Assignment Question

Answers as submitted by Santhy A/P Govindasamy for Business Law Paper for the MBA

Program at Open University Malaysia

Question 1

(a) “In simple language, a misrepresentation is a representation that is untrue, it is a false statement

made by one party to the contract to the other, before, or at the time of contracting, on which that

other party relied on in contracting.”

Per Abdul Malik Ishak J. in Travelsight (M) Sdn Bhd & Anor v Atlas Corp Sdn Bhd [2003]6MLJ658.

With reference to the Contracts Act 1950 and relevant cases discuss the circumstances and

elements of misrepresentation which cause a contract to be voidable.

(b) O 4 March 2014, Ahmad, an antique collector, entered a contract for the purchase of an antique

watch, which was described in good faith, by Farisham, the seller, as more than 100 years of age.

Ahmad paid the deposit of RM10, 000 out of the total price of RM50, 000 and promised to pay the

balance within one week. On 6 March 2014, while attending an auction for antiques, Ahmad met

Yatt, who told him that, she was the person who sold the antique watch which she inherited from

her father, to Farisham. Yatt told Ahmad that the watch is not very old as her father bought the

watch on the day that Malaysia got its independence, i.e. on 31 August 1957. Ahmad was very

disappointed with what Yatt told him and immediately sent an email to Farisham which stated that

he intended to terminate the contract which he entered with Farisham on the ground that there

was misrepresentation of fact. Ahmad also wanted to claim back the RM10, 000 of deposit which

he has already paid to Farisham.

Advice Farisham.

Question 1 (a)

One of the important elements for a valid contract is there must be free consent between the

parties in order to contract. Section 13 Contracts Act 1950 states, “two or more persons are said

to consent when they agree upon the same thing in the same sense. ”

One of the factors which would affect the free consent of one or both parties to a contract is

the element of “misrepresentation”.

Misrepresentation is an untruthful or misleading statement of fact made by the proposer of

the agreement to the other party with whom he wishes to enter into acontract with. However

the law provides where the contract has been entered into as a result of misrepresentation by

one party, the contract becomes voidable at the option of the party whose consent was

obtained.

The Contracts Act 1950 s. 18 defines “misrepresentation” as includes –

(a) “the positive assertion, in a manner not warranted by the information of the person making it, of that

which is not true, though he believes it to be true;

(b) any breach of duty which, without an intent to deceive, gives an advantage to the person committing

it, or anyone claiming under him, by misleading another to his prejudice, or to the prejudice of anyone

claiming under him; and

(c) causing, however innocently, a party to an agreement to make a mistake as to the substance of the

thing which is the subject of the agreement.”

It must be noted here the misrepresentation under Section 18 is one made without any element of

fraud being present in the statement. Thisis because the party who is making the statement does so

“honestly believing in the truth of the statement he makes, or negligently or innocently makes such statement

which is untrue or causes another to make a mistake of fact”.

In Edgington v. Fitzmaurice [1885] 29 Ch D 459., the directors of a company issued prospectus

inviting subscriptions for raising money, to make improvements on the building, purchasing horses

and vans and developing the trade of the company. However the director’s plan was to use the

money to pay off existing debts of the company. It was held there was misrepresentation of fact

because there was no intention on the part of the company to use the money in the manner it had

stated. The contract was thus voidable at the option of the party who was wronged.

An important point to note here is that the untrue statement must be a statement of fact and not

merely a statement of opinion. When the misrepresented statement made is one of opinion then

the claim of the representee to treat the contract as voidable in his favor fails.

A case which supports this point is Bisset v. Wilkinson[1927] AC 177. The respondents wanted to

purchase land for purpose of sheep-farming. They relied on the appellant’s statement that an

estimated two thousand sheep can be reared on the land. The appellant had no prior experience in

sheep-farming. The claims were found to be untrue and the respondents wanted to rescind the

contract on the ground of misrepresentation. It was held the statement by the appellant was merely

his honest opinion and the claim to rescind the contract failed.

However in the case of Smith v. Land and House Property Corporation [1884] 28 Ch D 7,

Lordship Bowen LJ said: “if the facts are not equally known to both sides, then a statement of opinion by the one

who knows the facts best involves very often a statement of material fact, for he impliedly states that he knows facts

which justify”and his Lordship allowed the defendant to rescind the contract for misrepresentation.

