Authored By: CHIANG XIN YU
Multimedia University
Case Title & Citation
The name of this case is Damansara Realty Bhd v Bungsar Hill Holdings Sdn Bhd & Anor and is officially cited as [2011] 6 MLJ 464.
Court Name & Bench
Court: FEDERAL COURT (PUTRAJAYA)
Judges: RICHARD MALANJUM CJ (SABAH AND SARAWAK), HASHIM YUSOFF AND MOHD GHAZALI FCJJ
Date of Judgement
11 October 2011
Parties Involved
Appellant (plaintiff): Damansara Realty Bhd (Developer)
Respondents (defendants): Bungsar Hill Holdings Sdn Bhd & Anor (Owned a land)
Facts of the Case
A Property Development Agreement (PDA) was made between the appellant and the respondents which gave the plaintiff the right to develop 15.5 acres of land owned by the first respondent for 15 years staring from 4 July 1994, but no ownership right was transferred to the plaintiff.
However, the plaintiff did not start the development, so the defendants issued a termination notice on 25 October 2007 and claimed that it was a material breach. The termination happened 13 ½ years into the 15-year period and after receiving the termination notice, the plaintiff tried to begin the development, but these failed.
The main issue between them was whether the plaintiff had to continuously develop the property over 15 years or could start development at any time within those 15 years. The plaintiff then sued the defendants for wrongful termination, but the High court dismissed the case as it was a commercial contract should be interpreted in a commercially sensible way. The court held that it was reasonable that the parties intended the entire property to be developed within 15 years. The Court of Appeal upheld this decision.
Issues Raised
- When several related agreements are signed at the same time, can one agreement be terminated without considering how other agreements may be execute, even the agreements rely on each other?
- Whether a party can terminate a contract delay under section 56(2) of the Contracts Act 19501, if the time is not stated to be of the essence?
- Whether section 47 of Contracts Act2overridesthe common law rule that performance must be done within a reasonable time when the contract already specifies a time for performance?
- Whether a termination notice issued by one party is valid when the contract allows the other party a chance to fix the breach, but the opportunity is not given? • Whether under sections 47 and 56 of the Act, the court can imply time is of the essence when the contract does not explicitly mention but provided a fixed duration? • Whether a party must specifically plead an implied term that time is of the essence when raising as defence against a claim for specific performance?
Arguments of the Parties
Plaintiff’s argument
The plaintiff argued that the lower courts were wrong to treat the PDA as an independent agreement. The counsel explained that all four agreements were signed on the same day (7 January 1993) and were interconnected. These agreements also show their commercial intention that the plaintiff had the right to develop the land with its own pace and the RM 40 million payment under other agreements proved the agreements were linked.
The counsel claims that plaintiff have the right to start development whenever it wanted, or to get extra 3-year extension after 15-year period as time was of the essence does not state in the PDA. Regarding the third issue, the plaintiff’s learned counsel argued that since a time for performance is stipulated in the PDA, section 47 of the act should not apply.
The counsel also argued that the defendants did not give any notice to fix the alleged breach before termination, making the termination unlawful. The defendants also wrongly assumed the plaintiff could not amend the breach. Lastly, the plaintiff’s counsel referred to Swarnam Ramachandran v Jayapalan3, argued that the defendants must expressly plead and prove time is of the essence, so that plaintiff have a chance to present evidence to dispute it.
Defendant’s argument
The defendants’ counsel argued that the issue of the agreements being interlinked was not raised earlier, so the court should not consider it. Each agreement should be treated separately as their clauses and parties involved were different. The plaintiff’s claim that PDA was an independent contract was inconsistent with contract law.
The counsel mentioned time was of the essence for the development to start and finish within the 15 years. The failure to begin the work was a breach of PDA under section 56(1), allowing the defendants to terminate the contract. Even if time was not of the essence, section 47 of the act still needs to apply, as time cannot be left open ended unless the parties agreed. The law provides two possibilities: if the parties explicitly or impliedly treat time as essential, section 56(1) applies, but if not, section 47 applies.
In reply, the defendants counsel argued that the PDA would automatically end on 3 July 2009, no notice was needed to terminate it, and the plaintiff had no right to extend the period. Clause 16 under PDA allowed the defendants to end the agreement if there was a material breach, but giving notice was optional, not compulsory. The counsel further contended that it would also be impossible for the plaintiff to complete the development within 30 days, the defendants were not required to give a chance to fix the breach.
The counsel also mentioned that whether time was of the essence depends on the nature of the contract and the parties’ intentions and conduct. Since the defendants had stated these facts in their amended defence, the plaintiff cannot claim they were unaware that time is of the essence is ascertained in the PDA.
Judgement
In this case, the court dismissed the appeal with costs and affirmed that the defendants were justified to terminate the contract. The court held that even though the four agreements were related, they did not form a single transaction. The key test used is whether an agreement can be stand as own or must be treated as part of one overall deal. Here, the PDA was an independent agreement, stand on its own, so the termination clause in it is valid.
