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