Misrepresentation renders the contract voidable. This means the contract is construed to remain

valid between the parties, unless and until it is set aside by the party to whom the misrepresenta t ion

was made to. Once the party to whom the misrepresentation was made to refuses to be bound by

the contract then the contract in question is terminated ab initio as if it had never existed. The

parties are thus restored to the position in which they stood before the contract was entered into.

Section 19(1) Contracts Act 1950 provides that, “the result of an agreement, which has been entered

into due to a misrepresentation on the part of the party making it, would cause the agreement to be voidable

at the option of the party whose consent was thus caused”.

Section 19(2) Contracts Act 1950provides, “A party to a contract, whose consent was caused by …

misrepresentation, may, if he thinks fit, insist that the contract shall be performed , and that he shall be put

in the position in which he would have been if the representation mad e had been true.”

An exception to this is “If such consent was caused by misrepresentation ....., is not voidable, if the party

whose consent was so caused had the means of discovering the truth with ordinary diligence”. The law

further states “A …misrepresentation which did cause the consent to a contract of the party on whom

……….., the misrepresentation was made, does not render a contract voidable.”

In the case Attwood v Small [1838] 6 Cl & Fin 232., Attwood was selling a mine. He made

exaggerated and untrue statements as to its earning capacity. But before agreeing to buy the mine,

Small sent his own experts to assess the mine’s capacity. They concurred in Attwood’s assessment.

When the true factual situation was discovered, Small decided to rescind the contract for

misrepresentation. Held the action for rescission failed because Small had relied upon his own

experts rather than on Attwood’s’ representation.

Similarly in the case of Travelsight(M) Sdn Bhd & Anor v. Atlas Corporation Sdn Bhd High Court

Malaya, Kuala Lumpur[2003],there was a sale and purchase agreement between the parties for the

sale of a piece of property measuring in area approximately 1,592 sq. ft.. The purchaser had

specifically told the seller he wanted the premises for his own occupation. When the property was

final delivered to the buyer upon his making full payment of the purchase price it was discovered

the floor plan had been reduced by 122 square feet. There was also misrepresentation alleging the

building plans had been approved by Dewan Bandaraya Kuala Lumpur before the signing of the

Sales & Purchase Agreement (SPA), but apparently the approval was only obtained after the

signing of the SPA. The courts held there was misrepresentation and the contract was voidable at

the option of the plaintiff.

Another point to note here is the party deciding to rescind the contract due to misrepresenta t ion

must communicate his decision within a reasonable span of time. This would enable the party who

made the untrue statement (representor), know his exact position pertaining to the contract. The

reason being that unless termination of contract is informed to the representor, he is otherwise

entitled to treat the contract as existing.The action by the representee to terminate the contact,

would effectively nullify the contractual link between him and the representor. The recission of

the contract is pronounced by the courts. The judge in Travelsight sighted the case of Abram SS

Co. v Westville Shipping Cp. Ltd(supra) and Car and Universal Finance Co. Ltd v. Caldwel[1965]

1 QB525.[1964] 1 All ER 290 to support the above statements.

Section 65 Contracts Act 1950, further goes on to provide the representee who choses to terminate

the contract should restore any benefit he may have received back to the person from whom it was

received, being the representor.

Thus in JC Lam Gow & Anor v Maju-Tekno Sdn Bhd[1994]3CLJ783 the judge gave the plaintif fs

the right to rescind the contract and ordered the sum paid by the plaintiffs to the defendants be

refunded with interest at the rate of 8% and costs.

In summary the circumstances and elements of misrepresentation which causes a contract to be

voidable is:

1. The very fact there was misrepresentation, would cause the contract to be voidable at the

option of the party who was wronged.

2. The misrepresentation must be one as to the facts and not one of opinion by the representor.

3. The representee can either terminate or affirm the contract.

4. It is important the representee discloses his intention to the representor within a reasonable

time.

5. Termination of the contract results in the parties being restored to the position they were in

before entering into the contract.

6. Affirmation of the contract means the representee choses to overlook the misrepresenta t ion

and wishes to continue with the contract.

