FRAUD

 INTRO

It can be mentioned as a general rule that if a person causes someone to act on a false representation that is not believed to be valid by the maker himself, he is said to have committed fraud.

DEFINITION

According to the section 17 of the Contracts Act 1950, "Fraud" includes any of the following acts committed by a party to a contract, or with his connivance, or by his agent, with intent to deceive another party thereto or his agent, or to induce him to enter into the contract.

Thus, fraud is defined as including certain actions committed with the intention of inducing another party to conclude a contract.

5 DIFFERENT ACTS WHICH MAY CONSTITUTE FRAUD

1. The suggestion, as to a fact, of that which is not true by one who does not believe it to be true

Section 17(a) has similar requirements to Section 18(a) in that a misrepresentation of the truth presented to the party must be falsely addressed. The only difference is the state of mind of the maker of the statement.Under17(a) maker of statement may not consider it to be true.

Where one party induces the other party to contract on the faith of representations made to him, all of which is untrue, the whole contract is regarded as fraudulently acquired:

Kheng Chwee Lian v Wong Tak Thong [1983] 2 MLJ 322 pg 259 Alsagoff

2. The active concealment of a fact by one having knowledge or belief of the facts

The explanation can be seen in illustration (c ) and (d) to S.19 to show the operation of S. 17(b)

Where a party to a contract actively conceals or prevents certain material information from reaching the other  party to the contract,  this active concealment amount to fraud:

Horsfall v Thomas (1862) 1 H & C 90

The situation under S. 17(b)  + Illust. (c) & (d) must not be confused with the general rule of caveat emptor that silence does not amount to misrepresentation or fraud

Passive concealment can be referred to the explanation & illustration (a) & (d) to S.17 where passive concealment is not considered as fraud:

Keates v The Earl of Cadogan (1851) 10 CB 591

3. A  promise made without any intention of performing it

It is an act of fraud under S.17(c) when a promise is made without any intention of fulfilling it. Either the promisor realises that he will not fulfil it when he makes the promise or he makes a promise that he intends to break:

MUI Plaza Sdn Bhd v Hong Leong Bank Bhd (No 2) [1998] 7 MLJ 122

4. Any other act fitted to deceive

S. 17(d) is a catch-all clause to avoid any fraud that escapes the law's net:

Loi Hieng Chiong v Kon Tek Shin [1983] 1 MLJ 31

5. Act or omission as the law specially declares as fraud

If any law states explicitly that such actions or omissions are fraudulent, that act or omission amounts to fraud under S.17 (e)

SILENCE OR NON-DISCLOSURE

The general rule is that mere silence or non-disclosure is not constituting fraud. There are, however, certain situations where silence or non-disclosure may constitute fraud, as provided for in the S.17 explanation. 

1. A duty  of the person keeping silence  to speak 

The law places a duty on a person in a position of confidence and trust to speak and reveal all relevant information to the individual who places trust and confidence in him in every transaction between them. See illustration (b).

2. In some circumstances the silence is, in itself, equivalent to speech.

See illustration (c) to S. 17

STANDARD OF PROOF FOR FRAUD 

If it involves fraud of a strictly civil nature, due to the seriousness of the claim, the degree of probability required will differ from case to case. It should be of greater probability than in the claim of neglect on grounds of tort.

The civil burden of proof on the balance of probability should apply if it is based on a civil offence:

Ang Hiok Seng v Yim Yut Kiu [1997] 2 MLJ 45

EFFECT

The contract that is made to be fraud will be void as mentioned in S.19 of the Contracts Act 1950. However, there are certain exceptions provided in S.19 of the Contracts Act 1950.

Exception

1. Where the misrepresentation  or fraud  did not affect the misled party’s consent  to enter into the contract

2. Where the misrepresentation or fraud by silence could have been discovered by the misled party had he exercised ordinary diligence before entering into the contract.

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MISTAKE

 INTRO

For a mistake to affect the validity of a contract it must be an "operative mistake", ie, a mistake which operates to make the contract void. Mere mistake, in itself, it is said, ought not to affect the consent of one of the parties to the contract, or to their obligations under the contract.

