Dispute Resolution - Juen, Jeat, Nic & Nair

June 2, 2023

Illegality and Attribution

On 18 January 2023, the Court of Appeal upheld the High Court’s decision allowing a takaful operator’s claim against loss adjusters appointed by the operator for breach of contract. The loss adjusters contended that the takaful operator could not recover damages for breach of contract because it was bound by the illegal acts of its own employee. JJNN acted for the takaful operator.

The arguments at the High Court and the Court of Appeal centered on whether the illegal “contract” between the takaful operator’s employee and the loss adjusters’ employee had “tainted” the contract between the insurer and the loss adjuster with illegality, resulting in the contract being illegal, void, and unenforceable. In this regard, the concepts of vicarious liability, illegality, attribution, and agency were canvassed before the Court.

After a full trial, the High Court allowed the takaful operator’s claim, holding that the contract between the takaful operator and the loss adjuster was legal, valid, and enforceable. The Court of Appeal affirmed the decision of the High Court.

Factual Background

The takaful operator had issued 12 takaful certificates to 12 different participants, providing cover for loss or damage to property as a result of fire. Following the issuance of the certificates:

(1) Fire loss or damage claims were submitted to the takaful operator in respect of all 12 certificates.

(2) The takaful operator appointed the loss adjusters to investigate each of these claims.

(3) The loss adjusters purportedly carried out the investigations and submitted the report of these investigations to the takaful operator.

(4) On the basis of these reports, the takaful operator paid out over RM1.3 million to the 12 participants.

It was subsequently discovered that that the investigation reports submitted to the takaful operator were all fakes and forgeries in that, (1) most of the premises at which the fires allegedly occurred did not even exist and (2) where the premises did exist, there had not been any fires. It later became clear that there had been a “rogue” employee working for the takaful operator and another “rogue” working for the loss adjusters. The fraudulent scheme had been worked out between these 2 individuals, who subsequently disappeared.

The takaful operator brought an action against the loss adjuster for breach of contract, on the basis that it had paid over RM1.3 million based on the fictitious investigation reports submitted to it by the loss adjusters. The loss adjusters brought third party proceedings against the 12 participants for being part of the fraudulent scheme.

High Court

At the trial, the loss adjusters contended that the claim should not be allowed because the contract between takaful operator and the loss adjuster was tainted by illegality. The loss adjuster also contended that the takaful operator ought to be “vicariously liable” for the its employee’s conduct.

The High Court disagreed with the loss adjuster’s contentions and found that the contract was legal and enforceable.

In arriving at this decision, the High Court observed that the doctrine of vicarious liability was irrelevant as there had been no tortious claim brought by the loss adjusters against the takaful operator’s employee. The Court observed that, if the loss adjusters was contending that its contract with the takaful operator was illegal because of the actions of the takaful operator’s employee, the appropriate principle to consider was the doctrine of attribution.

Under the principle of attribution, the loss adjusters would not be held responsible for the takaful operator’s losses if they were caused by takaful operator’s employee if that employee's conduct could be “attributed” to the takaful operator.

In allowing the takaful operator’s claim, the High Court applied the House of Lord’s decision in Rolls & Stone Ltd (In Liquidation) v Stephen Moores (a firm). In that case, the Court had employed the concept of the “directing mind” of a company, finding that the fraudulent conduct of a director could be treated as the conduct of the company or to be attributed to the company if the individual was the “directing mind” of the company.

Applying this principle, the High Court found that the employee’s actions could not be attributed to the takaful operator as the employee was not the “directing mind” of the takaful operator.

The Court also considered attribution from a principal-agent point of view but was of the view that an agent who acts against its principal’s interests cannot be said to be acting within his authority. The Court also held that an agent’s knowledge should not be attributed to his principal where the knowledge relates to the agent’s own breach of duty to his principal.

Finally, the High Court noted that the “very thing” argument also applied to the present case: illegality should not be raised to defeat a claim where the damage was caused by fraud which was the “very thing” the defendant was appointed to investigate in the first place.

