AVOIDING PITFALLS IN CONTRACTS

By LEE SWEE SENG Advocate & Solicitor LL.B. LL.M, MBA Notary Public, Trade Marks Agent, Industrial Designs Agent, Certified Mediator [email protected]

www.leesweeseng.com

©copyright

Main Areas of Coverage

Commercial Contracts Shareholders Agreement & Articles of Association Negotiation Oral terms & Representation Conditions & Warranties Breach & Notice to Rectify Termination Remedies Exemption / Limiting Clauses Relevant Law/ Jurisdiction Clause

COMMERCIAL CONTRACTS

The formation is founded on: 1) Offer 2) Acceptance 3) Intention (to create legal relationship) 4) Consideration Provided That the parties freely consent to contract, are competent to contract, for a lawful consideration and with lawful object.

The Ritz Hotel Casino Limited and Ors v Datuk Seri Osu Haji Sukam 2005 [HCKK] Is the enforcement of such a judgment in Malaysia contrary to public policy in Malaysia?

Justice Datuk Ian H.C. Chin opined that: There is no doubt that gambling is injurious to the pubic welfare or else there would not have been a law from time immemorial that gambling debts are irrecoverable. Not only that, two of the principles of Malaysia national philosophy called the Rukun Negara (in the Malay language), that is Belief in God and Good Social Behavior, would mean that gambling is injurious to the public welfare as being against the Rukun Negara.

Conclusion:

The application for registration of the Judgment is dismissed with no order as to costs. The Judgment Debtor is not deserving of costs as he had engaged in an activity that his religion frowns upon and which it would be against public policy to assist him by way of awarding him costs.

Intention (to create legal relationship)

The Court: - will ascertain what common intentions should be ascribed to the parties from the terms of the documents - will consider the surrounding circumstances - is not bound by the labels that parties choose to affix onto the particular document but to construe the document as a whole and to determine from its language and any other admissible evidence its true nature and purport.

ARTICLES OF ASSOCIATION & SHAREHOLDERS AGREEMENT

Articles of Association - A contract between a member and every other member.

- A new member is bound by it.

Shareholders Agreement - A contract between the members of the company to regulate their conduct and define their duties and obligations inter se in the running of the company.

- However, it only creates personal obligations.

Where there is a conflict, which one prevails?

Russel v. Northern Bank Development Corp [1992] 3 All ER 161 at 166

The House of Lord held: Of course, individual shareholders may deal with their own interests by contract in such a way as they may think fit. But such contracts, whether made by all or some only of the shareholders, would create personal obligation, or an exceptio personalis against themselves only, and would not become a regulation of the company, or be binding on the transferees of the parties to it, or upon new or non-assenting shareholders.

Beh Chun Chuan v Paloh Medical Centre Sdn Bhd [1999] 3 MLJ 262

The Court held that in order to ensure that the terms of the shareholders' agreement shall bind the shareholders inter se under the Companies Act 1965, it would be necessary to incorporate them into the articles of the company.

NEGOTIATIONS

Where there have been protracted negotiations and a considerable exchange of correspondence, the traditional analysis of offer and acceptance will not be helpful.

In the circumstances, the Court will consider: -the whole of the correspondence -the conduct of the parties -and ascertain if the parties did reach an agreement upon all material terms in such circumstances that the proper inference is that they agreed to be bound by those terms from that time onwards.

Rush & Tompkin Ltd. v Greater London Council [1989] 1 A.C. 1280

“The (without prejudice) rule applies to exclude all negotiations genuinely aimed at settlement whether oral or in writing from being given in evidence. A competent solicitor will always head any negotiating correspondence “without prejudice” to make clear beyond doubt that in event the negotiations being unsuccessful they are not to be referred to as the subsequent trial. However, the application of the rule is not dependent upon the use of the phrase “without prejudice” and if it is clear from the surrounding circumstances that the parties were seeking to compromise the action, evidence of the content of those negotiations will, as a general rule, not be admissible at the trial and cannot be used to establish an admission or partial admission.”