MISTAKE UNDER ENGLISH LAW

English contract law recognises three types of mistake;

1. Common Mistake

2. Mutual Mistake

3. Unilateral Mistake

This will usually render the contract invalid ab initio (from the beginning) when the courts make a finding of mistake, so it is as though the agreement never existed. It constitutes a major difference from voidable contracts. Where a contract is void, the contract remains and is binding until the innocent party takes steps to set aside the contract. Thus, a person purchasing goods under a contract will acquire good title to those goods if there is a voidable contract. No title moves if a contract is void. This difference is most important if the items have been sold to a third party.

1. Common Mistake

Common mistakes exist where both parties to the contract make the same mistake. Three categories have emerged as giving rise to a cause of action:

Res extincta - the subject matter of the contract no longer exists

 

Res sua - where the goods already belong to the purchaser

 

Mistake as to quality - only available in very narrow limits

Res extincta 

 

Res extincta will apply where both parties enter a contract with the belief that the subject matter exists when in fact it does not exist. The contract will be held to be void for mistake:

 

Scott v Coulson [1903] 2 Ch 439              

 

Couturier v Hastie [1856] 5 HL Cas 673     

 

 

The statutory provision is also available in contracts for the sale of goods where the goods have perished:

 

S.6 Sale of Goods Act 1979

Res sua

 

This applies where party contracts to buy something which in fact belongs to him. This will generally render the contract void. Although if the action is based on equity this will render the contract voidable:

 

Cooper v Phibbs (1867) LR 2 HL 149

Mistake as to the quality

 

A mistake as to quality is only capable of rendering a contract void where the mistake is as to the existence of some quality which renders the subject matter of the contract essentially different to that what it was believed to be:

 

Bell v Lever Bros [1932] AC 161         

 

Leaf v Int Galleries [1950] 2 KB 86    

 

Great Peace Shipping v Tsavliris (International) Ltd [2003] QB 679

2. Mutual mistake

A mutual mistake is one where the parties are at cross purposes. The courts apply an objective test to see if the contract can be saved. Ie would a reasonable person looking at the correspondence between the parties have understood the contract to have a single meaning. If yes the contract is valid on that meaning. If a reasonable person could not determine the meaning then the contract will be void for mistake:

Raffles v Wichelhaus (1864) 2 H & C 906

3. Unilateral mistake

 

In unilateral mistakes, only one of the parties is mistaken. There are two categories within unilateral mistakes: mistakes relating to the terms of the contract and mistakes as to identity. The contract is void.

POSITION UNDER CONTRACTS ACT 1950

Section 21 covers both common and mutual mistakes. Just a few cases reported where the Malaysian courts have considered the scope of Section 21. The basis for making agreements void under Section 21 would tend to be that there was either no free consent between the parties in such cases or that the consent was nullified (Copyright Act Section 14(e)).

It must be one 'essential to the agreement' in order for a mistake to be operative under Section 21. The conditions in which a fact can be deemed 'essential to an agreement' are not made clear by the Act:

Sheikh Brothers Ltd v Ochsner [1957] AC 136 (Eastern Africa)

A mistake of fact made by both parties may occur in the following circumstances:

i) Mistake as to the existence of the subject matter 

- Illustration  (a),(b) and (c) of Section 21

When unknown to both parties the subject matter of the agreement had ceased to exist or has never been in existence at all at the time of the agreement, the agreement is void;

Galloway v Galloway (1914) 30 TLR 531

ii) Mistake as to the identity of the subject matter 

Usually arises where one party intends to deal with one thing and the other with a different one;

Falck v Williams [1900] AC 176

iii) Mistake as to the quality of the subject matter 

- The contract is still valid.