In allowing the takaful operator’s claim against the loss adjusters, the Court also allowed the loss adjusters’ 3rd party claims against the 12 participants, who had participated (no pun intended) in the fraudulent scheme.

Court of Appeal

On appeal, the loss adjusters held steadfast to their position that the takaful operator ought to have been found vicariously liable for its employee’s actions.

The loss adjusters also contended that the High Court had erred in relying on Stones & Rolls Ltd, which has been criticised in more recent decisions by the Supreme Court of the United Kingdom. The loss adjusters asserted that the UK Supreme Court’s judgment in Singularis Holdings Ltd (in liquidation) v Dajwa Capital Markets Europe Ltd was now the prevailing law on the concept of attribution.

On the point of vicarious liability, the Court of Appeal affirmed the High Court’s finding that vicarious liability could not be used as a defence in the manner advanced by the loss adjusters (i.e., as a defence to a breach of contract, in the absence of any claim against a principal tortfeasor)

On the issue of illegality and attribution, on the takaful operator’s behalf, we argued that the that the High Court would not have reached a different conclusion even if it had applied the Singularis instead of Stones & Rolls.

In Singularis, the plaintiff company brought an action against an investment bank for making payments from moneys held to its account to 3rd parties. These payments were made on the instructions of a director and the sole shareholder of the plaintiff. The claim brought against the investment bank was for breach of its “Quincecare” duty of care (an implied term of a contract between a bank and its customer that the bank would use reasonable skill and care in executing customer orders).

The issue in Singularis Holdings Ltd was whether such a claim would be defeated if the instructions were given by the company’s director and sole shareholder who was the “dominant influence over the affairs of the company”. The UK Supreme Court was not inclined to apply the “controlling mind” or “dominant influence” test used in Stones & Rolls. Instead, the Court employed a “context and purpose” approach to attribution.

In applying this approach, the UK Supreme Court declined to attribute the fraudulent acts of the company’s director and sole shareholder to the plaintiff company. The Supreme Court held that:

“The context of this case is the breach by the company's investment bank and broker of its Quincecare duty of care towards the company. The purpose of that duty is to protect the company against just the sort of misappropriation of its funds as took place here. By definition, this is done by a trusted agent of the company who is authorised to withdraw its money from the account. To attribute the fraud of that person to the company would be, as the judge put it, to 'denude the duty of any value in cases where it is most needed' (para [184]). If the appellant's argument were to be accepted in a case such as this, there would in reality be no Quincecare duty of care or its breach would cease to have consequences. This would be a retrograde step.”

Similarly, we argued that the “context” in the present case was the breach by the loss adjusters of its contractual duty towards the takaful operator. The “purpose” of that duty was to protect the takaful operator against incorrectly paying out on claims, which was the very thing that took place. Therefore, to attribute the employee’s fraud to the takaful operator would be to denude the loss adjusters’ duty of any value in cases where it is most needed. Therefore, the employee’s fraudulent actions ought not to be attributed to the takaful operator.

After hearing lengthy submissions from both parties, the Court of Appeal dismissed the appeal and upheld the decision of the High Court. In delivering its decision, the appellate Court did not provide its views on the doctrines of illegality and attribution. As of the publication of this article, the grounds of judgment are unavailable. Without the benefit of written grounds, it will be interesting to see how the doctrine of attribution (in the context of an “illegality” defence) will be treated and applied by the Courts moving forward, particularly with regard to the UK Supreme Court’s approach in Singularis.

Authors: Harish Nair and Casper Tey

Published by JJNN in Dispute Resolution, Insurance

Tags: attribution, illegality, insurance, loss adjuster, singularis, takaful, vicarious liability

February 24, 2023

Representative Action against Professional Trustee Company Struck Out

On 22nd December 2022, the High Court struck out a class action suit seeking more than RM300 million against our client, a professional trustee company. Our Christopher Foo and Harish Nair acted for the client.

