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1 IN THE COURT OF APPEAL, MALAYSIA (APPELLATE JURISDICTION) CIVIL APPEAL NO: P-02 (NCVC)(W)-1527-08/2016 BETWEEN TAN KOK SIANG [I.C. NO.: 740313-02-5457] … APPELLANT AND KEMUNING SETIA SDN BHD [CO. NO.: 785064-V] … RESPONDENT [In the Matter of the High Court of Malaya at Pulau Pinang (Civil Division) Civil Action No: 22NCVC-211-12/2015 Between Kemuning Setia Sdn Bhd [Co. No.: 785064-V] … Plaintiff And Tan Kok Siang [I.C. No.: 740313-02-5457] … Defendant] 2 CORAM: ABANG ISKANDAR BIN ABANG HASHIM, JCA BADARIAH SAHAMID, JCA MARY LIM THIAM SUAN, JCA JUDGMENT OF THE COURT Background [1] In the claim before the High Court, the respondent, a housing developer and the appellant, an individual, had two contractual relationships. [2] The first was via an oral contract made in 2009. In this oral contract, Tan Swee Leong [PW1], better known as Steven Tan, the Chief Executive Officer [CEO] of the respondent approached the appellant with an offer that the appellant work as its project manager in its housing project known as 98 Greenlane Lintang Gangsa [the project]. The appellant was required to serve as project manager until the completion of that project. For ease of reference, this will be referred to as the ‘employment contract’. [3] The amount of consideration under this employment contract is disputed. The appellant maintains that it was for RM1 million whereas the respondent claimed that it was for RM500,000.00. The respondent 3 claimed that it had advanced the appellant this sum of RM500,000.00 via a discount for the same amount in the second contractual relationship between the parties. [4] The second contractual relationship between the parties arose when the appellant purchased from the respondent one unit of 3-storey terrace house in the project vide sales and purchase agreement dated 10.1.2013. For this purchase, the respondent gave the appellant a discount of RM500,000.00 off the purchase price of RM1,068,000.00. A credit note was issued on 12.5.2014. The appellant took out a housing loan to finance the payment of the balance of the purchase price. This second contractual arrangement will be referred to as the ‘Sales and Purchase Agreement’ [SPA]. [5] The appellant resigned before the project was completed. He resigned on 17.7.2014 after having worked for the respondent for 5 years. His letter of resignation was accepted by PW1, without protest. [6] It is not in dispute that during his tenure as project manager, the appellant played a key role. Amongst others, the appellant liaised with the relevant authorities in procuring the necessary approvals of the local authority for planning and for building plans, liaised with various persons such as the consultants for the project, the landowners and solicitors and also generally assisted in the eviction of squatters on the land so that the project could be built. [7] A year after the appellant resigned, PW1 met the appellant at Starbucks Café at Seagate, Penang. There, PW1 informed the appellant that the respondent wanted the appellant to refund the 4 discount of RM500,000.00 together with interest because the appellant had resigned prematurely. PW1 also suggested the appellant sell the 3- storey terrace house as the value of the house was said to be in the region of RM1.3 million. According to PW1, the respondent wanted the refund because it was disappointed and shocked with the appellant’s resignation as he had left the respondent’s employment at a time when his services was most needed. The respondent was left in a quandary and the appellant’s resignation had delayed the respondent’s project. PW1 testified that the respondent decided to wait for the project to complete before claiming the refund from the appellant. The project was completed in March 2015; it was then ready for delivery. When the appellant refused to refund the RM500,000.00, the respondent sued. [8] The appellant counterclaimed for payment of the balance of agreed remuneration, delivery of vacant possession of the property under the SPA, and liquidated damages. Decision of the High Court [9] The learned High Court Judge allowed the respondent’s claim and ordered a refund of the RM500,000.00 after finding that the appellant was in breach of the employment contract. The counterclaim was dismissed on the basis that the appellant was not entitled to delivery of vacant possession and liquidated damages. The learned High Court Judge found that since the appellant had refused to perform the employment contract in its entirety, the appellant had in fact repudiated the contract and was not entitled to payment under section 40 of the Contracts Act 1950. Consequently, the appellant’s argument that he had 5 substantially performed part of the contract, as much as 90% and hence is entitled to keep the money, was rejected by the learned Judge. According to the learned Judge: “The concern of the Court is not what the defendant has performed. But what he has promised. In this case, the defendant has admitted he had breached his promise. When he resigned prematurely, the defendant agreed he had disabled himself from performing his promise in its entirety. The effect of which, the plaintiff is entitled to apply section 40 of the Contracts Act 1950 and put an end to the agreement.” [10] The learned Judge proceeded to find that the respondent had rightly accepted the appellant’s repudiation, “and the contract no longer exists. Since the defendant is not entitled to gain any benefit under the contract, he