BECA (M) SDN. BHD V. TANG CHOONG KUANG &
ANOR.
SUPREME COURT, KOTA KINABALU
LEE HUN HOE CJ (BORNEO), WAN SULEIMAN SCJ, GEORGE SEAH SCJ
[FC CIVIL APPEAL NO. 280 OF 1984]
30 SEPTEMBER 1985
CONTRACT: Housing developers - Sale and purchase of flats -
Deposit or "booking fee" - Rule 10(2) of Housing (Control and Licensing of
Developers) Rules 1980 - Provisional agreement - Licence - Validity - Void -
Section 66 of Contracts Act 1950 - Sections 5, 20 of Housing (Control and
Licensing of Developers) Enactment 1978.
JUDGMENT
Lee Hun Hoe CJ (Borneo):
This appeal is against the dismissal by the learned Judge of an appeal
from the decision of the Sessions Court, Kota Kinabalu.
Breifly, the appellants are a company incorporated in Malaysia with its
registered office at Tingkat 5, Wisma Central, Jalan Ampang, Kuala Lumpur.
They are housing developers. One of their ventures was the development of an
area of land in Sandakan at Mile 2, Leila Road, Tanah Merah into a
commercial and residential complex known as Leila Komplex. The respondents
agreed to buy 3 units of flats consting RM703,685 from the appellants and on
1 May 1981 paid a deposit of RM20,000. It was common ground that the deposit
was made before the issuance of the Developer's Licence and the Sale
Advertisement Permit on 26 September 1981. The respondents were asked to
sign the Sale and Purchase Agreement on 23 May 1981. They did not sign it.
Instead, through their solicitors, they claimed for the refund of the
deposit on the ground that the deposit was collected illegally under r.
10(2) of the Housing (Control and Licensing of Developers) Rules 1980 (herinaftaer
referred to as "the Rules"). These Rules were made under the Housing
(Control and Licensing of Developers) Enactment 1978 (hereinafter referred
to as "the Enactment") on 23 January 1980 and which were gazetted on
15 May 1980 to come in force on 1 July 1980.
The respondents claimed that the payment of the deposit was intended to
be a "booking fee". On the other hand the appellants maintained that the
deposit was in actual fact part payment towards the purchase price of the
three units of flats. They said that the payment was not illegal by reason
of or prohibited under the said r. 10(2). They counterclaimed for the
deposit to be forfeited. Rule 10 reads as follows:
10 (1) A purchaser of housing accommodation including the land shall
not be required to pay a booking fee of a sum exceeding 2.5 per centum of
the purchase price of such housing accommodation including the land.
(2) Notwithstanding para. (1) of this Rule, no purchaser of a housing
accommodation including the land shall be required to pay a booking fee of
a sum exceeding one thousand ringgit.
(3) For purposes of this Rule the term `booking fee' shall include any
payment by whatever name called which payment gives the purchaser an
option or right to purchase the housing accommodation including the land.
The learned President of the Sessions Court held that the deposit was
meant to be a booking fee and not part payment. At the time of collecting
the deposit the appellants had not as yet obtained the licence and permit.
Without the proper licence they were not authorised to collect deposit. He,
therefore, ordered the refund of the deposit and dismissed the counterclaim.
In dismissing the appeal the learned Judge stated at p. 8 of the Appeal
Record:
... Rule 10(1) and 10(2) limits the amount of booking fee which may be
collected by a housing developer from a purchaser. Rule 10(3) is clearly
enacted to prevent any attempt by a housing developer to contract out of
its provisions ........
Having set out r. 10(3) the learned Judge went on:
The payment of the deposit in my judgment was caught by the provisions
of the above rule. It was not disputed that such payment had given the
respondents in this case the option or right to purchase the 3 units of
flats. To hold that the deposit was part payment and not booking fee would
render its provisions a dead letter and to reinstate the mischief which
the rule was designed to remedy.
Before us the same arguments in the lower Courts were used. We agree with
the learned Judge that the main issue is really what is the effect of the
provisional agreement entered into by the parties before the issuance of the
licence to the developers. It is the submission of the appellants that a
contract which does not comply with the said Enactment and Rules made
thereunder is not invalid and should be enforceable according to its terms.
The Singapore case of Mary-Ann Arrichiello v. Tanglin Studio Pte. Ltd.
