VITIATING FACTORS

Business Law (SUBS)

Summary
INTRODUCTION
Intro to Vitiating Factors
Introduction
● Circumstances that occur:
 Before the Contract is made;
 At the time the Contract.

● Consequence:
 Depends on the type of vitiating factor;
 Void – Contract entered into on the ground of mistake or
illegal contracts
 Voidable – Contracts entered into on the ground of
misrepresentation, fraud, coercion, undue influence.
Primary focus of issues
● Two critical issues arise when a contract is said to be
vitiated:
 First – the contract entered into is one which is not lawful
in the eyes of the law; OR
 Second – the contract entered into is one which is not
voluntary i.e. consent is absent.
● Either one circumstance existing would vitiate the contract.
● The need for a contract to be lawful as well as consensual
was provided for under section 10, Malaysian Contracts Act
1950.
Section 10, Malaysian Contracts Act 1950

“All agreements are contracts if they are made by the free consent
of parties competent to contract, for a lawful consideration and with
a lawful object, and are not hereby expressly declared to be void.”

● Section 10 should then be read together with section 2(h),

Malaysian Contracts Act 1950.
Section 10 and section 2(h) Implications

● When section 10 and section 2(h) are read in tandem the

following inference/interpretation can be made:

 the agreement is not a contract;

 it is enforceability of an agreement that makes it a contract;
 there may be issues or circumstances that make the
agreement not enforceable;
 free consent affect enforceability of agreements.
 When would an agreement be affected impacting its
enforceability?
● Section 14, Malaysian Contracts Act 1950 provides guidance as to when consent would
be
● Section 14 states:

Consent is said to be free when it is not caused by—

a) coercion, as defined in section 15;
b) undue influence, as defined in section 16;
c) fraud, as defined in section 17;
d) misrepresentation, as defined in section 18; or
e) mistake, subject to sections 21, 22 and 23.

Consent is said to be so caused when it would not have been given but for the existence of
such coercion, undue influence, fraud, misrepresentation, or mistake
Effect of section 14, Malaysian Contracts Act 1950
● Gives value to consent and voluntariness making them essential
to enforceability of contracts.
● Consent is closely tied to freedom of contract.
● However not all forms of consent vitiating circumstances will
affect enforceability of contracts.
● Ordinary life based circumstances will not vitiate contract.
 E.g. Pressure to get a job to meet personal commitments will
not vitiate an employment contract.
 Distinction must be made between circumstances which reflect
ordinary life pressures and those which are recognised by the
Contracts Act 1950.
FRAUD
Section 17 CA 1950
WHAT IS FRAUD?
Business Law (SUBS)
Fraud – section 17, Malaysian Contracts Act 1950
Act of one Deprives the
person other person’s
deceiving freedom of
another for contract
financial gain. FRAUD

Fraudulent act Deprives the

must be such other person
a degree to right of choice
affect free to assume risks
under the
consent. contract.
Section 17, Contracts Act 1950 provides…
Fraud includes any of the following acts committed by a party to a
contract, or with his connivance, or by his agent, with intent to deceive
another party thereto or his agent, or to induce him to enter into the
contract:
a) the suggestion, as to a fact, of that which is not true by one who does
not believe it to be true;
b) the active concealment of a fact by one having knowledge or belief of
the fact;
c) a promise made without any intention of performing it;
d) any other act fitted to deceive; and
e) any such act or omission as the law specially declares to be fraudulent.
 Kheng Chwee Lian v Wong Tak Thong
REASONING ADOPTED, Any party who
per Seah F.J. induces another