Factual Background

In 2010, a group of investors (including the plaintiffs in the suit under discussion) invested and took part in an oil palm plantation scheme set up and operated by a management company. Our client was appointed as the trustee of the scheme under a trust deed entered into between our client, the management company, and each investor of the scheme.

The scheme had been established, and subsequently opened for public subscription, under Division 5 of the Companies Act 1965. Upon the Act being repealed, the scheme then fell to be governed under the Interest Scheme Act 2016. Under the scheme, a certain number of “plots” were created and offered to the public for purchase. The scheme was planned to last for up to 23 years, with 2 phases envisaged. Under the trust deed, the management company was required to “repurchase” the plots during the second phase of the scheme if requests were made by the investors. Investors were also entitled to a return on their investment in the form of receipt of “net yield” from the oil palm plantation.

Around 2016, the scheme met various challenges, including an unexpectedly high volume of requests for repurchase of plots by investors. A meeting of the investors was then held pursuant to the provisions of the trust deed. A resolution was put forward to close the scheme with immediate effect, which was passed by a vast majority of the investors present and voting at the meeting.

Following this, a group of investors brought a representative action by way of an originating summons against the management company. This group of investors were asking the Court to order the management company to pay all monies due on the “net yield” and to repurchase all the plots in the second phase of the scheme. In this representative action, the investors heavily contended that the scheme was a “ponzi scheme” because the scheme was set up in such a way that investors could not request that the management company “repurchase” the plots in the first phase of the scheme (the first 6 years). Therefore, the investors contended that the scheme allowed the management company to swindle the investors during the first 6 years (i.e., the first phase) and subsequently close the scheme as soon as the scheme entered the second phase. The investors claimed that the provision in the trust deed that allowed the management company to call for a meeting of the investors to close the scheme was a convenient “exit clause”.

At the same time, the management company filed their own originating summons seeking to wind up the Scheme in light of the resolution passed at the investors’ meeting.

Round 1 - Suit against Manager

Both summonses were heard together by the High Court. The High Court found that the resolution passed (to close the scheme) at the investors’ meeting was null and void. The scheme was ordered to be wound up. In arriving at its decision, the High Court found that the investors’ contention that the scheme was a “ponzi scheme” was baseless and unsubstantiated.

On appeal, the Court of Appeal found that the resolution passed at the Growers’ Meeting was valid and the Scheme was wound up thereafter. The High Court’s order was varied accordingly (i.e. the remainder of the decision of the High Court was affirmed). The Court of Appeal did not disturb the High Court’s finding that the scheme was not a “ponzi scheme”.

Round 2 - Suit against Trustee

In 2022, the plaintiff, by way of a second representative action, filed a suit against our client, the trustee company. The plaintiff contended that the trustee knew or ought to have known that the scheme was a scam. The plaintiff’s reason for this was that the management company was able to invoke the so called “exit clause” under the trust deed to close the scheme when the scheme entered its 2nd phase. The plaintiff further contended that, by failing to warn the investors or to safeguard the investors’ interests, the trustee had breached its duties to the investors. The plaintiff also contended that the trustee had acted in conflict of interest and in concerted fraud with the management company to defraud the investors.

Submissions of the Parties

At the hearing, on behalf of our client, we contended that the principle of res judicata and issue estoppel barred the plaintiff from reventilating the issues which were raised or ought to have been raised in the previous suit against the management company (i.e. Round 1). Essentially, the thrust of the plaintiff’s case was the contention that the scheme was a “scam” and that the trustee had been in cahoots with the management company in an attempt to defraud the investors - the contention that the scheme was a scam had been considered and dismissed by the High Court in the previous suit. While there was a difference of semantics, i.e. the use of the word scam in Round 2 and “ponzi scheme” in Round 1, the plaintiff’s claim was still barred by the principles of res judicata and issue estoppel - simply utilising new nomenclature should not defeat these established principles. The principle of res judicata, and issue estoppel in particular, seeks to prevent there being different findings made by the Courts on the same issue, coming out of different suits or actions. In this case, if the scheme was found to be a scam, it would result in there being two contradicting decisions of the High Court – with the Court finding, during Round 1, that the scheme was not a “ponzi scheme”.

