SOON LEE HUAT PALM OIL MILL SDN BHD v STABLE-WIN SDN BHD [2013] 4 MLJ 374

Court of Appeal (Kuala Lumpur)

Declaration for a contract to be null and void for the reason of a mutual mistake

1.   Stable-Win Sdn Bhd, the Plaintiff (hereafter referred to as the “Respondent) company, is 100% owned by Ecofuture Bhd (“EB”), a publicly traded business.

2.  EB is the owner of a palm oil mill (hereinafter referred to as the “Mill”) and a milling permit to run the Mill.

3.  Prior to April 2009, neither EB nor the Respondent had the resources to maintain the Mill’s operations, and the Mill was underutilised and in poor condition.

4.  Consequently, disagreements occurred between EB and the Respondent which resulted to the Respondent having to lease the Mill to the Appellant for it to run the Mill and entered into a lease agreement (“Lease Agreement”).

5.  The Appellant incurred expenses of RM3,134,497.94 for the repair of Mill in order to improve work production.  In a letter dated 17 July 2009, the Malaysian Palm Oil Board (“MPOB”) issued the Appellant a temporary milling licence.

6.  By letter dated 13 August 2009, the Respondent protested to the Appellant being given a provisional permit.

7.  In response to the Respondent’s protest, the MPOB asked the parties in a letter dated August 28, 2009, to negotiate a resolution before the Appellant was granted a new licence.

8.  In a letter dated 23 December 2009, the Appellant confirmed that it had assured the Respondent that, upon receiving a new licence, it would return the licence to the Respondent when the lease agreement expired.

9.  This assurance was made during a meeting between the Appellant, MPOB, and the Respondent on 21 December 2009.

10.  The Respondent then agreed to give up its current milling permit in a letter dated 15 March 2010 in which the same is also sent to MPOB.

11.  The MPOB further told the Respondent that, in light of the lease agreement that was in effect at the time, the existing licence that is now provided to the Respondent cannot be retained.

12.  MPOB then informed the Respondent in a letter dated 4 August 2009 that the MPOB Regulations 2005 (the “MPOB Regulations 2005”) prohibited the issuance of a licence to two companies for the same activity.

13.  Therefore, a new milling licence for the Appellant can only be granted once the Respondent’s current licence is revoked.

14.  On 21 December 2010, the Respondent commenced an action against the Appellant alleging that the Respondent did not have a valid miling license to operate the Mill and that the Lease Agreement is null and void.

15.  The High Court declared the Lease Agreement to be void and ordered the Appellant to return the possession of the Mill to the Respondent.

16.  The learned judicial commissioner ruled as follows:

“10. I therefore find that there was a mutual mistake of fact in that both parties were under the misapprehension that the plaintiff could retain its licence whilst the defendant is required to apply and obtain a licence from the MPOB in order to operate the Mill under cl 3.17 of the lease agreement, whereas in fact the parties were unaware that under the MPOB Act 1998 and the MPOB (Licensing) Regulations 2005 (PU(A)516/2005) (‘the Regulations’) the MPOB is not able to issue more than once licence in respect of a particular mill. In view of s 21 of the Contracts Act, I find that the lease agreement is void as the issue of the licence under the lease agreement is an essential term of the lease agreement, without which the defendant cannot operate the mill.

2.  Whether the parties were unaware that no license could have been granted concurrently to two distinct companies to run the Mill under the Malaysian Palm Oil Board Act 1998 (“Act 582”).

1.  The Court found that the learned judicial commissioner made a mistake when she decided that the parties had believed that the Respondent could keep its current licence while the Appellant applied for a licence from the MPOB to run the same Mill.

2.  According to the Court of Appeal’s assessment of the material before the Court, the mutual error issue does not even come up.

3.  The Lease Agreement in fact expressly provides that the Appellant must apply for the license in order to continue operating the Mill in which reads as follows:

“3.17 MPOB Licence

The Lessor shall grant to the Lessee the rights of operating the palm oil mill including all mining, buying and selling of fresh fruit bunches, palm kernel, crude palm oil and etc after signing the Lease Agreement. The Lessee shall apply for and obtain the MPOB licence in order to carry out trading activities in palm oil and oil palm business as soon as practicable”

4.  As only one milling permit will be awarded per mill, the Court held that the aforementioned sentence implicitly requires the Respondent to give up its current licencing to the MPOB.

