because the 1st Defendant had explained that, that Clause 3.1(a) was
meant specifically for permanent residence.
Further, the most pertinent issue that has to be considered is that the Statement of Claim pleads that "the 2nd
Defendant appeared to have allowed his premised to be used for purpose other than for single family

residential purpose." The claim cannot be based on a mere conjecture. On those reasons above, this
complaint has to be dismissed.
iv. The 2nd Defendant allowed number of vehicles to be parked at or around the Common facility Area
in such a manner as to impede or obstruct the free movement of vehicles of some of the house owners
and/or residents, including the Plaintiffs herein.
All the Plaintiffs' witnesses testified that they encountered obstruction of free flow of vehicle by visitors
parked at the 2nd Defendant house. In cross examination PW1 testified that she did not witness the incident.
PW2 and PW4 in cross-examination admitted that there are security personnel who would ask for cars to be
removed if they are parked indiscriminately.
All the Plaintiffs' witness could not gave the particulars or the vehicle number that was alleged to be parked
at the Common Facility Area.
Based on the above evidence, the Plaintiffs has failed to prove on the balance of probabilities that the 2nd
Defendant had allowed vehicle to be parked indiscriminately and thereby obstruction or impending the free
flow of traffic, the 2nd Defendant did not breach clause 3.1(a) of DMC.
v. Had constructed prayer altar in an obtrusive location.
Clause 7.5 (k) of the Sierramas West Property Development & Construction Guidelines attached in Schedule
2 of DMC states that: "prayer altars are to be set back a discreet distance from the property line and placed in
an unobtrusive locations".
DW3, Chan Yow Choy, who is the Senior Project Manager of the 1st Defendant testified that the 2nd
Defendant has a further 5 maters of garden available from the altar to his house. DW1 and DW3 testified that
the 2nd Defendant had space at the back of his house on a lower ground level.
The altar was placed in front of the 2nd Defendant house. P3A, P3B, P3C and P34 proved this. It is
undisputed facts that the altar was situated a mere 1.12 meters away from the front of the 2nd Defendant
property line and only 2.235 meters from the Plaintiff 1 house.
The 2nd Defendant himself, during cross examination had admitted that the altar was in a place where
everyone can see.
[7] The 2nd Defendant submitted that there are two elements to this complaint. The first being, the altar must
be constructed and secondly the altar must be in an obstructive location. The Plaintiffs must prove both
elements.
[7] Further, it was submitted that Section 5 of the National Land Code 1965 applies in this situation. Clause
7.5 (k) states that:
"Prayer altars are to be set back a discreet distance from the property line and placed in an unconstructive
location".
There is no distinction made between prayer altars that are constructed or installed.
DW2, who is the Legal and Administration of the 1st Defendant, admitted that pre-fabricated prayer altar did
not breach the DMC, were fresh terms unilaterally imposed by the 1st Defendant. This clause was in because
the 1st Defendant had encountered numerous problems with same altar issues in Sierramas East, whose
DMC did not contain the same clause. The 1st Defendant did not specify what type of altar would infringe

clause 7.5(k) when drafting the DMC. So it must apply to all altars, given the plain and ordinary meaning of
the words.
Further, Clause 7.5(a) to (j) deals with rubbish bin, cloths lives, air-conditioner units, extend water filters,
sola water heater, ground lathing fixtures and garden sheds. All these are not constructed but installed. There
is no distinction between constructed and installed to be made for payer altar. Section 5 of the National Land
Code 1965 has no application in this action.
It is trite law that documents must be construed within its four corners. This is the decision of the Federal
Court in Tindok Besar Estate Sdn Bhd v TinjarCo [1979] 2 MLJ 229; [1979] 1 LNS 119, and the Supreme
Court case of Koh Siak Poh v Perkayuan OKS Sdn Bhd [1986] 1 MLJ 238; [1985] CLJ (Rep) 506; [1985] 1
CLJ 174, where it was held that in a clear and unambiguous document the court should not go beyond any
written terms.
The question here is whether it is in a discreet distance from the property line and whether it is an obtrusive
location to place the altar as where it is now.
The Oxford Reference Dictionary defines the word "discreet" as follows:"...! showing caution and good
judgment in what one does; not giving away secrets. 2. unobtrusive."
"Unobtrusive" is defined in Oxford Reference Dictionary as follows: "...not making oneself or itself noticed".
During the cross-examination, the 2nd Defendant admitted that the altar was in a place where anyone can
see.
In the circumstances, I agree with the submission for the Plaintiffs that the altar, being a mere 1.12 meters
away from the property line and 2 meters away from the 1st Plaintiff house is in a discreet distance from the
property line and in an obtrusive position constituting a breach of Clause 7.5 (k) of the Construction/Property
Development Guidelines.
Clause 12.1 of the DMC clearly states that compliance with the Sierramas West Property Development &
Construction in Schedule 2 is mandatory. Clause 12.1 states as follows:
"The Purchaser acknowledges and confirm that he has read, fully understood and will comply with the
Construction / Property Development Guidelines which is annexed as the Second Schedule."
The 2nd Defendant had entered a binding contract with the Plaintiffs, therefore he is contractually bound by
the terms of DMC. It is obligatory for him to adhere to the DMC. It is clear from the evidence adduced that
the 2nd Defendant had failed to comply with Clause 7.5 (k) of the Sierramas West Property Development &
Construction Guidelines.
vi. The 1st Defendant had failed, refused and/or neglect to take any or any appropriate action in
respect of the various complaints against the 2nd Defendant.
It was admitted in the Defence of the 1st Defendant that each Plaintiff had separately entered into a common
Deed of Mutual Covenants (DMC) with the 1st Defendant.
Further, it was the evidence of the 1st Defendant that the intention of the Sierramas West Property
Development and Construction Guidelines among others is to ensure that any buildings constructed pay due
respect to both their neighbours and the surrounding open spaces, in the interest of harmonious community. It
could not however override the legitimate and reasonable construction and/or installation of structures for the
purpose of religious worship within the compound of the purchasers.

The DMC was imposed on all Purchasers inclusive of all Plaintiffs. It was imposed because it was a
condition precedent to any Sale and Purchase Agreement entered into by them.
It was admitted by DW1 in cross-examination that it was a condition precedent that the Plaintiffs signed the
DMC before purchasing their houses. The 1st Defendant is the enforcer of DMC.
Pursuant to Clause 22.5 DMC, the 1st Defendant has the right to enforce the DMC. Clause 22.5 DMC reads
as follows:
"The vendor may take whatever action it considers appropriate to seek relief in respect of any breach by the
purchaser of this Deed including but not limited to :

(a)

injunctive relief;

(b)

declaratory relief;

(c)

recovery damages
and shall be entitled to seek such relief concurrently".
Furthermore, pursuant to Clause 22.7 DMC, the 1st Defendant was given power to enter onto any property to
rectify the defaults.
The evidence of DW1 was corroborated by DW2 that they are under a duty to make due inquiring when they
received complaints.
DW2, Mr. Ramesh admitted that during their investigation, Mr. Albert Lim and Mr. Khusyairi only
interviewed the 2nd Defendant. They failed to interview the complainants themselves. Most of the
complaints are the Plaintiffs in this suit. The 1st Defendant based their decision not to enforce the terms of
the DMC against the 2nd Defendant on the investigation report by Mr. Albert Lim and Mr. Khusyairi. This
investigation was partial, as they only listened to the 2nd Defendant side of facts. The 1st Defendant did not
even produce the report as evidence in court.
In not tendering the said report, the 1st Defendant had withheld evidence and as such, adverse inference
under Section 114(g) Evidence Act 1950 ought to be raised against the 1st Defendant. The inference here is
that if the report was tendered, the evidence would favour the Plaintiffs.
The 1st Defendant sought to unilaterally impose fresh terms into the DMC as stated in D9. These fresh terms
suggested that if the altar is pre-fabricated, readymade, installed as opposed to constructed, placed within the
confines of the property, than it may be placed anywhere on the property. DW2 admitted in crossexamination that these were fresh terms. Clause 7.5(k) of the Construction/Property Guidelines makes
absolutely no mention about such absurdities.
When discretion is conferred on someone in a special position or authority, that discretion must be exercised
fairly and honestly in the interest of all residents at Sierramas West.
InBreen v Amalgamated Engineering Union & Ors. [1971] WLR CA, per Lord Denning M.R stated:

"If the rules set up a domestic body and give it discretion, it is to be implied that the discretion must be
exercised fairly. Even though its functions are not judicial or quasi judicial but only administrative, still it
must act fairly and should it not do so the courts can review its decision."
In Re SQ Wong Holdings (Pte) Ltd, [1987] 2 MLJ 298, held that:
"In law, the directors have discretion whether or not to recommend a dividend, even on the preference shares,
but this discretion must be exercised fairly and honestly in the interest of the company."
The evidence shows that the 1st Defendant did not exercise its discretion in a fair, honest and reasonable
manner.
The 1st Defendant seeks to invoke Clause 25.1 and 25.2 of DMC to exclude all liability against them. These
clauses do not absolve the 1st Defendant of liability for negligence and are inapplicable when considering
negligence simply because they do not specifically exclude liability for negligence.
The Plaintiffs complaint against the 1st Defendant were not only did the 1st Defendant refused to enforce the
DMC against the 2nd Defendant, but the 1st Defendant also found wrongly and without due enquiry, that the
2nd Defendant did not breach the DMC. Clearly, the exercise of discretion is only with regards to
enforcement and not discretion with regards to any finding of facts made by the 1st Defendant, which was
negligence on their part when they decided that the 2nd Defendant did not breach the DMC. It is clear that
the 1st Defendant did not exercise its discretion in a fair and reasonable manner.
The 1st Defendant also trying to invoke Clause 26.2 of the DMC to nullify the Plaintiffs' rights to a cause of
action. Such a clause contravenes Section 29 of the Contracts Act 1950 and thus it is illegal.
It is trite law that any attempt to exclude liability for acts of negligence must be expressly and clearly
worded.
It is trite law that any attempt to exclude liability for acts negligence must be expressly and clearly worded.
In the case of Canada Steamship Lines Ld v. The King [1952] A.C. 192 where it states at page 208 as
follows:
"... It is well settled that a clause of this nature is not to be construed as extending to protect the person in
whose favour it is made from the consequences of the negligence of his own servants unless there is express
language to that effect or unless the clause can have no operation except as applied to such a case."
[12] This position was accepted in the case Premier Hotel Sdn. Bhd. V Tang Ling Seng [1995] 1LNS 166
states that:
General words of exclusion would not ordinarily protect a contracting party from liability for negligence. To
protect him from liability for negligence, the words used must be sufficiently clear, usually either by
referring expressly to negligence or by using some such expression as 'however caused'. Here, the exemption
clause did not clearly or specifically exempt liability for negligence.
It is clear that Clause 25.1 DMC does not make any express and clear reference to acts of negligence. Clause
25.1 DMC cannot be read to exempt any liability from negligent acts.
Furthermore, clause 25.2 DMC is only applicable to clause 25.1 DMC which states as follows:

"...shall be bound by this clause and shall be deemed to have automatically waived any and all rights, claims,
demands and causes of action against the Vendor arising from or connected with any matter for which the
liability Of the Vendor has been disclaimed this Clause." (emphasis added).
Clause 25.1 of DMC does not expressly exclude liability for negligence or for breach as a duty of care by the
1st Defendant or for refusal to enforce the terms therein. Any attempt to exclude liability for acts of
negligence must be expressly and clearly worded.
Conclusion :
It is not disputed that Plaintiffs and Defendants are bound by Deeds of Mutual Covenants and Sierramas
West Property Development and Construction Guidelines.

[1995] 4 MLJ 229

PREMIER HOTEL SDN BHD v TANG LING SENG
HIGH COURT (KUCHING)
ELIZABETH CHAPMAN JC
CIVIL APPEAL NO KG 3-1994(III)
29 July 1995
Contract Exemption clause Loss of valuables from hotel room Hotel receptionist parted with room
key of guest to unknown person Whether exemption clause in hotel regulation excluded hotel from liability
The respondent stayed at a hotel owned by the appellant. He went out one afternoon and left his room key
with the hotel receptionist. The receptionist gave the key to an unknown person who said that some of the
respondent's workers had come to collect his key. Upon his return, the respondent found that his personal
belongings in his room were missing. The respondent did not instruct any one to collect his room key. The
respondent sued the appellant for negligence. His evidence was that he had always left his key at the
reception and would collect it himself. The appellant's Hotel Regulation contained the following exemption
clause: 'The Hotel will not assume responsibility for valuables or money lost from the room.'
The sessions court judge held that the respondent's room key had been handed over to persons unknown and
that the loss suffered by the respondent was a result of the negligence of the appellant's employees. The
appellant appealed. The appellant relied on the exemption clause as a defence.
Held, dismissing the appeal:

(1)

The question for determination by the sessions court judge was essentially one of fact and he had the
advantage of seeing and hearing the witnesses. It was only in a rare case that an appellate court would be
justified in coming to a different conclusion from the trial judge on the question of credibility.

(2)

General words of exclusion would not ordinarily protect a contracting party from liability for negligence. To
protect him from liability for negligence, the words used must be sufficiently clear, usually either by
referring expressly to negligence or by using some such expression as 'however caused'.

(3)

Here, the exemption clause did not clearly or specifically exempt liability for negligence.

(4)

The appellant, by its servants, was plainly negligent in failing to look after the respondent's room key and the
receptionist had negligently parted with the key.

(5)

As for the award of damages, the trial judge had not acted upon any wrong principle of law.
1995 4 MLJ 229 at 230

Bahasa Malaysia summary

Penentang telah menginap di sebuah hotel kepunyaan perayu. Beliau keluar satu tengah hari dan
meninggalkan kunci biliknya dengan penyambut tetamu hotel itu. Penyambut tetamu itu telah memberikan
kunci itu kepada seorang yang tidak dikenali yang mengatakan bahawa pekerja penentang telah datang untuk
mengutip kunci itu. Apabila beliau balik, penentang mendapati bahawa barangan kepunyaannya di dalam
bilik itu sudah hilang. Penentang tidak menyuruh sesiapa mengutip kunci bilik itu. Penentang membawa
tindakan terhadap perayu untuk kecuaian. Keterangannya adalah beliau selalu meninggalkan kunci biliknya
di meja sambut tetamu dan akan mengutipnya sendiri. Peraturan hotel perayu mengandungi fasal
pengecualian berikut: 'The Hotel will not assume responsibility for valuables or money lost from the room.'
Hakim mahkamah sesyen memutuskan bahawa kunci bilik penentang telah diserahkan kepada orang yang
tidak dikenali dan bahawa kehilangan yang dialami oleh penentang adalah keputusan kecuaian pekerjapekerja perayu. Perayu membuat rayuan. Perayu bergantung kepada fasal pengecualian itu sebagai
pembelaan.
Diputuskan, menolak rayuan itu:

(1)

Soalan untuk diputuskan oleh hakim mahkamah sesyen pada dasarnya adalah satu soalan fakta dan beliau
mempunyai kelebihan melihat dan mendengar saksi-saksi. Cuma dalam satu kes yang luar biasa mahkamah
rayuan boleh disokong dalam membuat kesimpulan yang berlainan daripada hakim perbicaraan atas soalan
kebolehpercayaan.

(2)

Perkataan-perkataan pengecualian yang am biasanya tidak akan melindung satu pihak yang membuat kontrak
dari tanggungan untuk kecuaian. Untuk melindungi dirinya dari tanggungan untuk kecuaian, perkataanperkataan yang digunakan mestilah cukup jelas, biasanya dengan merujuk secara nyata kepada kecuaian atau
dengan menggunakan ungkapan seperti 'however caused'.

(3)

Di sini, fasal pengecualian tidak mengecualikan dengan jelas atau spesifik tanggungan untuk kecuaian.

(4)

Perayu, melalui pekerja-pekerjanya, jelasnya cuai kerana gagal menjaga kunci bilik penentang dan
penyambut tetamu itu telah dengan cuai menyerahkan kunci itu.

(5)

Berkenaan dengan award ganti rugi pula, hakim perbicaraan tidak bertindak atas prinsip undang-undang
yang salah.
Notes
For cases on exemption clauses, see 3 Mallal's Digest (4th Ed, 1994 Reissue) paras 1549-1559.
1995 4 MLJ 229 at 231

Legislation referred to
Evidence Act 1950 s 114(g)

Fabian Lim (Fabian AH Lim Advocate) for the appellant.

Lau Mei Ling (Sim & Lee Advocates) for the respondent.
ELIZABETH CHAPMAN JC
This is an appeal against the decision of the learned sessions court judge in holding Premier Hotel Sdn Bhd
negligent for the loss of the respondent's valuables and personal effects from the hotel room during the
respondent's stay in the said hotel.
The respondent had gone out with his friends one afternoon and on his return to the hotel he went to the
receptionist to get his key to the hotel room. He was told by the hotel receptionist that the key to his room
had been taken by somebody. He then went up to his room with a friend and he found his room key in the
room but his brief case together with his personal effects and his passport, identity card, birth certificate,
travellers cheques and Hong Kong dollars amounting to $40,000 were missing.
The respondent then went to the receptionist to ask why his key had been given to somebody else and
according to the latter, some of his workers had come to collect his key. The respondent told the receptionist
he had no workers in Sibu and further that he did not instruct anyone to collect his room key. It is noted that
the respondent was not cross-examined on this by counsel for the appellant.
A police report was lodged; the respondent's trip to Hong Kong had to be cancelled because of the loss of his
passport. From the evidence adduced in the court below it is clear that there was no forced entry into the
respondent's hotel room; he had placed the key under the care and custody of the appellant's servants.
The respondent's story is that he had always left his key at the reception and would collect it himself. The
sessions court judge who had the advantage of seeing and hearing the witnesses found that the respondent's
room key had been handed over to person(s) unknown and that the loss suffered by the respondent was a
result of the appellant's employees' negligence in handing the room key to person(s) unknown. The sessions
court judge did not deem it fit to draw an adverse inference under s 114(g) of the Evidence Act 1950 against
the respondent, who did not call his two friends who were with him at the material time, to testify. He was
satisfied with the respondent's evidence and he gave no weight to the evidence of DW2, the assistant
manager of the hotel.
The question for determination by the sessions court judge was essentially one of fact and I see no valid
reason to disturb this finding of fact of the trial judge who had taken proper advantage of his having seen and
heard the witnesses and had arrived at such finding based on the material evidence before him. It is only in a
rare case that an appellate court lacking the advantage of seeing and hearing the witnesses
1995 4 MLJ 229 at 232
would be justified in coming to a different conclusion from the trial judge on the question of credibility.
The crux of the matter here is whether the exemption clause in the Hotel Regulation (exh D1) would operate
to exempt the hotel from liability for valuables or money lost from the hotel room. The said clause reads:

The Hotel will not assume responsibility for valuables or money lost from the room.
9 Halsbury's Laws of England para 370 states:
Necessity for clear words: the contra proferentem rule. The basic rule of construction in respect of exclusion
clauses is that it requires clear words to exclude a liability which would otherwise arise. Thus, any ambiguity
is to be construed against the party putting forward the clause for his protection; this is known as the contra
proferentem rule. This basic rule has been qualified and extended as follows: (1) general words of exclusion
will not usually be construed so as to cover serious or 'fundamental' breaches going to the root of the
contract; (2) general words of exclusion may be construed as having no application to liability for
negligence.
and at para 373:
Construction against exclusion of liability for negligence. Where a contracting party may be subject to
liability for negligence and to a stricter form of liability the position is that general words of exclusion will
not ordinarily protect him from liability for negligence, but will prima facie be construed so as to protect him
from that stricter form of liability. To protect him from liability for negligence the words must be sufficiently
clear, usually either by referring expressly to negligence or by using some such expression as 'however
caused'.
In my considered opinion exh D1 did not clearly and specifically exempt liability for negligence. The
appellant, by its servants, was plainly negligent in failing to look after the room key of the respondent and
the person in charge of the counter at the material time had negligently parted with the key.
As for the award of damages in this case I see no valid reason to interfere with it as I find that the trial judge
had not acted upon any wrong principle of law.
For the reasons given above, the appeal is dismissed with costs, unless agreed, to be taxed.
Appeal dismissed.
Reported by Gary Kwan

[2014] 3 MLJ 169

CIMB Bank Bhd v Maybank Trustees Bhd and other appeals
FEDERAL COURT (PUTRAJAYA)
ARIFIN ZAKARIA CHIEF JUSTICE, RAUS SHARIF PCA, ABDULL HAMID EMBONG,
SURIYADI AND AHMAD MAAROP FCJJ
CIVIL APPEAL NOS 02(f)-2704 OF 2012(W), 02(f)-2804 OF 2012(W), 02(f)-2904 OF 2012(W),
02(f)-3004 OF 2012(W) AND 02(f)-3304 OF 2012(W)
10 February 2014
Contract Breach Terms Whether lead arranger for issuance of bonds was in breach of terms
Information memorandum ('IM') IM contained important notice by lead arranger excluding its liability
Whether lead arranger entitled to exclude liability arising from IM through notice Condition precedent
Whether lead arranger had acted in breach of condition precedent by not ensuring accounts were ringfenced prior to issuance of bonds Loss Whether most proximate cause of the loss was issuance of the
bonds without the ring fencing in place Liability Apportionment of Whether courts below had erred
in apportioning liability between lead arranger and trustee on 50:50 basis Whether trustee was wholly
liable for loss Interest Whether bondholders were entitled to pre-judgment interest Indemnity
Claim for Whether trustee should be indemnified in full by issuer of bonds Whether directors of issuing
company should be liable as constructive trustees
Tort Negligence Duty of care Whether trustee was grossly negligent
When Pesaka Astana (M) Sdn Bhd ('Pesaka') was awarded three government contacts, it proposed a
financing scheme to finance the contracts. The scheme involved the issuance of public Islamic bonds worth
RM140m to a primary subscriber with Pesaka's government contracts charged as security. Under the terms of
subscription and facility agreement, Pesaka appointed KAF Investment Bank ('KAF') as the lead arranger,
facility agent and issuing agent for the issuance of the bonds. KAF, who was to advise Pesaka on how to go
about obtaining a loan in a bond market, was, inter alia, tasked with the duty to prepare all the required
documentation to obtain the necessary approval from the Securities Commission. KAF assisted in the
preparation of a document called the information memorandum ('IM') that provided information about the
bonds to potential investors. In the IM, KAF included an important notice to exclude any liability arising
from any claim that may arise from the IM. Under the scheme, the bonds were first issued to a primary
subscriber, who in turn sold the same to the bondholders, who in return for investing in the bonds were to be
repaid on the maturity date. The bond funds paid by the bondholders were to be deposited into Shariah
designated accounts ('SD accounts'), which Pesaka was required to open at recognised financial institutions.
In order to ensure that the financial interest of the bondholders was secured, Pesaka entered into a trust deed
with Maybank Trustees Bhd ('MTB'). Under the trust deed, MTB was appointed as the sole trustee to manage
and control the SD accounts ie the SD accounts were to be completely ring fenced. As it turned out, instead
of opening new SD accounts, Pesaka used its existing conventional accounts as the designated accounts and
MTB was not made sole signatory to these accounts. In short, the accounts were not ring-fenced when the
bonds were issued. Having control over the accounts, Pesaka utilised the monies in the designated accounts
for its own purposes and failed to redeem the bonds and repay the bondholders on the maturity date.
Aggrieved the bondholders commenced an action in the High Court against 12 defendants. The bondholders
then entered a consent judgment against all the defendants, except KAF and MTB. However, the bondholders
chose not to execute the consent judgment. Instead they proceeded to trial against KAF and MTB. The High

Court found for the bondholders against MTB and KAF for breach of contract and negligence. The trial
judge also denied KAF any indemnity against Pesaka and apportioned liability between KAF and MTB on a
60:40 basis. On appeal, the Court of Appeal affirmed the findings of the High Court but re-apportioned
liability between KAF and MTB on a 50:50 basis. MTB filed a Notice of Contribution and a counterclaim
against Pesaka and the directors of Pesaka claiming, inter alia, an indemnity in full. In addition, MTB also
filed a counterclaim against CIMB, in the light of the accounts held by Pesaka maintained by CIMB. The
Court of Appeal granted MTB an indemnity of 2/3 of the sum claimed as against Pesaka and its directors.
KAF, MTB, Pesaka, the directors of Pesaka and CIMB have been granted leave to proceed with the instant
five appeals, which were jointly heard.
Held:

(1)

The first issue to be considered was whether KAF was entitled to include the important notice in the IM and
if so whether this notice operated as a disclaimer to negate KAF's duty of care. Based on the cases cited it
was clear that it was open to KAF, as the lead arranger, to include the important notice as a disclaimer in the
IM. It was not contrary to law or business practice to do so. In any case, the IM contained information
belonging to the issuer, Pesaka, and not that of the lead arranger and was therefore Pesaka's document. Both
the High Court and the Court of Appeal fell into serious error when they held that on the facts, there existed a
duty of care owed by KAF to the bondholders despite the presence of the important notice in the IM. Further,
it was common ground that the bondholders were sophisticated investors and experienced financial
institutions with vast experience in the capital market and not ordinary investors. They were thus expected to
act on independent and professional advice from their own sources in the light of the disclaimer as contained
in the IM. Thus, KAF as lead arranger was entitled to exclude liability arising from the IM through the
important notice. It therefore followed that KAF could not be held liable for any information found in the IM
(see paras 32, 44, 46, 50 & 52).

(2)

The second issue to be considered with regard to liability was whether KAF had acted in breach of the
condition precedent that required the SD accounts to be ring-fenced prior to the issuance of the bonds. From
the evidence adduced, namely the letter from Pesaka and the transactional letter, KAF was justified in being
satisfied that the SD accounts had been opened and that MTB had been made the sole signatory to these
accounts ie that the accounts had been ring-fenced. By holding that KAF had a duty to independently verify
that the SD accounts were ring-fenced, the Court of Appeal had placed a much higher burden on KAF than
what was required under the issue documents. In the present case, it could be reasonably concluded that
when the bonds were issued, KAF was fully satisfied that all the conditions precedent had been complied
with and was not acting in breach (see paras 75, 77 & 81).

(3)

Based on the evidence, the cause of loss was directly attributable to Pesaka, who had misappropriated the
funds. The Court of Appeal erred in holding that the most proximate cause of the loss was the issuance of the
bonds by KAF without the ring fencing in place. KAF was not a party to the trust deed, which was strictly
between the issuer and MTB. MTB had wide powers and rights under the trust deed and the power of
attorney, but it failed to take the necessary action to ring fence the account before the issuance of the bonds
or immediately after the bonds were issued. Thus, the most proximate cause of the loss was the failure on the

part of MTB to ring fence the SD accounts or alternatively to stop Pesaka from operating them. As such,
MTB was wholly to blame for the loss and not KAF (see paras 82, 84 & 87).

(4)

As a result, MTB was 100% liable to the bondholders and its appeal against the order of the Court of Appeal
in apportioning liability between MTB and KAF at 50:50 had to be dismissed (see para 91).

(5)

However, as the total sum of monies that was received and dissipated by Pesaka did not exceed RM107m,
the judgment should not be entered for the sum of RM149,315,000, which sum represented the redemption
value of the bonds. If MTB was to be held liable for the full amount of Pesaka's indebtedness, it would
amount to treating MTB as if it was either the primary debtor or guarantor to the bonds issue, which was not
the case. Accordingly, MTB was only liable to RM107m and not the full amount of RM149,315,000 (see
para 95).

(6)

The Court of Appeal had erred in allowing pre-judgment interest, which the High Court had correctly
refused. In deciding the question of interest, the court should consider the express agreement of the
bondholders in the trust deed. In this case, cl 39 of the trust deed had provided that no interest should be
payable (see para 101).

(7)

Although cl 14.1 of the trust deed clearly provided that MTB would be indemnified 'save and except for its
gross negligence, willful default, willful breach or fraudulent actions', the Court of Appeal found MTB to be
guilty of gross negligence and only ordered Pesaka to indemnify MTB up to two-thirds of the sum claimed.
However, this meant that Pesaka would stand to gain at least 1/3 of its ill-gotten gains. It would not be
equitable for Pesaka who had received the ill gotten gains to be put in a position where it could retain those
gains or any part of it. This is especially so since the bondholders had not taken any steps to enforce the
consent judgment entered between Pesaka and the bondholders and instead focused their attention on MTB
on the basis that the latter was in the position to satisfy the bondholders' claim. Thus, MTB should be
indemnified in full (see paras 108 & 112).

(8)

The directors of Pesaka had acted dishonestly when they misapplied the proceeds of the trust monies. In the
circumstances this court had to intervene by imputing a constructive trust upon the two directors for their
role in misapplying the trust monies. The corporate veil could not be the directors' defence from MTB's claim
for indemnity. With Pesaka having admitted full responsibility to the bondholders via the consent judgment,
the two directors should fully indemnify MTB for the loss (see paras 128129 & 131).

(9)

From the totality of the evidence, CIMB was only complying with instructions given by the banker-customer
relationship and could not be construed as being dishonest in the ordinary standards of reasonable and honest
people. As such, CIMB was not liable for the monies in the two accounts that were in its management. MTB
was totally liable (see paras 148 & 150).

Apabila Pesaka Astana (M) Sdn Bhd ('Pesaka') diawardkan tiga kontrak kerajaan, ia mencadangkan skim
pembiayaan untuk membiayai kontrak-kontrak tersebut. Skim itu melibatkan penerbitan bon-bon Islam
awam bernilai RM140 juta kepada pelanggan utama yang mana kontrak-kontrak kerajaan Pesaka telah
dicagarkan sebagai jaminan. Di bawah terma-terma perjanjian langganan dan kemudahan, Pesaka telah
melantik KAF Investment Bank ('KAF') sebagai pengatur utama, ejen kemudahan dan ejen penerbitan untuk
terbitan bon-bon tersebut. KAF, yang sepatutnya memberi nasihat Pesaka tentang cara memperolehi
pinjaman dalam pasaran bon, telah, antara lain, ditugaskan dengan kewajipan untuk menyediakan semua
dokumentasi yang dikehendaki bagi memperoleh kelulusan yang diperlukan daripada Suruhanjaya Sekuriti.
KAF telah membantu dalam penyedian dokumen dipanggil memorandum maklumat ('MM') yang
menyediakan maklumat tentang bon-bon kepada bakal pelabur-pelabur. Dalam MM itu, KAF memasukkan
notis penting untuk mengecualikan apa-apa liaibiliti yang timbul daripada apa-apa tuntutan yang mungkin
timbul daripada MM itu. Di bawah skim itu, bon-bon tersebut pertama kali diterbitkan untuk pelanggan
utama, yang kemudian telah menjual yang sama kepada pemegang-pemegang bon, yang mana sebagai
pulangan kerana melabur dalam bon-bon itu hendaklah dibayar semula pada tarikh matang. Wang bon-bon
itu yang dibayar oleh pemegang-pemegang bon hendaklah didepositkan ke dalam akaun-akaun Syariah yang
ditetapkan ('akaun-akaun SD'), yang perlu dibuka oleh Pesaka di institusi kewangan yang diiktiraf. Bagi
tujuan memastikan kepentingan kewangan pemegang-pemegang bon terjamin, Pesaka telah memasuki surat
ikatan amanah dengan Maybank Trustees Bhd ('MTB'). Di bawah surat ikatan amanah itu, MTB telah
dilantik sebagai pemegang amanah tunggal untuk mengurus dan mengawal akaun-akaun SD iaitu akaunakaun SD hendaklah dilindungi sepenuhnya. Namun begitu, tanpa membuka akaun-akaun SD baru, Pesaka
telah menggunakan akaun-akaun konvensional sedia adanya sebagai akaun-akaun yang ditetapkan dan MTB
tidak dijadikan penandatangan tunggal kepada akaun-akaun tersebut. Pendek kata, akaun-akaun tersebut
tidak dilindungi apabila bon-bon itu diterbitkan. Pesaka yang mempunyai kawalan ke atas akaun-akaun
tersebut telah menggunakan wang dalam akaun-akaun yang ditetapkan bagi tujuannya sendiri dan telah gagal
menebus bon-bon tersebut dan membayar balik pemegang-pemegang bon itu pada tarikh matang. Pemegangpemegang bon yang terkilan itu telah memulakan tindakan di Mahkamah Tinggi terhadap 12 defendandefendan. Pemegang-pemegang bon tersebut kemudian telah memasuki penghakiman persetujuan terhadap
kesemua defendan, kecuali KAF dan MTB. Walau bagaimanapun, pemegang-pemegang bon memilih untuk
tidak melaksanakan penghakiman persetujuan itu. Sebaliknya mereka telah memulakan perbicaraan terhadap
KAF dan MTB. Mahkamah Tinggi mendapati berpihak untuk pemegang-pemegang bon terhadap MTB dan
KAF kerana pelanggaran kontrak dan kecuaian. Hakim perbicaraan juga menafikan KAF apa-apa ganti rugi
terhadap Pesaka dan memperuntukkan liabiliti antara KAF dan MTB berasaskan 60:40. Atas rayuan,
Mahkamah Rayuan mengesahkan penemuan-penemuan Mahkamah Tinggi tetapi telah memperuntukkan
semula liabiliti antara KAF dan MTB berasaskan 50:50. MTB telah memfailkan notis sumbangan dan
tuntutan balas terhadap CIMB, berdasarkan akaun-akaun yang dipegang oleh Pesaka yang diselenggarakan
oleh CIMB. Mahkamah Rayuan memberikan MTB ganti rugi sejumlah 2/3 daripada yang dituntut terhadap
Pesaka dan pengarah-pengarahnya. KAF, MTB dan Pesaka, pengarah-pengarah Pesaka dan CIMB telah
diberikan kebenaran untuk memulakan lima rayuan ini, yang didengar bersama.
Diputuskan:

(1)

Isu pertama untuk diambil kira adalah sama ada KAF berhak memasukkan notis penting dalam MM dan jika
begitu sama ada notis ini berfungsi sebagai penafian untuk menyangkal kewajipan berjaga-jaga KAF.
Berdasarkan kes-kes yang dipetik ia adalah jelas bahawa ia adalah terbuka untuk KAF, sebagai pengatur
utama, untuk memasukkan notis penting sebagai penafian dalam MM itu. Ia tidak bertentangan dengan
undang-undang atau amalan perniagaan untuk berbuat demikian. Dalam apa keadaan, MM itu mengandungi

maklumat yang dimiliki penerbit, Pesaka, dan bukan pengatur utama dan oleh itu adalah dokumen Pesaka.
Kedua-dua Mahkamah Tinggi dan Mahkamah Rayuan terkhilaf apabila memutuskan bahawa berdasarkan
fakta, terdapat kewajipan berjaga-jaga oleh KAF kepada pemegang-pemegang bon meskipun terdapat notis
penting itu dalam MM tersebut. Selanjutnya, adalah alasan yang sama bahawa pemegang-pemegang bon itu
adalah pelabur-pelabur canggih dan institusi-institusi kewangan berpengalaman dengan pengalaman luas
dalam pasaran modal dan bukan pelabur-pelabur biasa. Mereka dengan itu dijangka untuk bertindak
berdasarkan nasihat bebas dan profesional daripada sumber mereka sendiri berdasarkan penafian
sebagaimana terkandung dalam MM tersebut. Oleh itu, KAF sebagai pengatur utama berhak mengecualikan
liabiliti yang timbul daripada MM itu melalui notis penting tersebut. Oleh demikian seterusnya bahawa KAF
tidak boleh dipertanggungjawabkan untuk apa-apa maklumat yang didapati dalam MM tersebut (lihat
perenggan 32, 44, 46 50 & 52).

(2)

Isu kedua untuk dipertimbangkan berkenaan liabiliti adalah sama ada KAF telah bertindak melanggar
prasyarat yang menghendaki akaun-akaun SD dilindungi sebelum terbitan bon-bon itu. Berdasarkan
keterangan yang dikemukakan, terutamanya surat daripada Pesaka dan surat transaksi, KAF mempunyai
justifikasi untuk berpuas hati bahawa akaun-akaun SD telah dibuka dan bahawa MTB telah dijadikan
penandatangan tunggal kepada akaun-akaun tersebut iaitu bahawa akaun-akaun itu telah dilindungi. Dengan
memutuskan bahawa KAF mempunyai kewajipan untuk mengesahkan secara berasingan bahawa akaunakaun SD itu dilindungi, Mahkamah Rayuan telah meletakkan beban yang lebih berat ke atas KAF daripada
apa yang dikehendaki di bawah dokumen-dokumen terbitan itu. Dalam kes ini, ia boleh disimpulkan secara
munasabah bahawa apabila bon-bon itu diterbitkan, KAF berpuas hati sepenuhnya bahawa semua prasyarat
telah dipatuhi dan ia tidak bertindak dalam pelanggaran (lihat perenggan 75, 77 & 81).

(3)

Berdasarkan keterangan, sebab kehilangan adalah berpunca secara langsung daripada Pesaka, yang telah
menyalahgunakan wang tersebut. Mahkamah Rayuan terkhilaf kerana memutuskan bahawa sebab paling
hampir untuk kehilangan itu adalah terbitan bon-bon itu oleh KAF tanpa terdapat perlindungan. KAF bukan
pihak kepada Surat Ikatan Amanah, yang mana adalah hanya antara penerbit dan MTB. MTB mempunyai
kuasa dan hak yang luas di bawah Surat Ikatan Amanah dan Surat Kuasa Wakil, tetapi ia gagal untuk
mengambil tindakan sewajarnya untuk melindungi akaun itu sebelum terbitan bon-bon tersebut atau dengan
segera selepas bon-bon tersebut diterbitkan. Oleh itu, sebab paling hampir untuk kehilangan itu adalah
kegagalan di pihak MTB untuk melindungi akaun-akaun SD atau secara alternatif untuk menghentikan
Pesaka daripada melaksanakannya. Oleh itu, MTB harus dipersalahkan sepenuhnya untuk kehilangan itu dan
bukan KAF (lihat perenggan 82, 84 & 87).

