[2005] MLJU 472

THE GOLF CHEQUE BOOK SDN BHD AND ANOR v NILAI SPRINGS BERHAD

COURT OF APPEAL (PUTRAJAYA)
 GOPAL SRI RAM, JCA., AZMEL BIN

HAJI MAAMOR., JCA., ZALEHA ZAHARI, JCA RAYUAN SIVIL NO N-02-47-
2002
 26 November 2005

C.K.. Ng, Patrick Fam (Wong & Associates), Harmeet Singh (Raja Eleena Siew
Ang & Associates)

Script:
Judge:

The plaintiffs (appellants before us) brought an action against the defendant
(respondent before us) for breach of contract. The defendant applied to strike out
the statement of claim on the ground that the first plaintiff was not privy to the
contract as asserted by the plaintiffs. It also delivered a defence and
counterclaim. The High Court granted the defendant"s application and struck out
the statement of claim. The counterclaim was directed to be separately tried. The
trial of the counterclaim is set for hearing and disposal on 11 January 2006.
Dissatisfied with the High Court"s order of striking out the statement of claim the
plaintiffs appealed to this Court. We heard this appeal on 21 November 2005 and
allowed it. We did not give reasons at once. Ordinarily a case such this would not
warrant a judgment because the principles governing applications to strike out a
pleading are trite and each case really turns on its own peculiar facts. But this
case has a company law dimension to it which is of interest to the legal
profession. So, a judgment is called for. The facts are fairly straightforward.

The issue whether there was a valid, binding and enforceable contract between
the first plaintiff and the defendant turns upon the interpretation of the facts
surrounding the making of the contract and the application of section 35(1) of the
Companies Act 1965

Before us, learned counsel for the plaintiffs argued that the payments made by
the first plaintiff after its incorporation to the defendant is evidence of conduct
amounting to ratification. Therefore, this contract is valid and was done in a good
faith.

There is however another matter. It has to do with the argument of learned

counsel for the defendant in response to the appeal. To recall, he said that the
moment his client became aware that the first plaintiff had not been in existence
at the time of the making of the contract, it returned to the plaintiff the monies
received under the contract.

This, said counsel, is because the defendant would never have entered into the
contract if it had known that the first plaintiff did not exist. This issue, namely,
unilateral mistake, is a very serious point and one that must be thoroughly
investigated at the trial. If the trial judge finds that the identity of the person with
whom the defendant was seeking to contract with was, objectively speaking, of
importance to the defendant, then the contract would, as a matter of law be void
for unilateral mistake. See, Cundy v Lindsay (1878) 3 App Cas 459.

But, if there was no mistake from an objective standpoint then the returning of the
monies by the defendant, as pointed out to counsel in the course of argument, a
clear breach of contract.

Although it is a precondition of ratification that the principal must have been in

existence when the contract was made. That common law rule was laid down in
the seminal case of Kelner v Baxter (1866) 2 CP 174.

the common law could and did produce illogical and unjust results. The
Companies Act 1965 ("the Act"), unlike its precursors, addressed this issue. By
section 35(1) it provided as follows:
"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."

For the reasons already given, the appeal was allowed. The orders of the
High Court were set aside and the writ was ordered to be returned to file.
The defendant was ordered to pay the costs of the appeal and those
incurred in the court below. We remitted the case to the High Court and
directed that the plaintiffs action be tried with the counterclaim on 11
January 2006.

Appellant:
Your honor, my client has already paid the amount owed to the
respondent on the 30th of October 1999. The contract was entered
between my client’s company which is The Golf Cheque Books and Nilai
Springs where Golf Cheque Books agreed to pay a sum of RM 80,000 for
the term contract to use the golf course.

However, the respondent has breached the contract when they

decided to withdraw from the contract.

Your honor,

Their argument was that my client’s company has yet to exist on the
contract date. It is true that the company was only incorporated 5
months after the contract was entered. However, the contract was
done in a good faith since my client has paid the sum of RM 80,000 to
Nilai Springs. Therefore, the contract is valid and their action of
returning the money is tantamount to breach of contract.

Your honor,

Under the virtue of Sec 35 subsection 1 of the Company Acts 1965

which reads “The legal status of pre-incorporation contract is invalid
and can be ratified by virtue of S35 (1) of the act. The outsiders are
secured when they make contract with a company in good faith. The
reason is because pre-incorporation can be ratified under this law”

Thus, the payment of the sum of RM 80,000 is equivalent to the

ratification of this contract.

Thank you
Respondent:
Your honor,

The Golf Cheque Books Sdn Bhd was not exist when my client entered
in the contract with them and my client was unaware of this fact. Had
they known the company was not in existence they wouldn’t not
proceed.

So Your Honor, if the existence of the company is questionable, how

can they enter into a contract since they do not have a legal status as a
corporation and they were not registered as a corporation therefore,
the contract entered was void

Furthermore, Your honor

The contract was entered by a party who was not privy to the contract
since the promoter was promoting a company whose existence was not
exist on the date of the contract.

By virtue of the common law, a company who whose legal entity was
not exist at the point of date of contract cannot enter into a contract
nor it can appoint any person to enter into contract on its behalf. See
case Kelner Vs Baxter, “A company is also incapable of ratifying a pre-
registration contract after its incorporation as it is pre-condition of
ratification that the principle must have been in existence when the
contract was made.

Thank you.