Malayan Banking Bhd v Foo See Moi [1981] 2 MLJ 17

The Federal Court held: “It is a settled law that letters written without prejudice are in admissible in evidence of the negotiations attempted.

But it is also settled law that where the negotiations conducted with prejudice lead to a settlement, then the letters become admissible in evidence of the terms of the agreement, unless of course the agreement has become incorporated in another document which would then be the evidence of the agreement.”

Legal Effect of Inchoate Agreement

Merely preparatory to the execution of a formal and detailed agreement; Merely spell out a general intention of the parties to enter into a contract until the execution of the formal agreement.

Mere devices formulated by parties to agree that they may enter into a legally binding contract in the future.

It is in this category of agreements that 'subject to contract' agreements, conditional contracts, option agreements, and the like, fall under.

The generally construction is: - Parties still in a state of negotiation; and - Parties do not intend to be bound unless and until a formal contract is exchanged.

Booking

pro forma

Daiman Development Sdn. Bhd. v. Mathew Lui Chin Teck And Anor. [1981] 1 MLJ 56

The Privy Council held that such a booking pro forma signed by a purchaser remained an inchoate agreement, unless again all the terms of the sale and purchase pertaining to the property are spelt out in the booking pro forma.

Memorandum of Understanding (MOU)

Is MOU a legally binding document?

Generally, not binding.

Lim Hong Liang v Tan Kim Lan [1997] 5 MLJ 157

The Court held that the MOU which was subject to a formal contract to be executed by the parties after finalizing the terms and conditions was not binding until such time that the formal contract was executed.

The MOU was an agreement to contract or an agreement to negotiate.

Lock-Out Agreement An agreement which is entered into by a potential purchaser and a vendor of real property whereby the vendor for good consideration agrees for a specified period of time, not to negotiate with anyone except the potential purchaser in relation to the sale of his property in which the potential purchaser has expressed an interest in purchasing, to prevent a vendor from "gazumping" i.e. in attempting to sell the property at a higher price subsequently.

Is a lock-out agreement a legally binding document?

It is an independent and binding agreement. As such, a breach of the lock-out agreement by the vendor will entitle the purchaser to sue for damages.

Abdul Rahim bin Syed Mohd v Ramakrishnan Kandasamy [1006] 3 MLJ 385

The Court held that 2 essential elements as follows must exist: (a) must contain a negative undertaking; and (b) must be for a fixed duration.

Confidentiality Often times, during negotiations, a party may be required to disclose confidential information. In such event, such party should insist that the other party undertakes to keep the information confidential and not to use the information for purposes other than to finalize the negotiation.

ORAL TERMS & REPRESENTATIONS

General Rule - Contracts can be made quite informally i.e.

no writing or other form is necessary. Hence, oral terms may binding.

However, Oral Contract – Different versions in Court Written Contract – Different interpretations in Court Hence, Reduced in writing as soon as possible as the faintest ink is better that the most retentive memory!

Variations No oral collateral agreement may arise if the written contract is expressed to constitute the entire contract between the parties. Accordingly, only variation in writing is binding.

Exclusion of Oral by Documentary Evidence

(Section 91 of the Evidence Act 1950) When the terms of a contract or of a grant or any other disposition of property have been reduced by or by consent of the parties to the form of a document, and in all cases in which any matter is required by law to be reduced to the form of a document, no evidence shall be given in proof of the terms of the contract, grant or other disposition of property or of the matter except the document itself, or secondary evidence of its contents in cases in which secondary evidence is admissible under the provisions herein before contained.

Exclusion of Evidence of Oral Agreement

(Section 92 of the Evidence Act 1950) When the terms of any such contract, grant or other disposition of property, or any matter required by law to be reduced to the form of a document, have been proved according to Section 91, no evidence of any oral agreement or statement shall be admitted as between the parties to any such instrument or their representatives in interest for the purpose of contradicting, varying, adding to, or subtracting from its terms.

CONDITIONS & WARRANTIES

Once it has been established that a certain stipulation is indeed a term of a contract, the question arises as to its comparative importance and effect.