[1981] 2 MLJ 60 and Daiman Development Sdn. Bhd. v. Mathew Lui Chin Teck
& Anor. [1978] 1 LNS 42 were cited in support. The appellants said that
relevant provisions of the Singapore Housing Developers (Control and
Licensing) Act (Cap. 250) and the Housing Developers Rules 1976 are
substantially similar to the Sabah Enactment and Rules. The only difference
is that in the Singapore case the developers had a licence whereas in the
instant case the developers had no licence. It was submitted that there was
no difference whether the developers had the licence or not before the
agreement was entered into.
At p. 63 of the Singapore case, Chua J stated:
The buying and selling of houses or flats is not a prohibited activity
under the law. Anyone (except foreigners in certain cases) can buy and
sell houses and flats in Singapore. The Act seeks to control housing
development not the sale and purchase of properties ... Section 21 of the
Act is merely seeking to control, amongst other things, the mode of
performance of the contract of sale by housing developers and it seeks to
do this through a licence guaranteed to the developer. It does not in any
way prohibit the formation of an agreement. Certain procedures are
provided for certain activities, for example, in advertising, in raising a
loan on the property and in agreements for sale. The so-called legal
impediment exists on the face of the licence only. Each licence could have
its own limitations. Whether or not a developer is under an impediment is
personal only to the developer.
The Act is merely prescribing a method of performance by the housing
developer for the protection of a class of persons - to protect purchasers
as far as possible from the risk of exploitation. The Act does not in any
way prohibit the making of a contract for sale and purchase of flats. The
licence that the Act requires is a lience to develop.
Chua J then referred to Daiman's case (supra), particularly
when Suffian, then LP said that the pro forma was a firm contract. He
therefore concluded that "the contract between the plaintiff and the
defendants is not illegal and is enforceable."
In Daiman's case (supra) Sir Garfield Barwick, after
referring to rr. 10 and 12 which are the same as the Sabah Rules, stated at
p. 59 onwards:
Rule 17 provides that contravention by a licensed housing developer of
any of the rules shall be an offence and render the developer liable on
conviction to a fine mr, for a second or subsequent offence, a fine or
imprisonment or both. Nothing in the rules expressly purports to
invalidate a contract which does not comply with the provisions of the
rules.
The rules impose no penalties on a purchaser who enters into a contract
which does not conform to the requirements of the rules. Clearly r. 12 does
not exclude the possibility of the contract of sale containing terms and
conditions other than such as are designed to effectuate the requirements of
the rules. Rule 12 requires a contract to contain within its terms the
stipulated provisions. It is observable that r. 12 does cover much of the
relationship of vendor and purchaser in relation to the purchase and is
mandatory so far as the appellant is concerned.
By r. 10(3) the RM20,000 is clearly meant to be "booking fee". It makes
no difference by whatever name such payment is called. Such payment gives
the purchaser an option or right to purchase the three flats. If the
purchaser fails to exercise the option or right then he would forfeit such
payment. Thus it seems that the parties appear to concede that if the
provisional agreement is held to be good only RM3,000 can be forfeited by
the developers. If the agreement is to be regarded as illegal, void and
unenforceable the developers would have to refund the deposit as under s. 66
of the Contracts Act it is provided that:
When an agreement is discovered to be void ... any person who has
received any advantage under the agreement or contract is bound to restore
it, or to make compensation for it, to the person from whom he received it.
In the recent case of Kin Nam Development Sdn. Bhd. v.
Khau Daw Yau [1984] 1 CLJ 181 (Rep) the
developers proposed to develop two pieces of land in Kuantan into a housing
estate. One of the pieces belonged to the Futo Trading Co. All the lots were
booked before approval for conversion and subdivision of the land was
obtained. Later, the conversion and subdivision were approved but subject to
the condition that a certain number of lots should be reserved for
bumiputras. The developers decided not to build any of the houses. Those who
had booked the lots sued the developers for specific performance. At the
trial the developers contended that they were not liable as the booking did
not constitute a binding contract and that even if it did so, the contract
was rendered not only impossible of performance but also illegal by the
imposition of the special condition. The learned Judge rejected the
developers' contention and gave judgment for the purchasers, in the form of
damages. In dismissing the appeal the Federal Court, inter alia, held
that the fact that the developers would no doubt incur a heavy financial
burden as a result of the special condition imposed but that was not a
relevant factor in involving the doctrine of frustration. In delivering the
judgment of the Court, Salleh Abas CJ, as he then was, left open the
question whether Malaysian r. 11(1) of the Housing Developers (Control and
Licensing) Rules 1970 would render a contract illegal by virtue of s. 24 of
the Contracts Act as this was not pleaded by the appellants and also there
was no factual basis upon which a ruling could be made. Nevertheless, he
also stated at p. 259,:
In any case there is nothing illegal about the consideration or object
of the contracts because they are only contracts for the sale and purchase
of houses, and neither do they come within any of the paragraphs of s. 24
quoted above although the appellant may well be guilty of an offence under
r. 17 for contravening r. 11(1) of the Housing Developers (Control and
Licensing) Rules 1970. In other words, the Rules do not affect the
validity or otherwise of the contracts which the developer has signed with
the purchasers.
