Dae Hanguru Infra Sdn Bhd v Baldah Toyyibah (Prasarana) Kelantan Sdn Bhd and Another Appeal [2022] 4 MLJ 51

DAE HANGURU INFRA SDN BHD v BALDAH TOYYIBAH (PRASARANA) KELANTAN SDN BHD AND ANOTHER APPEAL [2022] 4 MLJ 51

Federal Court

Capacity of Parties to Enter into Contract (Promoter & Successor)

Facts

1.     The Kelantan State Government was interested to construct, finance, design and building a highway road from Kota Bharu to Kuala Krai (“the Project”).

2.     For the purpose of this case review, the parties will be referred to as they were in the High Court.

3.     On 2012, the State Government issued an open proposal to implement it as a state project through the subsidiary of Perbadanan Menteri Besar (“Second Defendant”).  The subsidiary company incorporated as a special vehicle for the project is Baldah Toyyibah (Prasarana) Kelantan Sdn Bhd (“First Defendant”).

4.     Pursuant to the invitation as per the open proposal, Consortium Daelim JV (“CDJV”), a consortium led by Daelim Industrial Co Ltd expressed its interest to bid for the Project.

5.     Later, a number of discussions were held between CDJV and the State Government’s officers, including the representative of the First Defendant.  The State administration had expressed its willingness to award CDJV with the project during the discussions.  Based on one of the minutes of meeting, CDJV requested for the letter of intent (“LOI”) from the State Government to arrange financing with banks in Korea.

6.     In response to that request, the First Defendant issued an LOI dated 8 October 2012 (purporting to appoint CDJV as a turnkey contractor).  In the same letter, the CDJV was instructed to form a company acceptable to the First Defendant as the turnkey contractor to carry out the Project.

7.     After 2 days, CDJV expressed its acceptance of the terms and conditions stated in the LOI.  A letter known as Letter of Acceptance (“LOA”) was further issued by the First Defendant on 31 October 2012 which mentioned additional terms including requiring a guarantee that the maximum provisional contract price was to be at RM 1.8 billion.

8.     The LOA among others, required CDJV to provide evidence of incorporation of a turnkey contractor.  The First Defendant then reiterated that the terms mentioned in the LOA would form part of a contract that will be formalised.

9.     The acceptance of the further terms of the LOA was indicated by CDJV three weeks after that.

10.  On 5 December 2012, CDJV informed the First Defendant that a legal entity or turnkey contractor responsible for the implementation of the Project would be Dae Hanguru Infra Sdn Bhd (“the Plaintiff”), which was incorporated on 3 December 2012.

11.  Despite the formation of the Plaintiff, on 17 December 2012, CDJV met with the State Government to discuss a potential financial guarantee by the State but it was declined by the State.

12.  The First Defendant hired Jurutera Perunding Zakie (“JPZ”) as its project management consultant on finalising the arrangements with CDJV.  JPZ requested CDJV regarding its financial status, company profile and proposal of work in order to prepare for a contract document.

13.  During the meeting held on 29 January 2013, JPZ informed the Plaintiff about the launching ceremony is to be held on 19 February 2013 and a formal agreement which is expected to be signed on 27 February 2013 and there was a need for site clearance.  The Plaintiff at that meeting suddenly circulated a proposed draft agreement which denoted the Plaintiff as the party instead of CDJV.

14.  The Plaintiff provided additional terms in the draft agreement regarding the financial arrangement by the First Defendant via a letter dated 12 February 2013.

15.  A letter of enquiry dated 18 February 2013 was issued to CDJV by the First Defendant to clarify the relationship between the Plaintiff and CDJV.

16.  The First Defendant agreed to reimburse the Plaintiff solely for the costs associated with clearing the site for project launch, conducting survey work, and mobilising resources, pending the resolution of the above matters in paragraph 14 and 15.

17.  Later, on 1 March 2013, the Plaintiff responded to the queries made by the First Defendant.

18.  JPZ then, upon receiving the queries, make additional inquiries regarding the Plaintiff’s statement.  Upon inquiries, Daelim Industrial Ltd confirmed its withdrawal from the consortium.

19.  On the other hand, JPZ also wrote to each of the member of consortium to inquire about their support to the Plaintiff.  Each of the member of the consortium presented their new ideas for the Project instead of confirming their support.

20.  As a result, the First Defendant gave its ultimatum to the Plaintiff to proceed with the original terms stated in the LOI and LOA by 15 May 2013.  Additionally, the Plaintiff was required to secure the funding by 30 June 2013, or withdraw from the Project.