- Refer Explanation to S.21 

There is a valid contract despite the mistake, as the subject matter (oats) only differs in some quality, not substance;

Smith v Hughes (1871) LR 6 QB 597

iv) Mistake as to the possibility of performing the agreement 

Consent may be nullified if both parties believe that the contract is capable of being performed when this is not the case. The impossibility may arise either physically or legally or commercially;

Sheikh Bros v Ochsner(1957) AC 136

Unilateral contract in Contracts Act 1950

A mistake made by one party is not an operative mistake under the Contracts Act. The contract is valid. Refer Section 23 of the Contracts Act. This is because to protect bona fide purchaser for value without notice. An operative mistake will render the agreement void and the effect is that the subsequent bona fide purchaser will have no title to the goods. 

Inter absentes

 

Where the parties are not physically present when the contract is made, eg where the contract is made through dealings through the post, telephone or over the internet, the courts will only make a finding of mistake if the claimant can demonstrate an identifiable person or business with whom they intended to deal with. A mistake as to their attributes will not suffice:

 

Cundy v Lindsay (1878) 3 App Cas 459          

 

King's Norton Metal Co Ltd v Edridge; Merrett & Co Ltd (1897) 14 TLR 98    

 

Shogun Finance v Hudson [2003] 3 WLR 1371 

Inter praesentes

 

Where the parties contract in a face to face transaction the law raises a presumption that the parties intend to deal with the person in front of them:

 

Phillips v Brooks [1919] 2 KB 243                   

 

Ingram v Little [1961] 1 QB 31                      

Lewis v Avery [1971] 3 WLR 603 

Mistake as to the law

Referring to Section 22 of the Contracts Act 1950 and the illustration to the section, the contracts are considered as valid if the mistake is happened as to the law in Malaysia. It is different from the mistake happens as to foreign law. Mistake as to foreign law will be regarded as void. Mistake with regards to foreign law will be treated as a matter of fact, ie whether it is essential to the agreement, if yes, Section 21 of the Contracts Act applies.

EFFECT

The contract is void under Section 21. For a unilateral contract, the contract is invalid under Section 23. Except one that relates to the terms of the contract or one that relates to the identity of the person In such a case, there is no consensus ad idem between the parties.

REMEDY

Under Section 66 of the Contracts Act 1950, the party is entitled to get restitution. Also, under Section 30 of the Specific Relief Act, the claimant can get the rectification of a written document.

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MISREPRESENTATION

 INTRO

A misrepresentation is a false statement of fact or rule that prompts the representative to enter into a contract. If a statement made during the course of negotiations is classified as a description, rather than a word, where the statement turns out to be untrue, an action for misrepresentation might be open. Three forms of misrepresentation are available: innocent misrepresentation, negligent misrepresentation, and fraudulent misrepresentation.

The result of a finding of misrepresentation is that the agreement is voidable, i.e. the agreement exists, but the representative may set aside it. The available remedy depends on the form of misrepresentation but typically consists of rescission or harm. In certain cases, the right to rescind the contract can be lost. 

DEFINITION

The misrepresentation can be defined in section 18 of the Contracts Act 1950. A misrepresentation is a false statement of fact made by one party to another that induces the other party to enter into the contract, even if it is not a term of the contract.

In order to amount to an actionable misrepresentation certain criteria must be satisfied:

False statement

 As compared to viewing or estimating future events, a false statement of fact or law must be made:

Bisset v Wilkinson  [1927] AC 177            

Esso Petroleum v Mardon [1976] QB 801   

A statement of opinion could constitute an actionable misrepresentation in which the representative was in a position to understand the facts:

Smith v Land & House Property Corp (1884) 28 Ch D 7

A statement of future intent should not be misrepresented unless the representative has no intention of carrying out the specified intention:

Edgington v Fitzmaurice (1885) 29 Ch D 459 

A false statement of law will now amount to an actionable misrepresentation:

Pankhania v Hackney [2002] EWHC 2441

Silence will not generally amount to a misrepresentation:

Smith v Hughes (1871) LR 6 QB 597           

Walters v Morgan (1861) 3 DF & J 718   

EXCEPTION

i) Half Truth

A statement that does not present the whole truth may be regarded as a misrepresentation.

