White Chicks, The "Auction" Scene (2004)
Assume a scenario.
Lassie sees an advertisement in the newspapers for an auction of 5 hectares (ha) of land. Being an avid subsistence-vegetarian with a generous inheritance, she intends to purchase the land. She attends the auction and is the highest bidder.
Lassie pays for the land and takes possession. She commissions a surveyor to measure the land and much to her shock, horror and chagrin, the land only measures 4.8 ha; 0.2 ha less than that required.
Lassie intends to initiate a civil suit against The Bank of Doughnut, which is the chargee-bank that commissioned the auction. The core question would be what her cause of action would be; additionally, does a contract exist as-between Lassie and The Bank of Doughnut?
The FC decision in AmBank v Aim Edition
Just such a scenario faced the Federal Court in AmBank v Aim Edition [Civil Appeal No.:02(f)-33-07/2020(B)]. Here, the purchaser had purchased land on the basis that the Proclamation of Sale represented that the lands were 94.76 ha. A measurement was commissioned and it was discovered that the lands were, in actuality, 81.9945 ha (a shortfall of 12.7655 ha).
Aim Edition sued. Of importance would be the fact that Aim Edition pinned its claim solely on a breach of contract. It asserted that the chargee-bank (AmBank) had breached its contractual obligations to it by placing a Proclamation of Sale that was incorrect.
The High Court
After a full trial, the High Court held that there was no contract that existed as-between Aim Edition and AmBank. This was due to the fact that the chargee-bank was never the vendor. It did not acquire proprietary interests in the land, being a mere chargee.
The Court of Appeal
The CoA reversed the High Court. It distinguished a previous FC decision of Ranjit Singh v MBB [2016] 1 MLJ 165 and preferred several other decisions (that equated the chargee-bank to a vendor). The CoA granted compensation of ~RM16m to Aim Edition.
The Federal Court
Dissatisfied, AmBank appealed. The Federal Court unanimously allowed the appeal and set-aside the CoA’s decision.
The Federal Court noted the term “judicial contract” used in Ranjit Singh [para. 36]. However, the Federal Court emphasised that this was a term used more for convenience than legal import:
[37] It is unfortunate that the term ‘judicial contract’ was used, as the relationship between the parties in the public auction has really nothing to do with entering or making any contract as one is generally familiar with under common law or the Contracts Act of 1950.
[39] On our part, we must emphasise that the public auction is a judicial sale of the subject property, judicial as it is ordered by the Court after the Court is satisfied that the grounds for ordering a sale under the National Land Code 1965 have been met. If there are any shortcomings in that sale, the remedy lies elsewhere but not in contract as there is none to begin with.
The FC also emphasised that the chargee-bank was not the owner of the property:
[45] We disagree respectfully with the view that the chargee bank is to be regarded as owner of the property. The chargor or landowner does not abdicate any part of his ownership in the land to the chargee. As held in M&J Frozen Foods, the owner of the charged property remains the owner and his proprietary interest is not even transferred at the fall of the hammer. Whether in the application for the order for sale or subsequently at the auction ordered by the Court, the chargee bank is not involved qua vendor or owner; its capacity remains that of a chargee who has successfully obtained an order for sale. The chargee enjoys a specific remedy under section 253 of Chapter 3 of the National Land Code 1965 which is the statutory right to an order for sale so as to satisfy the charge in the event of a default or breach of the agreement relating to the charge. As was also pointed out in M&J Frozen Foods, the chargee is not capable of passing title of the property concerned as that remains with the owner at all times.
[60] We are therefore of the unanimous view that in relation to the first question, a judicial sale pursuant to section 256 of the National Land Code1965 clearly does not give rise to a contract between the chargee bank and the successful bidder such as the plaintiff who is the respondent in this appeal. Given the fact that the remedy for an order for sale is expressly provided by statute, there is no reason or need to deploy the legal fiction of a contract. Ultimately, this was a judicial sale governed by statute and it is neither correct nor plausible to fit such a creature of statute into the confines of the Contracts Act 1950.
The FC went on to hold that the decision of Malayan United Finance Berhad, Johore Bahru v Liew Yet Lan [1990] 1 MLJ 317 (together with a litany of decisions that followed the ratio therein) were all decided per incuriam:
[61] For all these reasons, we are of the opinion that Malayan United Finance and the Court of Appeal decisions which followed its reasoning in the respect discussed above, are flawed. The correct position is as explained in M & J Frozen Food Sdn Bhd [supra] and as discussed above. We therefore conclude that the Court of Appeal erred in following Malayan United Finance and in failing to have regard to the Supreme Court decision in M & J Frozen Food Sdn Bhd [supra].
What remedy is then left to Lassie?
The FC emphasised that the purchaser was not without recourse:
[62] In any event, it is evident from a perusal of the title that the respondent is now the registered owner with indefeasible title to 94.76 hectares. This is consistent with what was ordered by the High Court and as set out in the Proclamation of Sale. The fact that other titles have been issued which seemingly encroached on the respondent’s land means that the respondent ought to be pursuing other remedies.
To put it simply, the FC outlined that Aim Edition would do far better to take-out a civil suit against all those entities trespassing onto its lands. This would then grant it the right to enjoy the full and undivided parcel of land sans trespassers.
Key takeaways
From the above, the doctrine of caveat emptor rings loud and true. Any purchaser who intends to attend a public auction ought to take reasonable steps to ascertain the veracity of what is purportedly put-up for sale.
Notwithstanding this, a purchaser who subsequently discovers a shortfall is not automatically defeated. The FC in Ambank v Aim Edition emphasised that it was the pleaded case that ultimately was Aim Edition’s downfall:
[64] It follows from our answer to that question that the respondent’s pleaded cause of action was incorrectly premised. The respondent had sought to fit its claim for compensation solely within the confines of the Contracts Act 1950 but as we have seen, such a cause of action is not tenable.
In such a scenario, it is arguable that a purchaser would be able to file a claim for negligent misrepresentation. Such a plea was put-forth in Ranjit Singh but at trial, the purchaser was unable to substantiate his claim. This speaks more to a lack of evidence, than to the sustainability of a cause of action.
In the circumstances, Lassie would not be left bereft of a remedy. If she is able to establish that The Bank of Doughnut is negligent (a very real possibility, given the indolence of its CEO), she may be able to raise a claim for negligent misrepresentation.
Conclusion
The Federal Court has emphatically put the law in its correct position. Any party that falls victim to an unfortunate proclamation of sale will now know where its rights lie and will craft its pleadings accordingly.
GAVIN JAYAPAL
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