21.  On 13 October 2013,  due to the failure of the Plaintiff to comply with the LOA dated 31 October 2012 and the supplementary terms to LOA dated 18 February 2013, the First Defendant wrote to the Plaintiff stating that it was unable to continue with the negotiations. All the negotiations were considered lapsed starting from 1 July 2013 and therefore, the First Defendant declared itself free to negotiate with any other party on the Project.

22.  The Plaintiff sued the First and Second Defendant for breach of contract.

23.   At the High Court

(a) The Plaintiff claimed that there was a binding contract between CDJV and the First Defendant.

(b) The Plaintiff also contended that since the First Defendant was wholly owned by the Second Defendant, the veil of incorporation should be pierced to attach the liability to the Second Defendant.

(c)  The Plaintiff’s claim against the First Defendant was allowed by the High Court and dismissed the claim against the Second Defendant.

(d) The High Court agreed with the Plaintiff that the CDJV and the Plaintiff were the same entity and thus, the alleged contract concluded on 31 October 2012 had a binding effect.

(e)  The learned Judicial Commissioner then applied the principle of promoter and successor under Section  35(1) of the Companies Act 1965 (“Act 125“).

24.  At the Court of Appeal

(a) The appeal by the First Defendant was allowed and the appeal by the Plaintiff against the Second Defendant was dismissed.

(b) It was held that there was no contractual relationship between the First Defendant and the Plaintiff

(c)  The Court of Appeal found that-

(i)  the Plaintiff was never a member of the consortium since it was yet to be incorporated; and

(ii) there was no consensus ad idem to create a contractual relationship between the Plaintiff and the First Defendant; and

(iii)   there was no evidence of any novation of the contract to the Plaintiff and therefore no any valid and enforceable contract.

25.  Questions at the Federal Court

(a) Whether the rule on pre-incorporation contracts applies to successor company.

(b) Where by conduct and dealings the party awarding the contract had recognized and dealt with the successor company as the party undertaking the contract works, whether it was barred by estoppel from asserting subsequently that the successor company was a non-party and therefore not entitled to any rights under the contract; and

(c)  Whether preliminary exchange of documents between the parties, i.e LOI could reflect consensus ad idem and intention to create legal relations.

Issue 1.     Whether there is a valid contract concluded between the Plaintiff and the First Defendant?

2.     Whether the doctrine of estoppel disallowed the First Defendant from denying the contract with the Plaintiff?

Ratios

1.    The contract with the Plaintiff

(a) Consensus ed idem, i.e the meeting of mind is one of the significant requirements to form a valid contractual relationship.

(b) Even though there was an attempt to substitute CDJV for the Plaintiff as the contracting party, it was not successful since there was no evidence of any novation.

(c)  The Plaintiff cannot be deemed to represent any of the CDJV members.  The binding effect of the LOI and LOA did not concern the Plaintiff since the Plaintiff never existed at the material time.

(d) The Plaintiff’s draft agreement was self-serving and the facts showed that it had led the First Defendant to an immediate inquiry.  A draft agreement remains a draft, no proof of a consensus of mind.

(e)  According to the law, a binding contract with one party cannot bind another party without any proper novation being made to bind the new party.

(f)   Therefore, the Court of Appeal was correct in concluding that there cannot be binding agreement between the First Defendant and the Plaintiff even if there was a binding agreement between the First Defendant and CDJV.

2.     The doctrine of estoppel

(a) The Plaintiff contended that the doctrine of estoppel disallowed the First Defendant from denying a contract with the Plaintiff.

(b) The Plaintiff referred to the High Court case of Teras Kimia Sdn Bhd v Kerajaan Malaysia [2014] 7 MLJ 584 where the doctrine of estoppel was applied to allow the plaintiff’s claim against the defendant, due to the fact that the defendant had benefited from the work and services.  The facts before us are totally different.

(c)  In this current case, the meeting dated 29 January 2013 and a letter issued on 18 February 2013 by the First Defendant where it expressly articulated that the First Defendant would only pay for the preliminary works.

(d) The letter clearly mentioned that such payment would be made in the event that the contract between parties never materialise.

(e)  The Federal Court agreed with the submission made by the First Defendant regarding the legal principle in which a party will be paid on the basis of quantum meruit pending a formalisation agreement as per the case of British Steel Corp v Cleveland Bridge and Engineering Co Ltd.  Thus, there is no room for the application of estoppel.