ii) Statement Which Becomes False

Where a statement was true when made out but due to a change of circumstances has become false by the time it is acted upon, there is a duty to disclose the truth:

With v O'Flanagan [1936] Ch 575

iii) Contracts Uberrimae Fidei

Such as an insurance contract or when the agent is in a fiduciary role, one of the highest good faith. There is an obligation to reveal all relevant information in such contracts and a failure to do so can give rise to an action for misrepresentation.

iv) Fiduciary Relationship

Where there is a fiduciary relationship between the parties to a contract, a duty of disclosure will arise.

POSITION OF SILENCE UNDER CONTRACTS ACT 1950

-The same general rule as applied under English Law is applicable in Malaysia. According to Section 18(b) of Contracts Act, any breach of duty which, without an intent to deceive, gives an advantage to the person committing it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone claiming under him:

Lau Hee Teah v Hargill Engineering Sdn Bhd 

INDUCEMENT

Once it has been established that a false statement has been made it is then necessary for the representee to demonstrate that the false statement induced them to enter the contract.

Requirements:

a) Materiality

In the sense that it would have induced a reasonable person to enter into the contract.

b) Reliance

 There can be no inducement or reliance if the representee was unaware of the false statement:

Horsfall v Thomas [1862] 1 H&C 90

If the representee or their agent checks out the validity of the statement they have not relied on the statement. This was also stated in illustration (b) to Section 19 of the Contracts Act  :

Attwood v Small [1838] UKHL J60 

Wei Tah Construction (B) Co Sdn Bhd v Lau Wun Ing [1981] 2 MLJ 157

If the representee is given the opportunity to check out the statement but does not, in fact, check it out, they are still able to demonstrate reliance:

Redgrave v Hurd (1881) 20 Ch D 1

INDUCEMENT UNDER CONTRACTS ACT 1950

Explanation to S.19 is basically in line with English Law. A contract in such a situation is not voidable. Hence, there is a duty of the misled party to exercise ordinary diligence. This means that Section 18 has to be read with Explanation & Exception to Section 19:

Tan Chye Chew v Eastern Mining Metals Co Ltd 

The misled party should act according to the standard of the reasonable man in his position:

Tay Tho Bok v Segar Oil Palm Estate 

The exception to Section 19 is also inapplicable for false & fraudulent misrepresentation ie positive case of an active fraudulent misrepresentation:

Weber v Brown [1908] 1 FMSLR 12

The maker addressed the statement to the party misled:

Peek v Gurney (1873) L.R. 6 H. L. 377

TYPES OF MISREPRESENTATION

Once it has been established that a false statement was made and that it induced the contract, it is necessary to determine the type of misrep in order to determine the available remedy.

1. Fraudulent misrep

 

Lord Herschell defined fraudulent misrepresentation in Derry v Peek as a statement which is made either:

 

i) knowing it to be false,

ii) without belief in its truth, or

iii) recklessly, careless as to whether it be true or false

 

The burden of proof lies on the claimant:

 

Derry v Peek (1889) 5 T.L.R. 625

2. Negligent Misrepresentation under the Misrepresentation Act 1967

 

 Under s.2(1) Misrepresentation Act 1967, negligent misrepresentation is a statement made without reasonable grounds for belief in its truth. The burden of proof being on the representor to demonstrate they had reasonable grounds for believing the statement to be true.

 

This burden of proof is difficult to discharge:

 

Howard Marine v Ogden [1978] QB 574

3. Wholly innocent Misrepresentation

 

An innocent Misrepresentation exists where the representor can demonstrate reasonable grounds for belief in the truth of the statement:

Sim Thong Realty Sdn Bhd v Teh Kim Dar (2003) 

EFFECT OF MISREPRESENTATION

According to the Section 19(1) of the Contracts Act, the effect of an actionable misrepresentation is to make the contract voidable, giving the innocent party the right to rescind the contract and/or claim damages.