(4)

Akibatnya, MTB adalah 100% bertanggungjawab terhadap pemegang-pemegang bon itu dan rayuannya
terhadap perintah Mahkamah Rayuan dalam membahagikan liabiliti antara MTB dan KAF pada 50:50
hendaklah ditolak (lihat perenggan 91).

(5)

Walau bagaimanapun, oleh kerana jumlah keseluruhan wang yang diterima dan dilesapkan oleh Pesaka tidak
melebihi RM107 juta, penghakiman tidak patut dimasukkan untuk jumlah RM149,315,000, iaitu jumlah
yang menunjukkan nilai penebusan bon-bon itu. Jika MTB dipertanggungjawabkan untuk kesemua jumlah
keberhutangan Pesaka, ia sama seperti menganggap MTB sebagai penghutang atau penjamin utama kepada

terbitan bon-bon itu, yang mana bukan begitu. Oleh demikian, MTB hanya bertanggungjawab untuk RM107
juta dan bukan jumlah keseluruhan RM149,315,000 (lihat perenggan 95).

(6)

Mahkamah Rayuan terkhilaf kerana membenarkan faedah pra penghakiman, yang mana telah ditolak
sewajarnya oleh Mahkamah Tinggi. Dalam memutuskan persoalan tentang faedah, mahkamah mengambil
kira perjanjian nyata pemegang-pemegang bon dalam surat ikatan amanah itu. Dalam kes ini, fasal 39 kepada
surat ikatan amanah itu memperuntukkan bahawa tiada faedah patut dibayar (lihat perenggan 101).

(7)

Walaupun fasal 14.1 surat ikatan amanah jelas memperuntukkan bahawa MTB boleh diganti rugi 'save and
except for its gross negligence, willful default, willful breach or fraudulent actions', Mahkamah Rayuan
mendapati MTB bersalah kerana kecuaian melampau dan hanya memerintahkan Pesaka untuk mengganti
rugi MTB sehingga 2/3 daripada jumlah yang dituntut. Walau bagaimanapun, ini bermaksud bahawa Pesaka
akan memperoleh sekurang-kurangnya 1/3 daripada keuntungan haram yang diperolehnya. Adalah tidak adil
untuk Pesaka yang telah menerima keuntungan haram diletakkan dalam kedudukan di mana ia boleh
menyimpan keuntungan tersebut atau sebahagian daripadanya. Lebih-lebih lagi kerana pemegang-pemegang
bon tidak mengambil apa-apa langkah untuk menguatkuasakan penghakiman persetujuan yang dimasuki
antara Pesaka dan pemegang-pemegang bon dan sebaliknya memberi fokus perhatian mereka kepada MTB
atas dasar bahawa MTB berada dalam kedudukan untuk memuaskan tuntutan pemegang-pemegang bon itu.
Oleh itu, MTB patut diberi ganti rugi sepenuhnya (lihat perenggan 108 & 112).

(8)

Pengarah-pengarah Pesaka telah bertindak secara tidak jujur apabila mereka menyalahgunakan hasil wang
amanah itu. Dalam keadaan itu mahkamah perlu campur tangan dengan mengandaikan amanah konstruktif
ke atas dua pengarah yang berperanan dalam menyalahgunakan wang amanah itu. Tudung korporat tidak
boleh menjadi pembelaan pengarah-pengarah itu berdasarkan tuntutan MTB untuk ganti rugi. Berdasarkan
Pesaka yang telah mengakui tanggungjawab sepenuhnya terhadap pemegang-pemegang bon melalui
penghakiman persetujuan, dua pengarah itu patut memberi ganti rugi sepenuhnya kepada MTB untuk
kehilangan tersebut (lihat perenggan 128129 & 131).

(9)

Berdasarkan keseluruhan keterangan, CIMB hanya mematuhi arahan yang diberikan melalui hubungan pihak
bank-pelanggan dan tidak boleh ditafsirkan sebagai tidak jujur dalam piawai biasa seorang yang munasabah
dan jujur. Oleh itu, CIMB tidak bertanggungjawab untuk wang dalam dua akaun di bawah pengurusannya.
MTB adalah bertanggungjawab sepenuhnya (lihat perenggan 148 & 150).
Notes
For cases on duty of care, see 12(1) Mallal's Digest (4th Ed, 2013 Reissue) paras 12481334.
For cases on terms, see 3(2) Mallal's Digest (4th Ed, 2013 Reissue) paras 34513454.
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Paragon Finance plc v Thakerar & Co, Paragon Finance plc v Thimbleby & Co (a firm) [1999] 1 All ER
400, CA (refd)
Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC 1392 (Comm), QBD
(refd)
Rowlandson and others v National Westminster Bank Ltd [1978] 3 All ER 370, Ch D (refd)
Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97, PC (refd)
Selangor United Rubber Estates v Cradock (a bankrupt) and Others (No 3) [1968] 2 All ER 1073, Ch D
(refd)
Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC 1785 (Comm), QBD (refd)
Takako Sakao (f) v Ng Pek Yuen (f) & Anor (No 2) [2010] 2 MLJ 181; [2010] 1 CLJ 381, FC (refd)

Target Holdings Ltd v Redferns (a firm) [1995] 3 All ER 785; [1996] AC 421, HL (refd)
Titan Steel Wheels Ltd v Royal Bank of Scotland plc [2010] EWHC 211 (Comm), QBD (refd)
Twinsectra Ltd v Yardley and others [2002] 2 All ER 377, HL (folld)
Legislation referred to
Central Bank of Malaysia Act 2009 ss 56, 56(1)(a), 57
Civil Law Act 1956 s 11
Contracts Act 1950 ss 17, 18
Rules of the High Court 1980 O 42 r 12
Securities Commission Act 1993 ss 38(4), 65

Tommy Thomas (Alan Adrian Gomez and Nur Ashikin bt Abdul Rahim with him) (Tommy Thomas) in Civil
Appeal No 02(f)-2704 of 2012(W) for the appellant.
Wong Kian Kheong (Karen Lee Foong Voon and Geraldine Oh Kah Yan with him) (Wong Kian Kheong) in
Civil Appeal No 02(f)-2804 of 2012(W) for the appellant.
Cecil Abraham (Rishwant Singh, Mohamed Zaini Mazlan, Mawar Ahmad Fadzil and Amrit Gill with him)
(Zaini Mazlan) in Civil Appeal No 02(f)-2904 of 2012(W) for the appellant.
Robert Lazar (Mark Lau, Tan Ch'eng Leong and Gopal Sreenevasan with him) (Sreenevasan Young) in Civil
Appeal No 02(f)-3004 of 2012(W) for the appellant.
Malik Imtiaz Sarwar (Jenine Gill Sia, Siew Mun Lee and Zhen Yeap with him) (Sia Siew Mun & Co) in Civil
Appeal No 02(f)-3304 of 2012(W) for the appellant.
Robert Lazar (Mark Lau, Tan Ch'eng Leong and Gopal Sreenevasan with him) (Sreenevasan Young) in Civil
Appeal No 02(f)-2704 of 2012(W) for the respondent.
Robert Lazar (Mark Lau, Tan Ch'eng Leong and Gopal Sreenevasan with him) (Sreenevasan Young) in Civil
Appeal No 02(f)-2804 of 2012(W) for the respondent.
Tommy Thomas (Alan Adrian Gomez and Nur Ashikin bt Abdul Rahim with him) (Tommy Thomas) in Civil
Appeal No 02(f)-2904 of 2012(W) for the first to tenth respondents.
Malik Imtiaz Sarwar (Jenine Gill Sia, Siew Mun Lee and Zhen Yeap with him) (Sia Siew Mun & Co) in Civil
Appeal No 02(f)-2904 of 2012(W) for the 11th respondent.
Robert Lazar (Mark Lau, Tan Ch'eng Leong and Gopal Sreenevasan with him) (Sreenevasan Young) in Civil
Appeal No 02(f)-2904/ of 2012(W) for the 12th respondent.
Tommy Thomas (Alan Adrian Gomez and Nur Ashikin bt Abdul Rahim with him) (Tommy Thomas) in Civil
Appeal No 02(f)-3004 of 2012(W) for the first to tenth respondents.

Cecil Abraham (Rishwant Singh, Mohamed Zaini Mazlan, Mawar Ahmad Fadzil and Amrit Gill with him)
(Zaini Mazlan) in Civil Appeal No 02(f)-3004 of 2012(W) for the 11th respondent.
Lee Zhen Yeap (Sia Siew Mun & Co) in Civil Appeal No 02(f)-3004 of 2012(W) for the 12th to 20th
respondents.
Wong Kian Kheong (Karen Lee Foong Voon and Geraldine Oh Kah Yan with him) (Wong Kian Kheong) in
Civil Appeal No 02(f)-3004 of 2012(W) for the 21st respondent.
Robert Lazar (Mark Lau, Tan Ch'eng Leong and Gopal Sreenevasan with him) (Sreenevasan Young) in Civil
Appeal No 02(f)-3304 of 2012(W) for the first respondent.
Cecil Abraham (Rishwant Singh, Mohamed Zaini Mazlan, Mawar Ahmad Fadzil and Amrit Gill with him)
(Zaini Mazlan) in Civil Appeal No 02(f)-3304 of 2012(W) for the second respondent.
Arifin Zakaria Chief Justice:
INTRODUCTION
[1] There are five appeals before this court and they are:

(a)

Civil Appeal No 02(f)-2704 of 2012 (W) with CIMB Bank Bhd as the appellant and Maybank Trustees Bhd
as the respondent;

(b)

Civil Appeal No 02(f)-2804 of 2012(W) with Datin Murnina bt Dato' Hj Sujak as the appellant and
Maybank Trustees Bhd as the respondent;

(c)

Civil Appeal No 02(f)-2904 of 2012(W) with KAF Investment Bank Bhd as the appellant and MIDF
Amanah Investment Bank Bhd and 11 others as the respondents;

(d)

Civil Appeal No 02(f)-3004 of 2012(W) with Maybank Trustees Bhd as the appellant and MIDF Amanah
Investment Bank Bhd and 20 others as the respondents; and

(e)

Civil Appeal No 02(f)-3304 of 2012 (W) with Pesaka Astana (M) Sdn Bhd and eight others as the
appellants and Maybank Trustees Bhd and another as the respondents.
For convenience, we will first deal with the third appeal.
[2] This court had on 5 April 2012 granted leave to appeal to KAF Investment Bank Bhd ('KAF') on the
following questions of law:

(a)

What liability in law is assumed by an issuer, lead arranger, facility agent and issue agent with respect to
matters contained in an information memorandum?

(b)

To whom do the lead arranger, facility agent and issue agent owe duties in contract, tort and/or statute, and in
light of the express contractual obligations, duties and liabilities either by way of contract or under an
information memorandum?

(c)

Whether and to what extend are sophisticated investors, with the benefit of independent and professional
advice, allowed to expressly apportion their obligations, duties and liabilities either by way of or under an
information memorandum?

(d)

Whether and to what extend is the lead arranger allowed to:

o

(i)

Place experienced and sophisticated investors on notice as to the extend to which such investors are entitled
to rely on information contained in an information memorandum? and
o

(ii)

Limit any liability arising from any party reading and relying on the information memorandum?

(e)

Is an information memorandum an agreement within the meaning of s 65 of the Securities Commission Act
1993, and if so, who are parties to the information memorandum and how does the doctrine of privity of
contract apply?

(f)

Where a party has benefitted in pecuniary form from its fraudulent actions, in what circumstances will a
court of law countenance or permit that party to retain the benefit of that fraud?

(g)

Where parties to a contract provide that a party will indemnify the other in full for any and all expense, loss,
damage or liability arising out of the second party carrying out its duties under the contract in question:
o

(i)

Whether a court of law can interfere with the agreed contractual indemnity and order that only a partial
indemnity be given?; and
o

(ii)

What circumstances will justify a court making such an order in law?

(h)

Whether and to what extend can a court of law, to the exclusion of the Shariah Advisory Council, determine
or ascertain Islamic law for the purpose of Islamic financial business within the meaning of ss 56and 57 of
the Central Bank of Malaysia Act 2009?

(i)

Where a trial court makes a finding that there is no misrepresentation on a particular state of facts, in the
absence of an appeal from that decision by an affected party, can a Court of Appeal intervene and set aside
that part of the High Court decision? If the answer to this question is yes, then to what extend, if any, does
the doctrine of res judicata apply?

(j)

On the issue of liability for the default of the issuer in repaying the bonds:
o

(i)

In light of the fact that the lead arranger, issue agent and facility agent owe no duties in contract, tort or under
statute to the trustee, can the lead arranger, issue agent and facility agent, in law, be held to be contributorily
liable with the trustee for the default in the repayment of the bonds;
o

(ii)

What is the test for the apportionment of liability where more than one party is found liable and what part
does a party's knowledge in respect of the default play in the apportionment of liability? and
o

(iii)

Is the question to be asked whether (1) what is the proximate cause of the loss, or (2) what was the real
effective cause of the causa causans of the loss?

(k)

In a contractual context, can a statement of intent as to an event that is to take place in the future constitute a
misrepresentation under the law (including s 18 of the Contracts Act 1950)?

(l)

Whether the Court of Appeal was correct as a matter of fact and law in holding that the Securities
Commission must approve an information memorandum bearing in mind s 38(4) Securities Commission Act
1993 and if so, whether any party who wishes to issue an information memorandum is obliged to obtain prior
approval of the Securities Commission?
[3] We do not propose to answer the questions of law posed individually, but we will answer them in so far
as they are relevant to the appeal before us.
BRIEF FACTS
[4] Pesaka Astana (M) Sdn Bhd ('Pesaka') had obtained three government contracts. Pesaka proposed a
financing scheme through the issuance of public Islamic bonds worth RM140m ('the bonds'). Pesaka
appointed KAF as the lead arranger, facility agent and issue agent for the issuance of the bonds. This is
contained in the subscription and facility agreement ('the SFA') entered into between KAF, Pesaka and the
primary subscriber ('Kenanga').
[5] Pesaka then set up a Due Diligence Working Group ('the DDWG'). The DDWG gathered all information
required for the bonds scheme to formulate the information memorandum ('the IM'). The IM was put
together based on the information presented by Pesaka to the DDWG.

[6] Under the bonds scheme, Pesaka's contracts with the government will be charged as security. The
bondholders will provide funds to Pesaka to finance the contracts. In return, the bondholders will be repaid
on the maturity date. The security for the bonds exercise was the contracts which Pesaka had signed with
Bomba and the Ministry of Defence ('MINDEF'). The proceeds of these contracts were to be paid into
Pesaka's accounts which were to have Maybank Trustees Berhad ('MTB') as trustee and sole signatory.
[7] To ensure the financial interest of the bondholders are secured, the bonds scheme was structured with
MTB as the trustee, where all the proceeds from the government contracts due to Pesaka will be deposited in
Shariah designated accounts.
[8] The designated accounts will be under the sole control of the trustee. No one can use the monies in these
accounts except the trustee of the accounts and in the manner and for the purpose as specified in the trust
deed. In other words, the designated accounts will be completely ring fenced.
[9] Pesaka appointed MTB as the sole trustee to manage and control the designated accounts. This was done
under the trust deed entered into between MTB and Pesaka.
[10] As it turned out, instead of opening up new Shariah designated accounts, upon Pesaka's request, the
DDWG agreed to use the existing conventional accounts belonging to Pesaka as the designated accounts and
to convert them by making MTB as the sole signatory. Thus, Pesaka's existing accounts were used as the
designated accounts. However, these designated accounts were not fully converted as MTB was not made the
sole signatory to these accounts. Pesaka was still the signatory and had complete control over these accounts.
[11] Under the scheme, the bonds were first issued to Kenanga as the primary subscriber. Kenanga then on
sold the same to the plaintiffs (the bondholders). The bonds funds paid by the bondholders were deposited
into the designated accounts, under the control of Pesaka.
[12] Having control over the accounts, Pesaka utilised the monies in the designated accounts for its own
purposes and failed to redeem the bonds and repay the bondholders on the maturity date.
[13] On 25 October 2005, MTB arranged an informal meeting for Pesaka to table a debt repayment proposal.
The following details were, inter alia, revealed during the 25 October 2005 meeting:

(a)

Dato' Mohamad Rafie bin Sain ('Rafie') reported that he would like to come clean with the bondholders and
disclosed that Pesaka had actually received the monies, amounting to RM109m, sometime between June and
August 2004.

(b)

In response to queries from the bondholders as to where the monies were, Rafie mentioned that the funds had
been fully utilised to support Pesaka's overseas operation and overheads.

(c)

The bondholders asked the trustee as to how that could have happened and the trustee reported that KAF had
disbursed the bonds proceeds before the signatory was changed.

(d)

The bondholders then turn to KAF with the question as to how KAF could have disbursed the funds when
the documents stated that the trustee should have been the sole signatory prior to the disbursement

(e)

Farid Mohd Yusof reported that KAF had acted on the advice of Messrs Abu Talib Shahrom & Zahari ('the
transactional solicitor').

(f)

Miss Kim Lim of the transactional solicitor explained that the condition precedent only required Pesaka to
confirm that it had opened the designated accounts and that the board had passed a resolution to change the
signatories. It does not mention the need for KAF to get confirmation that the changes had been effected,

(g)

Pesaka then requested for indulgence until mid December to come up with a repayment proposal.
HIGH COURT
[14] Aggrieved, the bondholders then commenced action in the High Court against 12 separate defendants
which includes KAF. The bondholders were the parties who purchased the bonds in the secondary market
from Kenanga. The bondholders' claims against KAF in the High Court were fivefold, namely:

(a)

that the three trustee accounts which formed part of the designated accounts were not Shariah compliant;

(b)

that the bonds proceeds were not deposited into the disbursement account under MTB's control;

(c)

that the government contracts proceeds were never deposited into the revenue accounts under MTB's control;

(d)

that the foreign exchange claim was not RM31,529,338; and

(e)

that BOMBA had not agreed to compensate Pesaka on its foreign exchange losses and therefore, there were
misrepresentations in the IM.
[15] The bondholders then entered a consent judgment against Pesaka ('the first defendant'), Rafie ('the
fourth defendant') and the Amdac Group (the sixth to 12th defendants) for the full sum of claim ('the consent
judgment'). The bondholders then withdrew their action against Datin Murnina bt Dato' Haji Sujak ('the fifth
defendant') (Murnina).
[16] Having entered consent judgment for the full sum of the claim against Pesaka, the bondholders however
chose not to execute the consent judgment against Pesaka or had the damages assessed as against Rafie and
the Amdac Group. Instead, the bondholders proceeded to trial against KAF and MTB.
[17] The learned judge dismissed the claim in para 14 (d) and (e) and no appeal was brought by the
bondholders against the dismissal.

[18] The High Court allowed the bondholders' claim in para, (a), (b) and (c). The High Court found for the
bondholders against MTB and KAF for breach of contract and negligence.
[19] The learned judge denied KAF any indemnity against Pesaka and apportioned liability between KAF
and MTB on 60:40 basis.
COURT OF APPEAL
[20] On appeal, the Court of Appeal affirmed the findings of the High Court but re-apportioned liability
between KAF and MTB on 50:50 basis. The Court of Appeal further granted KAF an indemnity of 2/3 of the
sum of RM149,300,000 as against Pesaka.
KAF'S LIABILITY UNDER THE IM
[21] KAF is defined in the IM as the lead arranger. As lead arranger in a securitisation transaction, KAF is to
advise the issuer on how to go about obtaining a loan in a bond market. It is also tasked with the duty to
make submission of the proposal to the Securities Commission ('SC'), as the regulatory body, and to prepare
all the required documentation in order to obtain the necessary approval from the SC.
[22] KAF is also responsible for:

(a)

organising and identifying the apportionment of relevant advisers/parties (if applicable) in relation to the
private debt securities/Islamic securities for and on behalf of the issuer;

(b)

organising the formation of DDWG. It should be noted however that the DDWG was set up by Pesaka; and

(c)

participating as a member of DDWG, assisting in the preparation of IM, liaising with local rating agency,
marketing the securities to potential investors, monitoring the compliance of the conditions precedent prior to
issuance and supervising the documentation of the Islamic securities to the financial close.
HIGH COURT
[23] The High Court held that KAF as lead arranger owed a duty of care to the bondholders. This duty of
care, according to the High Court, arose out of the proximity of the relationship between KAF and the
bondholders which made it foreseeable that the bondholders would rely on the IM which KAF had played a
substantial role in putting together. The learned judge, therefore, held that KAF owed a duty of care to the
bondholders to ensure that the contents of the IM or otherwise known as the prospectus under the Securities
Commission Act 1993 ('the SCA') was neither false nor misleading.
[24] The learned judge also found that it was KAF's duty as lead arranger, not only to put together the
information contained in the IM and to make submission to the SC for approval, it was also KAF's duty to
verify the information that was given by Pesaka against the original documents.
[25] The learned judge held that KAF was liable in negligence in failing to verify the content of the IM, as a
result of which, the bondholders suffered damages.

[26] Learned counsel for KAF in his submission contended that the High Court judge in coming to her
decision failed to take into consideration the fact that the IM is not KAF's document, but that of Pesaka. In
fact, the letter from Pesaka dated 15 March 2004, in the IM, clearly acknowledged that the IM was prepared
by KAF based on information provided by Pesaka. Therefore, KAF should not be held liable for the
information contained in the IM.
[27] He further contended that in coming to her decision, the learned judge failed to consider the effect of the
important notice in the IM.
[28] With respect, we agree with learned counsel for KAF that the learned judge erred in saying that the IM
had to be submitted to SC for its approval under s 38(4) of the SCA, whereas the said section merely requires
a person issuing the IM, to deposit a copy of the IM within seven days after it is first issued. Therefore, it is
clear that the IM is not a document which requires approval of the SC.
[29] The learned judge further imposed a duty on KAF to verify the information contained in the IM against
original documents. We do not know how and on what basis this duty to verify arose. The learned judge
made no reference to any agreement or any statutory provision requiring KAF to verify the information
contained in the IM.
[30] The finding by the High Court in fact appears to go against the duties and obligations of KAF as spelt
out in the SFA. For instance, cl 14.2 (a) of the SFA clearly stipulates that KAF shall not assume or be deemed
to have assumed any obligation to or fiduciary relationship with the primary subscriber other than those for
which specific provision is made by this agreement or any obligation to or fiduciary relationship with the
issuer. Clause 14.2 (b) of the SFA further provides that the facility agent shall not be liable for any failure of
any other party to this agreement, or the trustee to duly and punctually perform any of their respective
obligations under the issue documents.
COURT OF APPEAL
[31] In affirming the decision of the High Court, the Court of Appeal went on to hold that the important
notice had no legal effect for two reasons, namely:

(a)

there was no approval from the SC for the important notice; and

(b)

KAF could not contract out its statutory duties or liabilities as it contravenes s 65 of the SCA.
[32] Like the High Court, the Court of Appeal fell into error in saying that the IM needs the approval of the
SC. As we stated earlier, that is not the case. As for the second ground, the Court of Appeal construed the
word 'agreement' in s 65 of the SCA to include the IM and accordingly the disclaimer is void as it
contravenes the said provision.
THIS COURT
[33] The Court of Appeal relied on the case of Antaios Cia Naviera SA v Salen Rederierna AB, The
Antaios [1985] AC 191 in extending the meaning of the word 'agreement' to include the IM but as rightly
pointed out by learned counsel for KAF, in that case the House of Lord was concerned with charter party
which had an arbitration clause and in particular with the construction of cl 5 of the charter party. Therefore,

strictly, the principle of construction as expounded by Lord Diplock in that case is relevant to the
construction of commercial contract and is not applicable to the interpretation of statute.
[34] Section 65 of the SCA provides as follows:
65 Agreements to exclude or restrict liability void.
An agreement is void in so far as it purports to exclude or restrict the liability of a person for contravention
of section 55, 57 or 58 or for loss or damage under section 153.
We agree with learned counsel for KAF that the word 'agreement' in s 65 of the SCA must be given its
ordinary meaning, which would mean some kind of contract between two or more parties. The IM on the
face of it is not a contractual document. It had been issued by KAF on behalf of Pesaka to provide
information to potential investors. The IM was not part of the issue documents which requires the approval
of the SC. For those reasons, we hold that the IM is not an agreement falling within s 65 of the SCA,
therefore, KAF is free to include the important notice in the IM to exclude any liability arising from any
claim that may arise from the IM.
[35] The important notice in the present case reads:
THIS INFORMATION MEMORANDUM IS NOT INTENDED BY KAF TO PROVIDE THE SOLE
BASIS OF ANY CREDIT OR OTHER EVALUATION, AND SHOULD NOT BE CONSIDERED AS A
RECOMMENDATION BY KAF TO PARTICIPATE IN THE FINANCING FACILITIES, EACH
PARTICIPANT IS URGED TO MAKE ITS OWN ASSESSMENT OF THE RELEVANCE AND
ADEQUACY OF THE INFORMATION CONTAINED IN THIS INFORMATION MEMORANDUM AND
TO MAKE SUCH INDEPENDENT INVESTIGATION AS IT DEEMS NECESSARY FOR THE PURPOSE
OF SUCH DETERMINATION. NEITHER KAF NOR ANY OF ITS DIRECTORS, OFFICERS,
EMPLOYEES, REPRESENTATIVES OR PROFESSIONAL ADVISERS (COLLECTIVELY, THE
'PARTIES') SHALL BE LIABLE FOR ANY CONSEQUENCES AS A RESULT OF THE RELIANCE ON
ANY INFORMATION OR DATA IN THIS INFORMATION MEMORANDUM.
ALL INFORMATION AND PROJECTIONS CONTAINED IN THIS INFORMATION MEMORANDUM
HAVE BEEN SUPPLIED BYPASB AS A MERE GUIDE ONLY AND DO NOT PURPORT TO CONTAIN
ALL THE INFORMATION THAT AN INTERESTED PARTY MAY REQUIRE. KAF HAS NEITHER
INDEPENDENTLY VERIFIED THE CONTENTS NOR VERIFIED THAT ALL INFORMATION
MATERIAL FOR AN EVALUATION OF THE FINANCING FACILITIES OR ABOUT PASB HAS BEEN
INCLUDED. NO REPRESENTATION OR WARRANTY, EXPRESS OR IMPLIED, IS MADE BY KAF
WITH RESPECT TO THE AUTHENTICITY, ORIGIN, VALIDITY, ACCURACY OR COMPLETENESS
OF SUCH INFORMATION AND DATA AS CONTAINED IN THIS INFORMATION MEMORANDUM.
BY RECEIVING THIS INFORMATION MEMORANDUM THE RECIPIENT ACKNOWLEDGES THAT
IT WILL BE SOLELY RESPONSIBLE FOR MAKING ITS OWN INVESTIGATIONS, INCLUDING THE
COSTS AND EXPENSES INCURRED, AND FORMING ITS OWN VIEWS AS TO THE CONDITION
AND PROSPECTS OF PASB AND THE ACCURACY AND COMPLETENESS OF THE STATEMENTS
CONTAINED IN THIS INFORMATION MEMORANDUM. FURTHER, KAF AND PASB, AND THEIR
OFFICERS OR EMPLOYEES DO NOT REPRESENT OR WARRANT THAT ANY INFORMATION
CONTAINED HEREIN WILL REMAIN UNCHANGED FROM THE DATE OF THIS INFORMATION
MEMORANDUM.

THIS INFORMATION MEMORANDUM INCLUDES CERTAIN STATEMENTS, ESTIMATES AND

PROJECTIONS PROVIDED BY PASB WITH RESPECT TO ITS ANTICIPATED FUTURE
PERFORMANCE. SUCH STATEMENTS, CONCERNING ANTICIPATED RESULTS AND SUBJECT TO
SIGNIFICANT BUSINESS, ECONOMIC AND COMPETITIVE UNCERTAINTIES AND
CONTINGENCIES, MANY OF WHICH ARE OR MAY BE BEYOND THE CONTROL OF PASB.
ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT SUCH STATEMENTS, ESTIMATES AND
PROJECTIONS WILL BE REALISED. THE FORECAST AND ACTUAL RESULTS MAY VARY, AND
THOSE VARIATIONS MAY BE MATERIAL. NO REPRESENTATIONS ARE OR WILL BE MADE BY
KAF OR PASB AS TO THE ACCURACY OR COMPLETENESS OF SUCH STATEMENTS, ESTIMATES
AND PROJECTIONS OR THAT ANY FORECAST WILL BE ACHIEVED.
THE CONTENTS OF THIS INFORMATION MEMORANDUM ARE STRICTLY PRIVATE AND
CONFIDENTIAL AND MUST NOT BE REPRODUCED OR CIRCULATED IN WHOLE OR IN PART
OR USED FOR ANY PURPOSE OTHER THAN THAT FOR WHICH IT IS INTENDED.
[36] The IM is widely used in other jurisdictions and it is generally accepted that the IM is merely to provide
the potential investors with the necessary overview of the product before deciding whether to participate in
bonds issue or otherwise. It is also common practice for a lead arranger to insert the notice of disclaimer.
[37] In the case of IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811, it was held that a
notice of disclaimer by an arranger absolves the arranger from the obligation to verify the accuracy of the
facts contained in the information memorandum. It was held that the disclaimer was sufficient to negate the
duty of care. The material facts in that case may be summarised as follows:

(a)

Goldman Sachs International ('GSI') was the underwriter of credit facilities made available to Autodis.

(b)

Additionally, GSI was also the arranger for the syndication of an intermediate tier of credit provided to
Autodis for its purchase of shares in Finelist, a UK listed company.

(c)

GSI created a Syndication Information Memorandum ('SIM'), subjet to certain standard wording, which was
distributed on or about 30 March 2000 to possible participants, including IFE.

(d)

IFE decided to invest in the security and subsequently brought an action against GSI, alleging
misrepresentation on the basis that GSI had failed to reveal further information regarding Finelist, which GSI
had obtained from Arthur Anderson prior to 30 May 2000.

(e)

Before the trial, IFE amended its pleading and included an additional claim for breach of duty of care.
[38] In its defence, GSI also relied on the terms of the 'important notice', under cover of which the SIM was
provided to IFE and all possible participants. That notice contains standard terms under which arrangers and
underwriters in the world of syndicated finance provide SIMs.

[39] The claim by IFE was dismissed by the High Court. The Court of Appeal affirmed the decision of the
High Court. Waller LJ in dismissing the appeal by IFE made the following observation:
28. The foundation for liability for negligent misstatements demonstrates that where the terms on which
someone is prepared to give advice or make a statement negatives any assumption of responsibility, no duty
of care will be owed. Although there might be cases where the law would impose a duty by virtue of a
particular state of facts despite an attempt not 'to assume responsibility', the relationship between GSI either
as arranger or as vendor would not be one of them. I entirely agree with the judge on this aspect. Second,
since IFE and GSI were parties to the contract under which GSI sold bonds to IFE, if there was a
misrepresentation it would be one to which the Misrepresentation Act 1967 would apply. If that Act does not,
for any reason, provide a remedy, there could as I see it be no room for IFE being able to succeed on some
other case of negligent misstatement.
[40] It would appear that important notice is a common practice not only in this country but also in more
established capital markets. Therefore, important notice cannot just be brushed aside. It has to be given
effect. After all, it cannot be denied that the bondholders in the present case are sophisticated investors and
experienced financial institutions. They have vast experience in bonds and are expected to act on
independent and professional advice from their own sources in respect of the contractual obligations in the
light of the disclaimer as contained in the important notice.
[41] IFE Fund SA has been followed in a number of other cases. (See JP Morgan Chase Bank v Springwell
Navigation Corp [2008] EWHC 1186 (Comm); JP Morgan Chase Bank v Springwell Navigation
Corp [2010] EWCA Civ 1221; Titan Steel Wheels Ltd v Royal Bank of Scotland Plc [2010] EWHC
211 (Comm); Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland plc [2010] EWHC
1392 (Comm); Standard Chartered Bank v Ceylon Petroleum Corporation [2011] EWHC
1785 (Comm); Brown v Innovatorone plc [2012] EWHC 1321 (Comm); and Go Dante Yap v Bank Austria
Creditanstalt AG [2010] 4 SLR 916)
[42] In Raiffeisen, the effect of important notice was considered by the court. At para 65, the learned judge
stated:
The Information Memorandum
[65] At the beginning of the Information Memorandum ('IM') there was what was headed an 'Important
Notice' which stated amongst other things:
' This Information Memorandum (the 'Memorandum') has been prepared from Information supplied by the
Company [EEL being defined as the Company].
The contents of this Memorandum have not been independently verified. No representation, warranty or
undertaking (express or implied) is made, and no responsibility is accepted as to the adequacy, accuracy,
completeness or reasonableness of this Memorandum or any further information, notice or other document at
any time supplied in connection with the Facility.
This Memorandum is being provided for information purposes only and is not intended to provide the basis
of any credit decision or other evaluation and should not be considered as a recommendation that any
recipient of this Memorandum should participate in the Facility. Each potential participant should determine
its interest in participating in the Facility based upon investigations and analysis as it deems necessary for
such purpose.

No undertaking is given to assess or keep under review the business, financial condition, prospects,
creditworthiness, status or affairs of the Company, the Borrower or any other person now or at any time
during the life of the Facility or (except as specifically provided in the Facility Agreement) to provide any
recipient or participant in the Facility with any information relating to the Company, the Borrower or
otherwise.
This Memorandum is being made available to potential participants on the strict understanding that it is
confidential. Recipients shall not be entitled to use any of the information contained in this Memorandum
other than for the purpose of deciding whether or not to participate in the Facility. Recipients are reminded
that this Memorandum is subject to the confidentiality undertaking signed by them.
It was held in Raiffeisen that as the IM is only a summary, it cannot therefore be assumed that the IM
contained everything that anyone might think relevant (even on credit issue).
[43] Similarly in Titan Steel Wheels Limited, one of the issues was whether Royal Bank of Scotland ('RBS')
was entitled to rely on contractual terms pertaining to its exclusion of liability or not. In that case, the High
Court held that there was no such duty of care, even if RBS had subsequently given advice to Titan.
[44] Therefore, it can be drawn from the authorities cited above, it is open to the lead arranger to include the
important notice as a disclaimer in the IM. It is not contrary to law or business practice to do so. This is so
because the IM contains information belonging to the issuer and not that of lead arranger. In the present case,
the IM is Pesaka's document.
[45] Since we have held that the important notice is not rendered null and void by s 65 of the SCA, hence it
must be given full effect and force.
[46] On close scrutiny of the judgment of the High Court and the Court of Appeal, with respect, we are of the
view that both fell into serious error when they held that on the facts, there existed a duty of care owed by
KAF to the bondholders despite the presence of the important notice in the IM. The reasons given by the
High Court read:
I am not going into the background of what I understand of the reasons leading to Pesaka looking for the
bonds. I find on the law that KAF as a lead arranger owes a duty of care to the bondholders Plaintiffs because
its responsibility fundamentally was to structure the bonds and to meet the object of its client, the issuer who
was looking for cheaper financing because the Islamic bonds were understood to offer that advantage and so
that it could meet existing obligation under the existing contracts with Bomba and MINDEF and that the
bondholders would be paid them monies when the bonds matured.
While the Court of Appeal at para 20, held:
Fraudulent misappropriation of trust property was the immediate cause of the loss of the revenue. But it was
dereliction of duty and or negligence that allowed that to happen. The stable door was invitingly not shut,
those who had the duty to shut that door would have to restore the total loss. That such is the extend of that
liability was reaffirmed in Target Holdings Ltd v Redferns (a firm) and anor [1996] AC 421
[47] Both courts made no reference to the contractual documents as contained in the issue documents. The
Court of Appeal referred to Target Holdings Ltd v Redferns (a firm) [1996] AC 421 in support of its finding.
This is a case concerning trust, where the degree of duty of care is higher than the present case. What is more
glaring, both the High Court and the Court of Appeal in finding that there existed a duty of care by KAF,
failed to consider the impact of the important notice or disclaimer. The High Court made no reference at all
to the important notice. Whereas, the Court of Appeal held that the IM is an 'agreement' within s 65 of

theSCA and for that reason the important notice was held to be void. This went against the principles in IFE
Fund SA and Raiffeisen cited above.
[48] It is also worth noting that both the High Court and the Court of Appeal, without considering the special
facts and circumstances of the case, simply ruled that there existed a duty of care on the principles of
'foreseeability', 'proximity', 'neighborhood' and 'fairness'. In applying those general phrases, it is important to
bear in mind the warning given by Lord Roskill in Caparo Industries plc v Dickman [1990] 2 AC 605 where
he said:
But such phrases are not precise definitions. At best they are but labels or phrases descriptive of the very
different factual situations which can exist in particular cases and which must be carefully examined in each
case before it can be pragmatically determined whether a duty of care exists and, if so, what is the scope and
extent of that duty.
[49] Another important consideration in this connection is whether or not the bondholders are persons with
sufficient experience or sophistication. This is borne out in JP Morgan Chase Bank.
[50] In the present case, it is common ground that the bondholders are sophisticated investors with vast
experience in the capital market. They are no ordinary investors. In JP Morgan Chase Bank, Gloster J held
that a trader employed by an investment bank, who made recommendations and gave advice to financially
sophisticated investors did not assume responsibility to the investor as to bring into play the full range of
obligations of an investment adviser or an asset manager. She concluded by saying that the bond salesman in
the financial world are no different to any salesman in ordinary life. The duty of care owed by them is lower
than that of investment advisors or an asset manager.
[51] The important notice in the present case clearly states:
by receiving this Information Memorandum, the recipient acknowledges that it will be solely responsible
for making its own investigations, including the costs and expenses incurred, and forming its own views as to
the condition and prospects of [Pesaka] and the accuracy and completeness of the statements contained in
this Information Memorandum.
This undoubtedly shifted the burden of verifying the content of the IM on the potential investors rather than
KAF.
[52] For the reasons stated above, we are of the opinion that KAF as lead arranger is entitled to exclude
liability arising from the IM through the important notice. It follows therefore that KAF could not be held
liable for any information found in the IM. Accordingly, we set aside the findings made by the High Court
and the Court of Appeal that KAF is liable for damages suffered by the bondholders consequent upon their
reliance on the IM.
CONDITION PRECEDENT 11
[53] Under the scheme of the bonds issue, Pesaka was required to open four Shariah compliant designated
accounts at recognised financial institutions. The four accounts were:

(a)

Disbursement Account (the DA);

(b)

Finance Service Reserve Account (the FSRA);

(c)

Revenue Account (the RA); and

(d)

Operating Account (the OA).