had to return the said RM500,000.00 to the plaintiff pursuant to section 66 of the Contracts Act 1950.” The appellant, therefore, had to repay the advance received, together with interest. The learned High Court Judge cited Berjaya Times Square Sdn Bhd v M Concepts Sdn Bhd [2010] 1 MLJ 597 in support. Decision of this Court [11] After hearing respective learned counsel and upon due consideration of their oral submissions, written submissions and the records of appeal, we allowed the appeal. We essentially took the view that the learned High Court Judge erred on both counts, in allowing the 6 claim and in dismissing the counterclaim. We found the learned Judge’s findings, views and application of section 40 of the Contracts Act 1950 plainly erroneous and must be set right. We further found the termination by the respondent wrong and unlawful, and that the appellant had substantially performed his contractual obligations under the oral employment contract. Even if the appellant was in breach, which we did not find to be the case, we also found that the respondent was not entitled to rescission of contract. Consequently, we were amply satisfied that this was a suitable case for appellate intervention and we allowed the appeal and set aside the decision of the High Court. These are our reasons in full. Section 40 of the Contracts Act 1950 [12] Leaving aside for the moment the question of whether the agreed sum payable to the appellant is RM500,000.00 or RM1 million, we observe that the sole basis of the respondent’s claim is section 40 of the Contracts Act 1950. The respondent’s claim is that because the appellant resigned before the agreed event or time, which is when the project is completed, the appellant has disabled himself from performance of the employment contract. Thus, the respondent is entitled to terminate the contract and sue for recovery of monies paid to the appellant. The reliefs sought included declaratory orders recognizing the respondent’s entitlement and an order that the appellant refund the RM500,000.00 that was advanced together with interest. [13] The learned Judge found the claim proved, that the employment contract was a “conditional contract in the sense that the defendant is 7 entitled to receive the sum of RM500,000.00 only if he continues to serve as the plaintiff’s project manager until the project is completed.” The money was however, paid to the respondent in advance. According to the learned Judge, when the appellant ‘accepted the RM500,000.00 in advance, he has contractually agreed that he will carry out his duty as the project manager until the project is completed.” For this reason, the learned Judge concluded that this is the “contract for its entirety”; that the relationship between the parties is “not like main contractor and sub-contractor where the amount of work done can be measured by a quantity surveyor”; it is, in effect, a “one off contract for completion of the project.” Her Ladyship found that the appellant knew the respondent “relied on his services to complete the project without any glitches. He also agreed that because of his premature resignation, he had ca used hardship to the plaintiff and delay in the project. For these reasons, he ought to have known that the purpose the money was paid in advance was to ensure that he would not leave the plaintiff without fulfilling his promise. The defendant must understand if he resigned before the project is completed, he is not entitled to get RM500,000.00.” [14] Put another way, the appellant had agreed to be project manager until the project was completed; and it is at that point in time that he will be paid. It is in that sense that the learned Judge understood the contract is “for” its entirety. The fact that the payment was in the form of an advance did not alter that agreement. In the learned Judge’s understanding, the ‘entirety’ of the contract refers to the appellant staying until the end of the project. Until and unless the project is completed, the appellant cannot leave and will not in fact be paid or be entitled to any payment. Therefore, by all accounts, leaving any sooner 8 would amount to a repudiation of contract entitling the respondent to rescind the contract. [15] With respect, this conclusion and understanding by the learned Judge is plainly erroneous and demonstrates misapprehension of section 40 of the Contracts Act 1950. That section reads as follows: When a party to a contract has refused to perform, or disabled himself from performing his promise in its entirety, the promisee may put an end to the contract, unless he has signified by words or conduct, his acquiescence in its continuances. [16] Two illustrations are given in section 40. Although neither illustration describes the present circumstances, they are insightful as to the meaning and application of section 40. Both illustrations concerned a contract to perform, that is, to sing for certain number of nights per week for 2 months. The payments in both cases was at a certain rate per night of performance. In the first illustration, the singer fails to turn up after six nights in which case the manager, the innocent party, is at liberty to put an end to the contract. In the second illustration, the singer similarly fails to turn up on a promised night but turns up subsequently with the assent of the manager. In the second scenario, the contract cannot be put to an end. The remedy is only in damages for the night when the singer did not perform. [17] To understand section 40, we