The plaintiff contended that the principle of res judicata did not apply on the basis that the trustee was not a party to previous suit. Further, the plaintiff argued that the causes of action in the present suit were different from the cause of action in the previous suit. In response, on behalf of the trust company, we argued that, regardless of the fact that the trustee was not a party to the previous summons and that the causes of action were different, issue estoppel would still apply to bar the plaintiff. In fact, there is a litany of prior decisions of the High Court in support of this point.

High Court's Decision

The High Court held in our client’s favour and struck out the plaintiff’s claim. The High Court agreed with our submissions that:

the plaintiff’s case was premised on the contention that the scheme was a scam or fraud;
with the effect of the High Court’s decision in the previous suit, the plaintiff could not now relitigate the same core issues before the court;
the bar to relitigate of the same issue encompasses parties who had not been involved in the earlier case; and
the principle of res judicata applied and the Plaintiff’s claim was found to be unsustainable.

The plaintiff has filed an appeal to the Court of Appeal against the High Court’s decision.

Authors: Harish Nair and Casper Tey

Published by JJNN in Dispute Resolution, News & Views, Unit Trusts & Investment Funds

Tags: dispute resolution, investment scheme, issue estoppel, litigation, res judicata, striking out

January 6, 2023

Setting Aside Adjudication Decisions under CIPAA: Growing Judicial Trends

Setting Aside Adjudication Decisions under CIPAA: Growing Judicial Trends

Since its introduction in 2014, the Construction Industry Payment and Adjudication Act 2012 (‘CIPAA’) and its effects have been widely felt throughout the construction industry. In its attempt to address the cash flow problems that had long pervaded the industry, CIPAA’s applicability to all construction contracts also increased the palette of tools available to contractors seeking to recoup finances.

Under CIPAA, disputes may be adjudicated summarily, and the resulting adjudication decision will become binding and enforceable on the parties. Section 15 of CIPAA provides that an aggrieved party may apply to the High Court to set aside an adjudication decision on certain grounds, with one such ground being a denial of natural justice. A section 15 setting aside application premised on a denial of natural justice may succeed before a court where the grievances indicate that the adjudicator had conflicts of interest (rule against bias) and/or that the adjudicator did not hear both sides of the dispute (the right to a fair hearing).

The High Court recently issued several decisions expanding upon what may amount to an adjudicator not hearing both sides of the dispute, undoubtedly issued in response to the spate of claims attempting to set aside adjudication decisions on such grounds. Two High Court decisions best shed such insight into this growing judicial thinking.

(1) China Construction Yangtze River (M) Sdn Bhd v Gold Mart Sdn Bhd [2022] MLJU 1789

Consequent to an adjudication under CIPAA, the Defendant was ordered to pay RM1,354,435.39 to the Plaintiff (‘the Decision’). Despite the Decision being in their favour, the Plaintiff applied to set aside the Decision.

In court, the Plaintiff confined its claim to a denial of natural justice on the part of the adjudicator. The Plaintiff contended that the adjudicator failed to consider two arguments advanced by the Plaintiff that would have otherwise increased the amount payable to the Plaintiff.

Firstly, the Plaintiff argued that the adjudicator failed to consider the issue of the Plaintiff’s lawful suspension of the Project works, which affected the sum of liquidated damages in the Decision (‘the Lawful Suspension Issue’). Secondly, the Plaintiff contended that the adjudicator did not consider the issue of the ‘wider scheme’ agreed between parties to waive the renewal of the performance bond which would have affected the Defendant’s right of set-off (‘the Wider Scheme’).

The Lawful Suspension Issue

The Plaintiff contended that the Defendant’s failure to promptly pay the Plaintiff in accordance with the contract caused the Plaintiff to exercise its right to suspend the Project under the Contract.