The DA, the FSRA and the RA were intended to be used for the purpose of receiving the bonds proceeds and
also to receive the proceeds from the existing contracts which were to form the corpus of the funds to repay
the bondholders.
[54] The OA was intended to receive the balance funds available upon full redemption of the bonds which
will be used to finance the working capital of Pesaka.
[55] A trustee would be appointed and be the signatory to all the designated accounts except the OA. MTB
was appointed to be the trustee to the bonds issue. The OA was intended to be operated and managed solely
by the Issuer. The appointment of MTB as trustee to these designated accounts was to safeguard the interest
of the bondholders and to provide integrity to the repayment scheme. This is commonly referred to as 'ring
fencing' which was described as being the fundamental basis upon which the bonds exercise was premised.
[56] The 'ring fencing' works on the basis that the receipt of the existing contract would be paid into the RA
and the FSRA to which the trustee would be the authorised signatory.
[57] Under the scheme, KAF's obligation in relation to the designated accounts is set out in schedule A to the
SFA which contains the conditions precedent to the bonds issue. One of the conditions precedent is CP11,
which reads:
11. Confirmation by the Issuer to the Lead Arranger that it has opened the Designated Accounts and
mandates (in form and content acceptable to the Lead Arranger) in respect of the Designated Accounts.
[58] CP11 must be read together with cl 3.1 of the SFA, which reads:
3.1 Condition Precedent
The obligation of the Issuer to issue the ABBA Bonds and the agreement of the Primary Subscriber to accept
and receive the ABBA Bonds under this Agreement shall be expressly subject to this condition that the Lead
Arranger has received the documents and or evidence listed in Schedule A in each case in form and content
satisfactory to the Lead Arranger and Primary Subscriber.
[59] It is not in dispute that there was no Shariah compliant designated accounts opened by Pesaka. Instead,
upon Pesaka's request, the DDWG agreed to use the existing conventional accounts belonging to Pesaka as
the designated accounts and to convert them by making MTB as the sole signatory. However, these
designated accounts were not fully converted because MTB was not made the sole signatory to these
accounts. In other words, Pesaka was still the signatory to these accounts, having complete control over the
accounts. In short, the accounts were not ring fenced when the bonds were issued.
[60] The issue before the court is whether KAF had complied with CP11 before the issuance of the bonds.
[61] It was contended on behalf of bondholders and MTB that KAF had acted in breach of CP11 by issuing
the bonds on 1 April 2004 without ensuring that ring fencing was in place. It was their contention that under

CP11, KAF had first to be satisfied that the designated accounts had been 'ring fenced' prior to the issuance
of the bonds.
[62] In reply, it was argued on behalf of KAF that KAF had fully complied with CP11 prior to the issuance of
the bonds on the basis that Pesaka had by four letters dated 15 March 2004 confirmed that Pesaka had
opened designated accounts to be managed and operated by MTB. Furthermore, the transactional solicitor
had through its letters to KAF dated 25 March 2004 and 29 March 2004 confirmed that all the conditions
precedent had been met.
HIGH COURT
[63] The learned judge disagreed that KAF's responsibility ended by receiving the confirmation alone. She
held that it is 'the responsibility of KAF to see that the condition precedent was fulfilled in real term and not
in executrix stage alone.' She expressed the view that KAF's duty was to ensure that the ring fencing feature
of the designated accounts must exist in reality and these features are to endure till the maturity of the bonds.
She concluded that the ring fencing was in fact not in place and therefore KAF was in breach of its duty
under CPU.
COURT OF APPEAL
[64] In affirming the findings of the High Court, the Court of Appeal held that before KAF could issue the
bonds, KAF had to be satisfied that CP11 had been complied with. In order to do so, KAF as lead arranger,
facility agent and issue agent, had to independently verify that they were all in place. Confirmation by
Pesaka was no proof that the required designated accounts with the mandates had actually been opened. In its
judgment, it held that 'KAF had to be absolutely sure that the required designated accounts with MTB in sole
control were in place before the issuance of bonds. The stable door must be first closed. The accounts into
which revenue would be deposited must be in operation and in the sole control of MTB before bonds could
be issued. Only such accounts could be designated accounts. But even so, those accounts must be Shariah
compliant.'
THIS COURT
[65] Shariah compliant was not an issue before us. As it would appear from submissions of parties, what is
critical is the absence of ring fencing in respect of the designated accounts which was the proximate cause of
the loss. Having said that, therefore, the issue before us is whether the High Court and the Court of Appeal
were right in their decision in holding that KAF had acted in breach of CP11 in issuing the bonds.
[66] We think it is relevant to consider the circumstances which led to KAF being satisfied that CP11 had
been complied with. For this, we have to consider the various correspondences between Pesaka, KAF and the
transactional solicitor. More importantly, the execution of the trust deed on 19 March 2004 in which MTB
was appointed as the trustee.
[67] The powers and duties of MTB as trustee may be gathered from the following clauses of the trust deed.
Clause 7.3 of the trust deed provides:
7.3 Entitlement:
The Issuer agrees and covenants that the Trustee is entitled to take such action and to exercise all rights and
remedies and discretion pursuant to the terms of this Deed and the other Issue Documents together with such
powers as are reasonably incidental thereto.'

And cl 8 of the trust deed provides:

8. DESIGNATED ACCOUNTS
8.1 Designated Accounts:
The Issuer shall open (where applicable) and maintain the following Islamic based income bearing accounts
with a Commercial Bank acceptable to the Trustee:

(a)

Disbursement Account;

(b)

Finance Service Reserve Account;

(c)

Revenue Account; and

(d)

Operating Account.
Other than the Operating Account, all other Designated Accounts shall be operated solely by the Trustee. The
Operating Account shall be operated solely by the Issuer.
[68] It would appear that it is the duty of Pesaka to open the designated accounts and the designated accounts
shall be operated solely by MTB as the trustee.
[69] Clause 12.3 of the trust deed provides for the appointment of MTB as the attorney of Pesaka. It reads:
12.3 Power of Attorney
The Issuer hereby irrevocably APPOINTS the Trustee or such other person or persons as the Trustee may
designate as its attorney or attorneys and in the name of the Issuer in the name of the attorney or attorneys
and on its behalf to do all such acts and execute in its name or otherwise all such documents and instruments
as may be deemed necessary or expedient by the Trustee to protect or otherwise perfect the interest of the
Trustee and/or the ABBA Bondholders under this Deed or which may be required for the full exercise of all
or any of the powers and rights conferred on the Trustee under this Deed '
[70] Pursuant to cl 12.3 of the trust deed, a power of attorney was executed on 19 March 2004 by Pesaka in
favour of MTB.
[71] Clause 2 of the power of attorney grants upon the trustee such broad powers and rights to do any act or
take any action on behalf of Pesaka.
The said cl 2 reads as follows:
2. APPOINTMENT
The Issuer hereby by way of security appoints the Trustee or any authorized officer of the Trustee or any
Insolvency Official, each with full power of substitution and each with full power to act alone, to be its
attorney and in its name and on its behalf to execute and as its act and deed or otherwise to do all such

assurances, acts or things which the Issuer ought to do under the covenants and obligations contained in the
Security Documents, and generally in its name and on its behalf to exercise all or any of the powers vested in
the Trustee, or any authorized officer of the Trustee or any Insolvency Official and (without prejudice to the
generality of the foregoing):

(a)

to execute, seal and deliver and otherwise perfect any deed, assignment, transfer, assurance, agreement,
instrument or act which may in the opinion of such attorney be required or deemed proper, necessary or
desirable in or for any of the purposes of the Security Documents;

(b)

to file any claim, to take any action or institute any proceedings which the Trustee may deem to be necessary
or advisable and to execute any documents and do anything necessary or desirable under any of the Security
Documents and with full power to delegate any of the powers hereby conferred upon it.
[72] On 24 March 2004, the transactional solicitor deposited the trust deed and the power of attorney with
the registry of the Kuala Lumpur High Court.
[73] On 25 March 2004, the transactional solicitor forwarded a letter to KAF confirming that other than
conditions precedent numbered 7 and 9, all conditions precedent as set out in schedule A of the SFA had been
fulfilled by Pesaka. This was followed by a letter dated 29 March 2004 from the transactional solicitor to
KAF confirming that Pesaka had fulfilled conditions precedent 7 and 9 of schedule A to the SFA.
[74] Under CP11, KAF is only required to obtain the confirmation and the mandates from Pesaka that the
designated accounts had been opened. The letters from Pesaka dated 15 March 2004 relating to the
designated accounts clearly stated that Pesaka had opened the designated accounts to be managed and
operated by MTB. Judging from Pesaka's letters, it is incorrect to say that the accounts are yet to be opened
or at the executrix stage as stated by the learned judge.
[75] In view of the above, we think it is justified for KAF to be satisfied that the designated accounts had
been opened and the MTB had been made the sole signatory to the designated accounts. In other words, the
designated accounts had been ring fenced. KAF had no knowledge that the designated accounts had not been
opened what more ring fenced.
IS IT KAF'S DUTY TO INDEPENDENTLY VERIFY THAT THE DESIGNATED ACCOUNTS
WERE IN FACT RING FENCED?
[76] The Court of Appeal in its judgment stated that it was KAF's duty, as lead arranger, facility agent and
issue agent, to independently verify that the designated accounts had been opened with MTB in sole control
prior to the issuance of the bonds. The Court of Appeal further held that the confirmation by Pesaka was no
proof that the required designated accounts with the necessary mandates had actually been opened.
[77] With respect, we think that the Court of Appeal had placed a much higher burden on KAF than what is
required under the issue documents. There is no such contractual duty in the issue documents for KAF to
independently verify that MTB had been made the sole signatory to the designated accounts. Under the SFA,
KAF's duty as the lead arranger is merely to ensure that Pesaka had opened the designated accounts and that
the mandates in form and content are acceptable to KAF.

[78] Further, we are of the opinion that the Court of Appeal had misinterpreted CP11 and did not give
sufficient weight to the fact that the transactional solicitor had certified the fulfillment of CP11 in their
written opinion to KAF.
[79] It should be pointed out that MTB did commence a separate action against the transactional solicitor in
the High Court. However, MTB failed in its action. MTB then appealed to the Court of Appeal but later
withdrew. In the circumstances, we hold that it is not unreasonable for KAF to act on the advice of the
transactional solicitor. Hence, KAF was not relying on the confirmation by Pesaka alone. More importantly,
the transactional solicitor was appointed by Pesaka's board of directors' resolution dated 15 January 2004.
[80] Therefore, it can reasonably be concluded that when the bonds were issued on 1 April 2004, KAF was
fully satisfied that all the conditions precedent in schedule A of the SFA, including CP11, had been complied
with.
[81] For the above reasons, we find that KAF had not acted in breach of CP11 when KAF issued the bonds
on 1 April 2004.
CAUSE OF LOSS
[82] The next issue to be considered is the cause of loss. From the evidence, the cause of loss is directly
attributable to Pesaka, who had misappropriated the fund. The facts revealed that instead of using the monies
to repay the bondholders, Pesaka had utilised the monies for its own purposes in breach of the terms and
conditions as contained in the issue documents.
[83] The Court of Appeal held that the most proximate cause of the loss was the issuance of the bonds by
KAF on 1 April 2004 without the ring fencing in place. The Court of Appeal so held on the ground that had
KAF not issued those bonds on 1 April 2004, there would not have been any loss even if the ring fencing was
not in place.
[84] The Court of Appeal was of the opinion that it was the duty of KAF to put MTB on board as trustee of
the designated accounts prior to the issuance of the bonds. With respect, we are of the view that the Court of
Appeal erred in coming to its finding because it is not supported by the issue documents. As a matter of fact,
KAF is not a party to the trust deed. It is strictly between the issuer and MTB. As we have said earlier in this
judgment, MTB had wide powers and rights under the trust deed and the power of attorney to take the
necessary action to ring fence the account prior to the issuance of the bonds. It is a fact found by the courts
below that MTB was duly notified of the proposed date of issuance of the bonds by KAF. There is no reason
for MTB not to take immediate action to ring fence the designated accounts prior to the issuance or
immediately after the bonds were issued. In the present case MTB chose to do nothing.
[85] Alternatively, MTB could have exercised its powers and rights under the power of attorney to stop the
withdrawal from the designated accounts by Pesaka after the bonds were issued.
[86] The Court of Appeal in its judgment correctly noted that MTB was notified of the bonds issue which
was originally on 26 March 2004 (then rescheduled to 1 April 2004) but MTB took no assertive step to
control those conventional accounts before the issuance of the bonds. The Court of Appeal further stated that
MTB could have informed KAF that the designated accounts were yet to be ring fenced but MTB did not do
so. For this reason, the Court of Appeal held that MTB was equally accountable for the loss.
[87] Premised on the above, it is our view that the most proximate cause of the loss was the failure on the
part of MTB to ring fence the designated accounts or alternatively to stop Pesaka from operating the

designated accounts. MTB could have done that by using its powers and rights as vested upon it by the trust
deed and the Power of Attorney. In our view, MTB is wholly to blame for the loss and not KAF.
CONCLUSION
[88] In the result, the appeal by KAF is allowed with costs, both here and in the courts below and the orders
of the High Court and the Court of Appeal are set aside.
[89] This court had also granted leave to appeal to MTB on the following questions of law:
QUANTUM

(i)

Is a trustee who has been adjudged to be negligent liable to compensate a bondholder in full for the face
value period of the bond, or only to the extent of what the bondholder would have received had the trustee
not been negligent?

(ii)

In assessing the measure of damages a trustee is adjudged to be liable for by reason of the trustee's
negligence, whether account has to be taken of what the beneficiary would have received had the breach not
been committed, or is the beneficiary entitled to be indemnified in full?
PRE JUDGMENT INTEREST

(i)

Whether the power of the court to award pre-judgment interest can be exercised in regard of an express
provision in the trust deed?

(ii)

Whether in an action brought on a breach of obligation on an Islamic financing transaction whether the
interest or compensation can be awarded by a court?

(iii)

Whether compensation for loss on a pre-judgment basis can be qualified in the absence of clear evidence on
the date to be sanctioned by the Syariah Advisory Council?
PESAKA'S INDEMNITY
Can a party ('the first party') who is adjudged to be liable on the basis that they acted fraudulently and who
received the full benefit of their illegal act be permitted to retain some measure of their ill-gotten gains on the
basis that the party to indemnify ('the second party') was negligent and whose negligence facilitated the
wrongdoing by the first party?
[90] In respect of MTB's appeal the main issues that call for determination may be summarised as follows:

(a)

The liability of MTB in relation to its roles in the bond issue.

(b)

The quantum recoverable by the bondholders against MTB.

(c)

The bondholders' entitlement to pre-judgment interest.

(d)

The liability of Pesaka and the extent of indemnity recoverable by MTB.

LIABILITY
[91] As held earlier in this judgment MTB is wholly to blame for the loss suffered by the bondholders. To
reiterate, the most proximate cause of the loss was the failure on the part of MTB to ring fence the designated
accounts or alternatively to stop Pesaka from operating the designated accounts. MTB could have done that
by using its powers and rights as vested upon them by the trust deed and the power of attorney. In our
judgment, MTB is wholly to blame for the loss and not KAF. As a result, the appeal by MTB against the
order of Court of Appeal in apportioning liability between MTB and KAF at 50:50 has to be dismissed with
costs. Hence, MTB is 100% liable to the bondholders.
QUANTUM RECOVERABLE BY THE BONDHOLDERS AGAINST MTB
[92] Having found that MTB is wholly liable we must now ascertain whether MTB is liable for the full
amount of RM149,315,000 which the issuer ('Pesaka') would have to pay to the bondholders. The High Court
had found that MTB and KAF were liable for the full sum of RM149,315,000. The decision was upheld by
the Court of Appeal but the final order of the Court of Appeal was for the sum of RM149,300,000. However,
on perusing the records and the Court of Appeal's judgment, we cannot find any reason why the Court of
Appeal had ordered this sum of RM149,300,000 instead.
[93] The reasons given by the Court of Appeal in upholding the decision of the High Court are as follows:
[30] The actual loss occasioned by the absence of 'ring fencing' was RM107m, which was the total revenue
that was deposited into Pesaka's conventional accounts at the CIMB Cosway Branch. It was argued that any
assessment of MTB's liability should be based on that RM107m. Common law provided that bondholders
would be indemnified for their total loss, which was the total face value of the bonds. Written law was not
any different. Section 57 (deleted by Act 1305) of the SC Act 1993 provided that 'a person who acquires,
subscribes for or purchases securities and suffers loss or damage as a result of any statement: or information
contained in a prospectus (the definition of which included the IM) that is false or misleading, or any
statement or information contained in a prospectus from which there is a material omission, may recover that
amount of loss or damage from' 'the issuer a principal advisor '. As said, there were false and or
misleading statements in the IM. The IM stated the contact sum was RM150,613,200, but failed to disclose
that the revenue that would be received would be substantially less than the contract sum, as the contracts
had already been partly paid at the time of issuance of the IM. The IM also imparted that a foreign exchange
loss claim for RM31,529,338 had been approved. The note at the bottom of 2562AR which read 'Bomba vide
[3118AR] has agreed to compensate [Pesaka] on losses arising out of foreign exchange differences, on its
contracts with [Pesaka] (ie contracts number (ii) and (Hi) in the table above)' was entirely economical with
the true. The truth was that the Fire and Rescue Department merely acknowledged a foreign exchange loss
claim for an unspecified amount (see 3118AR). Those statements on the revenue at 2562AR could not have
been true, as the total revenue actually deposited after the issuance of bonds, which was the acid test on the
truth of the statements in 2562AR, was only RM107m and not RM180m.

That clearly evinced that the statements at 2562AR were false and misleading. Had 'ring fencing' been in
place, MTB would only have had RM107m to redeem the bonds, and the shortfall would have to be covered
by Pesaka, KAF and MTB. Clearly therefore, the fact that only RM107m was lost would not assuage the
liability of KAF or of MTB.
[94] Before us, learned counsel for MTB submitted that any liability attaching on MTB must be limited only
to the amount that went into the RA from the existing contracts. And the amount that came into the RA did
not exceed RM107m. Learned counsel for the bondholders conversely submitted that MTB has to
compensate the bondholders 'in full for the face value of the bond' as it represented the latter's true loss. As
an authority for this proposition, learned counsel referred us to the case of Bartlett v Barclays Bank Trust Co
Ltd (No 2) [1980] 2 All ER 92 wherein Justice Brightman had summarised the relevant principles on the
measure of damages payable by a trustee to a beneficiary/estate for breaches of trust as follows:

(a)

the obligation of a defaulting trustee is to effect restitution to the trust estate;

(b)

until restitution has been made, the default continues because it has not been made good;

(c)

the obligation of a trustee who is held liable for breach of trust is fundamentally different from a contractual
or tortious wrongdoer;

(d)

the trustee's obligation is to restore to the trust estate the assets of which he (the trustee) has deprived it; and

(e)

in the case of a wilful default by a trustee, that is, a passive breach of trust, viz an omission by a trustee to do
something which as a prudent trustee he ought to have done, the court is entitled to order an account, that is,
a roving commission.
Learned counsel submitted that the Court of Appeal in our instant case had applied similar principles which
were relied upon by the House of Lords in Target Holdings Ltd v Redferns (a firm) [1995] 3 All ER 785 and
rightfully held that MTB 'who had the duty to shut the door' would have to restore the total loss suffered by
the bondholders.
[95] We have deliberated on this issue, and with respect we are unable to agree with the bondholders'
contention on this point. On the contrary we are inclined to agree with learned counsel for MTB. On the
evidence, we find that there is no serious dispute as to the total sum of monies that was received and
dissipated by Pesaka from the RA which did not exceed RM107m. This was even acknowledged by the
Court of Appeal which clearly stated that 'the actual loss occasioned by the absence of 'ring fencing' was
RM107m'. Thus, we are of the view that judgment should not and cannot be entered for the sum of
RM149,315,000 against MTB in favour of the bondholders, which sum represents the redemption value of
the bonds. First, as rightfully pointed out by learned counsel for MTB the sum of RM149,315,000 would
include a sum of RM31,529,338 which was stated to be the value of a foreign exchange loss claim, a sum
which was never approved and never meant to be received by Pesaka for which MTB can never be held
liable for, as it had nothing to do with the evaluation of the foreign exchange claim. Secondly, to hold MTB

liable for the full amount of Pesaka's indebtedness would amount to treating MTB as if it was either the
primary debtor or guarantor. It is pertinent to note that in actual fact MTB was neither the primary debtor nor
a guarantor to the bonds issue. Instead MTB was the trustee who failed to ring fence the sum of RM107m
that came into the RA. The amount that came to the RA does not exceed RM107m. Under the circumstances,
we are of the view that MTB should only be liable for RM107m and not the full amount of RM149,315,000
as ordered by the High Court.
[96] Thus, our answers to the two questions posed on quantum would be that MTB is not liable to
compensate the bondholders in full for the face value of the bond. Accordingly, this part of MTB's appeal is
allowed with costs. We make an order that MTB is liable only to RM107m and not the full amount of
RM149,315,000.
PRE-JUDGMENT INTEREST
[97] The High Court had rejected the bondholders' claim for pre-judgment interest. The rejection was based
on cl 39 of the trust deed which reads as follows:
NO PAYMENT OF INTEREST
For the avoidance of doubt and notwithstanding any other provision to the contrary herein contained, it is
hereby agreed and declared that nothing in this Deed shall oblige the Issuer, the Trustee or any ABBA
Bondholder to pay interest (by whatever name called) on any amount due or payable to other parties to this
Deed or to receive any interest on any amount due or payable to the Issuer, the Trustee or any ABBA
Bondholder or to do anything that is contrary to the teachings of Islam.
[98] The High Court in rejecting the bondholders' claim for pre-judgment interest gave the following
reasons:
I have carefully considered the language in clause 39 and I find that it is not so much a matter of Syariah
principles for the fact of this case but that the parties have simply agreed not to impose interest. And although
it was argued by the Plaintiffs that their right of action did not arise from the trust deed but founded
under Section 11 of Civil Law Act as well as Order 42 Rule 12 of the Rules of High Court, it cannot be
denied that the fundamental arrangement between the parties emanate from the issue documents of which the
trust deed is part of. However, the Syariah Advisory Council of Bank Negara Malaysia at its fourth meeting
which was held on 14.2.1998 had nevertheless resolved that the High Court may impose penalty charges at
the rate of 8% per annum on the judgment sums. This rate however is only to be allowed for actual loss.
Accordingly, I shall order interest at the rate of 8% not from the date of 1.8.2005 as proposed by the
Plaintiffs because this is only allowed on the judgment sum and the sum only becomes the judgment sum as
of to date. So I shall order the rate of 8% to run from today till the date of realization. It meets the ruling or
resolution of the Syariah Advisory Council of Bank Negara.
[99] The Court of Appeal decided otherwise. The Court of Appeal granted the bondholders penalty charges at
the rate of 3% on the judgment sum from 30 September 2005 to the date of the judgment. The Court of
Appeal gave the following reasons:
[39] The learned judge refused pre-judgment interests to the bondholders, against which the bondholders
cross-appealed. Pre-judgment interests might not be appropriate in Islamic finance business. But
compensation, could it not have been awarded? Both cl 9.4 of the SF agreement, (2.702AR) and cl 4.4 of the
trust deed (2591AR) identically provided 'In the event of overdue payment of any amounts due under the
ABBA Bonds Issuance Facility, the issuer shall pay to the Primary Subscriber and or ABBA Bondholders

compensation, on such overdue amounts at the rate and in the manner prescribed by the Shariah Advisory
Council of the Securities Commission or such other relevant regulatory authority from time to time'. Only the
promised payments of RM2,565,000 and RM5,950,000 (see 2666AR) towards secondary bonds were paid on
time. But when default was declared on 30 September 2005, all promised payments towards primary or other
secondary bonds, which then totaled RM149,300,000, fell immediately due. The SF agreement and trust deed
provided that compensation on the overdue sum of RM149,300,000 would be payable to the bondholders 'at
the rate and in the manner as prescribed by the Shariah Advisory Council of the Securities Commission or
such other relevant regulatory authority from time to time'. There was no evidence of 'the rate and in the
manner as prescribed by the Shariah Advisory Council of the Securities Council'. However, s 56(1)(a) of
the Central Bank of Malaysia Act 2009 provided that 'where the proceedings relating to Islamic financial
business before any court or arbitrator any question arises concerning a Shariah matter, the court or the
arbitrator, as the case maybe shall take into consideration any published rulings of the Shariah Advisory
Council or refer such question to the Shariah Advisory Council for its ruling'. As its 50th meeting on 26 May
2005, the Shariah Advisory resolved 'that the court may impose late payment penalty charges on judgment
debts as decided by the court (compensation) mechanisms'. The Council also resolved that the court may
impose penalty charges for the actual loss (ta'widh), which the Council agreed to adopt the 'annual average
for overnight weighted rate' of Islamic money market of the preceding rate as a reference point. The
bondholders who were denied the use of their money for the period 30 September 2005 to the date of
judgment (not awarded by the court below see 72AR) had suffered an actual loss which should have been
compensated. For those reasons, we unanimously allow the cross-appeal by the bondholders and order KAF
and MTB to pay to the bondholders the penalty charges at the rate of 3% on the judgment sum from 30
September 2005 to the date of judgment, and the costs of the latter appeal.
[100] Learned counsel for MTB argued that the Court of Appeal erred in its findings. It was submitted that
the parties to the trust deed, and here it would include the plaintiffs as bondholders, had agreed that no
interest would be payable. It was further submitted that the seeking of interest on the principal amount from
the date of default that is 30 September 2005 until judgment and thereafter is a pure and simple interest or
riba which the Shariah does not permit.
[101] We are inclined to agree with learned counsel for MTB on this point. We are of the view that the Court
of Appeal had erred in allowing pre-judgment interest, which the High Court had correctly refused, on the
premise that the parties had agreed that no interest will be payable. It is our view that in deciding the
question of interest, the court must consider the express agreement of the bondholders in the trust deed. In
this case, the trust deed as specified under cl 39 clearly provides that no interest shall be payable. The trust
deed is a contract and 'the court has a duty to defend, protect and uphold the sanctity of the contract entered
between the parties'. (See Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other appeals [2009] 6 MLJ
839.) It is unfortunate that the Court of Appeal appears to have overlooked cl 39 of the trust deed but instead
erroneously chose to rely on cl 4.4 of the trust deed which reads:
4.4 Compensation:
In the event of overdue payments of any amounts due under the ABBA Bonds, the Issuer shall pay to the
ABBA Bondholders compensation on such overdue amounts at the rate and manner prescribed by the
Shariah Advisory Council of the Securities Commission or such other relevant regulatory authority from time
to time.
[102] First, we wish to point out that cl 4.4 of the trust deed provides for the issuer to pay pre-judgment
compensation. As we all know in this case, the issuer is Pesaka and not MTB. Thus, the fact that the issuer
had agreed to pay 'compensation on such overdue amounts' cannot be applied to MTB in light of cl 39.

Secondly, there was no evidence adduced of the applicable rate as prescribed by the Shariah Advisory
Council of the SC. Thus, we are of the view that the order of the Court of Appeal on this issue must be set
aside. We allow MTB's appeal on this part of the judgment with costs. The order of the High Court in
rejecting the bondholders' claim for pre-judgment interest is reinstated. And our answers to the three
questions on pre-judgment interest are in the negative.
MTB'S CLAIM FOR INDEMNITY FROM PESAKA
[103] The High Court had dismissed MTB's claim for an indemnity against Pesaka. The High Court judge
ruled as follows:
In my judgment, the manner in which Mayban Trustees managed the accounts when they became aware of
withdrawals to me is more consistent with daily routine banking practices rather than managing these
accounts as a trustee of the bond issue and where the accounts in question are these securitized monies.
Alarm bells went off at the various stages but were either not heard or ignored by Mayban Trustees. As I had
said earlier, Mayban Trustees have not displayed the standard of diligence and knowledge not only of a
professional specialist trustee in the bond market but one who is paid. I agree with the submissions of learned
counsel for Pesaka that a paid trustee is expected to exercise a higher standard of diligence and knowledge
than an unpaid trustee. I agree with the authorities that have been cited, Bolam and Gillespie. I agree that
Mayban Trustees has not shown that degree of skill, prudence care and diligence consistent with the position
held at the material time.
And another factor that has weighed in my mind is the fact that BDO Binder, chartered accountants reported
that the bond proceeds and the contract proceeds had been duly accounted for and that these monies were
actually in fact used for the ordinary cause of business of Pesaka, its companies and its businesses and lands
ultimately acquired were for and on behalf of Pesaka.
Another factor to be taken into account is the fact that Pesaka had informed and had procured KAF's consent
as well as the DDWG on the use of the existing accounts as designated accounts. It had prepared the
necessary resolutions for the change of mandates, authorizations and signatories to these accounts. The
proceeds of the bonds and the monies were released into the accounts upon confirmation by the third party
that the CPs had being fulfilled. These Defendants cannot now to me be blamed for having relied on the
experts and the professionals whom they have engaged and paid for their opinion, advice and directions.
Finally, the consent judgments which have been entered into by these Defendants with the Plaintiff represent
in my mind, the accountability of these Defendants for their acts despite the role of the other Defendants.
In these circumstances, the claim for indemnity against these Defendants must fail. The counter-claim is
therefore dismissed with costs.
[104] The Court of Appeal was of a different view on this point. The Court of Appeal allowed MTB's appeal
on the issue of indemnity but only awarded a limited indemnity. It gave the following reasons:
[48] Negligence of KAF and MTB was held by the learned judge to have disentitled them to any indemnity
from Pesaka, on account of the respective riders in cl 13.1 of the SF agreement (in the case of KAF) and cl
14.1 of the trust deed (in the case of MTB). But there was a total failure by the learned judge to enquire if
those riders applied in the first.
[49] In the first place, could an exemption clause avail to the party guilty of a wilful breach which goes to the
root of the contract? In Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936, it was held by Lord Denning that

no exemption clause however widely drafted, could avail the party guilty of a breach which goes to the root
of the contract:

Notwithstanding earlier cases which might suggest the contrary, it is now settled that exempting clauses of
this kind, no matter how widely they are expressed, only avail the party when he is carrying but his contract
in its essential respects. He is not allowed to use them as a cover for misconduct of indifference or to enable
him to turn a blind eye to his obligations. They do not avail him when he is guilty of a breach which goes to
the root of the contract.
[105] Basically, the Court of Appeal was of the view that there was a total failure on the part of the High
Court to enquire into the exemption appearing at cl.14.1 of the trust deed which reads:
14.1 Indemnity:
The Trustee and every other attorney, agent or other person appointed by the Trustee under the provisions of
this Deed shall be entitled to be indemnified by the Issuer in respect of all liabilities, costs, charges and
expenses incurred by it or him in relation to this Deed and the other Issue Documents to which it is a party or
to the preparation and execution or purported execution thereof or to the carrying out of the trusts of this
Deed or the exercise of any trusts, powers or discretions vested in it or him pursuant to this Deed and the
other Issue Documents to which it is a party and against all actions, proceedings, costs, claims and demands
in respect of any matter or thing done or omitted in anyway relating to this Deed in priority to any payments
to the ABBA Bondholders and the Trustee may retain and pay out of any moneys in its hands arising from
this Deed all sums necessary to effect such indemnity and also the remuneration of the Trustee as
hereinbefore provided, save and except for its gross negligence, wilful default, wilful breach or fraudulent
actions.'
[106] In interpreting the above indemnity clause, the Court of Appeal referred to the case of Karsales
(Harrow) Ltd v Wallis [1956] 1 WLR 936 to the effect that no exemption clause however widely drafted,
could avail the party guilty of a breach which goes to the root of the contract.
[107] Premised on the above, learned counsel for MTB submitted that the Court of Appeal had held correctly
that at the end of the day it is a matter of construction of the clause in question. This according to learned
counsel is evident from a line of cases in Malaysia. This aspect of the submissions is better highlighted by
quoting the exact words employed by learned counsel in the written submission which state:
The question is in all cases whether the clause, on its true construction, extends to cover the obligations or
liability which it sought to exclude or restrict (Chitty, para 14-024). The law is that 'no exemption clause can
protect a person from liability for his own fraud [Chitty meant fraud within the context of section 17 of
our Contracts Act 1950] or require the other party to assume what he knows to be false.
The Court of Appeal held that the issue must be resolved by the proper construction of the said exclusion
clauses; see Hotel Anika Sdn Bhd v Majlis Daerah Kluang Utara [2007] 1 MLJ 248), Anderson v
Fitzgerald (1853) 4 HLC 484; (1853) 10 ER 551; and Guardian Assurance Co Ltd v Condogianis (1919) 26
CLR 231. In Hong Realty (Pte) Ltd v Chua Keng Mong [1994] 3 SLR 819 825, Karthigesu JA said:

It is trite law that exemption clauses must be construed strictly and this mean that their application must be
restricted to the particular circumstances the parties had in mind at the time they entered into the contract.

[108] Learned counsel for MTB advanced his arguments to the effect that cl 14.1 of the trust deed provided
that MTB would be indemnified 'save and except for its gross negligence, wilful default, wilful breach or
fraudulent actions'. Those were the particular circumstances that the parties had in mind at the time when
they entered into the trust deed. As such, learned counsel submitted that the exemption clause must be strictly
construed, meaning that it must be restricted to those particular circumstances of gross negligence, wilful
default, wilful breach or fraudulent actions by MTB.
[109] MTB's stance on this point is that the exemption clauses discussed in the preceding paragraphs could
not avail to Pesaka as a defence. Clause 14.1 of the trust deed, on its true construction, could not reasonably
have been intended to apply even when fraud by Pesaka had intervened to alter the circumstances in which
those exemption clauses would ordinarily apply. Learned counsel forcefully argued that any other
construction would mean that Pesaka could break every covenant with impunity.
[110] Learned counsel for Pesaka took a diametrically opposing view on this point in that MTB's reliance on
the indemnity clause was misconceived as they were liable for having acted in breach of duties owed to the
bondholders. Pesaka's stance on this point is that the indemnity provisions did not apply. For the forgoing
reason it was submitted that the Court of Appeal was clearly wrong when it concluded that the indemnity
provisions applied and that Pesaka was disqualified from relying on the exclusion clauses and MTB was
entitled to be indemnified.
[111] Having taken into account all that has been said on both sides pertaining to the issue at hand, we are of
the view that the Court of Appeal was correct in reversing the High Court decision on the issue of indemnity.
As such we are inclined to agree with learned counsel for MTB on this point that cl 14.1 of the trust deed
clearly provides that MTB would be indemnified 'save and except for its gross negligence, willful default,
willful breach or fraudulent actions'. It is clear in this case the High Court did not make a finding that MTB
was guilty of 'gross negligence, wilful default, wilful breach or fraudulent actions'. As such the High Court
had erred in denying MTB's claim for indemnity against Pesaka.
[112] The next issue is whether MTB should be indemnified in full by Pesaka. As stated earlier, the Court of
Appeal having held that Pesaka should not benefit from its own fraud went on to make a finding that since
MTB was guilty of gross negligence Pesaka was only ordered to indemnify MTB 2/3 of RM149,300,000
together with penalty charges at the rate of 3% on the said sum from 30 September 2005 to the date of
judgment at the rate of 4% at the date of judgment till the date of satisfaction. The reasoning behind this,
according to the Court of Appeal was that a full indemnity would mean that MTB was blameless.
[113] It was submitted before us that the Court of Appeal did not appreciate the effect of their decision in
only granting a limited indemnity in that the real fraudsters ie Pesaka will stand to gain at least 1/3 of their
ill-gotten gains. We agree it would not be just and equitable for Pesaka who had received the ill-gotten gains
to be put in a position where it can retain those gains or any part of it. The House of Lords had the occasion
to consider the issue of contribution in the context of the situation where one party still retained a portion of
the ill-gotten gains and whether they ought to contribute to the extent of a full contribution in the case
ofDubai Aluminium Co Ltd v Salaam [2003] 1 All ER 97.
[114] In that case, Dubai Aluminum, had suffered loss to the tune of USD50m and the parties who received
those monies were Mr Salaam and Mr Al Tajir. Dubai Aluminum had also sued a firm of solicitors, Amhurst,
who acted in the fraudulent transactions except that Amhurst were not recipients of the monies. Amhurst
settled the claim and then brought contribution proceedings against Mr Salaam and Mr Al Tajir. Lord
Nicholls of Birkenhead dealt with the issue as follows:

50 The other major factor which weighed with the judge when deciding to direct that the Amhurst firm
should be entitled to an indemnity was that Mr. Salaam and Mr. Al Tajir had still not disgorged their full
receipts from the fraud. The judge considered (at 475) it would not be just and equitable to require one party
to contribute in a way which would leave another party in possession of his spoils.
51 Mr. Salaam and Mr. Al Tajir submitted that this approach is impermissible. Under s. 2(1) of the 1978 Act
the court is required to assess the amount of contribution recoverable from a person which is just and
equitable 'having regard to the extent of that person's responsibility for the damage'. 'Responsibility' includes
both blameworthiness and causative potency. However elastically interpreted, 'responsibility' does not
embrace receipts.
52 I cannot accept this submission. It is based on a misconception of the essential nature of contribution
proceedings. The object of contribution proceedings under the 1978 Act is to ensure that each party
responsible for the damage makes an appropriate contribution to the cost of compensating the plaintiff,
regardless of where that cost has fallen in the first instance. The burden of liability is being re-distributed.
But, of necessity, the extent to which it is just and equitable to re-distribute this financial burden cannot be
decided without seeing where the burden already lies. The court needs to have regard to the known or likely
financial consequences of orders already made and to the likely financial consequences of any contribution
order the court may make. For example, if one of three defendants equally responsible is insolvent, the court
will have regard to this fact when directing contribution between the two solvent defendants. The court will
do so, even though insolvency has nothing to do with responsibility. An instance of this everyday situation
can be found in Fisher v C H T Ltd (No 2) [1166] 1 All ER at 9091, 2 QB 475 at 481 per Lord Denning MR.
53 In the present case a just and equitable distribution of the financial burden requires the court to take into
account the net contributions each party made to the cost of compensating Dubai Aluminum. Regard should
be had to the amounts payable by each party under the compromises and to the amounts of Dubai
Aluminum's money each still has in hand. As Mr. Sumption submitted, a contribution order will not properly
reflect the parties' relative responsibilities if, for instance, two parties are equally responsible and are ordered
to contribute equally, but the proceeds have all ended up in the hands of one of them so that he is left with a
large undisgorged balance whereas the other is out of pocket.
54 Rix J considered this was obvious. So did Ferris J, in K v P (J, third party) [1993] 1 All ER 521 at 529;
[1993] Ch 140 at 149. I agree with them.