To contract on the To contract on the

faith of the faith of the
representations representations
made made
Any of
which is
The contract is
deemed to have untrue
been obtained
fraudulently
Burden of Proof
● High Degree of Burden of Proof on the claimant.
● Lau Hee Teah v Hargill Engineering Sdn Bhd – burden of
proof on the balance of probability depending on the gravity
of the fraud
● Sinnaiyah & Sons Sdn Bhd v Damai Setia Sdn Bhd
[2015] – approved standard of proof is on balance of
probabilities
Essential Focus on…
● Critical evaluation of representations made;
● The must be proof (evidence) to show that the
representations are false;
● The purpose of evidence – bad faith reflecting dishonesty
and deception;
● Any indication of negligence or mistake would defeat the
claim of fraud.
Consequence of proof of fraud
● Contract is voidable – voidable means option is given to the
party affected by the fraud to decide either:
 To continue with the contract by seeking specific
performance;
 To avoid the contract and seek rescission.
● The right of a person affected by fraud to insist on specific
performance – section 19(2), Malaysian Contracts Act 1950.
● The right to seek rescission on a contract that has been
deemed voidable – section 19(1), Malaysian Contracts Act
1950
What features may be observed from section 17?
● There 3 essential features:
 There must be clear identification of the person affected by
the fraud and the person who committed the fraud;
 The mental element for fraud must be proven;
 The act constituting fraud must be proven – act or
connivance.
FRAUD – PARTIES TO
THE FRAUD
Section 17 CA 1950
Feature 1: Parties to the Fraud
● Under section 17, fraud can be committed other than the
person who is being sued for fraud.
● This happens when the person who commits fraud is an
agent of the party being sued.
● In this instance, if the agent commits the fraud while still
acting within his scope of duty, then the principal may be
sued for fraud by the other affected by it.
Feature 1: Parties to the Fraud.
● It must be noted that the claimant must prove that the agent acted
within the scope of his powers when committing the fraud.
● Otherwise the claimant’s case against the principal would not
succeed.
● This is because, in law, the principal is not responsible for
anything that the agent does outside the scope of the agency
agreement.
● Principal agent relationship – employee and employer, director
and company etc.
● Fraud may also be committed against the agent of the other party.
Principal’s Agent with Plaintiff

The principal Contract between the

The Agent (P)
principal and the agent
for the agent to
Agent enters into
represent the principal
contract with claimant
and contract on his
on behalf of the
behalf
principal. But agent
does so fraudulently.
If claimant discovers
the fraud, claimant can
sue the principal
directly. Plaintiff (3rd
party)
Principal’s Agent with Plaintiff’s Agent

The principal The Agent (P)

Contract
between the
principal and Agent enters into
If claimant discovers the agent for contract with claimant
the fraud, claimant can the agent to on behalf of the
sue the principal represent the principal. But agent
directly. principal and does so fraudulently.
contract on his
Plaintiff behalf