In Mary-Ann Arrrichiello's case (supra) the developers
wanted to increase the price of maisonette earlier agreed at RM129,600 to
RM135,000 by providing "better tiling". When the purchaser refused to pay
the increase and sued for specific performance the developers sought to
escape liability by pleading his own illegality to defeat the contract. In
Daiman's case (supra) the same thing happened. The developers
sought to increase the purchase price earlier agreed at RM26,000 to RM35,000
by "amendments to the building plans and increase of material and
construction." The purchasers did not agree to the increase and applied for
specific performance which was granted. In Kin Nam's case (supra)
the developers sought to avoid their liability because of the special
condition imposed by the Pahang State Government by not building the houses
which were already booked. Here the purchasers were awarded damages instead
of specific performance. The developers in the three cases cited had the
necessary licences and there was no evidence that when the agreements were
entered into any provisions of the Act or Rules had been infringed.
Nevertheless, to avoid liabilities the developers pleaded illegality on one
ground or another. In the instant case the developers not only had no
licence when the provisional agreement was entered into but also had
collected deposit far in excess of that allowable under the said Rules.
Section 5(1) of the Enactment provides that no housing developer shall
engage in, carry on or undertake housing development without (a) being in
possession of a licence issued under the Enactment, and (b) having made a
deposit with the Controller of a sum equivalent to 5% of the estimated costs
of the development. Failure to comply with s. 5(1) is an offence punishable
under s. 20 which carries a fine not exceeding RM20,000 or imprisonment for
a term not exceeding 5 years or both. It was only after the Peguam Negeri
wrote to the developers on 29 May 1981, pointing out the above that the
developers took the trouble to obtain a licence.
The respondents pointed out that the appellants had not only contravened
the provisions of the Enactment but also r. 10(2) which allows a maximum of
RM1,000 as deposit. They submitted that the provisional agreement was
therefore rendered illegal and void. Yeep Mooi v. Chu Chin Chua & Ors.
[1981] 1 MLJ 14; John B. Skilling & Ors. v. Consolidated Hotels Ltd.
[1978] 1 LNS 75 and Curragh Investment Ltd. v. Cook [1974] 3 All
ER 658 were cited in support. They submitted the learned Judge was right.
The learned Judge was aware that "there is no lack of authorities which
support the view that not in all cases where contracts were made in
contravention of some statutory provisons such contracts would be considered
to be illegal and uneforceable." However, he took the view that "for a
contract to be illegal there must be a sufficient nexus between the
statutory requirements and the contract and only where the statutory
requirements breached were sufficiently linked to the contract then the
question of its illegality would arise." He relied on a passage in the
judgment of Megarry J in Curragh's case (supra). After
referring to Chitty on Contracts,23rd Edn. (1968), pp. 428 and 429
which discussed the cases in which a transaction in breach of a statutory
prohibition was struck with illegality even though the statute did not in
term say so but only imposed some criminal sanction for the breach, Megarry
J expressed his views in the passage cited by the learned Judge. The
relevant passage reads:
I accept of course, that where a contract is made in contravention of
some statutory provision then, in addition to any criminal sanctions, the
Courts may in some cases find that the contract itself is stricken with
illegality. But for this to occur there must be a sufficient nexus between
the statutory requirement and the contract. If the statute prohibits the
making of contracts of the type in question, or provides that one of the
parties must satisfy certain requirements (e.g. by obtaining a licence or
registering some particulars) before making any contract of the type in
question, then the statutory prohibition or requirement may well be
sufficiently linked to the contract for questions to arise of the
illegality of any contract made in breach of the statutory requirement.