Question 1 (b)

In order to form an agreement which is enforceable in law, the following elements must be

present:

1. Proposal – This signifies the willingness of the party making the proposal to be in a

contractual relationship with the other party, whenever the terms of the contract are

agreed upon by the acceptor. A proposal made to a specific person means it can only be

accepted by that person and no other persons. The proposal must be clear and

communicated to the other party.

Section 6 Contracts Act 1950 provides, the proposal may be revoked “where the acceptor

fails to fulfill a condition precedent to acceptance.”

2. Acceptance – An acceptance is the agreement by the person to whom the proposal is

made to on the terms contained in the proposal made by the proposer. It is important the

acceptance be a positive act of acceptance and must be communicated to the proposer in

the usual and reasonable manner.

3. Consideration – This is the price paid by the acceptor to buy the promise or act of the

other person. Explanation 2 of Section 26, Contracts Act 1950 provides, adequacy of

consideration is immaterial as long as the agreement has been entered into by the parties

with free consent.

4. Intention to Create Legal Relations – For contracts entered into in business or

commercial agreements, the parties are presumed to have intention to create legal

relations.

5. Capacity to Contract – In order to form a valid contract, it is important the parties entering

into a contract have reached the age of majority and not of unsound mind.

6. Free Consent to Contract – To determine the legality of the contract, the parties to the

contract must have entered into it with free consent. One factor which may negate the

free consent is “misrepresentation”.

The Contract Act 1950 provides when all of the above elements are present in a contract then there

is a valid contract enforceable in law.

From the facts of the case provided in question 2 (b) there appears to be proposal from Ahmad, to

enter into a contract for the purchase of an antique watch from Farisham. It also appears Farisham

has given his acceptance in the usual and reasonable manner to Ahmad. Ahmad as consideration

for Farisham promising to sell the antique watch to him has provided him with a deposit of RM10,

000. The parties to the contract had intention to create legal relations with each other. I shall also

assume they had capacity to contract. However when it comes to matter of “free consent” there is

a hitch.

Farisham, has made an innocent misrepresentation when he made a statement in “good faith”

describing the antiquity of the watch to Ahmad who relied upon the statement made in order to

enter into the contract.

The misrepresentation under Section 18, Contracts Act 1950 is one made with no intention to

deceit. “The party making such a statement honestly believes in the truth of the statement, or negligently or

innocently makes such statement which is untrue or causes another to make a mistake of fact”. It is

important the statement be one of fact and not a mere opinion as in the case of Bisset v.

Wilkinson[1927] AC 177. In this case the representation by the seller as to how many sheeps the

land could carry was made on the sellers own estimate. It was held by the courts that this was a

statement of opinion and the claim to rescind the contract failed.

In law the effect of misrepresentation is to render the contract voidable. This means the contract is

construed to be valid between the parties unless and until it is set aside by the representee –

referring to the party to whom the misrepresentation was made to. This proposition is supported

by the case of Newbigging v. Adam [1886] 3 Ch D 582 at 592. The law states, when the representee

discovers the misrepresentation, the representee may make an election; to affirm or to rescind the

contract (Segar Oil Palm Estate Sdn Bhd v TayTho Bok [1997]4 CLJ 158). Once the representee

makes it clear, that the representee refuses to be bound by the contract then the contract in question

is terminated ab initio as if it never existed. This statement is also supported by the case law

Travelsight (M) SdnBhd v. Atlas Corporation Sdn Bhd, High Court Malay, Kuala Lumpur[2003].

Lord Atkinson in Abram SS Co. v. Westville Shipping Co. Ltd [1923] AC 773 at 781:

“Where one party to a contract expresses by word or act in an unequivocal manner that by reason of fraud

or essential error of a material kind inducing him to enter into the contract he has resolved to rescind it, and

refuses to be bound by it, the expression of his election, if justified by the facts, terminates the contract, puts

the parties is status quoante and restores things, as between them, to the position in which the y stood before

the contact was entered into.”

It is crucial once the representee decides to rescind the contract, the representee must communicate

his decision to the representor within a reasonable span of time. This is to enable the representor

to know the exact position pertaining to the contract because the representor is entitled to treat the

contract as subsisting unless he is duly informed of its termination (Car and Universal Finance Co

Ltd v Caldwell [1965] 1 QB 525,, [1964] 1 All ER 290). It is the court that pronounces recession.

