When the means to an end create more problems than they solve.
The Court of Appeal in the recent decision of Dream Property Sdn Bhd v Atlas Housing Sdn Bhd (J-02-3018-12/2011, 10 May 2013) has considered several interesting issues of contract law, and arguably may not have left the law in a better state.
In that case, the appellant Dream Property entered into a sale and purchase agreement (“SPA”) with the respondent Atlas to purchase a piece of land on which Dream Property intended to construct a shopping mall known as the “Batu Pahat Mall”.
Under the terms of the SPA, the balance purchase price was to be paid to Atlas 4 months from the date of confirmation that vacant possession is ready to be delivered (the completion date), with an automatic extension of 2 months subject to payment of interest (the extended date). Clause 12 of the SPA provided that in the event Dream Property fails to pay the balance purchase price on the completion date or the extended date, the SPA was to automatically terminate and the deposit forfeited to Atlas and the contract to be treated as null and void and of no further effect.
A dispute arose between the parties as to the date vacant possession was delivered and the completion date by which payment of the balance purchase price was to be made. Between 2006 to 2010, interlocutory proceedings to determine these issues were fought all the way up to the Federal Court which ordered the issues to be determined at full trial instead. Throughout that period, Atlas did not apply for any injunction restraining Dream Property from continuing the construction of the Batu Pahat Mall. Atlas merely requested Dream Property to cease all construction works on the land. Dream Property continued with and completed the construction of the Batu Pahat Mall.
After full trial of the matter, the High Court dismissed Dream Property’s claim and ordered vacant possession of the land together with the mall to be returned to Atlas. The High Court also ordered Dream Property to account to Atlas for all profits made from the use of the land in breach of the SPA. However, the High Court also ordered Atlas to pay Dream Property the costs of construction for Batu Pahat Mall.
The decision of the High Court was upheld by a majority of the Court of Appeal. The Court of Appeal held inter alia:-
- Clause 12 of the SPA meant that the SPA automatically became void upon default of Dream Property in paying the balance purchase price by the completion date, and there was no need for Atlas to communicate its acceptance of Dream Property’s breach by giving notice of termination to Dream Property;
- on the facts, the High Court was justified in awarding the remedy of account of profits for breach of contract (a controversial remedy introduced by the House of Lords in Attorney General v Blake [2001] 1 AC 268) on the basis that Dream Property had proceeded with the construction of the mall when Dream Property had been expressly required to refrain from doing so; that Dream Property had taken a risk by proceeding with the construction when there was a genuine dispute as to whether the SPA was terminated; that Dream Property had abused its authority under the power of attorney granted by Atlas to conclude Sale and Lease Agreements in respect of the mall; that Dream Property had acted in bad faith; Atlas was not obliged to apply for an injunction and there was no guarantee that it would have been successful in obtaining one;
- Despite being the party in breach of contract, Dream Property was entitled to recover the costs of the construction of the Mall from Atlas on the basis of quantum meruit under section 71 of the Contracts Act 1950, which provides that “Where a person lawfully does anything for another person, or delivers anything to him, not intending to do so gratuitously, and such other person enjoys the benefit thereof, the latter is bound to make compensation to the former in respect of, or to restore, the thing so done or delivered“. The Court of Appeal was of the opinion that the continued construction of the mall notwithstanding Atlas’ “order” that Dream Property refrain from doing so was nevertheless ‘lawful’, since the validity of the termination of the SPA was not settled until the decision of the High Court on 11 November 2011; secondly, the power of attorney continued to subsist not having been revoked by the respondent, and Dream Property continued the construction of the mall in the expectation of being successful in its claim for specific performance of the SPA, and Dream Property did not intend to benefit Atlas gratuitously. Finally, since Atlas did not seek an order to demolish the mall but had instead acquired possession of the land and the mall pursuant to the order of vacant possession, Atlas was now in a position to enjoy the benefit of a completely constructed mall.
This article does not propose to examine all the grounds upon which the Court of Appeal upheld the decision of the High Court. However, while it can be said that on the facts, the Court of Appeal had reached the correct decision in that Atlas was entitled to terminate the SPA due to Dream Property’s failure to pay the balance purchase price by the completion date, it is respectfully submitted that the reasoning of the Court of Appeal on several of the issues are controversial, and the remedies granted by the court to both Dream Property and Atlas are questionable.
First, while it is possible for a contract to provide for “automatic termination” upon the happening of a certain event, it should be stressed that in each case the question of whether or not the contract provides for automatic termination or requires the innocent party to take a positive step to bring the contract of an end depends upon the proper construction of the contract. This case should not be regarded as laying down a general principle that any breach of contract automatically brings the contract to an end without the innocent party having to do anything. The general rule is that the innocent party must communicate its acceptance of the breach and termination of the contract to the defaulting party for termination to be effective; this rule was recently reaffirmed by the UK Supreme Court in Geys v Société Générale [2013] 1 AC 523.