Breach of condition – Entitles the innocent party, if he chooses, to treat himself as discharged from further performance under the contract, and in any event to claim for damages for loss sustained by the breach.

Breach of warranty – Does not entitle the innocent party to treat himself as discharged, but to claim damages only.

In the absence of express provisions, the relevant factors to be taken into account to determine whether any term can be treated as a condition are as follows: (i) the form and wording of the term to determine the nature and obligation created by the term in question; (ii) the extent to which the entry into the contract was motivated by an understanding on the innocent party that the term will be strictly followed;

(iii) the likely effects of the breach of the term; (iv) the extent to which the innocent party wil be adequately compensated by an award of damages for the breach of the term; (v) the nature and subject matter of the contract.

BREACH & NOTICE TO RECTIFY

Any breach of contract gives rise to a cause of action; not every breach gives a discharge from liability. In certain cases, it is a statutory requirement for a notice to be given to the party in breach to accord the party the opportunity to rectify the breach.

Where there is a breach in any charge, Section 254 of the National Land Code requires the chargee to serve a notice in Form 16D on the chargor: specifying the breach in question; requiring it to be remedied within a month; and warning the chargor that if the notice is not complied with, the chargee will take proceedings to obtain an order for sale.

TERMINATION

Automatic Termination Certain contracts provide that the contract is to terminate on the occurrence of a specified event.

Termination by way of Notice In employment and other contracts, it is common to have provisions allowing either party to terminate by way of notice.

REMEDIES

Damages: General damages – Damage the law presumes to result from infringement of a legal right/ duty. Must be proved although the claimant cannot quantify exactly any particular items in it.

Special damages – Precise amount of pecuniary loss which the claimant can prove.

Liquidated damages – Where the damages have been agreed and fixed by the parties.

Does Section 75 of the Contracts Act 1950 mean that the plaintiff does not have to prove any damages suffered?

Selva Kumar a/l Murugaih v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817

The Court held that a plaintiff who is claiming actual damages in an action for breach of contract must still prove the actual damages or the reasonable compensation.

Specific Performance Conditions: (a) the contract must be within the category of contracts of which specific performance will be granted; (b) the contract is valid in form, has been made between competent parties and is unobjectionable in its nature and circumstances; (c) the plaintiff must have performed or had been at all times ready and willing to perform his part of the contract.

The categories of contracts which can be specifically enforced are specified in Section 11 Specific Relief Act 1950 as follows:-

(1) Except as otherwise provided in this Chapter, the specific performance of any contract may, in the discretion of the court, be enforced (a) when the act agreed to be done is in the performance, wholly or partly, of a trust; (b) when there exists no standard for ascertaining the actual damage caused by the non-performance of the act agreed to be done; (c) when the act agreed to be done is such that pecuniary compensation for its non-performance would not afford adequate relief; or

( d) when it is probable that pecuniary compensation cannot be got for the non performance of the act agreed to be done.

(2) Unless and until the contrary is proved, the court shall presume that the breach of a contract to transfer immovable property cannot be adequately relieved by compensation in money, and that the breach of a contract to transfer movable property can be thus relieved

.

Injunction An injunction is an order of a court requiring a party either: to do a specific act or acts (a mandatory or positive injunction); or to refrain from doing a specific act ( a prohibitory or negative injunction).

or acts

Interlocutory / interim An order until the hearing of the action or further order.

Perpetual A judgment determining and concluding the right in litigation.

Keet Gerald Francis Noel John v Mohd Noor bin Abdullah [1995] 1 MLJ 193 The Court of Appeal stated that a judge hearing an application for an interlocutory injunction should consider: (i) whether there is a bona fide serious issue to be tried; (ii) having found that there is, where the justice of the case lies; (iii) in view that the remedy is discretionary, take into account all disreationary considerations.