REMEDIES

1. Recission

This is putting the parties back in their pre-contractual position. Each party gives back the benefit which they have received under the contract. However, it is not always possible to rescind the contract and in some circumstances, the right to rescind may be lost.

Bars to Recission

The right to rescind the contract may be lost where a third party acquires rights, where the representee affirms the contract, through lapse of time or where restitution in integrum impossible.

2. Indemnity

An order of rescission may be accompanied by the court ordering an indemnity. This is a money payment by the misrepresentor in respect of expenses necessarily created in complying with the terms of the contract and is different from damages.

3. Damages

The injured party may claim damages for fraudulent misrepresentation in the tort of deceit. Damages are available in addition to rescission:

Abdul Razak bin Datuk Abu Samah v Shah Alam Properties Sdn Bhd [1999] 2 MLJ 500

Remedies for negligent misrepresentation

 

The remedy of the representee lies in damages in the tort of negligence under the assumption of responsibility and reliance doctrine laid down in:

 

Hedley Byrne & Co Ltd v Heller & Partners [1964] AC 465

 

 

 

Remedies for innocent misrepresentation

 

A representee who has been induced by an innocent representation may sue for rescission and consequent restitution, but he may not recover damages.

 

 

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UNDUE INFLUENCE

 INTRO

There is undue control where a contract has been entered into as a result of pressure falling short of the sum of coercion, the party subject to the pressure may have a cause for action in equity to have the contract set aside for reasons of undue influence. The undue influence works where a relationship exists between the parties that have been abused to achieve an unfair advantage by one party. Undue influence and alleged undue influence are split into real undue influence. If, as a result of the unfair influence, a contract is found to be entered into, this would make the contract void. This would cause the individual affected to have the agreement set aside against a party who has subjected the other to such control. In addition, the affected party may be entitled to have a contract set aside in such cases against a party who was not the person inflicting the power or pressure.

CLASSES OF UNDUE INFLUENCE

In the case of Bank of Credit & Commerce International v Aboody [1990] 1 QB 9233, three groups of undue influence were identified.

 Class 1 - Actual undue influence

Class 2a - Presumed undue influence

Class 2b - Presumed undue influence

CLASS 1- ACTUAL UNDUE INFLUENCE

As the name suggests, actual undue influence includes evidence that the contract was entered into as a consequence of the actual influence exerted. The claimant must plead and show the actions they say amounted to undue influence.

This can include acts such as threats to terminate a relationship, continuing to badger the party where before they finally give in, they have denied consent. The exact concept of undue influence does not exist. In RBS v Etridge, Lord Nicholls described the notion as:

"Undue influence is one of the grounds of relief developed by the courts of equity as a court of conscience. The objective is to ensure that the influence of one person over another is not abused. In everyday life people constantly seek to influence the decisions of others. They seek to persuade those with whom they are dealing to enter into transactions, whether great or small. The law has set limits to the means properly employable for this purpose. The law will investigate the manner in which the intention to enter into the transaction was secured: If the intention was produced by an unacceptable means, the law will not permit the transaction to stand. The means used is regarded as an exercise of improper or 'undue' influence, and hence unacceptable, whenever the consent thus procured ought not fairly to be treated as the expression of a person's free will. It is impossible to be more precise or definitive. The circumstances in which one person acquires influence over another, and the manner in which influence may be exercised, vary too widely to permit of any more specific criterion."

MANIFEST DISADVANTAGE?

It was originally a condition that the claimant seeking compensation by actual undue influence could also show that they had experienced a clear disadvantage.

In CIBC Mortgages v Pitt [1994] 1 AC 200, however, it was held that evident disadvantages were not necessary in cases of actual undue influence.