59 This suggests that a just and equitable distribution of the burden of liability calls for a substantial measure
of equality between the three of them. In this regard an unusual, and notable, feature of this case is the
extent to which some parties to the fraud, but not others, remain in possession of substantial amounts of
misappropriated money even after the plaintiff's claims have been met. Taken together Mr. Salaam and Mr.
Al Tajir are still net recipients to the extent of over $20m. If equality of burden is the goal, the Amhurst firm
ought not to be left out of pocket in respect of its $10m settlement payment. The firm should not be out of
pocket so long as Mr. Salaam and Mr. Al Tajir retain a surplus in hand. Unlike Mr. Salaam and Mr. Al Tajir,
neither the Amhurst firm nor Mr Amhurst received any money from the fraud.
[115] Similarly in the present case it is obviously not just and equitable to allow Pesaka to keep the ill-gotten
gains or any part of it. This is especially so when the bondholders have not taken any step to enforce the
consent judgment entered between Pesaka and the bondholders and instead focus their attention to MTB on

the basis that MTB is in the position to satisfy the bondholders' claim. Thus, by allowing indemnity in full,
Pesaka will be called to meet its obligation in full.
[116] We would therefore answer the question on Pesaka's indemnity in the negative. In the result, we allow
MTB's cross-appeal with costs and order full indemnity against Pesaka.
[117] We now deal with the appeal by Murnina against MTB for the order of indemnity obtained by MTB
against her in the Court of Appeal.
[118] The background facts need to be restated although some had been mentioned earlier in our judgment.
[119] MTB had filed for a notice of contribution dated 3 June 2009 and further re-re amended defence and
counterclaim on 15 September 2009, inter alia, against Pesaka, Rafie, Murnina and the Amdac Group
claiming for, among others a declaration as well as judgment to the effect that MTB is entitled to be
indemnified in full by them for any judgment that may be entered in favour of the bondholders or any one of
them against MTB.
[120] MTB's claim for indemnity against Pesaka, Rafie, Murnina and the Amdac Group is on the basis that
they are constructive trustees over the monies in the RA and which they had dominion over by virtue of
being the directors or chief executive officer and signatories to the bank accounts.
[121] MTB also claimed that a constructive trust is imposed on them by reason of their knowledge that the
monies in the RA were trust monies and that they knew that the monies were being misapplied or were
reckless as to their application.
HIGH COURT
[122] On 7 July 2008, a consent judgment was recorded between the bondholders and the defendants
(Pesaka, Rafie, Murnina and the Amdac Group) whereby it was agreed that:

(a)

judgment be entered against Pesaka in the sum of RM149,315,000 together with interest at the rate of 8% per
annum from 1 October 2005 to date of satisfaction;

(b)

Rafie and the Amdac Group agreed to pay to the bondholders general damages to be assessed together with
interests thereon at the aforesaid and period; and

(c)

the bondholders withdraw their action against Murnina.

[123] After a full trial, judgment was given in favour of the bondholders against the remaining defendants
whereby:

(a)

The bondholders' claim against MTB and KAF was allowed on the apportionment of 60:40 respectively.
Judgment in the sum of RM149,315,000 was accordingly entered.

(b)

The High Court however dismissed MTB's claim for indemnity against Murnina (and against Pesaka, Rafie
and the Amdac Group) absolving her obligation to pay in view of MTB's negligence in not showing 'a degree
of skill, prudence, care and diligence' as a paid trustee. According to the Court of Appeal, the trial judge
found as follows:
MTB was negligent that clauses 28.2 and (14.1) of the trust deed disallowed an indemnity claim where
there was gross negligence on the part of MTB (64AR) that the bond proceeds and said revenue were in
fact used for the ordinary course of business of Pesaka, its companies and its businesses and lands ultimately
acquired were for and on behalf of Pesaka that Pesaka had informed and procured KAF's consent for the
use of the existing accounts as designated accounts, that Pesaka prepared the necessary resolutions for the
change of mandate, authorisations and signatories to those accounts, that the proceeds of the bonds and
monies were released into the accounts upon confirmation by the third party that the CPs had been fulfilled,
that these defendants cannot now to me be blamed for having relied on the experts and the professionals
whom they have engaged and paid for their opinion, advice and directions that the consent judgment
which have been entered into by these Defendants with the plaintiffs represent in my mind, the accountability
of these defendants for their acts despite the role of the other defendants.

(c)

Nevertheless, with regard to the role and liability of Murnina, the High Court held as follows:
These are my findings. I in fact first of all agree that this is an appropriate case for the lifting of the veil of
incorporation as the evidence indicates that all the activities of Pesaka as well as the 6-12 Defendants were
directed for the benefit of Dato' Rafie who together with her wife own (90%) of Pesaka. Datin Murnina may
say that the shares were held by her on trust for husband and that he does not seem to have considered her as
joint owner but merely as holding the properties on his behalf. I agree with Mayban Trustees' proposition that
the impression given of them being in control, these 2 Defendants being in control of Pesaka and its group of
companies is consistent with the fact that Dato' Rafie himself had given evidence that he considered Pesaka
his personal property and he exercised actual control over them including the monies and the accounts
though they were carried out by other personnel in his companies. I'm not going to set out, I agree that on the
findings revolved around the reasoning in Wallersteiner v Moir, Gilford Motor's case to find that the directing
mind and controlling minds behind Pesaka and the Amdac Group of companies is the Defendants. In my
view, Datin Murnina remains liable even if she chose not to know or if she allowed herself to be used by
Dato' Rafie regardless of her personal reasons as to me she has chosen to enter into the realm of the corporate
world and engage with the public especially in matters concerning raising public funds through this bond
issue. It's not an uncommon feature today that many now choose to work from home without the benefit of
office space, without attending meetings and without even email particularly in this 21st century. It would be
disastrous if directors such as Datin Murnina would be absolved from accountability for the reasons that she
has proffered. Here monies moved in and out of the accounts and she signed for such movements and was
the recipient of these monies insofar as these investment and shares were in her name. Therefore I find that
she knowingly received proceeds of the trust money and for these reasons she has rightly been brought in.
THE COURT OF APPEAL
[124] An appeal was filed by MTB against Rafie, Murnina and the Amdac Group against the High Court's
refusal to grant MTB's claim for an indemnity or contribution from the directors of Pesaka and the Amdac
Group.

[125] In respect of the issue of lifting the corporate veil, the Court of Appeal discussed the position and the
extent of Murnina's involvement in the operation, management and business of Pesaka and the Amdac Group
and came to this opinion:
[66] There was no appeal by Pesaka, Rafie, Murnina, or the Amdac Group to challenge the lifting the
corporate veil or to contest those findings of fact (see above) that led the learned judge to lift the corporate
veil. Mr Wong Kian Keong for Murnina nonetheless submitted that there was no case for the lifting of the
corporate veil. But on the basis of high authority, it would seem that no credence should be given to that
submission.

[69] Be that as it may, we are nonetheless of the unanimous view, that is, after all consideration of the facts
and circumstances, that the corporate veil should be lifted. On that, we are at one with the learned judge.
First, it was all so evident that Rafie and Murnina absolutely ruled the roost. That was evident from the
pleadings alone. Pesaka, Rafie and the Amdac Group pleaded (i) that all major decisions of Pesaka were
taken by Rafie (183AR), (ii) that the only directors of the Amdac Group of Companies was Rafie and
Murnina and Murnina practically owned the entire equity of the Amdac Group of Companies (save for the
eight Defendant Amdac Capital) (183AR read together with 152AR). Pesaka, Rafie and the Amdac Group
pleaded that 'the shares of the Amdac companies although in the names of Rafie and Murnina, were at all
material times, held upon trust for Pesaka and the Amdac companies were treated as part of the Pesaka Group
of Companies' (183AR). And Murnina pleaded that all her shares in Pesaka were held upon trust for Rafie
(207AR) and that all her shares in the Amdac Group were held upon trust for Pesaka (207AR read together
with 152AR). Given that state of the pleadings, the original defendants admitted that Rafie owned both
Pesaka and the Amdac Group through Pesaka, and that Murnina who was a bare trustee for Rafie or Pesaka
owned nothing in her own right.
[70] The evidence was no different. Rafie testified that whatever belonged to him belonged to Pesaka
{1730AR), that he and Murnina owned nearly 90% of Pesaka (1730AR) and that he regarded Pesaka as his
personal property (1730AR) and or as his family company (1731 AR). Murnina testified that all her shares in
the Amdac Group were held upon trust for Pesaka (1382AR) and or Rafie (1407AR), that her Bukit Jelutong
lands were held upon trust for Pesaka (1407AR), and that her 87% of the issued capital of Pesaka was held
upon trust for Rafie (1398AR). The trust deeds dated 9 June 1997 (8133AR) and 11 June 2003 (8134AR)
also confirmed that Murnina held all her shares in Pesaka upon trust for Rafie.
[71] It could not be any clearer. The directing minds of Pesaka and the Amdac Group were Rafie and
Murnina who had absolute control of those companies at all material times. Rafie and Murnina were the
principals behind Pesaka and the Amdac Group. Rafie, Murnina and the Amdac Group were
indistinguishable as separate economic units. All notional separateness could be disregarded ( Sunrise Sdn
Bhd v First Profile (M) Sdn Bhd & Anor [1996] 3 MLJ 533). And with their absolute control of Pesaka and
the Amdac Group, Rafie and Murnina had fraudulently transferred the revenue to Murnina and the Amdac
Group who had no right whatsoever to that revenue or to retain or use the same for whatever reason or
purpose, in breach of every covenant that they, through their alter ego, had entered into with KAF and MTB.
Murnina, who had signed the security documents and the instructions to the CIMB Cosway Branch to
transfer the revenue to herself and to the Amdac Group, and so was right up to her neck in complicity in the
loss of the revenue, could not play humble housewife to feign ignorance. The indisputable truth was that
Rafie and Murnina, with their dominion through Pesaka over the revenue, had fraudulently misappropriated
and converted the revenue that belonged to the bondholders, in violation of the security documents. That was
fraud, plain and simple, in every sense of the word. The veil of corporation must be ignored in the face of

this unashamed fraud on KAF, MTB, and the bondholders (see Re Darby ex parte Brougham [1911] 1 KB
95). Rafie and Murnina and the Amdac Group should not be allowed to claim limited liability through the
corporate shield. The court should pull aside the corporate veil and treat Pesaka and the Amdac as being their
creatures, for whose doings they (Rafie and Murnina) should be responsible (see Wallersteiner v Moir; Moir
v Wallersteiner & Ors [1974] 3 All ER 217). There was only justification to pierce the corporate veil, to
ascertain the actual ownership of assets (Aspatra Sdn Bhd & Ors v Bank Bumiputra Malaysia Bhd &
Anor [1988] 2 MLJ 97, to enable creditors to reach the assets of Rafie, Murnina and the Amdac Group. If
not, then Rafie and Murnina and the Amdac Group would make off with the revenue. Justice positively
demanded that Rafie, Murnina, and the Amdac Group be ordered to indemnify MTB (see Jones and another
v Lipman and another [1962] 1 All ER 442 see also Gilford Motor Co v Home [1933] CH 935).
THIS COURT
[126] Before us, Murnina is now appealing the Court of Appeal's decision in ruling that the corporate veil of
Pesaka be lifted in allowing MTB's indemnity claim against her together with Rafie and the Amdac Group.
[127] Learned counsel for MTB submitted that, at trial, Rafie had admitted that the funds of the issuer were
utilised to invest in the Amdac Group in various investments both locally and abroad. The common pattern
was that the assets would ultimately be in the names of either Rafie or Murnina. The documentary evidence
clearly demonstrated that Murnina's knowledge of the bonds issue was far more extensive than what she
sought to portray, despite her counsel's plea that she merely played the role of homemaker and dutiful
housewife. Murnina allowed herself to be used by Rafie in carrying out the design to move monies out of the
trust account as well as to be recipient of those monies on those assets which are in her name. She executed
various resolutions in relation to the bonds issue including all resolutions pertaining to the opening of the
designated accounts. She conceded that she made it a point to read the documents she signed. In short, she
had the knowledge that she was used by Rafie to move out the monies from the trust accounts. The Court of
Appeal and the High Court were therefore not wrong in lifting the corporate veil and in finding her liable. We
agree with MTB's position that the various entities, Pesaka included, were a mere facade to perpetrate the
acts. The corporate veil cannot, in our view, be a defence for Murnina from the claim for indemnity by MTB.
[128] We are also in agreement with MTB's stand that Murnina was guilty of having been in 'knowingly
receipt' of the revenue from the background facts as adverted to earlier. The trial court in fact made such a
finding and this we affirm. Murnina had in our view acted dishonestly when she misapplied the proceeds of
the trust monies. This simply means that she had not acted as an honest person would in the circumstances
(see Royal Brunei Airlines Sdn Bhd v Tan [1995] 3 All ER 97 which describes such act as a 'conscious
impropriety'). Lord Nicholls in that case said, 'Honest people do not knowingly take others' property or
participate in a transaction he knows involves a misapplication of trust assets or in such a case deliberately
close his eyes or ears, or not ask questions, lest he learn something he would rather not know'. Murnina thus
cannot escape liability by playing blind and pleading ignorance. She had participated in committing the
breaches of duty by Pesaka and Rafie and must be held liable.
[129] In the circumstances, this court must intervene by imputing a constructive trust upon Murnina (as well
as Rafie) for her role in misapplying the trust monies. Constructive trust is 'a trust which is imposed by
equity in order to satisfy the demands of justice and good conscience, without reference to any express or
presumed intention of the parties' (per Arifin Zakaria Chief Justice in Hassan bin Kadir & Ors v Mohamed
Moidu bin Mohamad & Anor [2011] 4 MLJ 190; [2011] 4 AMR 677). Equity therefore demands that
Murnina (and Rafie) must not be allowed to keep those monies and in the process unjustly enrich herself
(see Fernrite Sdn Bhd v Perbadanan Nasional Bhd [2012] 1 MLJ 1; [2012] 5 MLRA 421).

[130] As regards Murnina's counsel's submission that MTB has no legal standing to pursue this action since
the bondholders had entered a consent judgment with Murnina (and Rafie and the Amdac Group) and
withdrawn the suit against her, we hold that there is no merit in this submission in view of our earlier
findings.
[131] With Pesaka having admitted full responsibility to the bondholders via the consent judgment, it would
be a travesty of justice that it be allowed to keep a portion of the ill-gotten gains and accordingly we order
that Murnina too (and Rafie who together with Murnina owned 90% of Pesaka) must fully indemnify MTB
for the loss. We therefore dismiss her appeal with costs. The order on indemnity by the Court of Appeal is to
that extent set aside.
CIVIL APPEAL NO 02(f)-2704 OF 2012(W) APPEAL NO (i) (CIMB'S APPEAL)
[132] CIMB is appealing against the order of the Court of Appeal to indemnify MTB to the extent of 1/3 of
the total liability that MTB would have to bear, that is after deduction of the sum to be indemnified by
Pesaka, Rafie, Murnina and the Amdac Group. For purposes of this appeal the following two questions will
be answered:

(a)

Having regard to the long established mandate rule for corporate customers under the law and practice of
banker/customer, whether the Court of Appeal acted correctly in holding that CIMB was liable as a
constructive trustee to a third party viz Mayban Trustees for monies held in an account operated at its
Cosway branch at all material times by the customer of the said account, viz, Pesaka through its duly
authorised signatories?

(b)

Not having found CIMB liable under either the 'knowing receipt' or 'knowing assistance' category, whether
the Court of Appeal was nevertheless right in law in holding CIMB liable as a constructive trustee?
[133] Even though the antecedents of this appeal have been adequately provided for under KAF's appeal,
when the need arises, additional details will be supplied in order to have better comprehension of the matter
under discussion.
[134] Pursuant to the IM document, the opening of the designated accounts were required to be undertaken.
Despite the want of ring-fencing, RM8,405,059.90 was deposited into the FSRA held at CIMB (formerly
BCB), Terminal 3, Subang Branch. This was an existing conventional account in the name of Pesaka. A
further sum of RM45,500,000 was deposited into the pre-existing escrow account in CIMB at the Cosway
branch. Likewise this was also a conventional account in the name of Pesaka and under its control. MTB in
its counter-claim alleged that this pre-existing escrow account, an account meant to receive payments from
government contracts, was converted into the RA. The aggregate sum, collected from the bondholders and
deposited under the two CIMB accounts amounted to RM53,905,059.90 (FSRA and escrow deposits).
[135] As there was no evidence adduced to show that there was anything untoward as regards the act of
depositing the monies into those two accounts, such transaction must have taken place in the course of a
normal banking practice. On the other hand the same cannot be said of the disposals of the monies from
those two accounts. The admission by Pesaka, amongst others, that practically all the monies had been
withdrawn from those two accounts, part of which were utilised for overseas investments or advanced to its
related companies, and left the bondholders high and dry.

[136] In this case, MTB had filed a counter claim pursuant to its duties under the trust deed against CIMB,
pleading negligence and breach of duty as a constructive trustee, in light of the accounts held by Pesaka
being maintained by CIMB. As reflected in paras 62, 63 and 64 of the counter claim MTB alleged that CIMB
owed a duty of care to it. The High Court held that not only was there no duty owed to MTB but a bankercustomer relationship existed between CIMB and the original signatories, namely Rafie and Murnina. The
trial judge found that CIMB had not acted dishonestly and thereupon dismissed MTB's counterclaim. The
Court of Appeal however took a different view and held that CIMB did owe a duty as a constructive trustee
to MTB and accordingly entered judgment against CIMB; hence this appeal. Thus, the question is did CIMB
commit any breach of constructive trust for those acts of disposals from the CIMB accounts?
[137] In Paragon Finance plc v Thakerar & Co, Paragon Finance plc v Thimbleby & Co (a firm) [1999] 1
All ER 400 the court had summed it up succinctly when it held, amongst others:
A constructive trust arises by operation of law whenever the circumstances are such that it would be
unconscionable for the owner of property (usually but not necessarily the legal estate) to assert his own
beneficial interest in the property and deny the beneficial interest of another.
(See also Takako Sakao (f) v Ng Pek Yuen (f) & Anor (No 2) [2010] 2 MLJ 181; [2010] 1 CLJ 381).
[138] In Datuk M Kayveas v See Hong Chen & Sons Sdn Bhd & Ors [2013] 5 CLJ 949 this court opined:
it may be construed that a constructive trust arises by operation of law irrespective of the intention of the
parties, in circumstances where the trustee acquires property for the benefit of the beneficiary, and making it
unconscionable for him to assert his own beneficial interest in the property and deny the beneficial interest of
another. Being bereft of any beneficial interest, and with equity fastened upon his conscience, he cannot
transfer any interest to himself let alone a third party. If he does, then a constructive trust comes into
existence.
[139] The logical sequential question to be resolved is, did CIMB owe a duty to anyone regarding the two
accounts except to Pesaka? It was indisputable that those accounts were under the control of Pesaka, and
being conventional accounts, the signatories were still Rafie and Murnina.
[140] Factually CIMB was in a peculiar position in that it was in a 'conflict of interest' position. Not only was
it a bondholder, and thus beneficially entitled to the monies in the accounts, but at the same time running a
banking business. Releasing the monies would cause CIMB to suffer equally as any bondholder whilst any
refusal to act on the instruction of Pesaka as a customer would entail a breach of the banker-customer
relationship between them. Yet as clearly seen, despite the two accounts being under the management of CI
MB, never for a moment did it take advantage of its position and recover its losses. Instead the transfers to
the other accounts as instructed by Pesaka were approved. So, where is the evidence to indicate even a trace
of dishonesty?
[141] The High Court when rejecting the counterclaim, justified its decision by concluding that there was
failure by MTB to establish dishonesty on the part of CIMB, an essential ingredient when intending to
establish a breach of constructive trust. The Court of Appeal in reversing the High Court held that CIMB
owed a duty of care as a constructive trustee to MTB.
[142] A perusal of the submission of MTB pointed to its heavy reliance on the 'knowing assistance'
proposition regarding the liability of CIMB, expounded amongst others, by Selangor United Rubber Estates
v Cradock (a bankrupt) and Others (No 3) [1968] 2 All ER 1073, Karak Rubber Co Ltd v Burden and others
(No 2) [1972] 1 All ER 1210 and Rowlandson and others v National Westminster Bank Ltd [1978] 3 All ER

370. In those cases dishonesty was not a relevant ingredient to found liability against a constructive trustee
under the 'knowing assistance' proposition; this approach was a major shift as propounded by Barnes v
Addy (1874) LR 9 Ch App 244, which demanded that, 'agents receive and become chargeable with some part
of the trust property, or unless they assist with knowledge in a dishonest and fraudulent design on the part of
the trustees.'
[143] A rethinking was detected in Carl-Zeiss-Stiftung v Herbert Smith & Co (a firm) and another (No
2) [1969] 2 All ER 367 (CA) when it opined that an element of dishonesty or of consciously acting
improperly was required to be established before a trustee could be said to have breached a trust (see
also Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] 1 All ER 118; Re Montagu's Settlement
Trusts; Duke of Manchester v National Westminster Bank Ltd and others [1992] 4 All ER 308; Lipkin
Gorman (a firm) v Karpnale Ltd and another [1992] 4 All ER 331).
[144] Then came the case of Royal Brunei Airlines which especially clarified the principles relating to
dishonest assistance. In this case, Royal Brunei contracted an agency agreement with Borneo Leisure Travel
Sdn Bhd ('BLT'), wherein it was to sell tickets for the Royal Brunei. The proceeds were then deposited into a
current account which was also the common account to defray some of BLT's expenses eg salary and
overdrafts. BLT was to hand over the proceeds of the tickets to Royal Brunei within 30 days. The respondent
(Tan) was the managing director and the principal shareholder of BLT. Later BLT went into insolvency and
Royal Brunei took action against Tan for knowingly assisting in breaching a trust. The Privy Council when
discussing whether the breach of trust must be a dishonest and fraudulent breach of trust committed by the
trustee, at the end of the day found Tan, on an objective test, liable. The Privy Council when discussing the
fault based liability opined:
Given then, that in some circumstances a third party may be liable directly to a beneficiary, but given also
that the liability is not so strict that there would be liability even when the third party was wholly unaware of
the existence of the trust, the next step is to seek to identify the touchstone of liability. By common accord
dishonesty fulfils this role.
[145] The above principle was extended by Twinsectra Ltd v Yardley and others [2002] 2 All ER 377 (HL),
when it introduced the two-fold tests of an objective and subjective test. In this case, Leach who was a
solicitor, acted for Yardley in a purchase of a piece of property. Financing was needed and Barclays Bank
agreed to finance the purchase. Unfortunately delays happened and an alternative source had to be found.
Twinsectra agreed to finance but subject to Leach giving an undertaking guaranteeing payment. Leach
refused but was agreed upon by another solicitor ie Sims. Later Barclays' loan came through thus dispensing
with the need of Twinsectra's loan. However Yardley and Sims proceeded with Twinsectra's loan, with Sims
now assuming the principal liability over the loan, as Sims owed Yardley monies. This agreement between
them was not known to Leach and Twinsectra except for a proposed draft of the undertaking seen by the
former. Sims handed over the monies to Leach who then paid it out on Yardley's instructions. When Yardiey
defaulted and Sims went bankrupt Twinsectra sued Leach for dishonest assistance of the breach of trust
occasioned by Sims. The trial Judge found Leach not dishonest. The Court of Appeal disagreed and
overturned that decision. The House of Lords agreed with the trial judge and allowed Leach's appeal.
[146] In a gist, a new test was introduced by Twinsectra, in that the concept of subjective dishonesty became
a requirement in a breach of trust situation. Lord Hoffman at p 382 in this case opined:
I do not think that it is fairly open to your Lordships to take this view of the law without departing from the
principles laid down by the Privy Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378. For the
reasons given by my noble and learned friend, Lord Hutton, I consider that those principles require more

than knowledge of the facts which make the conduct wrongful. They require a dishonest state of mind, that is
to say, consciousness that one is transgressing ordinary standards of honest behaviour. I also agree with Lord
Hutton that the judge correctly applied this test and that the Court of Appeal was not entitled, on the basis of
the written transcript, to make a finding of dishonesty which the judge who saw and heard Mr Leach did not.
[147] Lord Hutton at p 384 had added:
Thirdly, there is a standard which combines an objective test and a subjective test, and which requires that
before there can be a finding of dishonesty it must be established that the defendant's conduct was dishonest
by the ordinary standards of reasonable and honest people and that he himself realised that by those
standards his conduct was dishonest. I will term this 'the combined test'.
[148] Having scrutinised the evidence, we are satisfied that what was adduced before the court was merely
evidence pointing to CIMB complying with the instructions given by the banker-customer relationship. In
light of the peculiar position of CIMB, and with no cogent evidence having been adduced to say otherwise, it
is our view that CIMB could not be construed as being dishonest in the ordinary standards of reasonable and
honest people, with itself knowing, based on the subjective dishonest test, that what it did was dishonest
when transferring the monies to other accounts. This finding and conclusion therefore would be in line with
the combined tests of an objective and subjective test as propounded by Twinsectra.
[149] As opposed to CIMB's position MTB's stand is as follows. It argued that as all the pre-conditions of the
designated accounts had not been complied with it could not move in and administer the accounts. Whether
this position is acceptable or otherwise requires a scrutiny of the facts and background of this case. And this
we have done when discussing KAF's appeal. We found MTB liable for failing to ring fence the designated
accounts. No further discussion therefore is needed here on the finding of MTB's liability except to say that
with the authority it held MTB could have taken up many peremptory actions. Instead it did practically
nothing. To use the words of the learned judge, MTB instead of being proactive, had behaved 'like a
mannequin', when its appointment as trustees went as far back as July 2003. MTB had been unprofessional
and indifferent when it failed to take action despite being aware of the inaction of Pesaka.
[150] From the totality of the evidence we therefore hold that CIMB was not liable for the monies disposed
on the instruction of Pesaka from the designated account and instead hold MTB totally liable.
[151] Thus, our answer to the two questions are in the negative. The appeal is allowed with costs and the
order of the Court of Appeal set aside. The counter claim by MTB against CIMB is dismissed with costs.
CIVIL APPEAL NO 02(f)-3304 OF 2012(W) APPEAL NO (v) (PESAKA, RAFIE AND THE
AMDAC GROUP'S APPEAL)
[152] This brings us to the appeal filed by Pesaka, Rafie and the Amdac Group.
[153] MTB had filed counterclaim against Pesaka, Rafie, Murnina and the Amdac Group claiming for a
declaration as well as judgment to the effect that MTB is entitled to be indemnified in full by them for any
judgment which may be entered against MTB in favour of the bondholders or any one of them.
[154] MTB's claim for indemnity against Pesaka, Rafie, Murnina and the Amdac Group is on the basis that
they are constructive trustees over the monies in the RA. MTB claimed that a constructive trust was imposed
because they had knowledge that the monies in the RA were trust monies and that they knew that the monies
were being misapplied or that they were reckless as to their application.

[155] The High Court dismissed MTB's indemnity claim against Pesaka, Rafie, Murnina and the Amdac
Group.
[156] The Court of Appeal allowed MTB's appeal and made the following orders:

(a)

KAF and MTB should jointly bear 1/3 of the total loss of RM149,300,000 together with all penalty charges;

(b)

Pesaka to pay KAF and MTB the sum of 2/3 of RM149,300,000 together with penalty charges at the nominal
rate of 3% on 2/3 of RM149,300,000 from 30 September 2005 to the date of judgment, and penalty charges
at the rate of 4% on 2/3 of RM149,300,000 from the date of judgment to the date of satisfaction;

(c)

Pesaka to pay KAF and MTB the costs of their appeals;

(d)

Rafie, Murnina and the Amdac Group to pay MTB, the sum of 2/3 of RM149,300,000 together with penalty
charges at the nominal rate of 3% on half of 2/3 of RM149,300,000 from 30 September 2005 to the date of
judgment, and penalty charges at the rate of 4% on half of 2/3 of RM149,300,000 from the date of judgment
to date of satisfaction; and

(e)

Rafie, Murnina and the Amdac Group to pay the costs of MTB's appeal against them.
[157] We have dealt with the appeal by Murnina. For the same reasons in Murnina's appeal, we would also
dismiss the appeal by Rafie and the Amdac Group with costs and therefore we hold that they are fully liable
to MTB.
[158] In respect of liability of Pesaka for MTB's claim for indemnity, learned counsel for Pesaka contended
that the Court of Appeal clearly erred in holding that the indemnity provision under cl 14.1 of the trust deed
applied and that Pesaka could not rely on the exclusion in cl 14.1 which according to learned counsel was
clear, unambiguous and unequivocal in its meaning. It was submitted that an indemnity clause in business
contracts did not have to satisfy the test of reasonableness as required for indemnity provisions in a consumer
contract. It was further contended that while the High Court had applied the indemnity provision as written
and agreed to by the parties, the Court of Appeal in effect rewrote the provision. It was also submitted that
there was no basis for a finding of fraud by the Court of Appeal, and as such it erred in concluding that
Pesaka was disqualified from relying on the exclusion clause. For reasons which we will set out shortly we
are unable to agree with the aforesaid submissions.
[159] In considering the liability of Pesaka to MTB, the learned trial judge found that this was an appropriate
case for lifting the corporate veil. She found that Rafie was the directing mind behind Pesaka and the Amdac
Group. However she dismissed MTB's claim for reasons as set out in the relevant passages in her judgment.
The main reason appears to be her finding that MTB 'has not shown that degree of skill, prudence, care and
diligence consistent with the position held at the material time', which disentitled it to any indemnity under cl
14.1.

[160] The Court of Appeal found that there was a total failure on the part of the learned trial judge to enquire
if the exemptions in cl 14.1 applied. Summarising the more recent development of the jurisprudence on the
application of an exemption clause from leading authorities the Court of Appeal said:
[49] In the first place, could an exemption clause avail to the party guilty of a wilful breach which goes to the
root of the contract? In Karsales (Harrow) Ltd v Wallis [1956] 1 WLR 936, it was held by Lord Denning that
no exemption clause however widely drafted, could avail the party guilty of a breach which goes to the root
of the contract:

Notwithstanding earlier cases which might suggest the contrary, it is now settled that exempting clauses of
this kind, no matter how widely they are expressed, only avail the party when he is carrying his contract in its
essential respects. He is not allowed to use them as a cover for misconduct of indifference or to enable him to
turn a blind eye to his obligations. They do not avail him when he is guilty of a breach which goes to the root
of the contract.
[50] But such a doctrine of fundamental breach as a rule of law was disapproved by the House of Lords
in Suisse Atlantique Societe d'Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361,
who held, albeit obiter, that whether an exclusion clause was applicable when there was a fundamental
breach was one of the true construction of the contract. However, the doctrine of fundamental breach
continued to be used until it was again disapproved by the House of Lords in Photo Production Ltd v
Securicor Transport Ltd [1980] AC 827 (see Contract Law in Malaysia by Cheong Mei Fong, at p 203), who
held that whether an exclusion clause was applicable when there was a fundamental breach was one of the
true construction of the contract. On that, Their Lordships wire uncompromisingly clear:
Much has been written about the Suisse Atlantique case. Each speech has been subjected to various degrees
of analysis and criticism, much of it constructive. Speaking for myself I am conscious of imperfection of
terminology, though sometimes in good company. But I do not think that I should be conducing to the clarity
of the law by adding to what was already too ample a discussion a further analysis which in turn would have
to be interpreted. I have no second thoughts as to the main proposition that the question whether, and to what
extent an exclusion clause is to be applied to a fundamental breach, or a breach of a fundamental term, or
indeed to any breach of contract, is a matter of construction of the contract. Many difficult questions arise
and will continue to arise in the infinitely varied situations in which contracts come to be breached by
repudiatory breaches, accepted or not, by anticipatory breaches, by breaches of conditions or of various term
negligent, or deliberate action or otherwise. But there are ample resources in the normal rules of contract law
for dealing with these without the superimposition of a judicially invented rule of law: Per Lord Wilberforce.
My Lords, an exclusion clause is one which excludes or modifies general secondary or anticipatory
secondary, that would otherwise arise under the contract by implication of law. Parties are free to agree to
whatever exclusion or modification of all types of obligations as they please within the limits that the
agreement must retain the legal characteristics of a contract; and must not offend against the equitable rule
against penalties; that is to say, it must not impose upon the breaker of a primary obligation a general
secondary obligation to pay to the other party a sum of money that is manifestly intended to be in excess of
the amount which would fully compensate the other party for the loss sustained by him in consequence of the
breach of the primary obligation. Since the presumption is that the parties by entering into the contract
intended to accept the implied obligations exclusion clauses are to be construed strictly and the degree of
strictness appropriate to be applied to their construction may properly depend upon the extent to which they
involve departure from the implied obligations. Since the obligations implied by law in a commercial

contract are those which, by judicial consensus over the years or by Parliament in passing a statute, have
been regarded as obligations which a reasonable businessman would realise that he was accepting when he
entered into a contract of a particular kind, the court's view of the reasonableness of any departure from the
implied obligations which would be involved in construing the express words of an exclusion clause in one
sense that they are capable of bearing rather than another, is a relevant consideration in deciding what
meaning the words were intended by the parties to bear. But this does not entitle the court to reject the
exclusion clause, however unreasonable the court itself may think it is, if the words are clear and fairly
susceptible of one meaning only: per Lord Diplock.