5.  The Respondent’s current licence must be revoked in order for the Appellant to receive a new licence because the Respondent had stopped milling after leasing the Mill to the Appellant.

6.  The Court decided that the learned judicial commissioner erred in concluding that the parties had a shared factual error regarding the milling licence.

7.  When explaining a common error at common law, Khoury and Yamouni, in their book Understanding Contract Law (6th Ed), Chatswood, Australia: Lexisnexis Butterworths, 2007, stated the situation as follows:

“The courts will not render a contract void on the ground of common mistake unless the common mistake involves a matter which is so fundamental to the contract that both parties regard it as a condition precedent to the existence of binding contract. Whether a common mistake is of that nature will, of course, depend upon the facts of the case. However, decided cases, suggest that to be fundamental, the common mistake must either:

• Relate to the very existence of the subject matter of the contract, or

• Involve the sale of property to a person who already owns it.

By way of contrast, a common mistake as to the quality, nature or value of the subject matter is not sufficient.”

8.  Section 21 of the Contracts Act of 1950 (“Act 136”) codifies the doctrine of mutual error as it appears in English common law.

9.  A mistake made by both parties to an agreement is covered under Section 21 of Act 136 as follows:

“21. Agreement void where both parties are under mistake as to matter of fact.”

“Where both parties to an agreement are under a mistake as to a matter of fact essential to the agreement, the agreement is void.”

10.  According to the circumstances of the current case, we believe that the parties to the lease agreement are not making a shared error.

11.  According to the literal interpretation of clause 3.17 of the Lease Agreement, it is obvious that the lessor (referred to as “the Respodent”) was to give the lessee (referred to as “the Appellant”) the authority to run the Mill.

12.  It would be necessary for the Respondent to surrender its current licence to the MPOB and for the MPOB to grant a new milling licence to the Appellant because the Respondent’s milling licence cannot be transferred or assigned to the Appellant in order for the Appellant to operate the Mill.

13.  The Leasing Agreement should then be taken into effect.

14.  The Court also takes into consideration the submission by the learned counsel that even if there had been a mistake on both sides, it would only have been a legal error and not a factual one.

15.  According to Section 22 of Act 136, a contract is not voidable where both parties have made a mistake that is solely legal in nature.

16.  There is no doubt that the error is one of law and not one of fact if the Court were to accept the Respondent’s learned counsel’s argument that both parties to the Lease Agreement entered into it under some misconception or misperception regarding the necessity of adhering to the MPOB Act and the MPOB Regulations 2005, which state that no licence can be issued simultaneously to two different companies to operate the same Mill.

17.  Section 22 of Act 136 provides as follows:

“22. Effect of mistake as to law.

A contract is not voidable because it was caused by a mistake as to any law in force in Malaysia; but a mistake as to a law not in force in Malaysia has the same effect as a mistake of fact.

ILLUSTRATION

A and B make a contract grounded on the erroneous belief that a particular debt is barred by limitation: the contract is not voidable.”

18.  An error of fact and a mistake of law are entirely different things.

19.  Simply put, a mistake of fact is an error that does not result from the breach of a legal obligation on the part of the person who made it and consists of (1) unconscious ignorance or forgetfulness of a fact, past or present, material to the contract; or (2) belief in the present existence of a thing, material to the contract, which does not exist; or (3) belief in the past existence of such a thing, material to the contract, which has not existed.

20.  While a mistake of law occurs when a party correctly determines the legal significance of the facts after having full awareness of them.

21.  It is an erroneous opinion or inference based on incomplete or inaccurate application of judgement to the facts, and it inevitably assumes that the individual generating it is fully aware of the facts.

1.  Mistake of fact in contract law is when one or both parties to a contract misunderstood a provision that is crucial in order to comprehend the agreement meanwhile mistake of law specifically refers to a mistake made for the reason a party was unaware of the law.

2.  Accordingly, the legal effect as to the mistake of fact and mistake of law negates consent of the parties, therefore no agreement is said to have been formed at all.