Secondly, this case appears to be the first case in which Attorney General v Blake was applied by the Malaysian Courts to order an account of profit as a remedy for breach of contract. While the Court of Appeal acknowledged that such a remedy should only be awarded in exceptional cases, its reasons for concluding that this was an exceptional case (as summarized above) are, with respect, not convincing.
The Court of Appeal does not appear to have been referred to, and did not refer to, the decision of the English Court of Appeal in Experience Hendrix LLC v PPX Enterprises Inc [2003] 1 All ER (Comm) 830, where the court held that the breach of a commercial agreement in that case was not exceptional to the point where the court should order a full account of all profits which had or might have been made by the defendants by their breaches. The court observed that the case was not concerned with a sensitive subject such as national security and the defendants were not in the position of a fiduciary: the breaches, although deliberate, took place in a commercial context. According to the court, deliberate breaches of contract occurred frequently in the commercial world, and something more was needed to make the circumstances exceptional enough to justify ordering an account of profits, particularly where another remedy was available.
The instant case similarly did not involve issues of national security, and the Court of Appeal agreed that Dream Property was neither a fiduciary nor a trustee of Atlas. This was simply a case of breach of contract in a commercial context, with the parties each acting within their rights in the absence of any injunction granted by the court.
Further, it is puzzling and somewhat contradictory for the Court of Appeal, on the one hand, to regard the facts as “exceptional” essentially on the ground that Dream Property had continued with the construction of the mall despite there being a genuine dispute as to whether the SPA had been terminated, when the Court of Appeal, on the other hand, later observed that Dream Property could claim for a quantum meruit on the basis that the continued construction of the property was “lawful” since the validity of the termination of the SPA was not settled until the decision of the High Court, and in the expectation of Dream Property being successful in its claim for specific performance of the SPA (if the latter is correct, surely Dream Property was also justified in acting upon the power attorney to conclude Sale and Lease Agreements). Surely the same set of facts cannot amount to lawful conduct and unlawful conduct at the same time?
It is submitted that the proper remedy which should have been granted by the Courts in this case was not an account of profits based on Attorney General v Blake, but instead Wrotham Park damages, based on the decision of Wrotham Park Estate Co Ltd v Parkside Homes Ltd [1974] 1 WLR 798; [1974] 2 All ER 321 to the effect that where a breach of contract could in principle have been restrained by injunction, damages could be awarded which represented such a sum of money as might reasonably have been demanded by the claimant from the defendant as a quid pro quo for permitting the continuation of the breach, even though no injunction had been claimed in the proceedings or there was no prospect, on the facts, of such an injunction being granted.
Thirdly, the reasoning of the Court of Appeal in upholding the High Court’s decision to award compensation or quantum meruit to Dream Property on the basis of Section 71 of the Contracts Act 1950 is controversial.
As explained above, the facts relied on by the Court of Appeal in concluding that Dream Property in continuing the construction of the mall had acted “lawfully” and not gratuitously for the purposes of Section 71 were the same facts used by the Court of Appeal to support its conclusion that the conduct of Dream Property was so “exceptionally” wrongful so as to justify an Attorney General v Blake remedy, which is a wholly unsatisfactory state of affairs.
Furthermore, it is seriously doubtful whether section 71 can be invoked in favour of Dream Property at all. The section 71 quantum meruit remedy could only be available where it was Dream Property’s intention and purpose from the very beginning to construct the Batu Pahat Mall for Atlas’ benefit. This simply could not have been the case here, as Dream Property had constructed the mall for its own benefit i.e. to sell or lease the commercial units in the mall for a profit. Any “benefit” that Atlas would ex-post facto enjoy after the conclusion of the court proceedings in its favour (namely vacant possession of the land and the mall) surely cannot be taken into account for the purposes of determining whether Dream Property was entitled to a quantum meruit, especially when it does not change the fact that Dream Property never intended to construct the mall for Atlas’ benefit. This, with respect, was an unprincipled and illegitimate use of section 71 to justify the Court of Appeal’s decision. In fact, nearly half a century ago the Privy Council described such an interpretation as “a complete misreading of the section”: see Siow Wong Fatt v Susur Rotan Mining Ltd & Anor [1967] 2 MLJ 118, PC at 121.
In any event, one suspects that this clearly may not be the end of the matter, and an appeal to the Federal Court may very well be possible. It is hoped that the Federal Court will take the opportunity to clarify these important areas of the law.
Postscript: The decision of the Court of Appeal to award Dream Property the costs of construction of the mall was reversed on appeal to the Federal Court. Instead, the Federal Court applied the principle of unjust enrichment at common law to award Dream Property the market value of the mall: see our Article dated 9 March 2015 entitled ‘Absence of Basis: Challenges for the Malaysian Law of Unjust Enrichment‘.