will need to “hearken to first principles, for it is a failure to appreciate these, we apprehend, which is the cause of confusion in the mind of the appellant…” per Gopal Sri Ram 9 JCA [as he then was] in Ching Yik Development Sdn Bhd v Setapak Heights Development Sdn Bhd [1996] 3 MLJ 675, 681. From the provisions of section 40, it is apparent that a contract is not automatically brought to an end by a repudiatory breach. The right to terminate or rescind a contract is not available in every case of repudiation. That right is dependent on inter alia the nature of the term breached, and the conduct of the parties, “whether the breach is of sufficient gravity to allow the other party to rescind the contract” – see Visu Sinnadurai on the “Law of Contract” [supra], page 941. In the Court of Appeal’s decision in Ching Yik Development Sdn Bhd v Setapak Heights Development Sdn Bhd [1996] 3 MLJ 675, the “first principles” were reminded and it is the function of the trial Court to examine all the evidence led and determine the real facts in order to come to a decision on those material first principles: “Now, in every contract, be it for the sale of land or any other commodity, there are, generally speaking, some terms that are of fundamental importance and others of less or minor importance. The law creates the distinction for the purpose of determining the kind of remedy that is to be made available to an innocent party, i.e. the party who is not guilty of the breach. Where the term that has been flouted is fundamental to the contract, the innocent party is entitled to treat himself as being discharged from further obligations under it. But where the obligation that has been breached is only subsidiary or minor in nature, the innocent party may not treat himself as being free of his obligations under the contract, although he may sue and recover damages for the non-performance of the subsidiary term. The rules that operate in this area of the law of obligations produce a further consequence. A party who terminates a contract or treats it as having come to an end in reliance upon the breach of a non-fundamental term is himself guilty of a breach of a contract. 10 Whether a particular term is fundamental to the contract or merely a term of subsidiary importance depends very much on the way in which the particular contract is constructed.” [18] At page 682, the Court of Appeal further opined: “Another approach to the problem in cases that involve synallagmatic contracts is to look at the consequences of the breach of the term in question. If the breach is of such a nature that it goes to the root of the contract, then the term broken is fundamental in nature. On the other hand, if the consequences of the breach complained of are not serious in the sense that they do not go to the root of the contract, then the term in question is a subsidiary one entitling the innocent party to recover damages but not to treat the contract as being at an end.” [19] Where that right properly exists in law and on the facts, the innocent party can elect to either terminate or rescind or, carry on with the contract. The common law doctrine of election applies. This was explained by Seah FJ in Ganam Rajamany v Somoo Sinniah [1984] 2 MLJ 290: “A wrongful repudiation by one party cannot, except by the election of the other party, so to treat it, put an end to an obligation; if the other party still insists on performance of the contact the repudiation is what is called brutum fulman that is, the parties are left with their rights and liabilities as before.” 11 [20] This was also discussed by the Court of Appeal in Leong Weng Choon v Consolidated Leasing (M) Sdn Bhd [1998] 3 MLJ 860: “In other words, the plaintiff could either accept the repudiation by terminating the agreement or he could ignore the breach by treating the contract as alive and subsisting. As a matter of fact as well as on the pleadings, the plaintiff did not terminate the contract despite the repudiation by the first defendant so that the contract is still subsisting.” [21] Where the innocent party elects to affirm the contract, the contract is treated as still continuing with the rights and obligations of both parties still intact and, each party has a right to sue the other for damages – see Visu Sinnadurai on the “Law of Contract” [Fourth Edition Lexis Nexis], pages 938 to 940. However, where the election is to terminate, rescind or end the contract by reason of the breach, the innocent party is itself released from further performance of the contract. This was explained by Sir George Rankin in Muralidhar Chatterjee v International Film Co Ltd AIR 1943 30 PC 34, 38; [1942] LR 70 IA 35, PC. In that case, the Privy Council was dealing with section 39 of the Indian Contract Act, which is similar to section 40 of our Contracts Act 1950: “In a case within section 39, the party who rightly ‘puts an end to’ or ‘rescinds’ the contract is entitled to damages for the defaulting party’s breach. In this sense, the contract has not ceased to be ‘enforceable by law’. On the other hand, neither party is any longer bound to perform his promise – indeed an offer to do so, if made by either party, could properly be rejected by the other. The election of the party rescinding, as Cotton LJ once put it, ‘relieves the other party from any further obligation under the contract and enables 12 both parties to make arrangements for the future on the footing that the contract has been once for all broken and is at an end’: Johnstone v Milling