But it seems to me a far cry from that to the breach of statutory
requirements which are not linked sufficiently or at all to the contract
in question. There are today countless statutory requirements of one kind
or another, yet I cannot believe that an individual or a company who is in
breach of any of these requirements (for example, under the Factories
Acts) is thereby disabled from making a legal contract for the sale of
land or validly entering into covenants for title. To take an example that
was mentioned in argument, I do not think that it could seriously be
contended that every contract made by an English company, whether for the
sale of land or otherwise, is illegal if, when it is made, the company is
liable to prosecution and fine for failing to comply with some provision
of the (Companies) Act of 1948, for example, for not filing its annual
returns in due time. Such doctrine, for which I can see no justification,
would result in chaos. If in the present case I assume that the vendor is
in demonstrable breach of ss. 407 and 416, I am still quite unable to see
how this provides any ground for contending that the convenants for title
that the vendor must give will be impaired by illegality. The breach of
the law and the convenants for title seem to me to be wholly unconnected.
In Skilling's case (supra) the appellants were partners in
a firm of consultant engineers practising in the United States. They sought
to claim for their professional fee under an agreement. They were however
not registered as required under ss. 18 and 19 of the Singapore Professional
Engineers Act (Cap. 225). Held the agreement was illegal as it infringed the
provisions of ss. 18 and 19 of the said Act. In an earlier Singapore case of
Raymond Banham & Anor. v. Consolidated Hotels Ltd. [1975] 1 LNS 141
Winslow J disallowed the plaintiff engineer's claim for professional
services rendered on the ground of non-registration which infringed the
provisions of the Singapore Professional Engineers Act (Cap. 225). These two
cases are concerned with the effecct of non-registration of professional
engineers under that particular legislation.
It is useful to bear in mind the distinction between an agreement and a
contract. The word "contract" has at times been loosely used in the past. We
do not see why we should perpetuate such loose use of the words. The reason
is simply that we are used to the English common law which does not make the
distinction between the two terms as does our s. 2 of the Contracts Act. Our
s. 2 is word for word the same as the equivalent section of the Indian
Contracts and Specific Relief Acts. Pollock & Mulla on the Indian
Contracts And Specific Relief Acts, 9th Edn., p. 54 observes that:
The distinction between `agreement' and `contract' made by sub-s. (h)
is apparently original; it is convenient, and has been adopted by some
English writers. The distinction is apparent from s.2. By clause (e) every
promise and every set of promises forming the consideration for each other
is an agreement and by clause (h) an agreement enforceable by law is a
contract. By clause (g) an agreement not enforceable by law is said to be
void...
We have referred to the transaction as a provisonal agreement. What the
learned Judge decided was that the "provisional agreement", although
"contract" was used, is illegal.
In considering the effect on the agreement consequent upon the breach of
the Enactment it is necessary to examine the object of the Enactment. The
long Title says clearly that Enactment was to provide for the control and
licensing of housing developers and for matters connected therewith. The
main purpose was to protect the public from exploitation by unscrupulous
developers. We are only concerned in this case with the position of the
housing developers going into business without first obtaining a proper
licence. Section 5 of the Enactment is clear on this. The law says a housing
developer must obtain a licence and pay a certain sum as deposit to the
Controller before he can engage in, carry on or undertake the business of
housing development. Not every breach of a statutory prohibition would
render an agreement illegal or void though such breach may attract criminal
penalty. The fundamental question is whether the Enactment means to prohibit
the agreement. It is important that the Courts should be slow to imply the
statutory prohibition of agreements, and should do so only when the
implication is clear. Whether an agreement is implicity forbidden depends
upon the construction of the statute, and for this purpose no one test is
decisive. Persons who deliberately set out to break the law cannot expect to
be aided in a Court of justice. It would be a different matter when the law
is unwittingly broken. An agreement for the sale of, say, frozen food, is
not to be considered illegal or void merely because the premises in which
the frozen food is sold does not comply with the law. We recognise that each
case must be decided by reference to the relevant statute.
At the height of the housing boom the purchasers of houses were at the
mercy of unscrupulous housing developers. These developers collected
excessive deposits and delayed in building the houses. Invariably the
purchasers had to agree to increase in prices by the developers for one
reason or another. The situation became so bad that the law had to step in
to protect the house buyers. One of the means is to require a housing
developer to obtain a licence and to deposit certain sum of money with the
Collector before he can carry on business as a housing developer. Another
way is to make rules to ensure that no excessive deposit is collected from
would-be house buyers.