The law is that 'no exemption clause can protect a person from liability for his own fraud [Chitty] meant the
fraud within the context of section 17 of our Contracts Act 1950 or require the other party to assume what he
knows to be false. But it is uncertain whether, there is any rule of law, based on public policy, which would
prevent the exclusion by a principal of liability for fraud on the part of his agent acting as such. It is,
however, clear that any such exclusion would have to be expressed in clear and unmistakable terms on the
face of the contract so as to leave the other party in no doubt that fraud was covered' (Chitty, para 14-136).
(Emphasis added.)
[161] The Court of Appeal opined (and in our view rightly) that the upholding or otherwise of the exemption
clause agreed to by the parties depended upon the proper construction of that clause which must be construed
strictly stating that:
[53] what was agreed must be resolved by the proper construction of the said exclusion clauses (for the
general principles of construction of contract, see Hotel Anika Sdn Bhd v Majlis Daerah Kluang
Utara [2007] 1 MLJ 248) which must be construed strictly contra proferentem (Anderson v
Fitzgerald (1853) 4 HLC 484 ; (1853) 10 ER 551; Guardian Assurance Co Ltd v Condogianis (1919) 26
CLR 231).
[54] In Hong Realty (Pte) Ltd v Chua Keng Mona [1994] 3 SLR 819, 825, [1994] Karthigesu JA said:

It is trite law that exemption clauses must be construed strictly and this mean that their application must be
restricted to the particular circumstances the parties had in mind at the time they entered into the contract. On
any view of the matter the respondent and the appellants could not have intended that the exemption clauses
in the contract of bailment would apply when some act had intervened to alter the circumstances in... which
the exemption clauses would ordinarily apply.
[162] Turning to the exemption clause under cl 14.1 (as well as cl 13.1 of the SFA in their application to
KAF) the Court of Appeal found that the exemption clause did not apply for the following reasons:
[55] Clause 13.1 of the SF agreement provided that KAF would be indemnified 'save that the Issuer shall not
be liable to the Facility Agent for any expenses, loss, damage, or liability referred to herein arising from the
gross negligence or wilful misconduct or fraud or wilful default by the Facility Agent'. Clause 14.1 of the
trust deed provided that MTB would be indemnified 'save and except for its gross negligence, wilful default,
wilful breach or fraudulent actions'. Although differently worded, but yet both exemption clauses excluded
indemnity where loss was occasioned by gross negligence, wilful misconduct or fraud or wilful default by
KAF or MTB. Those were the particular circumstances that the parties had in mind at the time when they
entered into the SF agreement or trust deed. Both exemption clauses must be strictly construed to mean that

their application must be restricted to those particular circumstances of gross negligence, wilful misconduct
or fraud or wilful default by KAF and or MTB. But both exemption clauses did not provide for the
circumstance of fraud by Pesaka (fraud by Pesaka was by its wilful act that deprived, by inequitable means,
the revenue that belonged to the bondholders; see Kerr on the Law of Fraud and Mistake (7th Ed), at p 1).
So, could KAF or MTB have intended that the exemption clauses would apply even when some act had
intervened to alter the circumstances in which those exemptions clauses would ordinarily apply? Could KAF
or MTB have intended that the exemption would apply even when there was fraud by Pesaka? But it should
not seem that KAF or MTB could have intended so, as contacting 'parties assume the honesty and good
faith of the other; absent such an assumption they will not deal' (HIH Casualty and General Insurance Ltd &
Ors v Chase Manhattan Bank & Ors [2003] 2 Lloyd's Rep 61 68 per Lord Bingham). Since honesty was
assumed, it could not have been contemplated by KAF or MTB that the exemption clauses applied even
when there was fraud by Pesaka. KAF and or MTB could not have intended that the exemption clauses
would apply even when fraud by Pesaka had intervened to alter the circumstances in which those exemption
clauses would ordinarily apply. If that had been intended, then it should have been expressed in clear and
unmistakable terms on the face of the SF agreement and trust deed so as to leave KAF or MTB in no doubt
that fraud by Pesaka was covered. Clause 13.1 of the SF Agreement and cl 14.1 of the trust deed, on its true
construction, could not reasonably have been intended to apply even when fraud by Pesaka had intervened
to alter the circumstances in which those exemption clauses would ordinarily apply. Any other construction
would mean that Pesaka could break every covenant with impunity. And that absurd result could never be
right. Suffice it to say that those exemption clauses could not avail to Pesaka as a defence. (Emphasis added.)
[163] We find no reason to disagree with the aforesaid conclusion of the Court of Appeal. Indeed, in Suisse
Atlantique Lord Reid said:
As a matter of construction it may appear that the terms of the exclusion clause are not wide enough to cover
the kind of breach which has been committed. Such clauses must be construed strictly and if ambiguous the
narrower meaning will be taken. Or it may appear that the terms of the clause are so wide that they cannot
be applied literally: that may be because this would lead to an absurdity or because it would defeat the main
object of the contract or perhaps for other reasons. (Emphasis added.)
[164] On the finding of fraud against Pesaka, we are of the view that on the evidence, the Court of Appeal
was right in concluding that Pesaka fraudulently misappropriated and converted the monies which belonged
to the bondholders in breach of the security documents. Summing up the material events relating to the
fraudulent misappropriation of the bond proceeds by Pesaka the Court of Appeal said:
[18] 'Ring fencing' was not even there after the bonds had been issued and after the bonds proceeds had been
fully disbursed. In the meantime, revenue flowed into Pesaka's conventional account at the CIMB Coswav
branch. Pesaka had a number of conventional accounts, but the revenue was only deposited into the
revenue/proceeds account at the CIMB Cosway branch. That revenue belonged to bondholders. Still 'ring
fencing' was not in place, not even after all revenue had been deposited into Pesaka's aforesaid account. That
revenue in that aforesaid conventional account was not controlled by MTB. As a matter of sad fact, MTB had
no control whatsoever of all revenue deposited into the aforesaid conventional account after the issuance of
the bonds. When revenue was deposited into the aforesaid conventional account, Pesaka controlled it. The
signatory or signatories to all conventional accounts were vet the nominee/s of Pesaka. In that state, it should
have dawned upon KAF and or MTB that the security of the bondholders had been totally breached. Pesaka
could withdraw the revenue at will, notwithstanding that the revenue had been assigned and was no longer its
property. And sad to say, so it proved to be that Pesaka could indeed withdraw all revenue. Between July
2004 and September 2005, Pesaka fraudulently withdrew all revenue that had been deposited into its

conventional account at the CIMB Coswav branch. On Pesaka's instructions, all revenue in that
conventional account was transferred to other accounts. Pesaka had made off with the revenue, despite
Pesaka's prior notices to the CIMB Coswav and Subang branches that Pesaka had assigned and charged all
rights and title in and to all said conventional accounts to MTB (see 3727 and 3729AR). Not surprisingly,
there was nothing left in the till for the redemption of bonds. Bond holders were left high and dry, and quite
without payment.
[165] In the circumstances we agree with the Court of Appeal that Pesaka cannot rely on the exemption
clause under cl 14.1 as a defence. In HIH Casualty and General Insurance Ltd v Chase Manhattan
Bank [2003] UKHL 6 Lord Bingham said:
For, as Lord Justice Rix observed more than once in his judgment (pars 160, 169), fraud is a thing apart. This
is not a mere slogan. It reflects an old legal rule that fraud unravels all: fraus omnia corrumpit. It also reflects
the practical basis of commercial intercourse. Once fraud is proved, 'it vitiates judgments, contracts and all
transactions whatsoever': Lazarus Estates Ltd v Beasley [1956] 1 QB 702 at p 712, per Lord Justice Denning.
Parties entering into a commercial contract will no doubt recognize and accept the risk of errors and
omissions in the preceding negotiations, even negligent errors and omissions. But each party will assume the
honesty and good faith of the other; absent such an assumption they would not deal.
As such, Pesaka cannot benefit from its own fraud.
[166] We also agree with the Court of Appeal that notwithstanding MTB's breach of duty or negligence, it is
no excuse for Pesaka by its fraudulent misappropriation, to deprive the bondholders of the monies. Pesaka
must indemnify MTB. On the extent of the indemnity, for reasons which we have set out earlier in this
judgment, we order full indemnity against Pesaka. Hence, the Court of Appeal's order on the indemnity by
Pesaka is varied to that extent.
[167] In the result the appeal by Pesaka, Rafie and the Amdac Group are dismissed with costs.

[2013] 1 MLJ 526

Dato' Ariff Wan Hamzah & Ors v HwangDBS Investment Bank Bhd & Anor
HIGH COURT (KUALA LUMPUR)
NALLINI PATHMANATHAN J
CIVIL SUIT NO D-22640 OF 2009
27 November 2012
Tort Negligence Negligent misrepresentations and misstatements Investment of shares on
representations based on representations and statements Loss of earnings and interest Whether
representations faulty, inaccurate and misleading Whether there was deliberate omission of salient
financial information Duty of care owing Losses and damages Whether proven Whether there
was cause of action
The plaintiffs claimed against the defendants for negligent misrepresentation as well as negligent
misstatement. The second plaintiff, Wan Hamimie bt Wan Ariff ('Hamimie'), was the daughter of the first
plaintiff while the third and fourth plaintiffs, Dr Syed Ibrahim ('Ibrahim') and Mokhtar Ahmad ('Mokhtar')
were business associates or partners of the first plaintiff. The plaintiffs claimed a sum of RM6,909,940
together with loss of earnings and interest which they claimed to have lost as a result of investing in the
purchase of placement shares in a company called Litespeed Education Technologies Bhd ('Litespeed'),
based on the misrepresentations of the two defendants. It was alleged that the defendants' representations
were false, inaccurate and misleading and that they suffered losses and damages as the value of the Litespeed
shares plunged soon after Hamimie, Ibrahim and Mokhtar purchased the shares allotted to them under the
placement exercise. Further or alternatively, the plaintiffs contended that the defendants each owed them
separate duties of care. The first defendant, an agent of Litespeed responsible for statements in the
Prospectus, owed a duty to investors such as the plaintiffs, to ensure that all information in the Prospectus
was accurate up until the date of their subscription of shares in Litespeed, which the first defendant failed to
do. The plaintiffs' claim against the second defendant, who was Litespeed's auditor and reporting accountant,
premised on tort of negligent misstatement on the ground that its statements for the relevant financial years
as well as the prospective forecast in the Prospectus were reported favourably when they were actually
inaccurate, false and misleading. A duty of care was owed, it was contended, to these plaintiffs to ensure that
the financial statements set out in the Prospectus were accurate and fair, which the second defendant had
breached. In opposing the plaintiffs' claims, the defendants maintained, inter alia, that they made no
misleading statements or false representations as alleged; they owed no duty to the purchasing plaintiffs as
contended and
1 MLJ 526 at 527
therefore cannot be responsible for any losses suffered by the purchasing plaintiffs; and that they had
cautioned all investors in the Prospectus that there were no guarantees concerning Litespeed's share prices
and investors were advised to be careful about the inherent risks of such an investment. The second
defendant argued that the plaintiffs were not entitled to rely on any of the statements made by it in the
Prospectus and therefore owed no duty of care to the plaintiffs.

Held, dismissing the claim with costs:

(1)

The plaintiff's cause of action which premised on negligent misrepresentation by the first defendant failed.
The plaintiffs were bound to act on their own initiative and with the requisite professional advice
independently obtained in determining whether or not to invest in the Litespeed placement shares. The
limitation or exclusion clause was worded specifically to meet a situation such as has arisen here, namely
ascribing blame or liability to the first defendant for the investors' decision to invest in the Litespeed shares.
This was not a general exclusion or widely worded limitation of liability clause. Such clauses cannot simply
be ignored. By executing the letters of offer, the plaintiffs accepted these clauses as part of the binding
contract for the purchase of the placement shares and the effect of these clauses ought to be given full effect.
The net effect of these clauses was to exempt or exclude the first defendant from liability (see para 74).

(2)

The first defendant did not omit or deliberately withhold salient financial information as alleged by the
plaintiffs. Given their lack of knowledge at the material time it cannot be said that there was any negligent
misstatement on their part. As there was no further duty on their part to investigate and verify financial
performance beyond, it could not be concluded that they breached a duty of care. The first defendant had no
duty of care to ascertain and verify the financial performance for the first and second quarters of 20052006
and report on the same as was alleged by the plaintiff. As they owed no such duty of care to prospective
purchasers including the plaintiffs, there could be no liability under this head against the first defendant (see
para 92).

(3)

The plaintiffs, particularly the second to fourth plaintiffs did not rely in a specific way upon any of the
information set out in the Prospectus. A general reliance was insufficient. The plaintiffs were bound to show
that the information issued by the accountants worked so as to exert a specific influence on their minds and
as a consequence of which they were induced to purchase the shares. That has not been made out in the
instant case which is another reason why the plaintiffs' claim against the second defendant in this regard fails
(see para 105).

(4)

It was evident that the plaintiffs' complaint was that the assumptions
1 MLJ 526 at 528
pertaining to the financial forecast were wholly unrealistic, and as a consequence, misleading to prospective
purchasers such as the plaintiffs, when risks of non-performance of various contracts, or assumptions made
on contingent bases, were not highlighted. No proper qualifications were made or highlighted. No attempt
was made to verify the matters set out in the assumptions (see para 107).

(5)

The first defendant played a lesser role in relation to the profit forecast for 2006 than the reporting
accountants and was absolved of any issues of negligent misstatement or misrepresentation or omission. As
stated before and borne out by the verification notes the scope of the first defendant's duty was to verify the

issue price, details of the public issue, brokerage, underwriting and placement fees, restructuring and listing
exercise, and the procedure for application and acceptance (see paras 143144).

(6)

The plaintiffs were not entitled to any losses or damages as claimed as they have not established their case
against the defendant. The plaintiffs failed to establish that the second to fourth plaintiffs actually suffered
such losses as it was not evident in the first place that they had paid for those shares. It was also not clear on
the evidence, apart from a bare statement to that effect that the first plaintiff paid for the shares (see para
191(a) & (c)).
Cases referred to
Amal Bakti Sdn Bhd & Ors v Affin Merchant Bank (M) Bhd [2012] 5 MLJ 61, CA (distd)
1 MLJ 526 at 531
Boyd Knight v Purdue [1999] 2 NZLR 279, CA (refd)
Canavan v Wright [1957] NZLR 790, CA (refd)
Caparo Industries plc v Dickman [1990] 2 AC 605, HL (refd)
Electra Private Equity Partners v KPMG Peat Marwick and others [2001] 1 BCLC 589, CA (refd)
Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, HL (refd)
James McNaughton Paper Group Ltd v Hicks Anderson & Co [1991] 2 WLR 641, CA (refd)
Malaysian International Merchant Bankers Bhd v Lembaga Bersekutu Pemegang Amanah Pengajian Tinggi
Islam Malaysia [2001] 1 MLJ 375, CA (distd)
Malaysian Newsprint Industries Sdn Bhd v Perdana Cigna Insurance Bhd & Ors [2008] 2 MLJ 256, CA
(refd)
Orient Centre Investments and another v Societe Generale [2007] 3 SLR 566, CA (refd)
Peekay Intermark Ltd & Anor v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd's Rep 511,
CA (refd)
Scott Group v McFarlane [1978] 1 NZLR 553, CA (refd)
White v Jones [1995] 2 AC 207, HL (refd)

TS Lim (James Khong with him) (James Khong) for the plaintiff.
Yoong Sin Min (Samuel Tan with him) (Shook Lin & Bok) for the first defendant.
Kelvin Seet (Vendee Chai with him) (Cheang & Ariff) for the second defendant.
Nallini Pathmanathan J
INTRODUCTION

[1] The plaintiffs' claim against the defendants here is premised on negligent misrepresentation as well as
negligent misstatement.
[2] The plaintiffs are individuals who are related in the following manner. The second plaintiff, Wan
Hamimie bt Wan Ariff ('Hamimie'), is the daughter of Dato' Ariff Wan Hamzah, the first plaintiff ('Dato'
Ariff'). The third and fourth plaintiffs, Dr Syed Ibrahim ('Ibrahim') and Mokhtar Ahmad ('Mokhtar') are Dato'
Ariff's business associates or partners.
[3] The plaintiffs claim a sum of RM6,909,940 together with loss of earnings and interest which they claim
to have lost as a consequence of investing in the purchase of placement shares in a company called Litespeed
Education Technologies Bhd ('Litespeed') now known as Eduspec Holdings Bhd. In essence the plaintiffs
contend that they were induced to enter into the said purchases of shares in Litespeed based on the
misrepresentations of the two defendants. They contend that they relied on the representations of both
1 MLJ 526 at 532
defendants, which representations subsequently proved to be false, inaccurate and misleading. As a
consequence they maintain that they have suffered loss and damage as the value of the Litespeed shares
plunged soon after Hamimie, Ibrahim and Mokhtar purchased the shares allotted to them under the
placement exercise.
[4] Further or alternatively the plaintiffs contend that the defendants each owed them separate duties of care.
The first defendant, as Litespeed's advisor, managing underwriter, sponsor and placement agent was
responsible for statements in the prospectus, and owed a duty to investors such as the plaintiffs, to ensure that
all information contained in the prospectus was accurate up until the date of their subscription of shares in
Litespeed. It is further contended that the first defendant was under statutory duty to issue a supplementary
prospectus in the event there was a significant changein any matter disclosed in the prospectus, or if there
was a material misstatement or misleading statement or material omission. In breach of such duty, it is
contended the first defendant failed to ensure that the material information in the prospectus was accurate
and reliable and additionally failed to update or ensure that the information in the prospectus was up to date
until the date of subscription of the shares by the plaintiffs.
[5] With respect to the second defendant who were Litespeed's auditors and reporting accountants, the
plaintiffs' grievance stems from its statements for the relevant financial years as well as the prospective
forecast which were, in the prospectus, reported favourably. In reliance on the stated financial figures the
plaintiffs maintain that the representation in the prospectus was that Litespeed was financially sound. Again,
subsequent to the subscription, Hamimie, Ibrahim and Mokhtar complain that those financial statements
were inaccurate, false and misleading. Their claim against the second defendant is premised in tort for
negligent misstatement.
[6] A duty of care was owed, it was contended, to these plaintiffs to ensure that the financial statements set
out in the rospectus were accurate and fair, which duty the second defendant failed to comply with or abide
by.
[7] The defendants vigorously dispute the foregoing maintaining, inter alia, that:

(a)

they made no misleading statements or false representations as alleged;

(b)

they owed no duty to the purchasing plaintiffs as contended and therefore cannot be responsible for any
losses suffered by the purchasing plaintiffs;

(c)

they cautioned all investors in the prospectus that there were no

1 MLJ 526 at 533
guarantees concerning Litespeed's share prices and investors were advised to be careful about the inherent
risks of such an investment; and

(d)

the second defendant maintains that the plaintiffs were not entitled to rely on any of the statements made by
it in the reporting accountants' report contained in the prospectus and therefore owed no duty of care to the
plaintiffs.
THE FACTUAL BACKGROUND
[8] The background facts are set out comprehensively in the submissions of all the parties as well as the
evidence adduced during the course of trial. I adopt in part some of the submissions of learned counsel for
the parties below:
Between 20032005, D1 was known as Hwang-DBS Securities Bhd and was a stockbroking company as
well as a universal broker. It could, and did, act as advisor in corporate matters at the time. Subsequently it
was licensed as an investment bank in January 2007.
[9] In or around 2005, Litespeed was approved by the Securities Commission for public listing on the
Malaysian Exchange of Securities Dealing and Automated Quotation ('MESDAQ'). MESDAQ which has
now been replaced by the ACE Market, was then a market where public quoted shares of technology based
companies with scant financial track records were listed and traded.
[10] Litespeed was incorporated by Litespeed Education Pte Ltd, a Singapore company that decided to
incorporate it and list it on MESDAQ. Litespeed is a company that, as it name suggests, is involved in
propogataing education and learning technology.
[11] HwangDBS Investment Bank Bhd ('D1') was appointed by Litespeed to assist with its prospective listing
as well as to be it's placement agent for a portion of Litespeed's shares to be subscribed to by propsective
shareholders.
[12] On 20 July 2005 Bursa Malaysia gave its approval to Litespeed for the proposed listing on MESDAQ.
[13] D1 assisted Litespeed in preparing Litespeed's prospectus dated 27 October 2005 ('the prospectus') for
its shares issue in conjunction with the
1 MLJ 526 at 534
listing of 32,500,000 new ordinary shares at an issue price of 47 sen per share. The shares comprised:

(a)

4,234,000 shares available to directors, employees and business associates of Litespeed;

(b)

5,000,000 shares available for the Malaysian public; and

(c)

23,257,000 shares available by way of private placement ('placement shares').

[14] D1 also assisted Litespeed to procure investors for the placement shares. To this end, one of D1's
officers by the name of Ms Ong Hui Hui, DW3 ('Ms Ong') contacted one Encik Nik Haniff Kamal sometime
in 2005 on behalf of Litespeed, seeking to have Litespeed's officers make a presentation to potential
investors for the MESDAQ listing. This was part of the exercise to secure investors for the placement shares.
At that time Ms Ong was a director of corporate finance in D1.
[15] The plaintiffs maintain that Ms Ong, by reason of several prior transactions involving Dato' Ariff and
companies he is connected to, acted in the capacity of an advisor at all times. Dato' Ariff further testified in
the course of his testimony that Ms Ong made several specific and express representations pertaining to the
advantages of purchasing Litespeed shares by way of a private placement. These representations included
references, according to him, of the financial performance of Litespeed, its profit forecast and its price.
[16] Ms Ong on the other hand, strongly denies making any such representations to Dato' Ariff, maintaining
in turn that all representations pertaining to Litespeed were made by a director of Litespeed during the course
of the one presentation that was made to Dato' Ariff as a prospective purchaser. Ms Ong further disputes that
she exerted any influence whatsoever on Dato' Ariff or any of the other plaintiffs. She denies that she made
any of the several representations in respect of Litespeed, that she is now alleged to have made.
[17] It is not however in dispute that Ms Ong together with Litespeed's director at that time, one Pok Vik
Sent and other officers of Litespeed met with Nik Haniff Kamal who in turn arranged for Ms Ong and the
Litespeed team of officers to meet up with Dato' Ariff.
[18] A presentation was duly made by D1 on 3 October 2005. The plaintiffs, in their statement of claim,
alleged that Dato' Ariff had several meetings with Ms Ong where she had made representations and
presentations in respect of the Litespeed shares. At trial however, Dato'Ariff could only recall one meeting
with Ms Ong and the Litespeed officers on 3 October 2005.
1 MLJ 526 at 535
THE MEETING DATED 3 OCTOBER 2005
[19] Ms Ong herself maintained that the Litespeed directors had made one if not two presentations to Dato'
Ariff. Ms Ong was clear that the entire presentation was made by the Litespeed directors and not herself. All
queries with regards to the company were also directed to the Litespeed director and his team. She
maintained that she did not make any representations. This issue of fact is, naturally, in dispute.
[20] Hamimie Ariff, the second plaintiff was present for part of the meeting.
[21] The plaintiffs, through Dato' Ariff maintain that at the meeting with Ms Ong on 3 October 2005, she
personally briefed Dato' Ariff and Hamimie that Litespeed was a good prospect for investment; that it was
financially sound and that there was little, if any risk in the investment; that Litespeed had earned a profit
after tax of RM6,291,000 for the financial year ending 30 April 2005; that it was expected to earn a profit
after tax of not less than RM7.5m during its first year of listing thereby yielding an average earning per share
of not less than RM0.07 per share. According to Dato' Ariff, he understood from Ms Ong that the shares of

Litespeed would appreciate in value. As such it was put to the prospective investors that the issue price of
RM0.47 per share was fair and reasonable.
[22] Dato' Ariff's testimony is diametrically opposed to that of Ms Ong herself who testified on behalf D1. In
the course of her testimony Ms Ong testified that she was present on behalf of D1 to field questions on the
listing. She reiterated that she made no representations of any kind that Litespeed would be a good
investment. Neither was its profitability guaranteed, according to her. She further stated that all details of the
business and future plans of Litespeed were dealt with by the director of Litespeed. She stated that she was
fully aware that as a company listed on MESDAQ, which listed small capital tech companies with a limited
or no financial track record, she was not in a position to over sell or make any representations to the effect
that potential investors would be guaranteed or assured of profits. She further testified that Dato' Ariff, as a
'savvy businessman' would be well aware of the inherent risks involved in investing in MESDAQ companies.
[23] Ms Ong remained consistent in her testimony. In the course of cross- examination, she explained that at
roadshows and presentations it was not the function of D1 to explain the investment prospects of the IPO and
soon to be listed companies, because this task was always undertaken by the directors and officers of the
company. D1 would not, she insisted, make any recommendations at all but would leave this to the company.
1 MLJ 526 at 536
THE INFORMATION MEMORANDUM DATED 12 AUGUST 2005
[24] It is not in dispute that at the meeting on 3 October 2005, Ms Ong provided Dato' Ariff with an
information memorandum dated 12 August 2005. This is because the prospectus had not been completed.
The prospectus was only made available on 27 October 2005.
[25] The information memorandum gives information about the soon to be listed company, Litespeed. A
perusal of the same discloses the following salient points:
The recipient agrees and undertakes to be bound by the following terms and conditions, inter alia:

(a)

D1 made no recommendation to the recipient to undertake the proposed investment;

(b)

D1 did not assume any obligation to provide any recipient with any additional information or to update or
revise any information should it prove to be incorrect or misleading;

(c)

the recipient was to be solely responsible for his investment decision and was advised to seek independent
financial, legal or other such professional advice when making its own independent assessment of, amongst
others, the financial position, credit-worthiness and prospects of Litespeed and the extent of the risk
involved;

(d)

D1 and its representatives make no representation or warranty, express or implied as to the adequacy,
accuracy or completeness of the information contained in the information memorandum and expressly
disclaims any liability (whether in contract or tort) for any information in the said document; and

(e)

the Information may contain statements of anticipated future performance of Litespeed which reflect
assumptions made by Litespeed and D1. In this respect Litespeed makes no representation or warrant as to
the accuracy of the achievement of such statements.
[26] Dato' Ariff admitted that this information memorandum was given to him at the time of the presentation.
[27] It is also not disputed that Dato' Ariff did not subscribe for any of Litespeed's shares. Neither was the
identity of the prospective purchasers, namely Hamimie, Ibrahim and Mokhtar, made known to D1 by Dato'
Ariff. In other words, none of the prospective purchasers, save for Hamimie met up with Ms Ong or the
director and representatives of Litespeed prior to their
1 MLJ 526 at 537
subscription for an allotment of placement shares. At this stage, the prospectus dated 27 October 2005 was
not ready and was not therefore made available to any of the plaintiffs.
[28] After this meeting, D1 was informed that the second to fourth plaintiffs, ie Hamimie, Ibrahim and
Mokhtar were interested in investing in Litespeed. Ms Ong testified that Nik Haniff Kamal and his officers
contacted her and submitted the second to fourth plaintiffs' names.
THE PROSPECTUS DATED 27 OCTOBER 2005
[29] In the interim on 27 October 2005 the prospectus for Litespeed was issued in conjunction with its listing
of 32,500,000 new ordinary shares of ten sen each at an issue price of 47 sen per share. As such issuance was
well after the meeting on 3 October 2005, no prospectus was handed over to Dato' Ariff at the said meeting.
[30] Dato' Ariff testified that there was more than one meeting with Ms Ong and that he was given the
prospectus at one of these meetings, subsequent to 3 October 2005. In the course of cross-examination
however he could not recall or estimate a date when such a meeting took place, subsequent to 3 October
2005.
[31] In so far as D1 is concerned, their position is that the prospectus was made available to the plaintiffs
together with the applications for subscription to the placement shares. Ms Ong denies any meetings
subsequent to 3 October 2005 to specifically hand over the prospectus to Dato' Ariff.
[32] It is therefore in dispute whether the prospectus was in fact specifically made available to Dato' Ariff
between 3 October 2005 and 14 November 2005.
THE KEY STATEMENTS IN THE PROSPECTUS
[33] The plaintiffs highlight the following key passages from the prospectus:

(a)

the E-learning division of the Litespeed Group formed the dominant business focus and revenue stream for
the group, and of the divisions' customers, iRead International Pte Ltd ('iRead') was the largest;

(b)

Litespeed earned a profit after tax of RM6,291,000 for the financial year ended 30 April 2005 which
represented a more than 100% jump in its profits from the previous year;

(c)

Litespeed recorded such a significant increase due to 'economies of scale'

1 MLJ 526 at 538
with a 'higher revenue contribution from the E-learning division which has a higher profit margin in
comparison to the education services divison'; and

(d)

the prospectus contained a profit forecast which projected a profit after tax of RM7.511m for the financial
year ending 30 April 2006. The assumptions underpinning the forecast were also provided.
[34] The plaintiffs highlight the fact that a profit forecast was not mandatory for the purposes of the listing,
save that Litespeed or D1 would have to issue a negative statement in the prospectus on the exclusion of the
profit forecast. D1 on the other hand, while accepting that the profit forecast is not mandatory maintained
through its head of corporate finance, DW1 that the profit forecast had been included to ensure transparency.
The directors of Litespeed would otherwise have had to provide a reason as to why no profit was forecast or
disclosed. As they were bidding for more contracts than that included in the forecasts, they felt secure in
disclosing the same.
THE RISKS AND CAUTIONS HIGHLIGHTED IN THE PROSPECTUS
[35] The defendants highlight the following clauses which they maintain highlighted the inherent risk in
choosing to invest in these shares. These express terms specified that any investment in the shares of
Litespeed would not result in guaranteed returns and potential subscribers were put on notice of the risks
involved in investing in such shares and were advised to obtain professional advice before investing.
[36] For example the risks inherent in purchasing shares in a new MESDAQ company were highlighted in
the prospectus in bold capital letters at the beginning:
Investors should rely on their own evaluation to assess the merits and risks of the investment. In considering
the investment, investors who are in any doubt as to the action to be taken should consult their stockbroker,
bank manager, solicitor, accountant or other professional adviser immediately.
And:
Characteristics of the MESDAQ market of Bursa Malaysia Securities Berhad Investors should be aware
that the MESDAQ market of Bursa Securities is a distinct market from the main and second board of Bursa
Securities in many respects. In particular, companies listed on the MESDAQ market are subject to different
quantitative and qualitative requirements, which have been primarily designed to accommodate high-growth
and/or technology companies.
1 MLJ 526 at 539
Companies that are listed on the MESDAQ market may not have an operating history or any profit track
record prior to listing. As such, whilst potential investment returns may be relatively high, companies listed
on the MESDAQ market may be of higher investment risk.
[37] And under the heading 'Investment Considerations and Risk Factors' at para 3.1.1 of the prospectus it is
stated that:

LET Group has been profitable for the last three (3) financial years ended 30 April 2005 although it had in its
initial years suffered some losses. There is no assurance that the LET Group will be profitable in future years.
The Group's revenue and operating results are difficult to forecast and could be adversely affected by many
factors. These may include, amongst others, the ability of the Group to secure new contracts from their
clients, the ability of the LET Group to control unforeseen costs, unforeseen changes to the Group's operating
expenses, the availability of human resources to meet market demand,
THE LETTERS OF OFFER DATED 11 NOVEMBER 2005
[38] In or around early November 2005, D1 issued letters of offer dated 11 November 2005 ('the offer
letters') inviting the second to fourth plaintiffs to subscribe for some of the placement shares on the specified
terms. Attached to each offer letter was an acceptance form together with the prospectus. The three offer
letters issued to the three plaintiffs are identical in terms of their content.
[39] Paragraphs 2.1 and 2.1.2 of the offer letters expressly provided that in accepting the offer of the
placement shares, the subscribers had represented, warranted and undertaken to have made their own
'independent investigations in evaluating the merits and risks of acquiring the Placement Shares without
reliance on any representation made by Hwang-DBS as Placement Agent or on any of its representatives or
agents'.
[40] And para 3.4(a) of the offer letters specifies that:
by offering you the Placement Shares, Hwang-DBS is not making any recommendation to you nor
advising you regarding the suitability or merits of any transaction you may enter into in connection with the
Pre-listing Placement or otherwise
[41] According to the prospectus and letters of offer, the offers to subscribe for the placement shares had to
be accepted by 14 November 2005.
1 MLJ 526 at 540
ACCEPTANCE FORMS DATED 14 NOVEMBER 2005
[42] Accordingly, on 14 November 2005, Hamimie, Ibrahim and Mokhtar duly signed the acceptance forms
and submitted executed placement application forms also dated 14 November 2005 for the subscription of
the number of placement shares specified. Subsequently they were informed that they had been successful in
purchasing the following number of placement shares which were allotted to them:
(a) Hamimie

4,702,000 shares

(b) Ibrahim

5,000,000 shares

(c) Mokhtar

5,000,000 shares

[43] These shares were duly paid for vide three cheques issued by one Wangco Incorporated Sdn Bhd to D1
in the sums of RM2,350,000, RM2,350,000 and RM2,209,940.
LISTING OF LITESPEED SHARES ON MESDAQ
[44] One week after payment of the subscription price on the closing date of 14 November 2005, ie on 21
November 2005, Litespeed released its unaudited financial results for the quarter ended 31 July 2005 which
recorded a loss of RM1.907m.

[45] The Litespeed shares were then listed on MESDAQ on 24 November 2005.
[46] On 30 December 2005 Litespeed announced its financial results for the second quarter ending on 31
October 2005 which disclosed a significant net loss.
[47] Litespeed's annual report for the following year, 2006 disclosed a significantly worse financial
performance as it reported an audited loss after tax of RM9.870m. This was to be contrasted with the forecast
financial performance which was stated to be RM7.511m in the prospectus. This therefore reflected a 231%
deviation from the projected profit.
THE PLAINTIFFS' GRIEVANCES
Omission or non-disclosure of the financial performance of Litespeed for the quarter ended 31 July 2005
recording a loss of RM1.907m
[48] The plaintiffs complain that the defendants would have, or ought to
1 MLJ 526 at 541
have been aware of the poor financial results for Litespeed for the quarter ended 31 July 2005 (ie the loss of
RM1.907m) at the time of the meeting on 3 October 2005, yet they were not appraised or advised of the
same.
[49] They go further to complain that by failing to make such disclosure, particularly by the time the
prospectus was made available on 27 October 2005, D1 and D2 have effectively misstated the financial
position of Litespeed in the prospectus. In other words the plaintiffs contend that there was a duty on the
parts of D1 and D2 to ensure that all information pertaining to the financial position of Litespeed was
accurate and current. The failure to include the quarterly accounts for the quarter ending July 2005, which
showed a loss, therefore amounted to a failure to disclose material information which in turn amounted to
negligent misstatement.
Deviation between the profit forecast in the prospectus and the actual financial performance of Litespeed
for the financial year 2006
[50] The plaintiffs also complain of a further negligent misstatement. The prospectus disclosed that Litespeed
had a substantial contract worth RM3,770,000 with iRead International Pte Ltd (as alluded to earlier). This
disclosure it is contended was wholly inaccurate. This is because as of October and November 2005, iRead
was already in default of its payment obligations as specified in an appendix to the contract which sets out
the scheduled dates and quantum of payments due.
[51] Litespeed was then trying to recover monies due from iRead and had in May 2006 agreed on a revised
payment schedule. Save for a sum of RM20,000 iRead failed to pay the balance sum owing which led to
legal proceedings being filed in Singapore and a judgment being entered against iRead on 15 October 2007.
The plaintiffs contend that D1 and D2 would, or ought to have been appraised of this fact and should have
disclosed the same. This they maintain could have been achieved by producing a supplementary statement to
the prospectus.
[52] Due to the omission of this salient information the reported audited profits for the year ended 2005, as
well as the profit forecast for Litespeed contained in the prospectus, it is contended, was misleading. The
prospectus with the omission of this information therefore presented a misleadingly optimistic picture of

Litespeed's financial performance when its Litespeed itself, and its advisors, D1 and D2 knew or ought to
have known and disclosed to all relevant persons the facts that:

(a)

the unaudited financial performance of Litespeed for the quarter ended 31 July 2005 disclosed a significant
loss;
1 MLJ 526 at 542

(b)

the future financial forecast which was premised on the contract secured with iRead was contingent in turn
upon prompt payment by iRead of scheduled payments due from it in several instalments, but which were
already in default at the time of the issuance of the prospectus; and

(c)

further with respect to the profit forecast, the plaintiffs contend that the substantive deviation between the
profit forecast and the actual performance arose because with respect to several items in the prospectus, such
as the forecast on the LET Group, the iRead contract and the discontinuance of the Malaysian Ministry of
Education's Teachers Portal discontinuance, the profit forecasts were unduly unrealistic and failed to take
into account salient factors and conditions prevailing at the material time. In short the plaintiffs contend that
if in fact the defendants had taken into account these prevailing factors, such an optimistic profit forecast
would not have been specified in the prospectus. The plaintiffs maintain that the major revenue assumptions
in the profit forecast were 'plucked out of thin air' as opposed to being founded on sound bases, and
accordingly there was no substance to them. On this basis the plaintiff makes claim against the two
defendants who were Litespeed's advisors, in respect of the losses they claim to have suffered, namely the
cost of purchasing the subject shares.
TRIAL
[53] The trial of this matter took place over a period of two days on 2122 May 2012. The four plaintiffs
each testified at trial, although Dato' Ariff was the primary witness. They presented the entirety of the
plaintiffs' case.
[54] D1 called three witnesses, namely Ms Soon Dee Hwee, the Vice-President, Corporate Finance
Department of D1, Mr Chan Voon Jhin, DW2 and Ms Ong Hui Hui, DW3, the former representative of D1
who is alleged to have made the relevant 'representations' to Dato' Ariff.
[55] D2 called one witness, namely Valention Phua Cheng Lai, the senior manager incharge of the reporting
accountants report at material time.
[56] The voluminous documents at trial were largely Part B documents, meaning that the maker was
dispensed with while the contents remained in dispute. Accordingly exhibits were not marked singly.
Counsel were at liberty
1 MLJ 526 at 543
at all times to object to such documents as they saw fit.
ISSUES

[57] The salient matters that arise for consideration are as follows:

(a)

whether D1 through Ms Ong Hui Hui was negligent (at common law), or in breach of its statutory duty, in
making representations to the plaintiffs to the effect that Litespeed was a sound financial investment which
was expected to yield a substantive profit in the future, when in fact such representations were false, untrue,
inaccurate and/or misleading, and as a consequence of which the plaintiffs have suffered loss. In short the
plaintiffs claim against D1 is premised on negligent misrepresentation;

(b)

whether D1, as Litespeed's listing advisor (for the MESDAQ board) as well as its placement agent, was
negligent and/or in breach of its statutory duty in failing to disclose Litespeed's quarterly accounts for the
period ending July 2005, the omission of which gave rise to a negligent misstatement, namely that Litespeed
was financially sound and a good investment prospect, when as a matter of fact, such representations were
false, untrue, inaccurate and/or misleading, and caused the plaintiffs to invest in the same, resulting in losses;

(c)

whether D2, as Litespeed's auditors and reporting accountants were negligent and/or in breach of its statutory
duty in failing to disclose Litespeed's quarterly accounts for the period ending July 2005, the omission of
which gave rise to a negligent misstatement, namely that Litespeed was financially sound and a good
investment prospect, when as a matter of fact, such representations were false, untrue, inaccurate and/or
misleading, and caused the plaintiffs to invest in the same, resulting in losses;

(d)

whether D2, as Litespeed's auditors and reporting accountants, were negligent and/or in breach of its
statutory duty in allowing or permitting or approving the positive financial forecast to be inserted in the
prospectus, which inclusion gave rise to a negligent misstatement, namely that Litespeed was a good
investment prospect, when as a matter of fact, D1 knew or ought to have known that the factual
premise/consideration on which the forecast was based had altered or deteriorated materially as a
consequence of which the forecast was inaccurate and/or misleading. This caused the plaintiffs to suffer loss;
and

(e)

whether D1 as Litespeed's listing advisor and placement agent was negligent and/or in breach of its statutory
duty in permitting the inclusion of the positive financial forecast for 2006 in the prospectus, which inclusion
gave rise to a negligent misstatement, namely that
1 MLJ 526 at 544
Litespeed was a good investment prospect, when as a matter of fact, D1 knew or ought to have known that
the factual premise/consideration on which the forecast was based had altered or deteriorated materially as a
consequence of which the forecast was inaccurate and/or misleading. This caused the plaintiffs to suffer loss.
Each of these matters will be considered in turn.
Whether D1 through Ms Ong Hui Hui was negligent (at common law), or in breach of its statutory duty,
in making representations to the plaintiffs to the effect that Litespeed was a sound financial investment

which was expected to yield a substantive profit in the future, when in fact such representations were
false, untrue, inaccurate and/or misleading, and as a consequence of which the plaintiffs have suffered
loss
[58] The plaintiffs contend that D1, through Ms Ong Hui Hui, was effectively Dato' Ariff's and his family's
financial advisor by reference to several corporate loans and transactions, namely:

(a)

the RM38.8m loan to Borcos Shipping Sdn Bhd by DBS Bank Ltd. In this context Dato' Ariff testified that in
or around September 2003, D1 advised and brokered the acquisition of NST Logistics Sdn Bhd by Syarikat
Borcos Shipping Sdn Bhd and further advised and arranged for the said loan of RM38.8m to Borcos to
facilitate the same;

(b)

Dato' Ariff further testified that between July to December 2004, D1 advised and arranged an issuance of
RM85m private debt securities to AWH Equity Holdings Sdn Bhd, the holding company of Borcos;

(c)

between October 2003 to November 2005, D1 provided corporate and financial advisory services in the
proposed initial public listing of Borcos and NST Logistics Sdn Bhd through a special purpose vehicle
known as Borcos Bhd. In this transaction, D1 acted as advisers, underwriters and placement agents where
their services included the preparation of the prospectus, applying to the Securities Commission and other
related services;

(d)

the issuance of a USD37m standby letter of credit to Wangco Incorporated Inc. By DBS Bank Ltd (Labuan).
Dato' Ariff testified that in or around July 2005, D1 advised and arranged for this loan.