(also a Plaintiff’s
principal) agent
FRAUD – MENTAL
ELEMENT
Section 17 CA 1950
Feature 2: The Mental Element
● Words in section 17 refer to ‘intention to deceive or induce’
● Take note that direct evidence would normally be scarce e.g.
reliable witnesses, admission of fraud.
● Hence there will be some reliance on circumstantial
evidence e.g. inference from conduct, inference made from
documentary evidence such as the contract etc.
● However take note that the defendant may raise evidence to
show that his conduct and circumstances reflect there was
negligence or mistake rather than an intention to deceive.
● If this happens, there can be no fraud.
Feature 2: The Mental Element
Grave v GA Bonus Plc. [1999] 2 Lloyd's Rep. 716.
● Grave took insurance from GA Bonus against fire.
● There was a fire which Grave alleged to be arson by third party after a robbery.
● This was shown to be covered by the policy.
● However Grave was denied claim because it was found that the claim was
based on fraud.
● The fact that the alleged robbers and arsonists did not rob the place before
setting fire to the premises showed that the robbery and arson allegation made
by Grave was deceit.
● Further evidence showed that Grave’s business was in very bad financial
shape.
● Based on these evidence, the court found there was fraud.
Feature 2: The Mental Element
● Alternative to intention to deceive, one would also be able to prove
the mental element for fraud by showing intention to induce.
● Comparative to intention to deceive, intention to induce represents
a lower level intention.
● In the context of contract law, intention to induce means the
intention to influence another to enter into a contract
● Important to consider what type of inducement would constitute
fraud under section 17.
● While the meaning of inducement has not clearly been indicated in
the words of the provision, some guidance may be gained from
the illustrations to and cases decided under section 17.
Feature 2: The Mental Element
Loi Hieng Chiong v Kon Tek Shi, [1983] 1 M.L.J 31.
● It was stated that,
 Courts have not ventured to lay down a general proposition of
the what amounts to fraud;
 Determined by acts or circumstance found in the particular case
based on;
 A statement of what is false OR
 Suppression of what is true.
● Therefore the focus is whether
 Oral or written statement communicated untruth; OR
 Conduct/Oral/Written statement concealed what was truth.
Feature 2: The Mental Element
Tan Chee Lan v Dr Tan Yee Beng [1997] 4 M.L.J 170 per
Augustine Paul J.C.
● Fraudulent conduct or statement must cause the other party
to enter into the contract.
● This must be proven to be:
 The intention of the of alleged defendant;
 As a matter of fact i.e. the claimant did enter into the
contract because of the fraudulent statement.
● Both of the above mentioned must be proven by the
claimant.
FRAUD –
ACT/CONNIVANCE
Section 17 CA 1950
Feature 3: The Fraudulent Act/Connivance
● The 3rd feature of section 17 is that it must be proven the defendant
did in fact commit a fraud by:
 Act OR
 Connivance.
● ACT =
 written/oral statement communicating untruth
 Conduct actively concealing truth.
● Connivance =
 Consenting to allowing the fraud taking place.
 Usually extends to knowing that fraud has been committed by
the agent and allowing it to proceed further.
Feature 3: The Fraudulent Act/Connivance
Ross v Ross, [1861-73] All E.R Rep. Ext. 1919, per Lord
Penzance
● Connivance means consent;
● Adopting the English law interpretation to the word into the
context of section 17 lead to the interpretation that the
defendant:
 Consented to the fraud:
Feature 3: The Fraudulent Act/Connivance
Therefore applying the interpretation gained from reference to
Ross v Ross, it can be argued that connivance would be:
● Usually inferred from conduct.
● There would be a need to prove that the defendant should
have known in the ordinary course of events that allowing
the act raised in the case would constitute fraud.
● Possibly applicable in situations where approvals for further
conduct in the contract or its formation are given after a
practice of checking where it was absent in the present
case.
Types Fraud – section 17(a) – (e)
● Section 17 provides circumstances of fraud:
a) the suggestion, as to a fact, of that which is not true by one
who does not believe it to be true;
b) the active concealment of a fact by one having knowledge
or belief of the fact;
c) a promise made without any intention of performing it;
d) any other act fitted to deceive; and
e) any such act or omission as the law specially declares to
be fraudulent.
Section 17(a)
“the suggestion, as to a fact, of that which is not true by one
who does not believe it to be true”

● Suggestion made – a positive assertion of a fact which is untrue.

● It needs to be proven that the defendant did not or could not
have believed in the truth of the statement made.
● E.g. A property company selling 11 pieces of land
communicating to the seller that all aspects of land are free for
the buyers use when in fact a large portion of land is occupied
by public infrastructure.
Section 17(a)
Tay Tho Bok v Segar Oil Palm Estate Sdn Bhd, [1996] 3 M.L.J 181.
 In this case the defendant argued that they did not know of the
utilities infrastructure on the land sold to the claimant.
 The claimant raised the issue of fraud that they ought to have
known in light of given facts and the size of the infrastructure on the
land.
 Claimant also argued that the price of the land should be
significantly less taking into account the area occupied by the
infrastructure.
 The Court found that there was fraud in light of the circumstances
proven by the claimant that the defendant could not have believed
in the truth of the statement made as well as that they knew the
statement was false when they made it.
Section 17(b)
“the active concealment of a fact by one having knowledge or
belief of the fact”
● Refers to a situation where silence (concealing a fact) may amount
to fraud;
● However one must take note of the Explanation to section 17,
which states that,