3.     Section 35 of Act 125

(a) Section 35 of Act 125 states that-

Form of contracts

(1)   Any contract or other transaction purporting to be entered into by a company prior to its formation or by any person on behalf of a company prior to its formation may be ratified by the company after its formation and thereupon the company shall become bound by and entitled to the benefit thereof as if it had been in existence at the date of the contract or other transaction and had been a party thereto.

(2) Prior to ratification by the company the person or persons who purported to act in the name or on behalf of the company shall in the absence of express agreement to the contrary be personally bound by the contract or other transaction and entitled to the benefit thereof”.

(b) In applying section 35 of Act 125, the High Court had done so predicated on two more conflicting findings:

(i) that the Plaintiff and CDJV were of the same entity; and

(ii) the contract purportedly concluded through the LOI and LOA was entered into by CDJV on behalf of the Plaintiff prior to its formation.

(c)  The mainstay of the Plaintiff’s argument is that, the First Defendant and the Plaintiff had a binding contract.

(d) The Plaintiff then emphasised its argument in the statement of claim in paragraph 6 and 11 to contend that the material facts to apply Section 35 has been pleaded-

“Paragraph 6

6. In LOA dated 31/10/2012, the First Defendant accepted CDJV (and subsequently the Plaintiff’s) ‘Proposal for Kota Bharu-Kuala Krai Expressway Construction Project’ at a Guaranteed Maximum Price of Ringgit Malaysia One Thousand and Eight Hundred Million only (RM 1, 8000,000,000.00).

Paragraph 11

…. pursuant to the First Defendant’s LOA dated 31.10.2012 there was a concluded contract between the First Defendant acting for and on behalf of the Kelantan State Government’s State Agency which was the Second Defendant and CDJV/the Plaintiff.. (Emphasis added.)”

(e)  According to the Federal Court’s opinion, the above pleadings cannot be said to have addressed the legal principle of promoter and successor.

(f)    There are two requirements laid down under Section 35 of Act 125  before a pre-incorporated contract can be binding-

(i)  it must be a conduct made on behalf of the company (in this case the Plaintiff) prior to its incorporation; and

(ii)  the contract must be ratified by the company once incorporated.

(g)  On this instant appeal, there was no evidence to support the Plaintiff’s case.  If CDJV indicated at the outset that it was negotiating and was intending to enter into the agreement on behalf of the Plaintiff, the First Defendant would not need to clarify the Plaintiff’s relationship to CDJV.

(h)  Furthermore, it is unjustifiable to claim that CDJV entered into the contract on the Plaintiff’s behalf given the Plaintiff’s proposal in its letter dated 12 February 2013 which mentioned different terms from the LOI and LOA issued to CDJV.

(i)    The First Defendant in the meeting on 30 April 2013 was prompted by these new provisions to assert that it would not stray from the Project’s original agreement with CDJV.

(j)    All of these point to the fact that the Plaintiff and CDJV do not even agree on the Project’s conditions, let alone agree to negotiate on the Plaintiff’s behalf.

(k)  In this recent appeal, the LOI and LOA were never proved to be made for and on behalf of the pre-incorporated Plaintiff.   No one from the either side testified that Daelim Construction was its promoter and there was no evidence that the said agreement was either novated or assigned to the Plaintiff to make it a party.

(l)    Moreover, in a promoter-successor scenario, the promoter should leave the scene as soon as the successor is formed to take over.

(m)   In this case, the Plaintiff was incorporated on 3 December 2012 and the First Defendant continued to deal with Daelim Consortium on the contractual issues and never dealt with the Plaintiff as if it were a successor.

(n)  Therefore, the learned trial judge had erred in holding that the Plaintiff’s conduct proved the promoter-successor scenario.

(o)  On the other hand, there is no evidence pertaining to the second requirement of Section 35 of Act 125 in regards to the ratification by the successor company of the agreement entered on its behalf.

(p) Therefore, the learned trial judge had erred in holding that the Plaintiff’s action proved the promoter-successor scenario.

Decision

1. The Federal Court unanimously dismissed the appeal of the Plaintiff with costs, and affirmed the decision of the Court of Appeal.

Key Take Away

1.      According to the Companies Act 2016 (“Act 777”), promoter means-

“in relation to a prospectus issued by or in connection with a corporation, means a promoter of the corporation who was a party to the preparation of the prospectus or of any relevant portion of the prospectus; but does not include any person by reason only of his acting in a professional capacity;”

2.     The promoter has an obligation to bring the company in legal existence to ensure its successful running and he may enter into a contract on behalf of the prospective company, i.e. pre-incorporation contract.

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