(e)

In or around July 2005, D1 advised and arranged for a loan of RM46m to Wangco Incorporated Sdn Bhd
from EON Bank; and

(f)

a USD6m term loan from DBS Bank to Globrant. Here too, Dato' Ariff testified that in or about December
2005, the loan was procured through the advice and arrangement of D1.
1 MLJ 526 at 545
[59] Dato' Ariff testified that D1 'advised and brokered' these various corporate transactions largely through
Ms Ong Hui Hui, DW3. By reason of these matters Dato' Ariff maintained that Ms Ong Hui Hui, on behalf
of D1, in effect took on the role of financial advisor to himself and by extension to his family and
conglomerate of companies in which he had an interest, direct or indirect.
[60] Ms Ong Hui Hui disputed this contention maintaining that contrary to what Dato' Ariff stated, she had
met Dato' Ariff on a few occasions but did not know him well. She maintained that she generally dealt with
the personnel in his office, particularly one Encik Nik Haniff Kamal.

[61] She went on to testify that between 20032005, D1 was known as Hwang-DBS Securities Bhd and was
a stockbroking company as well as a universal broker. This mean the types of services and products it could
offer, particularly with respect to the grant of loans was limited. It could act as an advisor in corporate
matters. However D1 was only licensed as an investment bank in January 2007. Ms Ong maintained that at
the material time Hwang DBS Securities Bhd was neither the advisor nor arranger for items (a) and (d)(f)
above.
[62] She accepted that Hwang DBS Securities Bhd did act as the adviser, placement agent and managing
underwriter for Borcos Shipping and as adviser for the proposed acquisition of NST Logistics. This came
through Nik Haniff Kamal. Similarly she with respect to the AWH Equity Holdings Sdn Bhd transaction she
accepted that Hwang DBS Securities Bhd acted as the co-financial adviser and co-arranger together with
Mulpha Capital Markets Sdn Bhd for the exercise. She maintained that they were not the main advisors.
[63] In summary therefore, Ms Ong testified that D1's predecessor, Hwang DBS Securities Bhd had only
dealt with one transaction for Borcos Shipping as set out in item (c) above and as a secondary advisor in the
AWH Equity transaction, namely item (b) above. With respect to all the other transactions, in the course of
cross-examination of Dato' Ariff it transpired that it was not in fact D1's predecessor itself that was an
advisor.
[64] Ms Ong also stated that Hwang DBS Securities Bhd through its officers had dealt directly with Nik
Haniff Kamal and others rather than Dato' Ariff. She described Dato' Ariff as a 'savvy' businessman and
denied that she was his private and 'trusted personal advisor'.
[65] Having considered the competing testimonies of Dato' Ariff and Ms Ong Hui Hui, it is evident that their
versions are diametrically opposite, making it extremely difficult for the court to conclude on the truth of
either
1 MLJ 526 at 546
version conclusively. This is particularly so because the evidence pertaining to the nature of their relationship
is almost entirely oral and premised on the individual's impression of the nature of the same.
[66] However a consideration of the extent of the role played by D1's predecessor, Hwang DBS Securities
Bhd in the series of transactions set out above discloses clearly that the latter played little or no role in most
of the transactions apart from the two set out in items (b) and (c) above.
[67] It would therefore appear to this court that the role played by Ms Ong Hui Hui was not that of corporate
adviser but more in the capacity of a placement agent who arranged for Litespeed's directors to make the
requisite presentations to enable prospective investors to determine whether or not they were interested in
investing in the company. While she may well have been optimistic about the performance of Litespeed, it
does not appear from a consideration of the totality of the evidence that:

(a)

representations in the form of the detailed account suggested by the plaintiffs through Dato' Ariff were in fact
made by Ms Ong Hui Hui. The representations relied upon by the plaintiffs through Dato' Ariff are taken
directly from the prospectus. The prospectus was only available in late October, ie after 27 October 2005.
However, the evidence points to the fact that representations in the form suggested by the plaintiffs in fact
transpired at the meeting on 3 October 2005 when a presentation on Litespeed was made by its directors. At
that meeting such representations were evident in the information memorandum and the briefing by
Litespeed's director. In other words the preponderance of evidence suggests that the 'representations' which

the plaintiffs allege were made by D1 were in fact made by Litespeed's directors both orally and in the form
of the information memorandum;

(b)

it is not clear that a copy of the prospectus dated 27 October 2005 was handed over by Ms Ong Hui Hui to
Dato' Ariff after the meeting on 3 October 2005 and before the issuance of the offer letters on 11 November
2005 which had annexed to them a copy of the prospectus. I so conclude because Dato' Ariff is unable to
state approximately when such a meeting took place and because Ms Ong consistently maintained that she
did not meet Dato' Ariff after the 3 October meeting, and denies handing over the prospectus to him
personally. It would in fact appear that the prospectus was made available to the plaintiffs when the offer
letters were dispatched to them on 11 November 2005, immediately before they subscribed to the shares.
Again on a preponderance of evidence it is not clear that they therefore relied on the contents of the
prospectus to make a decision to invest in Litespeed. Rather it would appear that premised on the oral
representations made at the meeting on
1 MLJ 526 at 547
3 October 2005 as well as the information contained in the information memorandum Dato' Ariff determined
that Litespeed was a good prospective investment. The other plaintiffs do not appear to have relied on these
representations but relied on Dato' Ariff to decide the matter for them; and

(c)

the evidence of the second plaintiff, Hamimie does not assist in this matter. She testified that although she
attended the meeting on 3 October 2005, she was not present throughout the presentation. She did not
therefore hear Ms Ong Hui Hui make the representations that Dato' Ariff ascribes to her. Ms Ong too
maintains that she did not speak to Hamimie on that occasion or at any other time. She did not meet or deal
with the Ibrahim and Mokhtar at all.
[68] I have therefore concluded that Ms Ong and therefore D1 did not act as Dato' Ariff's or the plaintiffs'
corporate adviser in respect of the Litespeed shares. Neither did Ms Ong Hui Hui take on the role of a
general corporate advisor in relation to this transaction. D1's function appears to be limited to the role of
assisting in the listing and in securing purchasers for the placement shares. It is in this latter capacity that D1
arranged for meetings with Dato' Ariff, namely to offer placement shares for Litespeed. Such a role did not
envisage or entail D1 through its representatives making binding representations to prospective purchasers.
This is clear from the information memorandum which specifically states as set out earlier the advice that
prospective purchasers were investing at essentially their own risk.
[69] It follows from the foregoing that if D1 through Ms Ong Hui Hui did not act as a corporate advisor, nor
make the representations she is alleged to have made, that the cause of action premised on negligent
misrepresentation fails. This is because as a matter of fact it has not been established by the plaintiff on a
balance of probability that Ms Ong Hui Hui on behalf of D1 did in fact make the representations ascribed to
her. It is equally if not more probable that the representations referred to were in fact made orally by
Litespeed's directors and by way of statements in the information memorandum. The statements in the
information memorandum emanate from Litespeed's directors, not D1.
[70] Whether or not the several other elements of this cause of action in negligent misstatement are made out
is irrelevant in view of my finding based on a consideration of the oral testimony of Dato' Ariff and Ms Ong
Hui Hui to the effect that the plaintiffs have failed to establish that Ms Ong Hui Hui did in fact make the

representations ascribed to her. Secondarily, there is insufficient evidence to establish that the plaintiffs relied
on such alleged representations to make the decision to purchase or invest in Litespeed shares.
1 MLJ 526 at 548
[71] In this context, it must be pointed out that the second to fourth plaintiffs, vide their pleadings and
testimony made it clear that the alleged representations were only made to the Dato' Ariff. They conceded
that they never met far less relied on any statements oral or written from D1. Only the second plaintiff,
Hamimie stated that she read the prospectus. However she relied on the advice of Dato' Ariff, stating that 'my
father informed that according to Ong Hui Hui Litespeed was a good investment and financially sound'.
Accordingly there is no basis to conclude that the second to fourth plaintiffs received or acted upon or were
induced by the alleged representations made by Ong Hui Hui. The element of reliance and inducement are
therefore absent.
[72] Even if I am incorrect in so concluding on a consideration of the totality of the oral testimony presented
at trial, it is evident from a perusal of the information memorandum and more significantly the letter of offer
that the plaintiffs understood and undertook that they had made their own 'independent investigations in
evaluating the merits and risks of acquiring the placement shares without reliance on any representation
made by Hwang-DBS as placement agent or on any of its representatives or agents'.
[73] Further on in the offer letters it is also stated that: 'by offering you the Placement Shares, Hwang-DBS is
not making any recommendation to you nor advising you regarding the suitability or merits of any
transaction you may enter into in connection with the Pre-listing Placement or otherwise; '
[74] It follows from the foregoing express exclusion or limitation that D1 made it expressly clear that the
plaintiffs were bound to act on their own initiative and with the requisite professional advice independently
obtained in determining whether or not to invest in the Litespeed placement shares. In the instant case the
limitation or exclusion clause is worded specifically to meet a situation such as has arisen here, namely
ascribing blame or liability to D1 for the investors' decision to invest in the Litespeed shares. This is not a
general exclusion or widely worded limitation of liability clause. In these circumstances such clauses cannot
simply be ignored. The plaintiffs by executing the letters of offer accepted these clauses as part of the
binding contract for the purchase of the placement shares. As such the effect of these clauses ought to be
given full effect. The net effect of these clauses is to exempt or exclude D1 from liability even if Ms Ong had
in fact made the representations which are now ascribed to her by the plaintiffs.
[75] Therefore the plaintiffs' cause of action premised on negligent misrepresentation by D1 through Ms Ong
Hui Hui fails.
1 MLJ 526 at 549
Whether D1, as Litespeed's listing advisor (for the MESDAQ board) as well as its placement agent, was
negligent and/or in breach of its statutory duty in failing to disclose Litespeed's quarterly accounts for the
period ending July 2005, the omission of which gave rise to a negligent misstatement namely that
Litespeed was financially sound and a good investment prospect, when as a matter of fact such
representations were false, untrue, inaccurate and/or misleading and caused the plaintiffs to invest in the
same, resulting in losses
[76] D1 was appointed as an advisor to Litespeed to assist it in its submissions to the authorities for
approvals for the MESDAQ listing and in assisting Litespeed in preparing the prospectus. Ms Soon Dwee
Hee, DW1, the witness for D1 explained that D1's duties included collating the information provided by

Litespeed's auditors and reporting accountants, Ernst & Young as well as by Litespeed's directors for
incorporation in the prospectus.
[77] D1 was tasked with ensuring compliance with regulatory guidelines and to seek the relevant authorities
approval for the prospectus which was given. The Securities Commission approved the terms of the
prospectus on 13 October 2005, while Bursa Malaysia approved Litespeed's share listing on the MESDAQ
market which was to take place on 24 November 2005. The prospectus was therefore issued on 27 October
2005 to prospective shareholders.
[78] The plaintiffs' complaint is that D1 failed to ensure that the prospectus disclosed the losses for the first
quarter of Litespeed's financial year ending 31 July 2005. In this context it is relevant that the Litespeed
financial year end is on 30 April. As such for the year 20042005, it's financial year end would be 30 April
2005, which was the date up to which the prospectus furnished the audited accounts. For the year 2005
2006, Litespeed's financial year would end on 30 April 2006. As such the first quarter for this year would be
from 1 May 200530 July 2005. The complaint is that this quarter's results, namely for the first quarter of
20052006 was not disclosed.
[79] The prospectus states that the reporting accountant's report was based on the proforma consolidated
income statement of the Litespeed group of companies, not only Litespeed Education Technologies Bhd, up
to and until 30 April 2005. The profit after tax for the year ended 30 April 2005 was RM6.291m. It did not
purport to report financial performance beyond that date. The prospectus however is dated 27 October 2005.
[80] As the first quarter for the following year ended on 31 July 2005, the plaintiffs complain that these
accounts ought to have been included to give a more accurate and realistic picture of the company's
performance.
1 MLJ 526 at 550
[81] Litespeed had to announce its results for the first quarter of the following year, namely for the quarter
ending 31 July 2005 at least two market days before Litespeed's listing on 24 November 2005 in compliance
with regulatory requirements. Litespeed so complied by announcing the first quarter's results ending 31 July
2005 on 21 November 2005. The unaudited quarterly report for the first quarter reported a net loss for the
period of RM1.907m. This translated to a loss per share of 3.5 sen.
[82] DW1, Ms Soon testified that D1 was only made aware of the first quarter results between 18 and 21
November 2005, just before Litespeed's listing on 24 November 2005. As of these dates the plaintiffs had
already purchased their shares. It was put to her in the course of cross-examination that D1 was in fact aware
of the financial results of the company for both the first and second quarters, ie for the quarter ended 31 July
2005 and 31 October 2005 prior to the issuance of the prospectus on 27 October 2005. DW1 denied this.
[83] It was also suggested to her that D1 had deliberately delayed presenting or making known the results
until the closing date was crossed and the shares were subscribed for by the plaintiffs. DW1 disagreed. It was
suggested that D1 had failed to check or ascertain whether this information pertaining to Litespeed's financial
results for the first quarter was in fact available prior to issuance of the prospectus. However DW1
maintained that Litespeed was still compiling the information at that stage and that it was not available yet, ie
as of 27 October 2005.
[84] It was further put to DW1 that D1 had failed to verify whether there were any changes to Litespeed's
affairs after 30 April 2005. DW1 disagreed maintaining that a due diligence had been conducted. She also
disagreed that the prospectus essentially documented a 'sales pitch'.

[85] Considering the totality of DW1's evidence it appears that D1 was only appraised of the financial
performance of Litespeed for its first financial quarter for the year 20052006, ending on 31 July 2005 on 18
November 2005, well after the issuance of the prospectus. These results were duly announced on
21 November 2005, days prior to the listing on 24 November 2005. DW1 insisted, and I accept her evidence,
that D1 only knew about the results when Litespeed's directors made them available in or around 18
November 2005.
[86] DW1 also explained that as the quarter ending 31 July 2005 was the first quarter it was not possible to
gauge with any degree of certainty whether or not the performance of the company would be good or adverse
for the entire year as they were only appraised of the first quarter's results. She pointed out that often the
more profitable quarters are the third and fourth quarters. For
1 MLJ 526 at 551
this reason, given the uncertainty D1 took the view that there was no requirement to issue a supplementary
prospectus.
[87] The plaintiffs also complain of losses of RM2.3m for the second quarter of the year 20052006, which
ended on 31 October 2005. Again D1 through DW1 testified, and I accept her testimony, that D1 was only
appraised of these second quarter results ending on 31 October 2005 after the listing on 24 November 2005.
Litespeed in fact announced its second quarterly report on 31 December 2005. Given the lengthy disparity
between the announcement of the second quarter results in December and the listing well before that in
November 2005, it would not have been possible for D1 to know or announce or disclose these profits prior
to the listing. As the prospectus was dated 27 October 2005 it would not have been possible to include these
results given that D1 had no knowledge of these financial figures.
[88] The primary issue that falls for consideration here is whether:

(a)

D1 was under a duty to ascertain or verify the financial performance beyond 30 April 2005 for the purposes
of the prospectus; and

(b)

whether D1 deliberately withheld or suppressed information pertaining to the poor financial performance of
Litespeed in order to boost or augment or induce prospective buyers to invest in these shares, despite being
aware of its poor financial performance.
[89] With respect to D1's duties, it would appear from the verification report which sets out the varied duties
of the professional advisers for the listing of Litespeed on the MESDAQ board that matters pertaining to
financial matters particularly income statements, balance sheets and financial statements lay primarily with
Litespeed itself as well as D2, Ernst & Young. D1 in this same report was tasked with verifying, inter alia:

(a)

the issue price;

(b)

details of the public issue and basis of arriving at the issue price;

(c)

brokerage, underwriting and placement fees;

(d)

restructuring and listing exercise;

(e)

declarations of no conflict by advisors; and

(f)

procedure for application and acceptance

[90] The foregoing is not in dispute. It follows from the foregoing that D1's scope of duties did not entail a
verification of the accounts, particularly not unaudited financial performance records for the first two
quarters of the year 20052006. The prospectus was stated to cover financial performance until
1 MLJ 526 at 552
30 April 2005 only, namely for the financial year 20042005:

(a)

as such it cannot be concluded that D1 had a duty to ascertain and then disclose financial accounts for a
period beyond that specified in the prospectus when such verification fell to be conducted by D2 and
Litespeed itself. It would amount to an unfair extension of D1's duties to conclude that it owed a duty to the
prospective purchasers to exert the initiative to ascertain financial performance beyond the period specified
in the prospectus. In other words, D1 had no duty, given the scope of its works, to initiate, ascertain and
verify accounts for Litespeed for the first and second quarters of the financial year 20052006;

(b)

this is particularly so, given that D1 was not appraised of the first quarter profits showing a loss of
RM1.907m until 18 or 21 November 2005, by which time the plaintiffs had already subscribed for the shares
and listing was due in a matter of days on 24 November 2005. As D1 did not know of these results at the
time of issuance of the prospectus on 27 October 2005 or soon thereafter, it was not possible for D1 to
provide further disclosure or produce a supplementary prospectus before 18 November 2005. As of the date
when D1 was appraised of the first quarter results in November 2005 it was too late to provide further
disclosure. In any event I also accept DW1's evidence that the first quarter results in themselves at that stage
could not indicate with any degree of precision how the company would fare throughout the course of the
year, particularly given that payments tended to come in, in the later quarters, ie the third and fourth quarters;
and

(c)

there is insufficient evidential basis for this court to conclude that D1 deliberately withheld or suppressed
information pertaining to the losses relating to these two quarters with the specific purpose of promoting
sales of the placement shares. The evidence in fact discloses that D1 was only appraised of the first quarter
results days before listing (by which time the plaintiffs had already subscribed) and of the second quarter
results in December 2005, well after the listing. This has not been successfully challenged. As such if D1 was

not aware of these results, it cannot be said that it withheld or suppressed such information. It is only if D1
had knowledge of these results that it could so withhold or suppress such information.
[91] Further, given the scope of duties of D1 as outlined above, and which envisaged that D2 and Litespeed
would verify financial performance, D1 was entitled to rely on D2's confirmation of the same, as the party
directly responsible for an assessment of financial perforamance.
[92] Given my findings above, it follows that D1 did not omit or deliberately withhold salient financial
information as alleged by the plaintiffs. Given their
1 MLJ 526 at 553
lack of knowledge at the material time it cannot be said that there was any negligent misstatement on their
part. As there was no further duty on their part to investigate and verify financial performance beyond 30
April 2005, it cannot be concluded on that basis that they breached a duty of care. In other words, D1 had no
duty of care to ascertain and verify the financial performance for the first and second quarters of 20052006
and report on the same as is now alleged by the plaintiff. As they owed no such duty of care to prospective
purchasers including the plaintiffs, there can be no liability under this head against D1.
Whether D2, as Litespeed's auditors and reporting accountants were negligent and/or in breach of its
statutory duty in failing to disclose Litespeed's quarterly accounts for the period ending July 2005, the
omission of which gave rise to a negligent misstatement, namely that Litespeed was financially sound and
a good investment prospect, when as a matter of fact, such representations were false, untrue, inaccurate
and/or misleading, and caused the plaintiffs to invest in the same, resulting in losses
[93] As the reporting accountant, D2 prepared a report on the proforma consolidated balance sheets of
Litespeed as well as the Litespeed Education group of companies. It also prepared a letter on the
consolidated profit forecast of the group and a reporting accountant's report for inclusion in the prospectus. It
is necessary to first consider the context and scope of the reporting accountants' report. This is set out in D2's
report/letter to the directors of Litespeed dated 14 October 2005. ln the said letter D2 specifies that:

(a)

their duties pertain to reporting on the pro forma consolidated balance sheets as set out in the prospectus
which have been prepared for illustrative purposes only, to provide information as to how the balance sheet
of the Litespeed Group of companies as at 30 April 2005 might be affected by the public issue of 32.5
million new Litespeed shares at an issue price of 0.47 sen payable upon the listing of the company on the
MESDAQ market;

(b)

the preparation of the pro forma consolidated balance sheets in accordance with the guidelines issued by the
Securities Commission prospectus Guidelines was the sole responsibility of the directors;

(c)

the auditors', ie D2's responsibility was to form an opinion, as set out in the Guidelines and to report its
opinion to Litespeed. Their work comprised primarily of comparing unadjusted financial information with
the original work considering adjustments and discussing the balance sheets with officers of Litespeed; and
1 MLJ 526 at 554

(d)

D2 specified that their work involved no independent examination of any of the underlying financial
information other than a review of the audited financial statements of the group which included the audited
balance sheet as of 30 April 2005 only.
[94] It is evident from a perusal of the scope of D2's work that it was limited to forming an opinion after
discussion with the relevant officers of Litespeed, the audited balance sheet and accounts for the period
ended 30 April 2005. More significantly they had no duty to independently examine the underlying financial
information.
[95] The plaintiffs' grievance in respect of this issue is that D2 was negligent in failing to disclose the first
quarterly reports for the year 20052006 ending 31 July 2005. The first issue that therefore requires
consideration is whether D2 was in fact aware or had knowledge of those accounts for the term ended 31
July 2005, yet failed to disclose the same in the prospectus dated 27 October 2005.
[96] The evidence at trial in the course of the cross-examination of D2's witness, one Valentino Phua Cheng
Lai, DW4 ('DW4') was as follows:

Q:

If you look at page 340, the quarter ended 31 Oct 2005, it was then announced on 30 December 2005. So it
came out within two months. Now, let's go back to page 325. These results of the quarter ended 31 July 2005,
took about four months to come out correct?

A:

Q:

Yes

My question to you is that these results would have been available before the prospectus was issued, isn't that
correct?

A:

It was never made available to us.

Q:

You never asked for them?

A:

The company has, the company has uh

Q:

No my question to you is, did you ask for them?

A:

Ask from them from which period to which period.

Q:

For this quarter after the end of the quarter 31 July 2005, did you ask for the results at any time up to the date
of the prospectus?

A:

Up to the date of our auditor's report, yes.

Q:

You never got them?

A:

We only got, I can't remember.

Q:

What you got, you did not reveal that's my question to you. Do you agree with me? Do you agree with me or
not.

A:

Agree in what way.

1 MLJ 526 at 555

Q:

That the company had poor results for the first quarter ended 31 July 2005.

A:

As far as the company is concerned, uh the results of the company

Q:

No, would you agree with me that you never revealed the poor results on 31 July 2005?

A:

I don't get your question.

Q:

What was the date of the accountant's report?

A:

The date of the accountant's report is I think October.

Q:

A:

Yes

The date of the accounts is 1st of August.

Q:

So you did not ask for anything after 1st of August.

A:

After, yes.

Q:

Alright I put it to you, you should have asked, do you agree with me or not?

A:

As far as uh

Q:

No. Would you agree with me that you should have asked for the accounts after the 1st of August up until the
date of your prospectus.

A:

Yes we would have asked.

Q:

You would have asked or you should have asked?

A:

I I would have asked.

Q:

You did not receive it.

A:

We did not receive it.

Q:

You did not query it.

A:

We did not query because, they, they have certain amount of time to come out with a set of financial
statements.

Q:

So you did not insist for the purposes of the prospectus?

A:

I can't remember that.


[97] In the course of re-examination these issues were clarified further:

Q:

Valentino let's take your last few questions first. When you say that the company had a certain amount of
time to come up with the publication of the first and second quarter results. I don't know how much time
exactly was that.

A:

I think it's based on Bursa's listing requirement.

Q:

To your recollection, how many months?

1 MLJ 526 at 556

A:

Uh

Q:

You can extend?

A:

For a listed company I know it's two months.

Q:

How many?

A:

Two months after the first quarter.

Q:

Now when you say you were referred to the first quarterly and second quarterly result of 2005, which was
announced on 21 November 2005 and 30 December 200. Both sets were unaudited.

A:

That's correct.

Q:

Right when were you made known of this unaudited document? After the date of your accountant's report or
before?

A:

It's actually after the date of the accountants report.

Q:

After 14th October 2005

A:

That's correct

[98] It is therefore not in dispute that the directors as a matter of fact only made available the first quarterly
results ending 31 July 2005, on 21 November 2005. That is the date of announcement of their unaudited
results, although DW2 had indicated that D1 had possibly received the same on 18 November 2005.
[99] Therefore it follows from a consideration of these dates alone that as the prospectus is dated 27 October
2005, D2 had no knowledge of the first quarter unaudited accounts as of the date of the issuance of the
prospectus on 27 October 2005. (D2 in fact issued its report on the accounts as of 1 August 2005). If D2 had
no knowledge of the accounts of the first quarter ending 31 July 2005 as of October 2005, then it follows that
D2 could not disclose the same. And as such the question of suppressing or failing to disclose the same does
not arise. Therefore D2 cannot be said to have failed to disclose or suppressed material information within its
knowledge.
[100] However the matter does not end there. The plaintiffs contend that D2 owed a duty of care to
prospective purchasers relying on the prospectus to have asked for the first quarterly accounts and to have
reported the same. In determining whether such a duty of care does in fact subsist, the scope of works
undertaken by D2 becomes relevant. A perusal of the same as set out above discloses that D2 was only under
a duty to form an opinion on the audited accounts of Litespeed up to and until 30 April 2005. Such a duty did
not extend to periods beyond that date.
1 MLJ 526 at 557
[101] However it is contended by the plaintiff that in its report D2 has stated as a matter of fact that it was
not aware of a change in the circumstances pertaining to the financial position of the Litespeed Group when
it issued its report dated 1 August 2005. The plaintiffs complain that given the losses incurred as of 31 July
2005 this is a clear misstatement.
[102] While a direct comparison on hindsight of the figures for the first quarter ended 31 July 2005 does
indeed disclose a loss, it is evident from the evidence I have set out above that D2 was not appraised of these
results until well after the issuance of the prospectus dated 27 October 2005. They were not given the results
for the first quarter despite DW4 having testified that they asked for the same. The directors simply did not
make the information available despite request. As such when D2 made its statement as of 1 August 2005, it
did so with all the information within its possession. There was no question of suppression or a failure to
disclose or even a failure to ask for results after 31 July 2005. In all these circumstances, it is difficult to
conclude that D2 is culpable in terms of negligent misstatement. The statement issued by D2 was at the
material time accurate to the best of its knowledge and efforts to ascertain the financial status of the
company. The situation was compounded by the fact that there was no requirement for Litespeed, which was
then not listed, to make disclosure of its accounts within any specific period. The position altered upon listing
when it became incumbent upon the listed company to make disclosure of its audited financial performance
within two months of the close of a quarter. Accordingly the results for 31 October 2005 were made available
before 31 December 2005. For the July quarter however, there was no such requirement, hence the delay by
the directors in announcing the same, some four months later.

[103] The case of Boyd Knight v Purdue [1999] 2 NZLR 278 determined by the Court of Appeal in New
Zealand is instructive. In that case a firm of auditors provided a report for a failed finance company, whose
business consisted of the borrowing of money from the public and on-lending it at a margin. From time to
time the finance company issued prospectuses. The claim related to one particular prospectus which
contained a report by the auditors which stated that the financial statements in the prospectus gave a true and
fair view of the state of affairs and changes in financial position of the issuer and guaranteeing subsidiaries,
and that the amounts stated in the statements had been correctly taken from audited financial statements. As a
result of some fraudulent activity and fictitious loan accounts the shareholders' funds were in fact overstated
by 1.15m dollars. While the court found that there existed a sufficient proximity between the auditors and
potential investors which placed a duty on the auditors to be careful in their issuance of certificates, the court
found that there was no liability on the part of the auditors because it was insufficient to create liability that
an investor had relied in a general way on the
1 MLJ 526 at 558
existence of the prospectus and the regulations. There must have been a reliance on the basic features of the
financial statements. It was held that the investor had to prove that he or she paid attention to the content of
the financial statements and noted these basic features. The court held as follows:
When auditors furnish a report for inclusion in a prospectus they express an opinion about the financial
statements of the company which they have audited: they confirm the accuracy of those statements in the
sense of that word used above. However they are not called upon to make any comment on the state of the
company's affairs. They undertake no duty to assess for would-be investors whether it is creditworthy. Their
duty is to inform, not to give advice. The record shown by the financiai statement speaks for itself. The true
and fair view may be one of the prosperity or poverty. The report therefore has no context for anyone who
has not read the accounts. Without such a reading the report telis the reader nothing except that the company
has a set of accounts which comply with the regulations and present a true and fair view. In so far as such a
report refers to a true and fair view, it is almost meaningless unless read in conjunction with the figures in the
accounts. It must follow, it seems to me, that in so certifying the accounts the auditors cannot be taken to
have accepted an obligation to an investor who has not read and relied upon them. Reliance, and a
consequential duty of care, cannot be asserted, as it were, in a vacuum. There must first have been a specific
influence of the financial statements on the mind of the investor. It is not enough for the investor to say that,
without troubling to look at the accounts, he or she relied in a general way upon the statutory scheme,
making an assumption that an investment is sound or the issuer creditworthy because there was a trustee
playing a supervisory role in connection with the prospectus and an auditor had furnished the report required
by the regulations.
[104] The court went on to conclude that it would be placing an undue burden on the auditor to hold them
accountable for the accuracy of figures which were not relied upon by the plaintiff investors. In that case
there was a careless error. In the instant case no question of an error arises.
[105] However the parallel to be drawn here is that the plaintiffs, particularly the second to fourth plaintiffs
did not rely in a specific way upon any of the information set out in the prospectus. As stated above a general
reliance is insufficient. The plaintiffs are bound to show that the information issued by the accountants
worked so as to exert a specific influence on their minds and as a consequence of which they were induced to
purchase the shares. That has not been made out in the instant case which is another reason why the
plaintiffs' claim against D2 in this regard fails.
1 MLJ 526 at 559

Whether D2, as Litespeed's auditors and reporting accountants, were negligent and/or in breach of its
statutory duty in allowing or permitting or approving the positive financial forecast to be inserted in the
prospectus, which inclusion gave rise to a negligent misstatement namely that Litespeed was a good
investment prospect, when as a matter of fact D1 knew or ought to have known that the factual
premise/consideration on which the forecast was based had altered or deteriorated materially as a
consequence of which the forecast was inaccurate and/or misleading. This caused the plaintiffs to suffer
loss
[106] The plaintiffs claim that D2 in reporting or confirming that Litespeed had earned a profit after tax of
RM6,291,000 for the year ended 30 April 2005, were culpable of misrepresentation or negligent
misstatement because there was a deviation of some 231% between the forecast financial performance and
actual performance which the plaintiffs attribute to the fact that the major revenue assumptions, known as
specific assumptions, had no substance behind them, for the reasons stated below:

(a)

such forecast profit after tax included revenue amounting to RM3,770,000 from a contract between Litespeed
and iRead International Pte Ltd ('iRead'), when as a matter of fact, save for a deposit of RM500,000 the
balance of the said sum of RM3,770,000 was never paid by iRead to Litespeed;

(b)

with regard to the Catch Them Young campaign, there was no highlighting of the fact that withdrawals from
many schoois had already been anticipated due to the shortening of the school week from 5 1/2 days to five
days in August 2004;

(c)

with respect to the forecast for some of the projects in the year 2006, the projection was RM2.5m while the
deviation was RM2.49m, meaning that the target was missed which in turn demonstrates, according to the
plaintiffs that it was wholly unrealistic. This ought to have been highlighted by the auditors; and

(d)

the forecast for the Teachers' Portal Project failed to highlight the fact that it was about to lapse and come up
for renewal or discontinuance. Instead the forecast was that RM4.7m would be generated. In reality the
project which was supposed to be up for renewal tender in 2005 was discontinued resulting in no revenue
whatsoever being generated.
[107] From the foregoing, it is evident that the plaintiffs' complaint is that the assumptions pertaining to the
financial forecast were wholly unrealistic, and as a consequence, misleading to prospective purchasers such
as the plaintiffs, when risks of non performance of various contracts, or assumptions made on contingent
bases, were not highlighted. No proper qualifications were
1 MLJ 526 at 560
made or highlighted. No attempt, it is contended, was made to verify the matters set out in the assumptions.
The reporting accountant's scope of duties
[108] D2 in response to the foregoing points to its scope of duties as set out above and maintains that as
reporting accountant, their report presented the historical financial information of the group on a pro forma

basis and for illustrative purposes only. D2 maintains that it was not within its scope of work to carry out an
independent examination of any of the underlying historical financial information.
[109] Further the historical financial information was based on the audited financial statements of the group
for the period financial year ending 30 April 2005. There were no audited financial statements made
available to the reporting accountants for the period subsequent to 30 April 2005.
[110] D2 further highlights that it did not give any opinion on the achievability of the profit forecast which in
any event was prepared by the directors, not D2. On the contrary, D2 points to the caution it had sounded
about the uncertainty of the profit forecast provided by the directors, which states as follows:
The Directors of LET forecast the consolidated profit after taxation for the financial year ending 30 April
2006 will be as follows
Profit after taxation 7,511,000
A forecast in this context, means prospective financial information prepared on the basis of assumption as to
future events which management expects to take place and the actions which management expect to take as
of the date the information is prepared (beset-estimate assumptions). In particular, forecast of consolidated
profit after taxation are substantially dependent on the achievability of the Specific Assumptions as set out in
Section 10.6 of the prospectus. While information may be available to support the assumptions on which the
forecast are based, such information is generally future oriented and therefore uncertain. Thus, actual results
are likely to be different from the forecast since anticipated events frequently do not occur as expected and
the variations could be material. (Emphasis added.)
The specific assumptions
[111] As set out above it is expressly stipulated that the forecast of consolidated profit is substantially
dependent on the achievability of the specific assumptions. In relation to these specific assumptions, the
preamble to the same sounded the following cautionary note:
1 MLJ 526 at 561
The profit forecast for the financial year ending 2006 have been prepared based on a set of assumptions made
by the directors, which includes significant assumptions about future events and outlook that may not
necessarily occur. In particular, the forecast are dependent on the achievability of the Specific Assumptions
as set out below. Forecast of results will be materially affected by economic, other circumstances and should
the actual events differ from those specific assumptions, and for these reasons, the actual results may vary
considerably from the forecast.
[112] In this context it is relevant that it was emphasised by D2 at several points including the foregoing
paragraphs that:

(a)

the makers of the financial forecast for the group for the financial year ending April 2006 was the directors of
the Litespeed Group and not D2. D2 did not assume responsibility for the actual quantum of profit forecast.
That responsibility remained with the directors;

(b)

the 'accuracy' or 'reliability of the financial forecast was dependent upon the reasonableness or veracity of the
specific assumptions which had been detailed specifically. It was cautioned that a variation of those
assumptions brought about by economic or other circumstances could result in a considerable variation from
the financial forecast of RM7,511,000 for the year ending April 2006; and

(c)

responsibility for the accuracy and reasonableness of the specific assumptions lay with the directors.
[113] That the directors assumed full responsibility for the veracity of the matters forming the basis for the
specific assumptions is expressly stipulated at para 10.7 of the prospectus:
The Directors of LET have reviewed and analysed the reasonableness of the bases and assumptions stated
therein after due and careful inquiry in arriving at the consolidated profit forecast of the LET Group for the
FYE 30 April 2006. The Directors of LET are of the opinion that the consolidated profit forecast is fair and
reasonable in light of the future prospectus of the LET Group, the future plans and strategies to be adopted
by the LET Group and after taking into consideration the estimated level of gearing, liquidity and working
capital requirements of the Group.
[114] It does not follow therefore that D2 had assumed or undertaken responsibility for the veracity of these
bases forming the basis of the assumptions.
What was the reporting accountant's role in relation to the financial forecast?
[115] This begs the question, what then did D2 actually do with regards to the financial forecast? What was
its role? This is answered by a perusal of the
1 MLJ 526 at 562
'Reporting Accountants Report on Profit Forecast' dated 14 October 2005 addressed to the directors of
Litespeed. From that document it appears that the role of D2 was to:

(a)

review the forecast of the consolidated profit after tax of the Litespeed group for the year ended April 2006
in accordance with the professional standards in Malaysia applicable to the review of forecast;

(b)

the review was undertaken with a view to tendering an opinion as to whether such forecast was properly
prepared on the basis of the specific assumptions; whether the forecast was presented on a basis consistent
with the accounting policies adopted by the group; and

(c)

D2 again reiterated that the directors of the group were solely responsible for the preparation of the profit
forecast and the assumptions. They also cautioned that the factual basis for the specific assumptions was
'future-oriented and therefore uncertain.' Accordingly a substantive variation from the forecast was 'likely to
be different'. In other words D2 cautioned of the real possibility of a substantive deviation which in fact is
precisely what occurred.
[116] Having set out the scope of their duty and the limitations to be expected in respect of any financial
forecast, D2 concluded as follows by way of a limited opinion:

Subject to the matters stated in the preceding paragraphs, in our opinion, the forecast of consolidated profit
after taxation, so far as the calculations are concerned, have been properly compiled on the basis of the
assumptions made by the directors and are presented on a basis consistent with the accounting policies
normally adopted by the Group.
[117] The financial forecast and the reporting accountant's opinion above were included in the prospectus. It
is evident from a perusal of the same that D2's function was to review and ascertain that:

(a)

the forecast had been 'properly compiled' in so far as the calculations were concerned, premised on the basis
of the assumptions made by the directors. This meant that D2 reviewed the forecast in terms of calculations,
utilising the assumptions made by the directors, and found the same to be adequate. D2 did not assess or
review the veracity, accuracy or probability of the assumptions themselves; and

(b)

secondly, D2 opined that the calculations for the financial forecast was made or presented in compliance with
accounting policies normally adopted by the group.
[118] It cannot therefore be said that D2 was responsible for holding out or verifying the accuracy of the
factual matrix underlying the specific
1 MLJ 526 at 563
assumptions. Those matters were entirely within the purview of the directors as was made known and clear
to any prospective reader of the prospectus interested in investing in Litespeed.
An examination of the specific assumptions
[119] I have set out above the specific grievances raised by the plaintiff in relation to the deviation in the
profit forecast based on the variation which occurred in relation to the specific assumptions.
The iREAD contract
[120] The grievance with regards to the iRead contract is two-fold. For the financial year ended 30 April
2005, ie for the period relevant for the purposes of the prospectus and D2's opinion as reporting accountant,
the plaintiff complains that the profit after tax of the group was misleading because it took wholly into
account revenue amounting to RM3,770,000 earned from a contract between Litespeed and iRead
International Pte Ltd, when this sum was never paid in full save for a sum of RM500,000 by way of deposit.
[121] In this context therefore the issue of whether as a matter of fact the revenue of RM3,770,000 was
recognised as revenue to Litespeed which comprised a part of the profit after tax of the group for the period
needs to be considered, as well as whether such recognition of the revenue was correct. It is not in dispute
that under the First iRead Contract, Litespeed was engaged to develop, supply, install, test and commission a
diagnostic assessment system as well as some E-learning modules and products for a total contract sum of
RM3,770,000. Delivery of the various modules comprising a part of the contract were to be delivered in
stages to iRead in accordance with Appendix A to the First iRead contract. Under the payment schedule,
RM200,000 was payable on or by 10 April 2005, the next RM300,000 on or by 10 June 2005, the third
instalment of RM600,000 on or by 10 October 2005, the fourth instalment of RM770,000 by 10 December
2005, the sixty of RM800,000 by 10 February 2006 and the final instalment of RM1,100,000 on 10 April
2008.