Besides, whether time is of the essence in a contract depends on the conduct and dealings of the parties. The law does not require a contract to include a specific clause stating this. In this case, although the PDA did not expressly mention that time was of the essence, time was implicitly of the essence, making section 56(2) of the Act was inapplicable.
Under the PDA, time is of the essence for starting and completion of the development within the 15-year period. In commercial contracts, time is generally presumed to be essential, and it was reasonable for the parties to intend the development to be completed or substantially completed within the 15 years. Therefore, the defendant can terminate the agreement under section 56(1)4 of the act, since the plaintiff failed to begin any development work.
The court also ruled that the plaintiff had a duty to start the development within a reasonable period but failing to perform any work for 13 ½ years was unreasonable. The plaintiff had breached the PDA, thereby justifying the termination notice. The court also held that the termination notice was valid, since the defendants still provided 30 days’ notice before the termination took effect, although the clause in the PDA does not require the defendants to do so.
Lastly, the defendants had clearly pleaded that time was essential in the PDA. It is enough for defendant to present facts proving this, there is no need to use the exact phrase. Therefore, the plaintiff was not surprised or affected by this.
Legal Reasoning or Ratio Decidendi
The court rejected plaintiff’s argument as the interpretation is commercially unreasonable. As stated in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd5, commercial contracts should be interpreted in a commercially reasonable construction as it is easier to reflect the parties’ intention. To determine if an agreement is independent, the key question is whether the agreement can stand alone or must treated as part of a single transaction. In Prudential Assurance Co Ltd v IRC6, even though the agreements were signed on the same day with a common goal, they were treated separately as each could be completed independently. Therefore, accepting the plaintiff’s argument would change the original legal agreement intended by the parties in 1993. There was not enough evidence to prove all agreements formed a single bargain. The defendants were entitled to exercise the termination clause in PDA.
The court rejected the view of time can only of the essence when is clearly stated in the contract. Referring to Berjaya Times Square Sdn Bhd v M-Concept Sdn Bhd7, which held that time can still be of the essence without an express clause and must be interpreted together with other contract terms. Therefore, whether time is of the essence depends on the parties’ conduct and dealings. Even if such clause exist, it does not automatically make time is of the essence which also mentioned in Mohammed Ibrahim & Anor v Mohammed Abdul Razzak8. The court must consider the parties’ intention, conduct, and surrounding circumstances to decide if time was truly essential.
The court also noted that if time is of the essence, section 56(1) applies and the innocent party have the right to terminate the contract which was also explained by Cheong May Fong in Civil Remedies in Malaysia9 . Since, the PDA is implicitly time is of the essence; section 56(2) becomes irrelevant.
The court also mentioned that the clause cannot be interpreted as the plaintiff may start the development near the end of the 15-year period, as this would be unreasonable. Referring to Stickney v Keeble10, the court held that when a period is set, a party who fails to take any action during that specific period cannot claim for extra notice or time to complete. Even if no specific completion time stated, the law assumed performance must be done within a reasonable time and the defaulting party who ignore their duties during that period cannot ask for more time.
Lastly, the court also explained that the purpose of pleadings is to prevent surprise and has a fair chance to respond. The court agreed with the defendants that they had clearly pleaded that time was of the essence in the PDA. Accepting the plaintiff’s argument would wrongly mean that the innocent party must use the exact phrase “time is of the essence,” which is unnecessary as stated in Superintendent of Lands and Surveys (4th Div) v Hamit Bin Matusin11. It is sufficient for the defendant to present facts showing that time was an important element of the agreement, there is no element of surprise.
Conclusion
Damansara Realty Bhd case highlights that commercial contracts should be interpreted in a commercially sensible manner. It also emphasised that whether time is of the essence is depends on the parties’ conducts and surrounding circumstance, and there are no strict requirements for the exact phrase “time is of the essence” presence in the contract. A party is justified in terminating a contract when the defaulting party fails to perform their duty within a reasonable time.
Reference(S):
Primary sources
Statute
Contracts Act 1950
Cases
Berjaya Times Square Sdn Bhd v M-Concept Sdn Bhd [2010] 1 MLJ 597; [2010] 1 CLJ 269 Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd [1997] AC 749 Mohammed Ibrahim & Anor v Mohammed Abdul Razzak AIR 2007 AP 294 Prudential Assurance Co Ltd v IRC [1993] 1 WLR 211
Ramachandran v Jayapalan [2004] 8 SCC 689
Stickney v Keeble [1915] AC 386
Superintendent of Lands and Surveys (4th Div) v Hamit Bin Matusin [1994] 3 MLJ 185
Secondary sources
Book
Cheong May Fong, “Civil Remedies in Malaysia” (Sweet &Maxwell Asia, 2007) 38
1 Contracts Act 1950, s56(2)
2 Contracts Act 1950, s47
3[2004] 8 SCC 689
4 Contracts Act, s56(1)
5[1997] AC 749
6[1993] 1 WLR 211
7[2010] 1 MLJ 597; [2010] 1 CLJ 269
8 AIR 2007 AP 294
9 Cheong May Fong, “Civil Remedies in Malaysia” (Sweet &Maxwell Asia, 2007) 38
10 [1915] AC 386
11 [1994] 3 MLJ 185