CLASS 2 A - PRESUMED UNDUE INFLUENCE

Establishing the presumption

There is no provision under Class 2a to show that undue influence was actually exercised. It has to be generated instead:

1. There was a relationship that gave rise to a presumption of undue influence as a matter of law.

2. The transaction is one that can not simply be clarified by the parties' relationship.

1. Relationships capable of giving rise to an automatic presumption of undue influence are those of a fiduciary nature and include:

Parent: child 

Solicitor: Client

Religious advisor: disciple

Doctor: Patient

Trustee: beneficiary

2. The transaction is one which can not readily be explained by the relationship of the parties.

 Where the deal is clearly not for the good of the weaker party but gives the party in a fiduciary position a great advantage, the law would increase the presumption that the transaction was entered into as a result of some kind of relationship violence. In terms of manifest disadvantage, the requirement used to be expressed. This led to confusion, however, particularly where a wife had an interest in the business of the husband, see:

National Westminster Bank v Morgan [1985] 1 AC 686                  

Bank of Credit & Commerce  International v Aboody [1990] 1 QB 923 (in relation to actual undue influence)          

CIBC Mortgages v Pitt [1994] 1 AC 200  (also actual undue influence)     

In view of the difficulties with regard to the manifest disadvantage, in Royal Bank of Scotland v Etridge [2001] 3 WLR 1021, the House of Lords held that the phrase could no longer be used and replaced by the requirement that the transaction is one which could not be easily clarified by the parties' relationship. This is intended to exclude insignificant gifts, but to put significant advantages within its realm, even where a gain is also earned by the vulnerable group. The transaction as a whole should be considered by the court.

CLASS 2B- PRESUMED UNDUE INFLUENCE

There is no automatic presumption arising under Class 2b as a matter of law. It must be identified here that there is a relationship of such a nature that one party has actually put its confidence and trust in the other to safeguard its interest. Including husband and wife, cohabitants, employer and employee, any partnership can be equivalent to these examples. The essential difference between Class 2 a and 2b is that it is appropriate to prove the relationship of trust and trust. It is no longer the case in modern times that women normally put all their faith in their husbands to deal with financial matters, although this can be done in some marriages.

Exceptionally, it has been held that a relationship of trust and confidence existed between a bank manager and his client:

 Lloyds Bank v Bundy [1975] QB 326            

 

However, it has been held that the normal relationship between banker and client is not one of trust and confidence:

 National Westminster Bank v Morgan [1985] 1 AC 686                                                  

 

A relationship of trust and confidence has also been seen in employer and employee relationship:

 Credit Lyonnaise Bank Nederland v Burch [1997] 1 All ER 144                              

 

 There is no need to establish that the party subject to the influence would not have entered into the contract but for the influence. There is also no need to establish a causal link in relation to misrepresentation beyond reliance:

 UCB Corporate Services Ltd. v Williams [2002] EWCA Civ 555    

REBUTTING THE PRESUMPTION IN CLASS 2A AND 2B

Through showing that the vulnerable party exercised free will in joining the transaction, the party accused of exercising undue influence can rebut the presumption. This is most generally established by showing that before agreeing to the agreement, they were fully aware of the risks involved and had obtained legal advice.

CONSTRUCTIVE NOTICE

The undue influence generally happened between a husband and wife. If a wife has undue influence, she may be entitled to have the transaction set aside against her husband, but the transaction is normally with a bank that has not been a party to the influence. It became apparent after the decision in Natwest v Morgan that banks were not operating in a fiduciary capacity in order to give rise to a presumption of undue influence. Another element had to occur in order to get the contract set aside against a bank. The definition of constructive notice was introduced by Barclays Bank v O'Brien [1993] QB 109.

Constructive notice arises where the bank is

 1. Put on enquiry and

2. Fails to take reasonable steps to ensure that the transaction was entered freely without the exercise of undue influence.

Consideration of factors which put the bank on enquiry:

 Bank Of Scotland v Bennett & Anor [1998] EWCA Civ 1965     

 Conoco Ltd v Khan & Anor [1996] EWCA Civ 968   

The current factors to be considered were set out in:

 Royal Bank of Scotland v Etridge [2001] 3 WLR 1021    

 

Agency

Where a bank instructs solicitors to advise the wife, the solicitor acts solely for the wife and not as an agent for the bank:

 Barclays Bank Plc v Thompson [1996] EWCA    

 

This applies even where the bank paid for the advice:

 National Westminster Bank Plc v Beaton & Anor [1997] EWCA Civ 1391     

 

For consideration of the position of unjust enrichment of the wife see:

 Dunbar Bank Plc v Nadeem & Anor [1998] EWCA Civ 1027

EFFECT

Section 20 of the Contracts Act 1950:

When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just.