[122] Pursuant to the First iRead contract, Litespeed supplied all the deliveries under the contract to iRead.
On the same day, Litespeed issued an invoice for the total contract sum to iRead. As of 25 January 2005
therefore Litespeed had complied with all its obligations for delivery under the First contract, hence the
invoice. Modules worth the entire contract had been supplied. As such, D2's witness, DW4 explained that the
total contract sum of RM3,770,000 was recognised and treated as revenue of Litespeed. This was
1 MLJ 526 at 564
utilised in the financial forecast which the plaintiff contends is misleading and erroneous because this money
was not actually received by Litespeed, save for the deposit.
[123] This begs the question how or why the said contract sum of RM3,770,000 was recognised as revenue
prior to its actual receipt. Under its general accounting policies on revenue recognition, D2 stated:
(m) Revenue recognition

(ii)

Rendering of services
Revenue from provision of services are recognised upon rendering of services.

(iii)

Sale of goods
Revenue is recognised upon the transfer of significant risk and rewards of ownership of the goods to the
customer which generally coincides with delivery and acceptance of the goods sold.
[124] DW4, an accountant further explained that the recognition of the revenue amounting to RM3,770,000
under the First iRead contract was in compliance with the applicable accounting standard on revenue
recognition in the Malaysian Accounting standards Board, Standard 9 on Revenue.
[125] The relevant portion of MASB 9 at para 8 defines revenue as 'the gross inflow of economic benefits
during the period arising in the course of the ordinary activities of the enterprise when those inflows result in
increases in equity, other than increases relating to contributions from equity participants'.
[126] With respect to the sale of goods, para 15 of MASB 9 stipulates:
Revenue from the sale of goods should be recognised when all the following conditions have been satisfied:

(a)

the enterprise has transferred to the buyer the significant risks and rewards of ownership of the goods;

(b)

the enterprise retains neither continuing managerial involvement to the degree usually associated with
ownership nor effective control over the goods sold;

(c)

the amount of revenue can be measured reliably;

(d)

it is probable that the economic benefits associated with the transaction will flow to the enterprise; and

(e)

the costs incurred or to be incurred in respect of the transaction can be measured reliably.
1 MLJ 526 at 565
[127] As all the deliverables the First iRead contract had been delivered to iRead by Litespeed, as had the
invoice it followed that the significant risks and rewards of ownership of the modules under the contract had
been transferred to iRead. The revenue could, in accordance with accepted accounting standards therefore be
recognised for the financial year ending 30 April 2005, which is what D2 accepted. They cannot be faulted
for doing so. It would appear that they were fully entitled to recognise the revenue because the said sum of
RM3,770,000 was payable by iRead to Litespeed.
[128] In so far as the provision of maintenance and technical support for a period of 12 months was
concerned, D2 acted in accordance with accounting standards by according recognition to revenue by
reference to the stage of completion of the transaction at the balance sheet date, which was 30 April 2005.
Such services had commenced on 25 January 2005. It therefore accorded a revenue recognition for a period
of approximately four months technical support while the balance was treated as deferred revenue.
[129] The plaintiffs maintain that the recognition of revenue above is flawed as it is only when a sum is paid
to, or collected by Litespeed that it can be recognised as revenue. However as shown above under the
Malaysian Accounting Standards Board 9, actual payment or collection is not a precondition for recognising
revenue. I accept that D2 acted in accordance with established and approved Malaysian Accounting practices
and therefore ought not to be faulted for such recognition of revenue.
[130] Further and in any event, D2 maintains that it had never made any representation that all the revenue
recognised had already been collected, when PW1 was cross-examined:

Q:

Did the 2nd Defendant in his report tell you that this 3.77 million had already been collected by the
Company?

A:

That's the impression

Q:

No, my question, did

A:

No, no, no but between the lines, that's what

Q:

So your answer is, yes or no?

Court:-

Let's take the question. Did DW tell you that the 3.77 miliion ?

Q:

was actually kept, been collected by the Company>

Court:-

Had been collected and your answer, Dato'?

A:

No. It doesn't say that, but but the impression is that it's collectable. It's a good debt, good customer, the
best customer, all these.
1 MLJ 526 at 566
[131] It follows from the foregoing that the PW1 was aware that the entire sum of RM3.77m had not been
collected in full. However he was of the view that as the revenue had been recognised there was no question
or suspicion of default.
[132] As a matter of fact when the D2 provided its report for the financial year ended 30 April 2005 on 1
August 2005, payment under the first two schedules of payment as set out above had already been paid,
totalling RM500,000. The next or third instalment was due in October 2005, which was the following
financial year. Accordingly in compliance with accounting standards, the assumption was made that the
revenue would come in as contracted.
[133] DW4 further explained that if subsequent to such recognition of revenue it came about that there was
uncertainty arising about the collectability of the quantum already recognised, then the uncollectable sum
would be regarded as a doubtful debt. Accounting treatment for a doubtful debt is to provide for it as an
expense. The issue an adjustment of the recognised revenue to 'correct' the initial recognition does not arise.
This is accepted accounting practice as recognised by para 19 of MASB. In this context para 19 of MASB
provides:
However when an uncertainty arises about the collectability of an amount already included in revenue, the
uncollectable amount or the amount in respect of which recovery has ceased to be probable is recognised as
an expense, rather than as an adjustment of the amount of revenue originally recognised.
[134] It would appear that there has been compliance with the Malaysian Accounting Standards Board in the
treatment of that portion of the First iRead contract monies that could not be recovered, after recognition of
revenue. Therefore it cannot be said that D2 acted negligently or made a negligent misstatement or gave
misleading information in the prospectus by treating the revenue due from iRead as recognised revenue.
[135] Subsequently the year that followed when it became evident that iRead was having difficulty, the
payments were rescheduled and when iRead failed to honour the rescheduled payments due, full provision
was made for the balance sum due and owing as a doubtful debt.
The second iREAD contract
[136] This issue is relevant to the issue of the deviation in the profit forecast. It is separate and different from
the first iRead contract. The second iRead contract was to be concluded in the financial year ending 30 April
2006. As a

1 MLJ 526 at 567

matter of fact this second iRead contract was a specific assumption underlying the profit forecast prepared by
the directors. It was anticipated to be procured for the year 2006 and to bring in a revenue of RM3.3m. It was
put to DW4 by learned counsel for the plaintiff that the anticipated revenue of RM3.3m for this second iRead
contract had been simply 'plucked out of the air by the directors', which DW4 denied.
[137] The second iRead contract was supposed to follow on from the first but did not. The feasibility and
viability of the second iRead contract was not a factual premise that D2 as reporting accountants were bound
to opine upon as being a certainty or otherwise. The scope of D2's function in relation to the forecast has
been set out above. They were under no duty to assess or foretell whether the various contracts and projected
income bringing projects would, as a matter of fact be completely or partially successful or otherwise. Their
duty was to review the mode of calculation of the profit forecast and to ascertain that it was premised on
matters compliant with established practice. It would appear that they did so. But they could not, in respect
of the financial year ending 30 April 2005, on 1 August 2005 have foretold with any degree of certainty or at
all, whether the projected incomes would in fact materialise the following year. Hence the cautionary
paragraphs throughout the prospectus to prospective purchasers warning them of the possibility of significant
variations in the projected profits based on the real possibility of significant variation in the specific
assumptions, of which the second iRead contract comprised one risk factor.
The E-learning contracts
[138] The profit forecast was also premised on a specific assumption that Litespeed's E-learning contracts
would be fully achieved. In their report for the financial year ending 30 April 2006, Litespeed disclosed that
the significant deviation in the group's financial forecast was largely attributable to the group's inability to
achieve E-learning contracts which were required to sustain its costs of sales and operating expenses. It is
evident that the group's inability to achieve the E-learning contracts can hardly be attributed to D2. It would
have required an ability to foretell for the reporting accountant to have stated in its report in the prospectus
that the group would fail to achieve most of its E-learning contracts. More importantly, that is not the
function of the reporting accountant and to extend D2's duty to that extent would be unjustifiable.
[139] The foresee ability of the success or otherwise of the targets set for the procurement of E-learning
contracts lies with the directors in any event as was clearly spelt out by D2 in its report and in the course of
the prospectus. Those express statements seeking to limit the scope of their work, and sounding a cautionary
note, cannot simply be ignored or treated as 'puff'. The words and
1 MLJ 526 at 568
clauses, so closely set out next to the actual financial forecast, and which are directly relevant to the same,
and which warns purchasers to be aware of the real danger of a significant variation, as well as the reminder
to obtain independent advice together have to be given real consideration.
[140] To my mind the net effect of these multitude of clauses is to expressly limit the duty of care of both D1
and D2 to the actual scope of their work in relation to the statements in the prospectus. It appears clear to this
court that the primary reason for the significant deviation in the profit forecast was the variability of the
factual premises comprising the basis for the forecast. These bases were put forward by the directors not D2.
D2 was moreover not in a position to verify or foretell the outcome or success of such proposed contracts.
Neither was D2 tasked to do so. Therefore D2 cannot be held liable for the same.

[141] With respect to the Catch Them Young programme and the Malaysian Ministry of Education Teacher's
Portal Project in 2005, the same reasoning comes through. It is not in dispute that the explanation for the
failure of the Catch Them Young Programme was the change in the school week in Singapore from 5 1/2
days to five days per week in August 2004. As a consequence more than an expected number of schools
decided to withdraw from the programme for the years 20052006. Therefore only 67% of the anticipated
revenue was collected. It is apparent that it was no part of D2's duty to, nor could D2 be expected to foretell
or anticipate such a reduction in either the number of school days or its effect on the programme. D2 cannot
be faulted for the failure of the programme.
[142] And similarly with the Teacher's Portal Project in 2005, D2 could not possibly be expected to foretell
that the Malaysian Ministry of Education would decide not to renew the project in 2005. More significantly
that is not the scope of D2's duty. In other words it is no part of D2's scope of work and thereby duty to
assess the achievability of the Teacher's Portal Project in 2005. It follows that as there is no duty of care
owed by D2 to readers of the prospectus or prospective purchasers to assess or guarantee the achievability of
the projects set out in the specific assumptions forming the basis for the profit forecast. As no such duty
subsists, there can be no breach. The losses suffered by the plaintiffs ought not, therefore, to be attributed to
D2.
1 MLJ 526 at 569
Whether D1 as Litespeed's listing advisor and placement agent was negligent and/or in breach of its
statutory duty in permitting the inclusion of the positive financial forecast for 2006 in the prospectus,
which inclusion gave rise to a negligent misstatement namely that Litespeed was a good investment
prospect, when as a matter of fact. D1 knew or ought to have known that the factual
premise/consideration on which the forecast was based had altered or deteriorated materiallv as a
conseguence of which the forecast was inaccurate and/or misleading. This caused the plaintiffs to suffer
loss
[143] D1 plays an even lesser role in relation to the profit forecast for 2006 than the reporting accountants,
whom I have determined above are absolved of any issue of negligent misstatement or misrepresentation or
omission.
[144] As stated before and borne out by the verification notes the scope of D1's duty was to verify the issue
price, details of the public issue, brokerage, underwriting and placement fees, restructuring and listing
exercise, and the procedure for application and acceptance.
THE PLAINTIFFS' GRIEVANCE
[145] However the plaintiffs' grievance is that the financial information that D1 had relied on was to be
procured only from the accounts for the period ending 30 April 2005, with no provision for any update on the
status of Litespeed or the group between that date, ie 30 April 2005 and the date of the prospectus, ie 27
October 2005.
[146] The plaintiffs' point to the fact that Litespeed's unaudited financial results for the first quarter of the
financial year 20052006, ie the quarter ending 31 July 2005, recorded a loss of RM1.907m. They question
why D1 (and D2) failed to inquire or ascertain Litespeed's performance after 30 April 2005 and prior to the
issuance of the prospectus as this would have accorded a more up to date or accurate picture of the group's
financial performance, which in turn would enable prospective investors to determine more accurately
whether or not to invest in Litespeed.

[147] However as discussed earlier, the evidence discloses that D1 only became aware of these first quarter
results in November 2005, after the listing of the Litespeed shares. I have also considered the issue of
whether D1 owed a duty to the prospective purchasers to make inquiries about the period subsequent to 30
April 2005 and concluded otherwise based primarily on the scope of works undertaken by them.
1 MLJ 526 at 570
[148] Moving on to the profit forecast, the plaintiffs say that while D1 was not prepared to make enquiries
about the current financial status of the company after 30 April 2005, it was nonetheless prepared to issue a
profit forecast for the following year, 2006. Given that such a profit forecast is not mandatory it is contended
that this is clear evidence of a misstatement by D1 which was made with a view to inducing prospective
purchasers to invest.
D1'S RESPONSE
[149] The profit forecasts were premised, as has been stated repeatedly, on the information given by the
directors and in respect of which D1 has no liability. Moreover as has been highlighted previously the
prospectus itself states that the directors accept full responsibility for the forecast.
[150] Further, the financial forecast was based on calculations (which were reviewed by D2) and the specific
assumptions which were made by the directors. Only D2 provided a limited opinion as has been considered
at length above. D1 was not involved in assessing or commenting on the financial forecast. As such it does
not appear that the accuracy or otherwise of the financial forecast can be attributed as a responsibility of D1.
In other words, D1's duty of care in relation to its duties pertaining to the contents of the prospectus does not
extend to an assurance that the profit forecast is certain or accurate.
[151] On the contrary the evidence at trial disclosed clearly that throughout the prospectus numerous
cautionary warnings were sounded to prospective investors. This is particularly so given MESDAQ which is
known to be a volatile market with considerable risk. In so far as the financial forecast was concerned, as
stated above, only D2 provided a limited opinion relating to the calculation and assessment method in
relation to whether the financial information provided in the prospectus complied with Malaysian accounting
standards. D1 was not directly involved. However even if it is considered that D1 had an overriding duty to
ensure that the information in the prospectus was not misleading this obligation was met because the
accuracy or otherwise of the financial forecast is not the responsibility of D1.
[152] The various cautionary statements issued have to be accorded due recognition, (see Peekay Intermark
Ltd & Anor v Australia and New Zealand Banking Group Ltd [2006] 2 Lloyd's Rep 511 at p 512 which was
adopted by the Singapore Court of Appeal in Orient Centre Investments and another v Societe
Generale [2007] 3 SLR 566 at pp 568 and 586). In Peekay's case, the English Court of Appeal held that by
signing the form acknowledging the investment risks and returning it to the bank, the plaintiff was aware of
the nature of the investment. Accordingly the plaintiff could not assert that it was
1 MLJ 526 at 571
induced to inter into the contract by the defendant bank. In the instant case in like manner, the second to
fourth plaintiffs, by accepting and signing the acceptance forms for the private placement shares, duly
acknowledged that they were purchasing the same without reliance on any representations of D1.
[153] In Malaysian Newsprint Industries Sdn Bhd v Perdana Cigna Insurance Bhd & Ors [2008] 2 MLJ
256 the Court of Appeal held that 'to deny the legitimacy and effectiveness of an exclusion clause for which

it was designed, would render it meaningless. The exclusion clause was clear and the words used were easily
definable, with no absurdity, inconsistency or repugnancy when arriving at a straightforward interpretation'.
[154] The plaintiffs' did establish through DW1 that the inclusion of a financial forecast was not mandatory.
However DW1 explained that the financial forecast was included as the directors had determined that for
purposes of transparency it was preferable to include the profit forecast. In the absence of a profit forecast,
Litespeed would have had to provide a reason as to why no profit forecast was being disclosed. D1 cannot be
faulted for permitting or agreeing to the inclusion of the profit forecast. This is particularly so given the clear
limiting and warning clauses which preceded and were set out subsequent to the forecast.
THE SPECIFIC ASSUMPTIONS
[155] I have considered each of the specific assumptions underlying the financial forecast in some detail in
relation to D2. There is no necessity for a repetition of those facts again here. Suffice to say that there is no
evidence or basis to warrant a finding or inference that:

(a)

D1 was responsible for the veracity of the factual premises underlying the financial projections for 2006.
This was primarily the responsibility of the directors of Litespeed. In any event D2 was available to give a
limited opinion to ensure that prospective purchasers who read the prospectus would know that the
calculations were in order and that the forecast had been premised on the utilisation of financial information
which was in conformity with Malaysian accounting standards. However neither D1 nor D2 could be
responsible for the Specific Assumptions and to that extent they took pains to set out at several places in the
prospectus that there was a real possibility of significant deviation in the forecast;

(b)

specifically in respect of the First iRead contract and its defaulting in the repayment of scheduled payments,
this information was not made known to D1. Being financial information in any event the primary
responsibility for the same lay with D2 to the limited extent of its role.
1 MLJ 526 at 572
Therefore it cannot be concluded that D1 had a duty to enquire or ascertain the status of repayment under
that contract; and

(c)

neither can D1 be faulted for the failure of the group to secure or procure the E-learning contract targets it
had set for itself as a target and which comprised the basis for the financial forecast. DW1 explained that at
the time of the inclusion of the forecast, the directors were in fact bidding for more contracts than that
disclosed in the forecast, there was no issue with including the proposed forecast.
THE AGM OF 31 OCTOBER 2006
[156] At Litespeed's Annual General Meeting held on 31 October 2006 the agenda included a resolution for
the audited accounts for the year ending 30 April 2006 to be passed. An explanation was provided for the
deviation in the profit forecast. None of the shareholders including the second to fourth plaintiffs queried or
complained about the losses incurred then. Accordingly the audited accounts were unanimously approved. If
indeed the second to fourth plaintiffs had been misled by the prospectus as now comprises the substratum of
their case, then grievances or protests ought to have been made clear at that stage.

[157] Ultimately it appears to this court that D1 owed no duty to any prospective purchaser to assure them
that the profit forecast was accurate or that a profit within that range could be anticipated. On the contrary,
prospective purchasers were warned about the uncertainty and variation of the specific assumptions which
would result in deviation. Prospective purchasers were also cautioned about the volatility of the market and
advised to procure independent advice. Certainly no assurance or guarantees were set forth in the prospectus
or information memorandum. It is pertinent that in the instant case the deviation arose not as a consequence
of erroneous or inaccurate information put forward by D1 and D2 but because of the uncertainty of the
factors relied upon to derive the forecast, a matter which fell squarely within the purview of the directors. D1
and D2 advised prospective purchasers of the risks involved sufficiently.
THE PLAINTIFFS' PLEADED CASE
[158] Learned counsel for D1 points to a marked deviation in the case pleaded by the plaintiffs and the case
subsequently led at trial. Paragraph 14 of the statement of claim reads as follows:
1 MLJ 526 at 573
Acting on the faith of the representations and/or inducements, the 2nd, 3rd and 4th Plaintiffs made
substantial investments in the said Company for themselves as well as for the benefit of Dato' Ariff
[159] In response D1 stated at paras 1213 of its defence:
With regard to paragraph 14 of the Statement of Claim, the 2nd to 4th Plaintiffs, on their volition and in
accepting the terms and conditions as set out in the 1st Defendant's letters of 11 November 2005, made their
respective Letters of Offer all dated 14 November 2005 at their own discretion to purchase the shares of
Litespeed. The 1st Defendant shall refer to the terms of the said letters of 11 November 2005 to show that the
2nd to 4th Plaintiffs decision to subscribe for the shares were made independently and without reliance on
any representation by the 1st Defendant or its agents. The offer to purchase was accepted on 14 November
2005 and the shares were listed on 24 November 2005.
13. The 1st Defendant denies the 2nd to 4th Plaintiffs were nominees of the 1st Plaintiff. It was expressly
affirmed in the Application Forms for the Placement Shares signed by each of the 2nd, 3rd and 4th Plaintiffs
that the Placement Shares applied for, were not being acquired as a nominee of another person or persons.
[160] At trial however, Dato' Ariff maintained that he purchased the Litespeed shares as a gift for the second
to fourth plaintiffs and that they were not investing for him. In other words they were not nominees for him.
The second to fourth plaintiffs testified and confirmed that they had accepted the subject shares as a 'gift'
from Dato' Ariff.
[161] D1 submits that this constitutes a significant departure from the pleadings and is in effect an attempt to
circumvent their initial stance that the shares had been purchased for Dato' Ariff's benefit or that they were
his nominees.
[162] I accept that there has been some deviation from the original pleadings. I am however not able to
conclude with any degree of certainty that this was in fact an attempt by the plaintiffs to 'circumvent' any
earlier stance they had taken. It is not in fact clear from the plaintiffs' original pleading in what manner Dato'
Ariff stood to benefit from the purchase of the Litespeed shares.
RELIANCE ON THE CONTENTS OF THE PROSPECTUS

[163] The evidence at trial disclosed that representations in the prospectus, such as they were, induced only
Dato' Ariff and not the other plaintiffs. As such the elements of reliance and inducement are not established
as having directly affected the second to fourth plaintiffs. The plaintiffs however contend that the
1 MLJ 526 at 574
representations were made by D1 and D2 to Dato' Ariff, and that these representations were communicated
by Dato' Ariff to the other plaintiffs, thus establishing liability. Ultimately the evidence shows that only D2 in
fact relied on what her father, Dato' Ariff said. The third and fourth plaintiffs did not rely on anything.
[164] It appears to this court that to establish negligent misrepresentation or negligent misstatement, it is
incumbent upon the complainant to establish that he relied upon that specific misrepresentation or negligent
misstatement as a crucial element in the cause of action. In other words it is incumbent upon the plaintiffs to
establish that the second to fourth plaintiffs relied upon the representations made by Ms Ong Hui Hui, or to
have read and been induced directly by the written representations in the prospectus, in order to succeed in
establishing liability under this cause of action. Here that element is absent which is another reason why I am
unable to conclude that liability lies with D1 and D2.
THE FIRST PLAINTIFF'S LOCUS STANDI
[165] It is evident from a consideration of the evidence that oral representations were alleged to have been
made, if at all in the manner contended, to Dato' Ariff. Dato' Ariff also read the prospectus. However it is not
in dispute that Dato' Ariff himself did not subscribe for the Litespeed shares. Neither did Dato' Ariff pay for
the said shares. The shares were subscribed for through a company known as Wangco. There is insufficient
evidence before the court for it to conclude that Dato' Ariff controlled Wangco or to lift the corporate veil and
attribute that payment to Dato' Ariff as he sought to contend at trial.
[166] Finally in the letters of acceptance, the second to fourth plaintiffs acknowledged or accepted the
stipulation that they were purchasing the shares for themselves and not as nominees for any other party.
[167] Given these factors it is difficult to ascertain the basis for Dato' Ariff's claim as a plaintiff in this suit.
None of the essential elements of the causes of action are relevant to Dato' Ariff as he was not an investor nor
even a prospective purchaser. Dato'Ariff as the first plaintiff who did not purchase any of the Litespeed
shares is not therefore entitled to any of the relief sought as he lacks locus standi.
LIABILITY OF D1 AND D2
[168] Having considered the totality of the evidence it appears to this court that the plaintiffs have failed to
establish their causes of action against both D1
1 MLJ 526 at 575
and D2. In the course of their submissions, the plaintiffs relied on several cases to substantiate their claim.
In White v Jones [1995] 2 AC 207, proposed beneficiaries under a will sued the solicitors who had been
instructed to prepare a new will which would have benefitted the plaintiffs, but which the solicitors neglected
to do. The testator died. In these circumstances it was held that a duty of care existed vis a vis the plaintiffs.
[169] In the instant case however I have concluded that D1 and D2's duty of care did not extend to giving
guarantees about the accuracy of the financial forecast. Neither did they owe a duty of care, given their scope
of duty, to disclose or comment on financial information beyond the date stipulated in the prospectus.
Moreover they did not, as a matter of fact have this knowledge and choose to suppress it in an effort to

mislead prospective purchasers. Their duty did not extend to ascertaining or verifying further information
beyond the date for which they had contracted to undertake their work. It might have been different if salient
financial information had been made known to them or they were duty bound to check information which
they failed to do. In such an instance, where a clear non-disclosure or suppression was evident on the facts,
or even if there was a clear error in dealing with given information, the findings might well be different. But
in the instant case there was no such evidence and the instant case is therefore distinguishable on the facts.
[170] In Electra Private Equity Partners v KPMG Peat Marwick and others [2001] 1 BCLC 589, which
related to a striking out application, a company had engaged KPMG to conduct a due diligence on a
company called Cambridge, it was proposing to invest in. Cambridge's auditors were one SKC which was
part of the KPMG international group. SKC concurred in Cambridge producing to Electra before the
investment, Cambridge's audited accounts and SKC's unqualified report on them for the year to the end of
February 1992. These accounts showed a significant profit before tax and net assets. Electra then invested in
Cambridge by purchasing loan stock. Cambridge's unaudited accounts for the 15 months to the end of May
1992 showed a significant loss, mainly due to bad debts. Electra lost its entire investment. Electra sued SKC
and KPMG. SKC applied to strike out Electra's claim. The English Court of Appeal held that the High Court
had erred in striking out Electra's claim because the judge erred in attempting to determine the central duty of
care issue on the evidence before him without regard to what other evidence might emerge when discovery
had been given and the issues of fact had been tested in oral evidence and by cross-examination.
[171] That is immediately distinguishable from the instant case where a full trial has proceeded and having
exhaustively examined the facts, it appears to this court that no duty of care arises in the circumstances of the
this case.
1 MLJ 526 at 576
[172] Further and in any event, the instant case does not attribute any error in the computation or treatment of
the accounts. In other words, there is no question of inaccurate information or accounts having been put forth
or assessed by D2. Here the complaint pertains to the accuracy of a financial forecast in respect of which the
defendants owe no duty of care, and in respect of which no assurances were given. On the contrary, warning
or cautionary notes were sounded. Exclusion clauses and disclaimers were present throughout the prospectus,
such being more than sufficient to warn a prudent investor of the risks that were being undertaken by
investing on a MESDAQ share counter.
[173] In Amal Bakti Sdn Bhd v Affin Merchant Bank (M) Bhd [2012] 5 MLJ 61 the Merchant Bank in this
case undertook, as advisor, a restructuring scheme which was based on a new company acquiring a business
from another company under an agreement and the new company issued shares to new investors. The bank
had acted as merchant bank and adviser in a scheme to restructure a public listed company. The scheme
involved the participation of another company, Milan Auto (M) Sdn Bhd which held the franchise to import
and distribute Alfa Romeo vehicles in Malaysia pursuant to a sales concession agreement it had with the
Italian manufacturer. The bank made public announcements and issued a prospectus stating that the listing
vehicle would be injected with Milan Auto (M) Sdn Bhd's core business of marketing and distributing Alfa
Romeo vehicles in Malaysia. This was to be achieved by the listing vehicle acquiring the total share capital
of an entity named Milan Auto Corp Sdn Bhd ('MAC') with whom Milan Auto (M) Sdn Bhd would execute a
business transfer agreement and a vehicle supply agreement.
[174] Unfortunately however the investors, who were the appellants in the case before the Court of Appeal,
were unaware that the sales concession agreement between MASB and the Italian manufacturer not only
expressly prohibited MASB from entering into the business transfer and vehicle supply agreements with

MAC, but that the sales agreement itself had been mutually terminated by the parties. Upon the Securities
Commission discovering that the agreement had been terminated, it revoked its approval of the restructuring
scheme and the listing. It obtained a court order to the effect that all contracts pertaining to the sale and offer
for sale of the listing vehicle shares were ab initio null and void.
[175] In these circumstances the Court of Appeal held that the merchant bank was negligent by reason of its
failure to ascertain by reasonable enquiry that MAC would not possess the new core business. By reason of
the prohibitory clause and the termination of the sales agreement MASB was never capable of injecting the
new core business into MAC. The entire exercise was a 'non-starter' from the outset rendering the listing
vehicle's shares worthless. It
1 MLJ 526 at 577
was found that the bank owed a duty of care to the investors. Transactions of the nature concluded between
the investors and MASB were provided for in the documents authored by the bank. The bank ought to have
been aware of that the announcements and statements it authored would reach investors and be relied upon
by them. It was further found that the steps taken by the bank in purported discharge of its duty of care fell
far short of that expected of a licensed merchant banker. The bank could not delegate its duties under the
Securities Commission Act and related legislation to third parties.
[176] Learned counsel for D1 sought to distinguish the foregoing case from the present case and I accept her
reasoning on this point. In Amal Bakti the scheme was dependent wholly on the core business to be acquired.
The Court of Appeal held that the fact of the acquisition was a material fact that the bank could very easily
have verified, as the counterparty could have been contacted. This is quite different from the instant case
which deals not with a fact per se, but with a profit forecast which by its very nature is not a verifiable fact.
[177] Additionally in the instant case, the effect of the numerous disclaimers and cautionary notes cannot be
ignored entirely. Any prospective purchaser including the plaintiffs were sufficiently warned of the nature of
the risk they were undertaking and that the profit forecast in itself was dependent upon a series of variables
which D1 could not guarantee. The investors here were expressly told that there was a real and significant
possibility that the forecast would vary quite considerably from the projected one, depending on the outcome
of the variables. Given this clear and express disclaimer it cannot be said that D1 acted negligently or in
breach of its duty of care. Any purported reliance by investors too had to be qualified by the various
disclaimers set out throughout the prospectus, marked in parts in bold.
[178] In the case of Malaysian International Merchant Bankers Bhd v Lembaga Bersekutu Pemegang
Amanah Pengajian Tinggi Islam Malaysia [2001] 1 MLJ 375, a merchant bank's representative was found to
have made representations to the investor and these representations were found to be false. The
representation was that the directors would guarantee payment of dividend for three years at a rate of 24%.
This case too is distinguishable on the following grounds as set out by learned counsel for D1, whose
reasoning I adopt:

(a)

D1 made no representations in the instant case. Statements pertaining to the forecast emanated from the
directors, who in turn set out the basis or assumptions on which such a forecast was made. This is not
attributable to D1. In MIMB however the representative had twisted and made a false representation of the
facts;

(b)

there were no disclaimers in the MIMB case whereas there are numerous
1 MLJ 526 at 578
disclaimers in the present case which deal specifically with the issues now comprising the subject matter of
complaint of the plaintiffs; and

(c)

the instant case involves MESDAQ shares which are recognised as being volatile and high-risk.
[179] And in the case of James McNaughton Paper Group Ltd v Hicks Anderson & Co [1991] 2 WLR 641
the Court of Appeal in England reversed the decision of the High Court where the latter had found that the
defendant accountants were in breach of a duty of care they owed to the plaintiffs to ensure that the accounts
were accurate. In that case negotiations were taking place for the take-over of a group of companies by the
plaintiff. The plaintiff asked the defendants, their accountants to prepare accounts for the group of companies
which comprised the subject matter of the take-over. The defendants submitted what they termed as 'final
accounts' and showed a net loss and in response to a specific question put by the plaintiff stated that the
group were breaking even or doing marginally worse. The plaintiff proceeded with the take-over and
discovered a number of errors in the accounts. On the plaintiffs' claim for negligence against the defendants
for loss and damage suffered as a result of the take-over the judge gave judgment for the plaintiff stating,
inter alia, that the defendants had misrepresented matters to the plaintiff and were in breach of a duty of care
they owed to the plaintiffs in respect of the accounts and the answer. On appeal however the decision was
reversed, the English Court of Appeal holding that there was not such a relationship of proximity between the
plaintiffs and defendants as to establish a duty of care.
[180] In the discussion on the law relating to negligent misstatement giving rise to economic loss the English
Court of Appeal in the foregoing case considered a large spectrum of cases from Hedley Byrne & Co Ltd v
Heller & Partners Ltd [1964] AC 465 onwards and culminating in Caparo Industries Plc v Dickman [1990]
2 AC 605. Reference was made to the speech of Lord Bridge in the Caparo case in which he summed up the
authorities in the United Kingdom in relation to this branch of the law (which differs from other
Commonwealth jurisdictions):
The salient feature of all these cases is that the defendant giving advice or information was fully aware of the
nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would
be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely
on that advice or information in deciding whether or not to engage in the transaction in contemplation. In
these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of
responsibility specifically to anticipate that the plaintiff would rely on the advice or information given by the
defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to
the effect of any disclaimer, would in that situation
1 MLJ 526 at 579
reasonably suppose that he was entitled to rely on the advice or information communicated to him for the
very purpose for which he required it.
[181] A restrictive approach was therefore adopted to any extension of the scope of the duty of care beyond
the person directly intended by the maker of the statement to act upon it. In deciding whether a duty of care
exists in any particular case it is necessary to take all the circumstances into account.

[182] Applying the foregoing to the instant case it is apparent that D1, as the merchant banker and
underwriter in preparing the prospectus would have been aware that potential investors, including the
plaintiffs would rely on the information in the prospectus in determining whether or not to make an
investment. However it is clear from the foregoing passage that effect has to be given to any disclaimer of
responsibility. A perusal of the prospectus in this case makes it clear that:

(a)

the nature of the information in the prospectus was clearly described such that its limitations were made very
clear. For example it was evident that matters pertaining to the profit forecast emanated from the directors
and not from D1 (or D2) directly. Secondly it was made clear that the forecast was premised on assumptions
the certainty of which could not be guaranteed. Therefore the information comprising the crux of the
complaint in this matter was not of a factual nature which was well within the knowledge of D1. Instead, it
was a prospective assumption, which by its very nature is speculative and does not fall within the purview of
factual information nor advice. A duty of care cannot exist in respect of such information which in itself is
uncertain or incapable of being ascertained accurately;

(b)

there was numerous disclaimers of responsibility and cautions sounded to prospective investors to procure
independent advice before undertaking investment; and

(c)

in the instant case the element of 'reliance' on the prospectus has not been made out as the plaintiffs who
invested in the subject shares did not read the prospectus. They merely relied on advice given by Dato' Ariff,
who in turn maintains that he relied on the prospectus, more particularly the profit forecast. This is
insufficient, to my mind, to amount to reliance on actual representations made in the prospectus, thereby
inducing the remaining plaintiffs to invest in these shares.
[183] For these reasons, it appears to this court that the plaintiffs have not succeeded in establishing that D1
was negligent in including the positive financial forecast for 2006 in the prospectus, thereby giving rise to a
negligent misstatement. I find as a matter of fact that D1 did not know that the factual
1 MLJ 526 at 580
premise on which the forecast was based had altered or deteriorated at the time when it was issued on 27
October 2005. As such D1 cannot be said to have issued a statement which it knew was inaccurate and
misleading. Further D1 owed no duty to ascertain or make further enquiries about the validity of the profit
forecast as of 27 October 2005, as it was entitled to rely on the information given to it by the directors at the
material time. Moreover the fact that they had provided numerous disclaimers which had the effect of
sufficiently warning potential investors to make their own independent inquiries prior to investment, clearly
had the effect of tempering any possible representation made by the forecast, which in any event, emanated
from the directors.
LOSS AND DAMAGE
[184] For purposes of completion I consider this issue, although it is evident from my foregoing conclusions
that, as no liability accrues to D1 and D2 in respect of negligent misstatement or misrepresentation, the issue
of damages flowing from such alleged negligence, does not arise.