Shortly after the imposition of the Movement Control Order in 2020, the Defendant denied being indebted to the Plaintiff as claimed. Instead, the Defendant asserted that it had overpaid the Plaintiff after taking into account the deduction of liquidated damages among other things. The Plaintiff continued suspending the Project works, leading to the Defendant determining the employment of the Plaintiff under the Contract.

The Plaintiff contended that, at the point of the Defendant’s determination, the adjudicator wrongly assessed the set-off of RM49,230,000 for liquidated damages deductible as the adjudicator did not consider the Plaintiff’s entitlement to an extension of time due to the lawful suspension of the Project owing to the imposition of MCO.

The Wider Scheme

The Plaintiff contended that the adjudicator also allowed the set-off/retention of the sum equal to the performance bond without considering the ‘wider scheme’ agreed to by both parties that obviated a further requirement of providing a performance bond by the Plaintiff.

The High Court’s Decision: the Lawful Suspension Issue

The High Court relied on the dicta in ACFM Engineering & Construction Sdn Bhd v Esstar Vision Sdn Bhd [2016], where the Court of Appeal observed that the fact that the appellant did not complain that the adjudicator had got the disputes on a wrong footing or that the adjudicator premised his decision on the wrong issues pointed towards the fact that the appellant’s complaint related to the merits of the adjudicator’s decision. The Court of Appeal held that section 15 of CIPAA does not provide for a court to review the merits of a decision or decide the facts of the matter. Instead, the court should look only at the manner at which the adjudicator conducted the hearing for errors of law of procedural fairness.

In deciding the Lawful Suspension issue, the High Court found that the adjudicator had not stated anywhere in the Decision that he would not consider the issues advanced by the Plaintiff. Rather, the High Court observed that the adjudicator made note of the Plaintiff’s expert evidence as adduced at the adjudication:

‘… I find that the adjudicator stated as follows in paragraph (31) of his Decision in respect of the first of two issues raised here by the Plaintiff:

“… I note that Mr Powell was of the view that no EOT is due in relation to the MCO and CMCO, but I take a different view”.’

As such, the High Court held that the adjudicator had indeed considered the Lawful Suspension issue, and had come to a decision after considering the competing expert evidence. The High Court remarked that even if there was an error on the computation of extension of time, this would go to the merits of the Decision.

The High Court’s Decision: the Wider Scheme

The High Court disagreed with the Plaintiff’s contention that the adjudicator had failed to consider the Wider Scheme issue. Instead, the Court held that the adjudicator had in fact considered this issue in the Decision but found that it was inconclusive as to whether a definitive agreement had been reached:

‘… I find that the adjudicator stated as follows in paragraph (47) of the Decision:

“… I am of the view that any arrangement reached… would have been part of a wider scheme which contemplated inter alia the completion of at least part of the Contract Works and which wider scheme has been superseded by events… I make no findings as to whether such wider scheme was ever agreed between the parties”.’

As such, the Wider Scheme was merely “peripheral and not material to justify a denial of natural justice even if the same has not been considered by the adjudicator as so contended by the Plaintiff”.

(2) PBJV Group Sdn Bhd v Enquest Petroleum Production Malaysia Ltd [2022]

Consequent to a letter of award followed by a formal PM-MCM contract (collectively ‘the Contract’), Enquest appointed PBJV as its contractor to execute the provision of maintenance, construction and modification works (‘the Works’).

Upon carrying out each portion of the Works as instructed, PBJV would submit tax invoices to Enquest. A total of 365 tax invoices were submitted by PBJV, with 307 approved and paid by Enquest. PBJV subsequently issued a notice of demobilisation of the Contract and a payment claim to Enquest pursuant to CIPAA for underpayment/non-payment of the 57 tax invoices of work done totalling to RM73,570,587.19.

The adjudicator ordered Enquest to pay PBJV a sum of RM71,567,429.55 together with interests and costs (‘the Decision’). Enquest did not make payment of this sum, and PBJV sought recourse by filing court proceedings whilst Enquest filed an application to set aside the Decision (‘the Setting Aside Application’).