Mere silence as to facts likely to affect the willingness of a person to

enter into a contract is not fraud, unless the circumstances of the
case are such that, regard being had to them, it is the duty of the
person keeping silence to speak, or unless his silence is, in itself,
equivalent to speech.
Section 17(b)
● Points to keep in mind:
 Mere silence would not amount to fraud – caveat emptor
rule (‘buyer beware’).
 Silence would only amount to fraud if there was a duty to
disclose such information
 See illustrations (b) and (c) to section 17.
● Such a duty may arise either by virtue:
 Of the skill/knowledge/expertise of the defendant; OR
 Due to circumstances arising in contract.
Section 17(c)
“a promise made without any intention of performing it”
● The key here would be to show that the defendant made a promise
which he did not intend to keep.
● Evidence in such a case could reflect:
 The defendant knew that it was a promise the defendant could not
himself do.
 However high degree of proof required.
 E.g. a defendant entering into contract, on behalf of his company,
with another for supply of consumable good when the defendant
knew his company had already been asked to wind-up the company.
 See the case of Bacom Enterprises Sdn Bhd v Jong Chuk, [2011] 5
M.L.J 820 (C.A).
Section 17(d)
“any other act fitted to deceive”
● A catch all provision.
● The focus would be to show that the design of the transaction
was intended to defraud.
● Requires analysis of transaction design and high degree of
evidence to prove.
● See the case of Golden Vale Golf Range & Country Club Sdn
Bhd v Hong Huat Enterprises Sdn Bhd. [2005] 5 M.L.J 64.
 Here the court took the conduct of two defendant together
to determine the design to defraud the claimant.
Section 17(e)
“any such act or omission as the law specially declares to
be fraudulent”
● E.g. section 368(a) of the Malaysian Companies Act 1956
 If an officer of a company enters into a contract with a
creditor of the company designed to defraud him of his
rights on the debt owed by the company to him, he may
then bring an action.
 See the case of Eric Chan Thiam Soon v Sarawak
Securities Sdn Bhd. [2000] 4 M.L.J 399.
MISREPRESENTATION
Section 18 Contracts Act 1950
WHAT IS
MISREPRESENTATION?
Section 18 Contracts Act 1950
section 18, Malaysian Contracts Act 1950
Misrepresentation” 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.
 What is misrepresentation?
Travelsight (M) Sdn Bhd v Atlas Corporation Sdn Bhd
[2003] 6 CLJ 344, at p. 352.
3. Before or at
the time of the
1.Representation
that is untrue
contract

Misrepresentation 4. Claimant relied on

representation to
2. Made by enter into the
defendant to contract
claimant
What is misrepresentation?
Admiral Cove Development Sdn Bhd v Balakrishnan a/l
Devaraj, [2011] 5 M.L.J 309 (F.C)

False Similar to making

Representation an honest mistake

Innocent
misrepresentation

Made with reasonable

grounds for believing it
to be true
Introducing Section 18, Contracts Act 1950
● A claimant seeking misrepresentation may resort to a claim
under section 18.
● The consequence of a claim under section 18 would ensure
the contract is voidable.
● If the claimant seeks to avoid the contract, then he would
need to rely on section 19(1), Contracts Act 1950.
● On the other hand, if the claimant seeks to enforce the
contract section 19(2) Contracts Act 1950 would be applied.
PROVING
MISREPRESENTATION
Section 18 Contracts Act 1950
Proving Misrepresentation
● In order to prove misrepresentation, one must bring one’s
case within one of the 3 circumstances provided in section
18.
● Take note that if the alleged misrepresentation has elements
of fraud, then the case should be brought under section 17
and not section 18.
● Level of proof on balance of probabilities i.e.
 Higher for fraud compared to misrepresentation
Proving Misrepresentation
● The basis of an action under section 18 is whether the
misrepresentation could have been discovered by ordinary
diligence by the claimant.
● If the claimant has the means of discovering the
misrepresentation by way of ordinary diligence then there can
be no claim for misrepresentation.
● The rule that there is no case if the misrepresentation could
have been discovered by ordinary diligence also reflects the
caveat emptor rule.
● The question then arises what amounts to ordinary diligence.
 ORDINARY
VS
EXTRA ORDINARY
DILIGENCE
Section 18 Contracts Act 1950
Ordinary versus Extra Ordinary Diligence
● In the case where a contract is signed it would be difficult to raise
misrepresentation in light of the case of L'Estrange v F Graucob
Ltd, [1934] All E.R Rep. 16.
● If the presumption applies then it is also presumed that the
claimant would have discovered the misrepresentation.
● It would be assumed that having understood the terms the
claimant would have discovered the inconsistency.
● The one possible way that the claimant could overcome the
presumption in L’Estrange’s case is by showing that there was
active concealment of the facts i.e. fraud.
● Then that is not a claim to be made under section 17.
Ordinary versus Extra Ordinary Diligence

