This case concerned the appropriate measure of damages following a decree of rescission for fraudulent misrepresentation.The Court of Appeal dismissed the plaintiff’s appeal and allowed the defendant’s appeal in part, clarifying the distinction between damages for rescission and damages for breach of contract.
Issue
The sole question before the Court of Appeal was the measure of damages the plaintiff was entitled to recover after the Federal Court set aside his sale and purchase agreement with the defendant on the basis of fraudulent misrepresentation and ordered damages to be assessed.
Legal Principles
The court restated several fundamental principles of contract law and remedies, with the following being central to the decision:
1. Rescission vs. Termination for Breach: The court drew a clear distinction between “true rescission” and the right to terminate future obligations for a breach of an essential term (repudiation).
- True Rescission (ab initio):
- It is a judicial remedy, such as that available for mistake, fraud, or lack of consent.
- It has the effect of setting the contract at naught ab initio (from the beginning), placing the parties on a footing “as though a contract had never been made”.
- Court Excerpt: “In those cases, the contract is treated in law as never having come into existence. … acceptance of a repudiatory breach does not bring about ‘rescission ab initio'”.
- Termination for Repudiatory Breach:
- The contract “has come into existence but has been put an end to or discharged” as to future obligations.
2. Damages for Fraudulent Misrepresentation (Tort) vs. Breach of Contract: An action for fraudulent or negligent misrepresentation is grounded upon the tort of deceit or negligence and entitles the representee to rescission and damages.
- Object of Damages for Fraud/Misrepresentation:
- The aim is to place the representee in the position he would have been had he not been induced by the misrepresentation.
- Court Excerpt: “The object of the law is to place the representee in the position he would have been had he not been induced”.
- Damages include “all expenditure incurred reasonably and properly in consequence of and flowing directly from the deceit, whether before or after the date of the rescission”.
- Object of Damages for Breach of Contract:
- The aim is to place the innocent party in the same position as though the contract had been performed.
3. Application of the Principles (The Present Appeals): The court concluded that because the Federal Court granted rescission based on fraudulent misrepresentation, the assessment of damages must be on the footing of rescission, not breach of contract.
- Recovery Limited to Expenditure: The plaintiff was only entitled to recover expenditure reasonably and properly incurred in consequence of the fraudulent misrepresentation.
- Recoverable Items (Allowed): Reimbursement of interest paid by the plaintiff to the bank, as this constituted expenditure reasonably and properly incurred in consequence of the fraudulent misrepresentation.
- These were: RM143,240.22 (interest paid from May 1986 to April 1997) and RM72,790.10 (interest on the monthly interest payments), totaling RM216,030.32.
- Irrecoverable Items (Disallowed): The plaintiff’s claims for loss of value of appreciation of the property (RM46,000.00), loss of value of club membership appreciation (RM5,999.00), and loss of rent were disallowed because they were “losses suffered in consequence of a breach of contract which is not the case in the present instance”. The cost of the valuation report (RM5,500) was also disallowed as an expense related to the proof of damages in contract.
Court Excerpt on Measure of Damages:
- “The assessment of damages should not be on the basis of a breach of contract, which would be to put the plaintiff in the position as though the contract had been performed, but on the basis that the contract had been rescinded, which would place the plaintiff in the position he would have been had he not been induced by the fraudulent misrepresentation. Therefore, the plaintiff was only entitled to recover expenditure reasonably incurred in consequence of the fraudulent misrepresentation, whether before or after the rescission.”
The final judgment dismissed the plaintiff’s appeal and allowed the defendant’s appeal in part, reducing the total award of damages to RM216,030.32.
Disclaimer: This post is for informational purposes only and does not constitute legal advice. Please consult a qualified Advocate & Solicitor for your specific legal needs.