So the contract is voidable.

REMEDIES 

Section 20 of the Contracts Act 1950:

When consent to an agreement is caused by undue influence, the agreement is a contract voidable at the option of the party whose consent was so caused. Any such contract may be set aside either absolutely or, if the party who was entitled to avoid it has received any benefit thereunder, upon such terms and conditions as to the court may seem just.

The contract can be set aside if the element of undue influence is found.

How to rescind a contract?

1. give notice to the other party – S.67 Contracts Act

2. apply to court – S.34(1)(a) Specific Relief Act

Exception to rescission

1. to a bona fide purchaser for value without notice:

Tengku Abdullah ibni Sultan Abu Bakar v Mohd Latiff

2. affirmation ie the complainant affirmed the transaction:

Allcard v Skinner

3. laches:

Saad Marwi v Chan Hwa Hua

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Coercion

INTRO

The law requires that parties enter into contracts with their full and free consent. If some form of pressure improperly applied to the victim caused his consent to the contract, the contract is void.

Section 10 of the Contracts Act 1950- All agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object, and are not hereby expressly declared to be void.

Section 14(a) of the Contracts Act 1950- Consent is said to be free when it is not caused by coercion

DEFINITION

Section 15 of the Contracts Act 1950-  "Coercion" is the committing, or threatening to commit any act forbidden by the Penal Code, or the unlawful detaining or threatening to detain, any property, to the prejudice of any person whatever, with the intention of causing any person to enter into an agreement.

The above definition provides for two ways of committing coercion:

1) Committing or  threatening to commit an act forbidden by the Penal Code

2) Unlawfully detaining or threatening to detain property or the threat thereof to the prejudice of any person

ELEMENTS

a) Coercion must be the committing of an act prohibited by the penal code.

b) The coercion must be the unlawful detention of any property or the threat to detain it.

c) The act of coercion must be carried out in order to allow an agreement to be entered into by any party.

Kesarmal s/o Letchman Das v Valiappa Chettiar [1954] MLJ 119

Facts: A transfer of property was made under ‘the orders of the Sultan, issued in the presence of 2 Japanese officers during the Japanese occupation of Malaysia.

Held: The transfer of the land contract was not valid as the consent given was under a threat and not free.

Chikkam Ammiraju vs. Chikkam Seshama (1918) 32 MLJ 494

Facts: A man threatened to commit suicide in the course of persuading his son and wife to released a deed of a particular property in favor of his brother. 

Held: A threat to commit suicide could be deliberated to be an act prohibited by the Indian Penal Code and considered to be coercion under the Indian Contract Act. The release of deeds can be set aside as it is voidable.

Teck Guan Trading Sdn Bhd v Hydrotek Engineering (S) Sdn Bhd

Facts: The Plaintiff is the vendor of round bars whilst the defendant is the Purchasers. They entered an agreement for the sale of round bars at a purchase price of RM1,180. Before the agreement was drawn up and following discussions between both parties, the defendant had confirmed the order for the goods by letter, with the price stated at RM1,244. By several exchanges of the letter, the plaintiff maintained that there was an error in the price appearing in the agreement, while the defendant insisted that the plaintiffs were bound by the price of RM1,180. The defendant paid a 15% deposit pursuant to the agreement but the plaintiff refused to supply the bar unless the 1st defendant agreed to the price of RM1244.

Held: There are two ways of committing coercion as defined by s. 15 of the Contracts Act 1950, one of which is the threatening of an act forbidden by the Penal Code  (FIRST LIMB), while the other is the unlawful detention or the threatening of such to the prejudice of any person (SECOND LIMB, with the intention of causing any person to enter into an agreement. 