Types:-

EXEMPTION / LIMITING CLAUSES

(1) Limits liability to cases of willful neglect or default (i.e. Limits one party's liability in the event of the occurrence of certain acts or default of the party);

“The company shall not be liable for any loss suffered by the owner due to burglary, theft, fire or any other cause whatsoever, unless such loss is solely caused by negligence of the company's own employee acting in the course of their employment.”

(2) Excludes or restricts liability which would otherwise attach to a breach of contract such as liability to be sued for breach or be liable for damages;

“Carrier undertakes to use its best efforts to carry the passenger and baggage with reasonable dispatch.

Times shown in timetables or elsewhere are not guaranteed and form no part of this contact. Carrier may without notice substitutes alternate carriers or aircraft, and may alter or omit stopping at places shown on the ticket in case of necessity. Schedules ar subject to change without notice. Carrier assumes no responsibility for making connections.”

(3) Limits the amount of damages (or otherwise called limitation clause) in the event of breach of the contract by one party.

“ ... the carrier shall not be liable for loss or damage or detention arising or resulting from the act neglect or fault of the servants or agents of the carrier...not in any event for an amount exceeding the declared value of goods paying freight on ad valorem basis or the invoice value whichever shall be least or in the case of any other goods the invoice value in sterling pounds 100 per package or unit or sterling pounds 25 per cubic metre or half hundredweight, which shall be least...”

There is no general rule of law to the effect that courts have power to refuse to give effect to exclusion clauses on the ground that they are unconscionable or unreasonable unless such clauses are rendered void by statutory provisions.

Despite the lack of any general power to strike out exemption clauses, the courts have applied the following principles to control the possibilities of abuse inherent in complete freedom of contract:-

(a) Party seeking to rely on such clause must show that it is incorporated as a term of the contract and sufficient steps have been taken to bring it to the notice of the other party; (b) such clause is to be contrued strictly against the party who introduced it and seeks to rely on it; (c) where there is such clause in a contract between A and B, C a third party, will not be allowed to shelter behind the clause in the absence of clear evidence that he is a party to the contract and that the contract was intended to protect him.

Thornton v Shoe Lane Parking Ltd [1971] 2 QB 163

The exemption clause was contained in the parking ticket which stated “ All Cars Parked At Owner's Risk.” Defendant: Exemption clause exempted the Defendants from liability for personal injury caused to the Plaintiff.

Court: The warning was too wide. If the Defendant intended to to exclude personal injury they have to explicitly say so. In the absence of such explicit warning, the Defendants were held liable for the personal injury sustained by the Plaintiff.

RELEVANT LAW / JURISDICTION CLAUSE

A contract may be connected with several territorial jurisdictions for the following reasons: parties reside in different countries contract is made in a country other than that in which it is to be performed or in which its subject-matter is situate other reasons.

Which legal system is applicable?

Doctrine of Proper Law The law which the parties intended to apply, to be ascertained by the intention expressed in the contract (if any). If no intention is expressed, it will be presumed from the terms of the contract and the relevant surrounding circumstances.

Express Choice Where the court considers the express choice to be meaningless, it will be ignored and the proper law will be determined according to any inferred choice, or failing that, the most closely connected system of law.

Inferred Choice Where the parties have failed to lay down expressly in their contract the law applicable to it, the court may be able to infer the law which the parties intended to apply from a variety of factors surrounding the contract. The most usual being: Choice of Jurisdiction Clause If the parties agree that the courts of a particular country shall have jurisdiction over any claims under the contract, then it is strongly to be inferred that the parties have chosen the law of the country as the proper law.

Arbitration Clause If the contract contains a clause whereby the parties agree that any disputes shall be submitted to arbitration in a particular country, there is a powerful, though not conclusive, inference that the parties have selected the law of the country of arbitration as the proper law.

No Choice There are many cases where it is evident that the possibility of a conflict of laws was absent from the minds of the parties. In such circumstances, the Court will adopt an objective approach and hold that the proper law is that the law “with which the transaction has the closest and most real connection”.

AVOIDING PITFALLS IN CONTRACTS

Assisted by Angie Chiong LL.B (Hons) Barrister-at-Law