[185] The plaintiff submits that the appropriate measure of damages to be imposed against the defendants is
as set out in the New Zealand case of Scott Group v McFarlane [1978] 1 NZLR 553 at p 585. That case
concerned the takeover of a company at a value based on the accountant's report which was erroneous as
certain assets had been overstated. The plaintiff then sought damages the measure of which was the
difference between the amount by which the investor was out of pocket and the value of the investment.
[186] In relying on this formula, the court in Scott's case drew a parallel with an action in tort for deceit
leading to a contract of purchase. In such a case, it was said, the normal measure of damages is the difference
between the price paid and the fair value at the time of purchase: Canavan v Wright [1957] NZLR
790; McGregor on Damages (13th Ed), Chapter 39.
[187] Applying the foregoing formula to the instant case, the plaintiffs here submit that the reported earnings
per shares for Litespeed for the year ended 30 April 2005 was 11.93 sen per share. The profit forecast
represented that the earnings per share would be 5.4 sen. However for the quarter ended 31 October 2005, the
loss per share was 2.93 sen and 5.31 sen for the year to date.
[188] Given the extent of the plaintiffs' collective investment, the aforesaid loss completely extinguishes the
quantum paid to subscribe for the shares in the
1 MLJ 526 at 581
first place. The plaintiffs therefore claim the entirety of the monies paid by way of subscription for their
investment in Litespeed, namely the sum of RM6,909,940.
[189] The defendants dispute this contention:

(a)

they point out that the plaintiff is bound to prove its loss and damage and cannot throw the matter to the court
for the court to decide. In this context they state that as the plaintiffs are still shareholders of Litespeed their
claim for such damages is untenable as they are still holding on to those shares. They have not sold their
shares. As such they cannot claim that they have suffered losses. They have not proven the loss they
allegedly suffered;

(b)

payment for the shares was not made by the plaintiffs but by a company known as Wangco which Dato' Arfff
claims to own. As such the defendants maintain that the plaintiffs have not shown that they have themselves
suffered loss in terms of monies paid out for the subscription of the subject Litespeed shares; and

(c)

they also point to the fact that the value of the Litespeed shares at the time when the claim was filed, was
adversely affected by the plaintiffs' own actions in filing a winding up petition on 11 June 2007 vide Kuala
Lumpur High Court Petition No D128384 of 2007. The same complaints as arose in the current suit were
the subject matter of the petition. This is not in dispute. With the presentation of the petition it was difficult
for Litespeed to continue business or procure new contracts as its financial operations were adversely
affected. D1 contends that the filing of this petition constituted a novus actus interveniens, which in any
event broke the chain of causation thereby precluding the plaintiffs from recovering the sum sought (even if
they managed to establish liability).

[190] Subsequently on 19 March 2009, the petition was withdrawn with no liberty to file afresh. It was
withdrawn for a settlement sum of RM400,000. The plaintiffs maintain that this sum represented legal costs,
while the defendants maintain that the said sum represented a full and final settlement of all issues raised in
the petition, which were identical to those matters raised here.
[191] Having considered the entirety of the submissions it appears to this court that:

(a)

the plaintiffs are not entitled to any loss or damages as claimed as they have not established their case against
both the defendants;

(b)

if liability had indeed been established, the normal measure of damages as set out in Scott v
McFarlane relying on the measure of damages in the tort
1 MLJ 526 at 582
of deceit, namely the difference between the actual price paid for the shares and a fair assessment of their
value at the material time might have been available;

(c)

however in the instant case the plaintiffs failed to establish that the second to fourth plaintiffs actually
suffered such loss as it is not evident in the first place that they had paid for those shares. It is also not clear
on the evidence, apart from a bare statement to that effect that Dato' Ariff paid for the shares. The evidence
discloses that the monies emanated from Wangco and there is insufficient evidence before the court for it to
conclude that Wangco is synonymous with Dato' Ariff such that the corporate veil should be lifted; and

(d)

the filing of the winding up petition is relevant as it appears that identical matters were raised and then dealt
with as settled with an exchange of a not insignificant sum of money. Issue estoppel arises to preclude the
plaintiffs from relitigating the same issues, and more significantly making claim under the same causes of
action, having received monies in settlement of the petition. It is not unreasonable to assume that the
settlement related to the matters raised in the petition which are raised again here. While the plaintiffs
maintain that the said sum was purely for costs, this does not resolve the issue completely. This again throws
doubt on the basis and quantum of the plaintiffs' claim.
[192] For the foregoing reasons it appears to this court that the plaintiffs' claim fails. It therefore stands
dismissed with the costs of this action to be borne by the plaintiffs. The quantum of costs to be awarded will
be determined by this court after hearing arguments.
Claim dismissed with costs.
Reported by Ibnu Aswan

All England Law Reports/1972/Volume 1 /Hollier v Rambler Motors (AmC) Ltd - [1972] 1 All ER 399

[1972] 1 All ER 399

Hollier v Rambler Motors (AmC) Ltd

COURT OF APPEAL, CIVIL DIVISION

SALMON AND STAMP LJJ AND LATEY J

18, 19 NOVEMBER 1971

Contract - Conditions - Incorporation in contract - Course of dealing - Exception clause - Contract

of bailment - Oral contract between garage and car owner - Owner requesting garage to repair car

- Manager of garage instructing owner to bring car to garage so that defects could be attended to Garage's normal practice to supply 'invoice' form to be signed by customer - Form including clause
stating garage not responsible for damage caused by fire to customer's cars on premises - Car
owner having had car repaired at garage on four occasions in previous five years - Car owner
having signed 'invoice' on at least two occasions - Whether exception clause incorporated in oral
contract by reason of previous course of dealing.

Contract - Exception clause - Bailment - Bailee's liability for negligence - Exclusion of liability Need for clear terms - Contract between car owner and garage for repair of car - Clause stating
that garage not responsible for damage caused by fire to customers' cars on premises - Garage as
bailees only liable for damage caused by negligence - Clause not sufficiently clear to exclude
liability for negligence - Clause merely a statement in nature of a warning that garage would not be
liable for fire caused otherwise than by their negligence.

The plaintiff's car having developed an oil leak, he telephoned the manager of the defendants'
garage and told him that he wanted some repair work done to it. The manager told the plaintiff that
he was unable to do anything immediately but that if the plaintiff had his car towed to the
defendants' garage they would attend to the defects in due course. The plaintiff agreed. Those
were the only terms of the agreement. Although the plaintiff had frequently bought spare parts for
his car from the defendants during the previous five years, when he wanted a car repaired or
serviced as a rule he sent it elsewhere. However, on three or four occasions during those five
years he had had the repairs or service carried out by the defendants. It was the defendants'
practice when doing repairs or servicing a car, but not when merely
[1972] 1 All ER 399 at 400

supplying spare parts, to have a form, described as an 'invoice', signed by the customer. The form
contained a description of the work to be carried out and the price for doing it. Underneath the
customer's signature was the following clause: 'The Company is not responsible for damage
caused by fire to customer's cars on the premises.' The plaintiff had signed this form on at least
two previous occasions when the defendants had carried out repairs to his car. While the car was
in the garage a fire broke out as a result of the defendants' negligence which caused substantial
damage to the plaintiff's car. In an action by the plaintiff claiming damages for negligence, the
defendants contended that, although on this occasion the plaintiff had not signed their 'invoice'
form, the clause thereon had been incorporated in the oral contract between the parties by a
course of dealing and that its effect was to exclude their liability for negligently causing a fire while
the plaintiff's car was in their care.

Held - The defendants were liable to the plaintiff for their negligence because--

(i) three or four transactions in the course of five years were not sufficient to establish a course of
dealing; the clause on the 'invoice' form could not therefore have been incorporated in the oral
contract made between the parties (see p 402 h, p 404 c, p 408 f and p 409 b, post); McCutcheon
v David MacBrayne Ltd [1964] 1 All ER 430 applied, Henry Kendall & Sons (a firm) v William Lillico
& Sons Ltd [1968] 2 All ER 444 distinguished;

(ii) alternatively, on the footing that a course of dealing had been established and the clause
consequently incorporated in the contract, the words of the clause were not sufficiently plain to
exclude liability for negligence; although as bailees the defendants could only be liable in
negligence, if they were seeking to exclude liability for negligence they ought clearly to have
conveyed that it was liability for negligence which was being excluded; the words used were
susceptible to a construction which would regard them as a mere statement in the nature of a
warning that if a fire did occur at the garage which damaged the car and it was not caused by the
negligence of the garage then the owner of the garage was not responsible (see p 404 f and g, p
406 g and j, p 407 e, p 408 g to j and p 409 d to f, post); dictum of Denning LJ in Olley v
Marlborough Court Ltd [1949] 1 All ER at 134 applied; dicta of Scrutton LJ in Rutter v Palmer
[1922] All ER Rep at 370 and of Lord Greene MR in Alderslade v Hendon Laundry Ltd [1945] 1 All
ER at 245 explained; Turner v Civil Service Supply Association Ltd [1926] 1 KB 50 and Fagan v
Green and Edwards Ltd [1926] All ER Rep 266 overruled.

Per Salmon LJ. In order to establish that a term has been implied into a contract by a course of
dealing, it is not essential to show that the party charged had actual and not merely constructive
knowledge of the term and with such actual knowledge had in fact assented to it (see p 403 g and
p 404 d, post); dictum of Lord Devlin in McCutcheon v David MacBrayne Ltd [1964] 1 All ER at 437
disapproved.

Notes

For conditions in contracts of bailment limiting liability, see 2 Halsbury's Laws (3rd Edn) 114-116,
para 225, and for cases on the subject, see 3 Digest (Repl) 76-79, 154-164.

For the incorporation of terms in a contract, see 8 Halsbury's Laws (3rd Edn) 74, para 147.

Cases referred to in judgments

Alderslade v Hendon Laundry Ltd [1945] 1 All ER 244, [1945] KB 189, 114 LJKB 196, 172 LT
153, 3 Digest (Repl) 102, 286.

Fagan v Green and Edwards Ltd [1926] 1 KB 102, [1925] All ER Rep 266, 95 LJKB 363, 134 LT
191, 8 Digest (Repl) 5, 6.

Kendall (Henry) & Sons (a firm) v William Lillico & Sons Ltd [1968] 2 All ER 444, [1969] 2 AC
31, [1968] 3 WLR 110, Digest (Cont Vol C) 853, 781b.

McCutcheon v David MacBrayne Ltd [1964] 1 All ER 430, [1964] 1 WLR 125, Digest (Cont Vol
B) 71, 254b.
[1972] 1 All ER 399 at 401

Olley v Marlborough Court Ltd [1949] 1 All ER 127, [1949] 1 KB 532, [1949] LJR 360, 29 Digest
(Repl) 16, 186.

Price & Co v Union Lighterage Co [1904] 1 KB 412, [1904-07] All ER Rep 227, 63 LJKB 222,
89 LT 731, 8 Digest (Repl) 46, 277.

Rutter v Palmer [1922] 2 KB 87, [1922] All ER Rep 367, 91 LJKB 657, 127 LT 419, 3 Digest
(Repl) 78, 159.

Turner v Civil Service Supply Association Ltd [1926] 1 KB 50, 95 LJKB 111, 134 LT 189, 8
Digest (Repl) 5, 5.

Appeal

This was an appeal by the plaintiff, Walter William Frederick Hollier, against a decision of
his Honour Judge Sir Shirley Worthington-Evans QC at Brentford County Court on 15
June 1971 in an action brought by the plaintiff against the defendants, Rambler Motors
(AMC) Ltd, claiming damages for negligence. The facts are set out in the judgment of
Salmon LJ.

R L Johnson for the plaintiff.

S L Tuckey for the defendants.

19 November 1971. The following judgments were delivered.

SALMON LJ.

The plaintiff bought a secondhand Rambler car early in 1970. I understand that that is a make of
car which is manufactured by the American Motor Corpn. The plaintiff had had Rambler cars for
some five years. In the middle of March 1970 he telephoned the defendants, Rambler Motors
(AMC) Ltd, spoke to the manager and told him that he wanted some repair work done to the car as
it had developed an oil leak. The manager said that the defendants could not do anything about it
for the moment, but if the plaintiff would have it towed or sent in on a conveyor the defendants
would attend to the defects and put them in order. The plaintiff agreed. Those were the only terms
of the agreement, expressed over the telephone. There would, however, obviously be an implied
term that the defendants would carry out the repairs and look after his car with reasonable skill and
care; and there would also be an implied term that the plaintiff would pay a fair and reasonable
price for the repairs. The plaintiff had his motor car conveyed to the defendants' garage towards
the end of March. While it was at the garage a fire broke out as a result of which substantial
damage was done to the car.

The plaintiff brought an action against the defendants claiming that the fire and the ensuing
damage had been caused by the defendants' negligence. At the trial, the chief issue of fact which
was fought--and it was fought very hard--was whether or not the defendants had discharged the
onus of proof (which would rest on them as bailees) of having taken reasonable care of the
plaintiff's property. The learned county court judge, in the course of a lucid and admirable
judgment, said:

'I have no hesitation in finding that the defendants failed to show that they had taken reasonable care of the plaintiff's
property. I am satisfied that the electric wiring of their premises was faulty in design and was not properly inspected or
maintained, and accordingly they are in breach of their duty as bailees of the plaintiff's property.'

It is to be observed that not only did he decide that the defendants had not discharged the onus of
proof resting on them, but that it had been proved affirmatively that they had been negligent. The
defendants do not challenge this finding. They rely, however, as they did in the court below, on a
clause which they contend excludes their liability for negligently causing a fire while the plaintiff's
motor car was in their care. The defendants argue that this clause was incorporated into the oral
contract by a course of dealing between them and the plaintiff.

The points of law to be decided by the learned county court judge were: Was the clause on which
the defendants were relying to be implied into the contract?
[1972] 1 All ER 399 at 402

And if so, did it have the effect for which the defendants were contending? The learned county
court judge was persuaded by counsel for the defendants (in an argument which I am sure was as
persuasive and skilful as that which he has addressed to this court), that such a term was to be
implied into the contract; and the learned county court judge found that, on the authority of Turner v
Civil Service Supply Association Ltd, he was bound to hold that that clause had the meaning for
which the defendants contended. The plaintiff now appeals from the decision of the learned county
court judge on those points.

I will deal first of all with the point whether the clause relied on by the defendants can properly be
implied into this oral contract by reason of the course of dealing between the parties. The plaintiff
had during the five years preceding March 1970 on many occasions bought spare parts from the
defendants. As a rule, when he wanted the car to be repaired or serviced, he sent it elsewhere, but
three or four times during those five years he had had the repair or service carried out by the
defendants. It was the defendants' practice when they were doing repairs or servicing a motor car-but not when they were merely supplying spare parts--to have a form which is described as an
'invoice' signed by the customer. I need not read the form, which is before us, in detail, but it
describes the work which is to be carried out and gives the price for carrying out the work. At the
bottom of the form appear the words:
'I hereby authorise the above repairs to be executed and agree to pay cash for same upon delivery of car to me.
Customer's signature.'

And the customer normally signed the form. Then immediately underneath the signature appear
the words:
'The Company is not responsible for damage caused by fire to customer's cars on the premises. Customer's cars are
driven by staff at owner's risk.'

It is not clear whether on each of the three or four occasions when the plaintiff had work carried out
he signed the form to which I have referred, but he did, at any rate, sign the form on two of those
occasions; one was on 15 April 1967, and the other hurriedly in the rain on 3 February 1970, not
quite two months before the date of the telephone conversation at which the oral contract relating
to the present case was made. This form that the plaintiff signed has three copies underneath it,
with carbons in between. The three copies underneath the form are retained by the defendants.
The top copy is handed to the customer after the work has been done and paid for. The plaintiff did

not read the forms on any occasion when he signed them, but there was nothing to have prevented
him from doing so.

Counsel for the defendants says that there was a course of dealing which constituted the three or
four occasions over five years--that is, on an average, not quite one dealing a year--from which it is
to be implied that what he called 'the condition' at the bottom of the contract should be imported
into the oral agreement made in the middle of March 1970. I am bound to say that, for my part, I do
not know of any other case in which it has been decided or even argued that a term could be
implied into an oral contract on the strength of a course of dealing (if it can be so called) which
consisted at the most of three or four transactions over a period of five years.

We have been referred to Henry Kendall & Sons (a firm) v William Lillico & Sons Ltd. That was a
case in which some feeding-stuff was sold by some merchants to a farmer. The feeding-stuff was
found to be defective. The farmer sued the merchants. The merchants brought in as third party the
persons from whom they had purchased the feeding-stuff; they in their turn brought in their
suppliers, and there was a long
[1972] 1 All ER 399 at 403

list of many parties brought in right down the chain. As between two of these suppliers a point
arose whether a term that the buyer under the contract took the responsibility for any latent defects
was a term which had been imported into the contract in question by reason of the course of
dealing between those parties. It is to be observed that in that case there had been three or four
dealings each month between the parties during the previous three years. The course of dealing
had been that the feeding-stuff was ordered orally by the buyer and the order was accepted orally
by the suppliers. Then on the day of the oral contract, or perhaps the next day, the suppliers sent
on to the buyer a sold note. One of the terms appearing on the sold note was that the buyer under
the contract took the responsibility for any latent defects. Three or four times each month, year in
and year out for three years, sold notes had been sent on to the buyer, and the buyer had never
raised any protest or said anything which would have led the sellers to assume that the buyer was
doing anything other than accepting the terms of the contract which appeared on the sold note. In
that case, although this practice had been going on all that time, and the buyer had received well
over 100 sold notes containing the condition to which I have referred, he had not actually read the
condition and knew nothing about it. It was argued that, therefore, the condition could not be
implied into the contract in question, although it had been made in exactly the same way as all the
other contracts, namely, orally, with a sold note in the usual form sent on after the contract had
been made. The House of Lords decided that the fact that the buyer had not read the condition on
the sold notes, having had every opportunity of doing so, did not avail him, because any
reasonable seller in circumstances such as those, having had no intimation from the buyer that he
took any objection to the condition, would have had good cause to assume that the buyer was
agreeing to the condition.

That case is obviously very different from the present case. That seems to be a typical case where
a consistent course of dealing between the parties makes it imperative for the court to read into the
contract the condition for which the sellers were contending. Everything that the buyer had done, or
failed to do, would have convinced any ordinary seller that the buyer was agreeing to the terms in
question. The fact that the buyer had not read the term is beside the point. The seller could not be
expected to know that the buyer had not troubled to acquaint himself with what was written in the
form that had been sent to him so often, year in and year out during the previous three years, in
transactions exactly the same as the transaction then in question.

The buyer in that case sought to rely on McCutcheon v David MacBrayne Ltd , which was also a
decision of the House of Lords. He relied on that authority chiefly for a passage in the speech of
Lord Devlin ([1964] 1 All ER at 437, [1964] 1 WLR at 134), which taken literally would mean that no
term can be implied into a contract by a course of dealing unless it can be shown that the party
charged has actual and not only constructive knowledge of the term, and with such actual
knowledge has in fact assented to it. McCutcheon v David MacBrayne Ltd is an example of a case
in which dealings between the parties prior to the contract in question cannot be relied on to import
a term into the relevant contract. In that case the appellant had asked his brother-in-law to have a
car shipped from the Isle of Islay to the mainland. The appellant had personally consigned goods
on four previous occasions. On three of them he was acting on behalf of his employer; on the other
occasion he sent his own car; and each time he signed what was called a 'risk note'. The risk note
made it plain that the respondents were accepting the goods on their ship on the condition that
they would not be responsible for any damage by negligence that the goods might suffer during the
course of the voyage. In that case, through negligence, the ship sank and the car was
[1972] 1 All ER 399 at 404

lost. The appellant's brother-in-law, who took the car to be shipped on the occasion in question,
had himself consigned goods of various kinds on a number of previous occasions. He said that
sometimes he had signed a note, and sometimes he had not. On one occasion he sent his own
car. He said that on the occasion in question no risk note was put before him. Apparently, unknown
to him, the purser, by mistake, had taken the car on board without asking him to sign the risk note.
The House of Lords held, as I have already indicated, that there was no previous course of dealing
from which the term of exclusion could be implied into the contract which had been made on behalf
of the appellant by his brother-in-law.

It seems to me that if it was impossible to rely on a course of dealing in McCutcheon v David

MacBrayne Ltd, still less would it be possible to do so in this case, when the so-called course of
dealing consisted only of three or four transactions in the course of five years. As I read the
speeches of Lord Reid, Lord Guest and Lord Pearce, one, but only one amongst many, of the facts
to be taken into account in considering whether there had been a course of dealing from which a
term was to be implied into the contract was whether the consignor actually knew what were the
terms written on the back of the risk note. Lord Devlin said that this was a critical factor. Even on
the assumption that Lord Devlin's dictum went further than was necessary for the decision in that

case, and was wrong--which I think is the effect of Henry Kendall & Sons (a firm) v William Lillico &
Sons Ltd--I do not see how that can help the defendants here. The speeches of the other members
of the House and the decision itself in McCutcheon's case make it plain that the clause on which
the defendants seek to rely cannot in law be imported into the oral contract they made in March
1970.

That really disposes of this appeal, but in case I am wrong on the view that I have formed, without
any hesitation I may say, that the course of dealing did not import the so-called exclusion clause, I
think I should deal with the point as to whether or not the words on the bottom of the form, had they
been incorporated in the contract, would have excluded the defendants' liability to compensate the
plaintiff for damage to the plaintiff's car by a fire which had been caused by the defendants' own
negligence. It is well settled that a clause excluding liability for negligence should make its meaning
plain on its face to any ordinarily literate and sensible person. The easiest way of doing that, of
course, is to state expressly that the garage, tradesman or merchant, as the case may be, will not
be responsible for any damage caused by his own negligence. No doubt merchants, tradesmen,
garage proprietors and the like are a little shy of writing in an exclusion clause quite so bluntly as
that. Clearly it would not tend to attract customers, and might even put many off. I am not saying
that an exclusion clause cannot be effective to exclude negligence unless it does so expressly, but
in order for the clause to be effective the language should be so plain that it clearly bears that
meaning. I do not think that defendants should be allowed to shelter behind language which might
lull the customer into a false sense of security by letting him think--unless perhaps he happens to
be a lawyer--that he would have redress against the person with whom he was dealing for any
damage which he, the customer, might suffer by the negligence of that person.

The principles are stated by Scrutton LJ with his usual clarity in Rutter v Palmer ([1922] 2 KB 87 at
92, [1922] All ER Rep 367 at 370):
'For the present purposes a rougher test will serve. In construing an exemption clause certain general rules may be
applied: First the defendant is not exempted from liability for the negligence of his servants unless adequate words are
used; secondly, the liability of the defendant apart from the exempting words must be ascertained; then the particular
clause in question must be considered; and if the only liability of the party pleading the exemption is a liability for
negligence, the clause will more readily operate to exempt him'.

[1972] 1 All ER 399 at 405

Scrutton LJ was far too great a lawyer, and had far too much robust common sense, if I may be
permitted to say so, to put it higher than that 'if the only liability of the party pleading the exemption
is a liability for negligence, the clause will more readily operate to exempt him'. He does not say
that 'if the only liability of the party pleading the exemption is a liability for negligence, the clause
will necessarily exempt him'. After all, there are many cases in the books dealing with exemption
clauses, and in every case it comes down to a question of construing the alleged exemption clause
which is then before the court. It seems to me that in Rutter v Palmer , although the word
'negligence' was never used in the exemption clause, the exemption clause would have conveyed
to any ordinary, literate and sensible person that the garage in that case was inserting a clause in

the contract which excluded their liability for the negligence of their drivers. The clause being
considered in that case--and it was without doubt incorporated in the contract--was: 'Customers'
cars are driven by your staff at customers' sole risk ... ' Any ordinary man knows that when a car is
damaged it is not infrequently damaged because the driver has driven it negligently. He also
knows, I suppose, that if he sends it to a garage and a driver in the employ of the garage takes the
car on the road for some purpose in connection with the work which the customer has entrusted
the garage to do, the garage could not conceivably be liable for the car being damaged in an
accident unless the driver was at fault. It follows that no sensible man could have thought that the
words in that case had any meaning except that the garage would not be liable for the negligence
of their own drivers. That is a typical case where, on the construction of the clause in question, the
meaning for which the defendant was there contending was the obvious meaning of the clause.

The next case to which I wish to refer is the well-known case of Alderslade v Hendon Laundry Ltd.
In that case articles were sent by the plaintiff to the defendants' laundry to be washed, and they
were lost. In an action by the plaintiff against the defendants for damages, the defendants relied on
the following condition to limit their liability: 'The maximum amount allowed for lost or damaged
articles is 20 times the charge made for laundering.' Again, this was a case where negligence was
not expressly excluded. The question was: what do the words mean? I have no doubt that they
would mean to the ordinary housewife who was sending her washing to the laundry that, if the
goods were lost or damaged in the course of being washed through the negligence of the laundry,
the laundry would not be liable for more than 20 times the charge made for the laundering. I say
that for this reason. It is, I think, obvious that when a laundry loses or damages goods it is almost
invariably because there has been some neglect or default on the part of the laundry. It is said that
thieves break in and steal, and the goods (in that case handkerchiefs) might have been stolen by
thieves. That of course is possible, but I should hardly think that a laundry would be a great
allurement to burglars. It is a little far-fetched to think of burglars breaking into a laundry to steal the
washing when there are banks, jewellers, post offices, factories, offices and homes likely to contain
money and articles far more attractive to burglars. I think that the ordinary sensible housewife, or
indeed anyone else who sends washing to the laundry, reading that clause must have appreciated
that almost always when goods are lost or damaged it is because of the laundry's negligence, and,
therefore, this clause could apply only to limit the liability of the laundry, when they were in fault or
negligent.

But counsel for the defendants has drawn our attention to the words used by Lord Greene MR in
delivering the leading judgment in this court, and he contends that Lord Greene MR was in fact
making a considerable extension to the law as laid down by Scrutton LJ in Rutter v Palmer. For this
proposition he relies on the following passage in Lord Greene MR's judgment ([1945] 1 All ER at
245, [1945] KB at 192):
[1972] 1 All ER 399 at 406
'The effect of those authorities can I think be stated as follows: where the head of damage in respect of which limitation
of liability is sought to be imposed by such a clause is one which rests on negligence and nothing else, the clause must
be construed as extending to that head of damage, because if it were not so construed it would lack subject-matter.'

If one takes that word 'must' au pied de la lettre that passage does support counsel for the
defendants' contention. However, we are not here construing a statute, but a passage in an
unreserved judgment of the Master of the Rolls, who was clearly intending no more than to restate
the effect of the authorities as they then stood. It is to be observed that MacKinnon LJ, who gave
the other judgment in this court, relied on the rule or principle which he said was very admirably
stated by Scrutton LJ in Rutter v Palmer. He said ([1945] 1 All ER at 247, [1945] KB at 195):
'Applying that principle to the facts of this case, I think that this clause does avail to protect the proprietor of the laundry
in respect of liability for negligence, which must be assumed to be the cause of these handkerchiefs having
disappeared.'

And clearly it did, for the reasons that I have already given. I do not think that Lord Greene MR was
intending to extend the law in the sense for which counsel for the defendants contends. If it were
so extended, it would make the law entirely artificial by ignoring that rules of construction are
merely our guides and not our masters; in the end you are driven back to construing the clause in
question to see what it means. Applying the principles laid down by Scrutton LJ, they lead to the
result at which the court arrived at in Alderslade v Hendon Laundry Ltd. In my judgment these
principles lead to a very different result in the present case. The words are: 'The Company is not
responsible for damage caused by fire to customer's cars on the premises.' What would that mean
to any ordinary literate and sensible car owner? I do not suppose that any such, unless he is a
trained lawyer, has an intimate or, indeed, any knowledge of the liability of bailees in law. If you
asked the ordinary man or woman: 'Supposing you send your car to the garage to be repaired, and
there is a fire, would you suppose that the garage would be liable?', I should be surprised if many
of them did not answer, quite wrongly, 'Of course they are liable if there is a fire'. Others might be
more cautious and say, 'Well, I had better ask my solicitor', or, 'I do not know. I suppose they may
well be liable'. That is the crucial difference, to my mind, between this case and Alderslade v
Hendon Laundry Ltd and Rutter v Palmer. In those two cases, any ordinary man or woman reading
the conditions would have known that all that was being excluded was the negligence of the
laundry, in the one case, and the garage, in the other. But here I think the ordinary man or woman
would be equally surprised and horrified to learn that if the garage was so negligent that a fire was
caused which damaged their car, they would be without remedy because of the words in the
condition. I can quite understand that the ordinary man or woman would consider that, because of
these words, the mere fact that there was a fire would not make the garage liable. Fires can occur
from a large variety of causes, only one of which is negligence on the part of the occupier of the
premises, and that is by no means the most frequent cause. The ordinary man would I think say to
himself: 'Well, what they are telling me is that if there is a fire due to any cause other than their own
negligence they are not responsible for it'. To my mind, if the defendants were seeking to exclude
their responsibility for a fire caused by their own negligence, they ought to have done so in far
plainer language than the language here used. In my view, the words of the condition would be
understood as being meant to be a warning to the customer that if a fire does occur at the garage
which damages the car, and it is not caused by the negligence of the garage owner, then the
garage owner is not responsible for damage.
[1972] 1 All ER 399 at 407

There is another case which I think throws some light on the problem before us, and that is Olley v
Marlborough Court Ltd. In that case there was a notice in the bedroom of a private residential hotel
to this effect: 'The proprietors will not hold themselves responsible for articles lost or stolen unless
handed to the manageress for safe custody.' Owing to the negligence of the hotel, a thief managed
to get into a room, which had been taken by the plaintiff, and stole a quantity of articles. The
plaintiff brought an action against the proprietors of the hotel, and succeeded in this court. In that
case there was a question whether the notice to which I have referred formed part of the contract
between the plaintiff and the hotel proprietors; and there was also some question whether the hotel
was an inn, in which case they would have been to some extent insurers of the goods, and another
question whether the hotel was only a private hotel. This court considered the case on the basis
that the notice did form part of the contract between the parties, and that the hotel was a private
hotel, and came to the conclusion, as I have already indicated, that the plaintiff was entitled to
recover. Denning LJ said ([1949] 1 All ER at 134, [1949] 1 KB at 550):
'Ample content can be given to the notice by construing it as a warning that the hotel proprietor is not liable, in the
absence of negligence. As such it serves a useful purpose. It is a warning to the guest that he must do his part to take
care of his things himself, and, if need be, insure them. It is unnecessary to go further and to construe the notice as a
contractual exemption of the defendants from their common law liability for negligence.'

Similarly, I think, in this case the words at the bottom of this form can be given ample content by
construing them as a warning in the sense that I have already indicated. It seems plain that if the
notice in the bedroom of the hotel had read as follows: 'Proprietors will not hold themselves
responsible for articles lost or stolen, nor for the damage or destruction of articles caused by fire',
and then there had been a full stop, and the notice went on to say that to avoid articles being lost
or stolen they should be handed to the manageress for safe custody, for the reasons which this
court gave it would have come to the conclusion that the notice would not have excluded the hotel
proprietors from liability for the loss of articles by a fire caused by their own negligence.

We have been referred to the case on which the learned county court judge relied and by which he
was bound, namely, the decision of Sankey J in Turner v Civil Service Supply Association Ltd . In
that case the defendants were furniture removers and warehousemen, and they entered into a
contract to remove the plaintiff's furniture from London to Hailsham. The contract was made subject
to various conditions. The plaintiff's goods were loaded on to the defendants' motor lorry, and in the
course of transfer a fire caused by the negligence of the defendants' servants destroyed the bulk of
the goods and damaged the remainder. Sankey J held, as he said with some hesitation and
reluctance, that cl 11 in the contract did exempt the defendants from liability. That clause read:
'The contractors are not responsible for loss or damage caused by fire, aircraft or bombardment to property in transit, in
storage, or in process of being packed ... '

Sankey J thought that, since the defendants could not be responsible for damage by fire, save fire
caused by negligence, the clause to which I have referred must necessarily be taken to exclude
their liability for negligence. I am afraid I cannot agree with that decision. It is fair to say, reading
that judgment, that the correct arguments do not appear to have been addressed to the court. I
think that in that
[1972] 1 All ER 399 at 408

case the defendants were in an even weaker position than the defendants are here. Clause 11 was
manifestly dealing with matters which had nothing to do with negligence: 'The contractors are not
responsible for loss or damage caused by fire, aircraft or bombardment to property in transit ... ' It
is difficult to see how the contractors could have been liable for any damage by aircraft or
bombardment. It is hardly to be supposed that they would have negligently manipulated an aircraft
over one of their own lorries, or bombarded it. It seems to me manifest that that clause was merely
a warning to the customer that the contractors were not responsible for damage by fire, aircraft or
bombardment, so that he could insure the goods against those risks. That case does not decide
anything except what the learned judge conceived to be the true construction of the clause there in
question. In my judgment, his decision was wrong. I consider also, for much the same reasons,
that the decision in Fagan v Green and Edwards Ltd, following Turner v Civil Service Supply
Association Ltd , was wrong.

There have been many cases, to which I do not think it is necessary to refer, in which these
exclusion clauses have been construed in relation to the liability of common carriers. I do not think
those cases have any application to the present case. Some of them may appear not to be very
satisfactory, but they can be reconsidered should the occasion arise. It does not arise in this case.

For these reasons, I have come to the conclusion that, although this was a most careful and in
many ways an excellent judgment, the decision was wrong: first, on the point whether or not the
term relied on by the defendants was imported into the contract by a course of dealing; and
secondly, on the construction of the clause, although on this point the learned county court judge
was bound by the decision of Sankey J to reach the conclusion at which he arrived. For these
reasons, I would allow the appeal. Before parting with this case, I should like to say how much we
are indebted to learned counsel on both sides for their most interesting and able arguments.

STAMP LJ.

I agree, for the reasons given by Salmon LJ, that the course of dealings between parties described
by Salmon LJ was not such that the terms of earlier contracts can properly be imported into the
oral contract here in question.

On the question of construction, I reach the same conclusion as Salmon LJ, but by, I think, a
slightly different route. As I understand the law, it is settled that where in a contract such as this you
find a provision excluding liability capable of two constructions, one of which will make it applicable
where there is no negligence by the defendant, and the other will make it applicable where there is
negligence by the defendant, it requires special words or special circumstances to make the clause
exclude liability in case of negligence: see, for example, Price & Co v Union Lighterage Co.
Similarly, I would hold that where the words relied on by the defendant are susceptible either to a
construction under which they become a statement of fact in the nature of a warning or to a
construction which will exempt the defendant from liability for negligence, the former construction is
to be preferred. The words here, 'The Company is not responsible for damage caused by fire to
customer's cars on the premises', are, in my judgment, certainly susceptible to a construction
which would regard them as a mere statement in the nature of a warning, and reinforced by the
principle that I have stated, I would hold that that is how they ought to be construed in this case. If
this be correct, I do not find it necessary to consider the cases which have been decided on the
footing that the clause under consideration was a term of the contract excluding some liability; for
on the view that I have formed, the clause on its true construction is not a clause of that nature.
[1972] 1 All ER 399 at 409

For those reasons, I would agree with the conclusion of Salmon LJ. I also agree, for the reasons
which he has given, that the decisions in Turner v Civil Service Supply Association Ltd and Fagan
v Green & Edwards Ltd cannot be regarded as reliable authorities. I, too, would allow the appeal.

LATEY J.

As regards the first ground of appeal, namely, that the learned county court judge was wrong in
holding that these printed words were imported as a term into the oral agreement by a course of
dealing, I agree that the learned judge, while his findings of primary fact on the evidence were
impeccable, did reach a mistaken conclusion. As I so wholly agree with the reasons stated by
Salmon and Stamp LJJ, there is no need to repeat them.

As regards the second ground of appeal, the main stream of the law, the basic principle, as I
understand it, is that if A enters into a contract with B and wants to include in it a term exempting
himself from liability for his own negligence, to be effective that term must sufficiently clearly

convey that it is liability for negligence which is being excluded. It has been argued during this
appeal that where A cannot be liable otherwise than in negligence, no such sufficiently clear words
are required. In my opinion, that is not the law. In each case one has to look at the words which are
claimed to exempt. When in fact A can be liable in negligence only, the law, I believe, is that that
fact, to employ Scrutton LJ's words in Rutter v Palmer ([1922] 2 KB 87 at 92, [1922] All ER Rep
367 at 370), 'will more readily operate to exempt him'. But the law goes no further than that.

In saying that, I want to add that I wholly and emphatically agree with what Salmon LJ has said in
his judgment when dealing with Rutter v Palmer and Alderslade v Hendon Laundry Ltd; when
referring to the passage in Lord Greene MR's judgment in the latter case; and with what he has
said about Turner v Civil Service Supply Association Ltd and Fagan v Green & Edwards Ltd. In the
sense I have mentioned and to that limited extent, in this case the defendants are entitled to pray
in aid that as bailees they could only be liable in negligence and, therefore, that the court should
more readily read these words as sufficient words of exemption. I approach the words in question
with that in mind and, doing so, to my mind these words would not convey to many intelligent
laymen that the garage is saying: 'If your car is damaged by fire we shall not be liable, and this is
so even though it is due to our own fault that the fire happens.' In my opinion, other and plainer
words are required. I, therefore, agree that on both grounds this appeal should be allowed.

Appeal allowed.

Solicitors: Herbert Smith & Co (for the plaintiff); Linklaters & Paines (for the defendants).

Mary Rose Plummer Barrister.

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