Once the representee elects to terminate the contract it would effectively destroy the contractual

link between him and the representor (Abram SS Co. v. Westville Shipping Co. Ltd (supra)). And

when the contract is wholly performed, as in the case of Travelsight where the plaintiff had paid

the full purchase price, the defendant was asked to pay him back the full purchase price with

interest at a rate determined by the courts.

In the case of Lam Gow & Anor v. Maju-Tekno Sdn Bhd & Anor [1994] 3 CLJ 783. there was a

reduction of 25.19% in the sizeof the land, the plaintiffs who were the purchasers of the land had

the right to rescind the contract because the “difference would not give the purchasers substantially what

they bargained for”. The judge allowed the recession and the judge ordered the defendants to refund

with interest at the rate of 8% and costs the sum paid by the plaintiffs. The courts also held the

plaintiffs be entitled to damages on account of the non-fulfillment of the agreement.

Another important point to note is the decision by the representee to either rescind or continue

with the contract should be communicated within a reasonable time. In this case Ahmad had made

known his intention not to continue with the contract on 6 March which was two days after the

contract was entered into between both parties.

Based on the facts provided I come to the following conclusions:

1. There is a representation of good faith on the part of Farisham. Farisham made “positive

assertion” of an information on the age of the watch, claiming it be a 100 year old antique.

Farisham honestly believed in the truth of his statement to Ahmad and there was no

malicious intent.

2. Farisham’s representation was made to an antique collector, Ahmad. Being an antique

collector, it is reasonable to expect Ahmad to have an expert knowledge to value and to

assess on the authenticity of claims made by a third party on an item before making a

purchase.

In the case of Attwood v Small the judge refused to grant the contract voidable at the option

of the party claiming he was misrepresented. This was because he had relied on his own

experts before making the decision to purchase.

Thus being an antique collector the courts may be doubtful as to believe Ahmad’s claim that

he was misrepresented to by Farisham as to the age of the watch.

3. Ahmad’s decision to rescind the contract is based on Yatt’s claim that she sold an antique

watch inherited from her father to Farisham and that the watch was bought by her father on

Malaysia’s Independence Day. It is important to determine:

Date of manufacture of the watch. Although Yatt’s father bought the watch on Independence

Day, it ispossible it was manufactured in 1914, thereby making the claim it’s a 100 year old

watch valid.

Whether the watch Ahmad purchased from Farisham and the watch Yatt is referring to are

one and the same. It is possible they are not talking about the same watch in which case

Farisham could be correct on the age of the watch he sold to Ahmad. However if they are

talking about the same watch then, as mentioned above, the date of manufacture of the watch

must be determined.

4. Ahmad in his email to Farisham, intends to terminate the contract on the ground there

was misrepresentation of fact.

There was no element of fraud in Farisham’s statement and applying the case of Bisset v.

Wilkinson [1927] AC 177, it is possible the courts may decide Farisham’s statement was

only his opinion.

5. Another important matter is the degree of reliance on the misrepresentation by Ahmad. In

Attwood v. Small[1838]6 Cl & Fin 232, the courts held there was no material reliance on

the misrepresented statement as Small had used his own experts to assess the land. Thus

it is possible the courts to reconsider Ahmad’s claim of misrepresentation as it is

reasonable to presume of Ahmad’s expertise in valuing an antique.

In conclusion, the worst case scenario for Farisham would be Ahmad can claim for

misrepresentation under Section 18, Contracts Act 1950, in which case the contract between the

parties would be voidable at Ahmad’s option. Once the courts declare rescission of the contract,

Farisham would have to refund the RM10, 000 deposit as well as pay any interest decided to by

the courts. Ahmad would also be entitled to damages on account of the non-fulfillment of the

agreement. This amount would also be determined by the courts.

It is also possible for the courts to look at the fact that Ahmad being an antique collector should be

an expert on assessing authenticity of purchases he makes. Applying Attwood v Small[1838]6 Cl

& Fin 232, case the courts may not allow recession of the contract and the contract would be valid

between the parties. In which case the contract continues and Farisham is entitled to payment of

the balance purchase price from Ahmad.