The Federal Court Case of Dae Hanguru Infra Sdn Bhd v Baldah Toyyibah (Prasarana) Kelantan Sdn Bhd and another appeal  4 MLJ 51
Please refer to the illustration above for a summary of the case up to the appeal to the Court of Appeal. The abbreviation used in the illustration above are adopted in the article below.
Appeal to Federal Court
Subsequent to the Court of Appeal’s judgment, P appealed against the decision of the Court in favour of D1 (“Appeal 32”) and D2 (“Appeal 33”). However, the Federal Court dealt only with the Appeal 32 as Appeal 33 was withdrawn by P subsequent to the Court’s decision.
Questions of Law Posed to Federal Court
- Does the rule on pre-incorporation contracts applies to a successor company whose principal had contracted on its behalf for it to undertake the project works?
- Does the conduct and dealings of the party awarding the contract had recognised and dealt with the successor company as the party undertaking the contract works? Is such party barred by estoppel from asserting subsequently that the successor company was a non-party and therefore not entitled to any rights under the contract?
- Does preliminary exchange of documents between the parties like a letter of intent could reflect a consensus ad idem and an intention to create legal relations? Would the principle ‘applies to construction contract as well’ make unsustainable the legal position expressed by the Court of Appeal that they reflect a ‘loose arrangement’ ‘lacking in …’ consensus ad idem or ‘the status of a contract’?
Federal Court’s Answer
The Federal Court did not answer any of the questions of law posed. Instead, the Court evaluated the facts and determined that:
- There is no contract between P and D1 because there was no consensus ad idem.
- No evidence to show that CDJV negotiated and intended to enter into the agreement on behalf of P. The consortium members had instead counter-offered their respective terms to D1.
- Although CDJV had initially indicated its acceptance of the terms of LOI and LOA, P proposed new terms which then caused D1 to insist that it would not deviate from the original understanding with CDJV.
- The arrangement for D1 to pay for the preliminary works cannot be used to estop D1 from the denying the existence of a contract for the Project between P and D1. D1 had clearly stated that the payment would be made even if the contract did not materialise. The applicable legal principle in such circumstances is that a party will be paid on the basis of quantum meruit pending a formalisation Agreement.
- The promoter and successor principle was not established.
- CDJV procured the LOI and LOA for itself, not as a promoter nor for P.
- In a promoter-successor scenario, the promoter should exit from the scene as soon as the successor is formed to take over. However, CDJV continued to discuss with KSG and JPZ.
In common law, a company cannot enter into any contract before incorporation due to a lack of legal entity. Therefore, it cannot be bound by a pre-incorporation contract. The company cannot ratify an agent’s action as the ratification has to be retrospective to the date of transaction when the company has yet to exist.
However, pre-incorporation contract is allowed in Malaysia pursuant to the enactment of Section 35(1) and (2) of the Companies Act 1965 (“CA 1965”) and now, Section 65(1) and (2) of the Companies Act 2016 (“CA 2016”).
|Section 35 of the CA 1965||Section 65 of CA 2016|
|(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.
|(1) A contract or transaction that purports to be made by or on behalf of a company at a time when the company has not been formed has effect as a contract or transaction made with the person purporting to act for the company or as agent for it, and he is personally liable on the contract or transaction accordingly.
(2) Notwithstanding subsection (1), a contract or transaction referred to in that subsection may be ratified by the company after its incorporation and the company shall be bound by the contract or transaction as if the company had been in existence at the date of the contract or transaction and had been a party to the contract or transaction.
The Federal Court succinctly set out the 2 legal requirements before a pre-incorporated contract can be binding.
- A contract made on behalf of the company (in this case, P) prior to its incorporation.
- That contract must be ratified by the company once incorporated.
Since there is no contract made on behalf of P, Section 35 of CA 1965 does not apply. The question of ratification is a moot point since the first requirement is not satisfied.
- If you intend to enter into a contract on behalf of a company that has yet to be formed, make it clear to the counterparty during the negotiation stage and before entering into the contractual relationship.
- Otherwise, procure a novation agreement to be signed by all the parties once the company has been incorporated. This would leave little room for doubt as to the proper party to a contract.
- Make sure that the company ratify the contract once it is incorporated.
This article was written by Rachel Chong ([email protected]), Associate (Corporate) of Messrs Chong + Kheng Hoe.