Sealdeck (Kuala Lumpur) Sdn Bhd, [2008] 4 M.L.J 438.

● In this case the plaintiff could not overcome the express term
in the agreement that the land could be only used for
residential purposes.
● However if what was needed was extra-ordinary diligence
then the Exception to section 19 does not apply – see the
case of Gemakota Enterprise Sdn Bhd v Public Bank Bhd
[1998] M.L.J.U 389.
 INNOCENT
VS
NEGLIGENT
MISREPRESENTATION
Section 18 Contracts Act 1950
Innocent vs Negligent Misrepresentation
● A case for misrepresentation must be based on innocent
misrepresentation.
● This is because the Malaysian Contracts Act 1950 was based on
Indian Contracts Act 1872, during which time negligent
misrepresentation was not formulated.
● Negligent misrepresentation was formulated in the case of Hedley
Byrne & Co Ltd v Heller & Partners Ltd, [1964] A.C. 465.
● Therefore a claim for misrepresentation under section 18 would
have to be for innocent misrepresentation.
● Innocent misrepresentation means making a false statement
while believing it to be true.
 RELIANCE
Section 18 Contracts Act 1950
Reliance
● The claimant would also have to show that he relied on the
misrepresentation made.
● This means:
 The claimant must show that he was induced by the
statement to enter into the contract;
 Take note that if there were other factors inducing the
claimant to enter into the contract then reliance does not
exist.
 See the case of Travelsight (M) Sdn Bhd v Atlas Corp Sdn
Bhd, [2003] 6 M.L.J 658 where it was held
misrepresentation must be operative in law.
 TYPES OF
MISREPRESENTATION
Section 18 Contracts Act 1950
Types of Misrepresentation
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.
Section 18(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.
● Prove there was a positive assertion which was untrue even
if the person making the statement believed it to be true.
● Key to proof:
 Show that positive assertion was made.
 It must be untrue.
 The person making the statement believed it to be true.
Section 18(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.
● The claimant would need to show:
 There was a duty;
 Misrepresentation reflects a breach of duty;
 The one who breached the duty gains an advantage;
 There was no intention to deceive.
Section 18(b)
Low Kon Fatt v Port Klang Golf Resort (M) Sdn Bhd,
[1998] 6 M.L.J 448.
● The court held that the defendants liable for
misrepresentation.
● In this case it appeared from the decision made that the
defendants had a duty to disclose information which affected
the decision of the claimant to enter into the contract.
Section 18(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.
● The focus under this provision is to prove that:
 There was a misrepresentation;
 The misrepresentation caused the claimant to make a
mistake;
 The mistake concerned the substance of the thing which is
the subject matter of the agreement.
MISTAKE
Sections 21 – 23 Contracts Act 1950
Mistake – section 21, Malaysian Contracts Act 1950
● When mistake is pleaded then the contract is void.
● Section 21 provides where:
 Two parties to an agreement;
 Contract under mistake;
 The mistake must be a matter of fact;
 Matter of fact must be essential to the agreement.
● Take note that a mistake as a matter of fact essential to the
agreement has to be related to conditions
Mistake – section 21, Malaysian Contracts Act 1950
● If the plea of mistake is proven, then the party claiming
mistake can rely on section 73, Malaysian Contracts Act
1950.
● Section 73 provides,

“A person to whom money has been paid, or anything

delivered, by mistake or under coercion, must repay or return
it.”