First Limb- The defendants failed to show the court any of the act s of the plaintiff is a threat to commit any act forbidden by the Penal code.  The reason given was commercial pressure/economic blackmail does not amount to coercion because the agreement to the price was an exercise of free will.

Second Limb- The argument by the defendant that the plaintiff’s refusal to supply the bars at the lower price amounted to unlawful detention of property in order to get the defendant to agree to the higher price.

The plaintiff’s refusal did not amount to unlawful detention of property. Because plaintiff was exercising his legal right of its own property.

RELATIONSHIP BETWEEN SECTION 15 AND SECTION 73

Section 73 of the Contracts Act 1950- A person to whom money has been paid, or anything delivered, by mistake or under coercion, must repay or return it.

*Meaning a person to whom money has been paid or delivered by mistake or under coercion must repay or return it.

Illustration (b) to S. 73- A railway company refuses to deliver up certain goods to the consignee, except upon the payment of an illegal charge for carriage. The consignee pays the sum charged in order to obtain the goods. He is entitled to recover so much of the charge as was illegally excessive.

Illustration (b) has the element of coercion: relating to unlawful detaining of property to the prejudice of any person.

Kanhaya Lal v. National Bank of India (1913) 40 Cal. 598 

Lord Moulton: on the definition of 'coercion' under s.72 of the Indian Contracts' Act 1899 (which is pari materia with s. 73 of the CA 1950):

"The word 'coercion' must therefore be there used in its general and ordinary sense as an English word, and its meaning is not controlled by the definition in section 15".

Chin Nam Bee Development Sdn. Bhd. V. Tai Kim Choo [1988] 2 M.L.J. 117

The Plaintiffs purchased certain houses to be constructed by the defendant and alleged that they have to pay an additional sum of RM4,000  each to the defendant under the threat by the defendant to cancel bookings for their houses. The defence was that the money was paid voluntarily and not under coercion. The plaintiffs claimed a refund under Section 73 and succeeded.

Eusoff Chin J.: It would be difficult to give effect to s. 73 illustration (b) if the word 'coercion' is to be given the meaning as defined in s. 15 of the Act. They appear to be in conflict with each other. Therefore the word 'coercion' in the context of s. 73 of the Act should be given its ordinary and general meaning since there is nothing under s. 15 which says that the word 'coercion' should apply throughout the Act. The definition of 'coercion' in s. 15 should only apply for the purpose contained in s. 14, as s. 14 of the Act specifically says so.

SECTION 15 AND ECONOMIC COERCION: A DEBATE- FACTORS ON ECONOMIC COERCION  IN MALAYSIA

The English common law on 'economic duress' does not apply in Malaysia. It can be illustrated in the case of; -

Perlis Plantations Bhd v Mohammad Abdullah Ang (1988)

English common law relating to economic coercion does not apply in Malaysia as our Contracts Act does not provide for any form of coercion other than as defined by Section 15.

“For duress to amount to defence the defendant should be able to show that his consent to the agreement he had entered into was not free in that such consent was caused by coercion as defined by section 15 of the Act…

THE EFFECT OF COERCION AND ITS REMEDIES

Rescission

Section 19 of the Contracts Act 1950-  When consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

It means that the party has a choice:

1)  He may affirm the contract and continue with it. Both parties must fulfil their obligations under the contract.

2) He may ask the court to rescind the contract. Both parties do not have to perform their obligations under the contract.

Remedies

Section 65 of the Contracts Act-  When consent to an agreement is caused by coercion, fraud, or misrepresentation, the agreement is a contract voidable at the option of the party whose consent was so caused.

Thus, the victim must restore the benefit received from the guilty party.

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Myself

 Name given Izzat Fakhri bin Halimi and now study in Bachelor of Law at Sultan Zainal Abidin University, Terengganu. This blog was created for Law of Contract II. Here, I will update my learning progress regarding the subject. Stay tuned!

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