Enquest contended that there had been a denial of natural justice and advanced three lines of argument. Firstly, the adjudicator failed to consider any of the clauses cited and relied upon by Enquest in its adjudication response and thus failed to appreciate the true effect and nature of the Contract when rendering the Decision. Secondly, the adjudicator adopted a ‘broad-brush’ approach without considering the specific arguments advanced by Enquest on each head of PBJV’s claims. Finally, the adjudicator failed to seek clarification notwithstanding an acknowledgement that there were discrepancies in PBJV’s supporting documents.

The High Court’s Decision

The High Court observed that section 15 of CIPAA was not meant as an appeal on the merits of an adjudication decision and referred to ACFM Engineering and Construction Sdn Bhd v Esstar Vision Sdn Bhd [2016], where it was held that natural justice ‘is nothing more than what we call the concept of ‘procedural fairness’’. Reference was also made to Ireka Engineering and Construction v PWC Corporation Sdn Bhd [2019], where the Court of Appeal held that there are two limbs to the rules of natural justice: (1) a man should not be the judge in his own cause; and (2) a judge must hear both sides of the dispute. In that vein, the court placed weight on the fact that the aggrieved party made no complaints that they were prevented from tendering evidence or from making certain submissions during the adjudication proceedings.

The High Court observed that the adjudicator had appropriately reviewed the adjudication claim and reply and had appropriately distilled the principal eight issues that required his decision. The High Court stressed that ‘the Decision must be read and understood contextually’ and by doing so there was ‘nothing seen the Decision that the Adjudicator has expressly excluded any argument put forth by the parties.’.

The High Court held that the Decision ‘need not be scrutinized with a fine-tooth comb addressing each and every argument raised by the parties’ and more particularly, an ‘absence of the adjudicator addressing each and every argument raised by the parties do[es] not mean that the Decision is unreasoned’.

Most notably, the High Court judge opined that adjudication decisions ‘must have reasons which on practical terms are often the winning party’s argument’ and although ideal, the ‘adjudication decision need not however have reasons that address the converse which on practical terms are the losing party’s position’.

In view of the above, the High Court held that the adjudicator had sufficiently set out his reasons to substantiate his findings when the Decision was read as a whole. The Court also held that Enquest’s complaint that the adjudicator did not seek clarification from the parties did not merit court intervention, as it was the adjudicator’s ‘prerogative to attach the appropriate weight to the evidence accordingly’.

Take-Home Points

The two High Court decisions above demonstrate that the courts lean towards the position that an adjudicator is only deemed to have not heard both sides of the adjudication dispute where the adjudicator makes express statements that they would not consider and decide issues advanced by either party.

The converse implication is that a court is more willing to find an adjudicator as having considered an argument even if an adjudicator merely refers to the argument in passing, or even only to the aggrieved party’s expert evidence, as was the case in China Construction Yangtze River v Gold Mart Sdn Bhd [2022]. Additionally, an adjudicator making ‘broad brush’ considerations without particularization or specification of ‘each and every argument raised’ does not equate to a breach of natural justice, as demonstrated in PBJV Group Sdn Bhd v Enquest Petroleum Production Malaysia [2022]. Notably, a court will train their attention towards the adjudicator’s reasoning in their rendered decision and will accept an adjudicator’s reasoning that are adoptions of the successful party’s position.

It may therefore be taken that, when dealing with an allegation by an aggrieved party of there being a denial of natural justice, the courts start from the position that the adjudicator has more likely than not accorded procedural fairness to the parties. Parties considering mounting a section 15 setting aside claim premised on the adjudicator not hearing both sides, i.e., a denial of natural justice, will require a compound of express facts other than just the sole contention that there was an absence of points in the adjudication decision addressing each and every argument.

For queries, please contact any of the following persons:

Tai Wei Jeat (jeat@jjnn.com.my)
Nicholas Mark Pereira (nic@jjnn.com.my)
Harish Nair (harish@jjnn.com.my)

Published by JJNN in Alternative Dispute Resolution, Dispute Resolution

Tags: adjudication, cipaa, construction, Construction Industry Payment and Adjudication Act 2012