So far we have been dealing with cases where the existence of the licence
was not in dispute. In the instant case the developers had no licence when
they entered into the provisional agreement with the buyers. We think the
distinction is most important in deciding the effect on the provisional
agreement. The consensus of the authorities would suggest that the
contravention of any of the Rules only renders the developers liable to a
penalty but does not invalidate any agreement entered into by the developers
and the buyers. The question is whether there is any difference in effect on
the provisional agreement consequent upon the breach of the Enactment
itself. The language of any provision of the Enactment shows clearly that
the legislature intends to protect the house buyers from exploitation by the
housing developers through the issuance of a licence. In this way the
Enactment seeks to control both the housing developers and the mode of their
performance. Although the Enactment does not expressly prohibit the making
of such an agreement any developer who enters into an agreement without
first obtaining a licence would run the risk of such agreement being
declared illegal, void, or unenforceable by one party only.
Under the provisions of the Contracts Act 1950 where the consent to an
agreement has been caused by coercion, fraud, misrepresentation or undue
influence, the contract is rendered voidable at the instance of the innocent
party. On the effect of non-compliance with statutory requirements,
Chitty on Contracts (General Principles) 24th Edn., para. 223 at p. 222
states:
Non-compliance with such statutory requirements may produce various
effects. It may make the contract void, or unenforceable, or unenforceable
by one party or enforceable only on an order of the court.
And para. 1022 at p. 1023 says:
Statutes which prohibit certain contracts often impliedly recognise,
for example by punishing only one of the parties, that the parties are not
equally at fault, and therefore on their true construction only one of the
parties to the contract is prevented from suing upon it. Accordingly `when
the policy of the Act is question is to protect the general public or a
class of persons by requiring that a contract shall be accompanied by
certain formalities or conditions, the contract and its performance
without those formalities or conditions is illegal, and cannot be sued
upon by the person liable to the penalties.' But the other party to the
contract is not deprived of his civil remedies because of the criminal
default of the guilty party.
The appellants as developers should know that they could not carry on the
business of housing development unless they had obtained a licence. Yet,
they acted as if they had the necessary licence by collecting deposit from
and entering into the provisional agreement with buyers who had no reason to
doubt the bona fide of the developers. The buyers could not be
expected to know that the developers had no licence at the time. It would be
expecting too much of the buyers to say that they "had the means of
discovering the truth with ordinary diligence" to quote the words of s. 19
of the . The learned President was very careful in dealing with the matter.
After referring to the various authorities and reviewing the law he came to
the conclusion that "the provisional agreement was a binding contract
between the parties here; however as the developers did not have the
necessary licences when they signed the agreement and collected the deposit,
the binding contract is voidable and can be avoided by the innocent party."
Having regard to the scope and purpose of the Enactment and the Rules
made thereunder, they are clearly made for the benefit of a class of people,
namely, the house buyers. The duty of observing the law is firmly placed on
the housing developers for the protection of the house buyers. Hence, any
infringement of the law would render the housing developers liable to
penalty on conviction. Although the developers have to comply with a number
of statutory requirements we are unable to find anything in the Enactment or
the Rules which would invalidate an agreement or contract as a result of any
breach of the Enactment or the Rules. On the facts of this case we are of
the view that the transaction is valid until it is avoided. The buyers had
elected to avoid the agreement and claimed for the return of the deposit.
We agree with the dismissal of the appeal from the learned President by
the learned Judge but for different reasons. We also agree that the
subsequent granting of the licence and the permit by the Controller could in
no way rectify the provisional agreement without the consent or knowledge of
the buyers. However, with respect, we are unable to agree with the learned
Judge that the provisional agreement is illegal. We prefer the approach
adopted by the learned President rather than that of the learned Judge on
the matter. Since the Enactment is meant to be for the benefit of the house
buyers it would seem, in our view, proper and right to regard the
provisional agreement as binding but voidable at the instance of the house
buyers. They should be given the option of either enforcing or repudiating
the agreement depending upon the market situation of the housing development
in the country. If the provisional agreement were to be declared illegal it
might in a given situation prove profitable to the devlopers, for instance,
when there is a housing boom. In which case it would be absurd to say that
the Enactment is to protect the buyers from exploitation when it is actually
aiding the developers to enrich themselves. So the avoidance of the
agreement would cause inconvenience and injury to innocent members of the
public. To declare the agreement binding but voidable at the instance of the
buyers would provide no incentive to the developers to do any act before
obtaining a proper licence. Accordingly, we would dismiss the appeal with
costs. Deposit to the respondents on account of taxed costs. |