The Long Arm of the Law
21 November 2022
Brief facts
In Intergos Spolka Z Organiczona Odpowiedzialnosca v XFYRE (M) Sdn Bhd & Anor [2022] 9 CLJ 418, the first defendant agreed to supply 80,000 boxes of disposable nitrile rubber gloves (‘gloves’) to the plaintiff, a Polish company, in consideration of USD632,000 under an agreement dated 3 August 2020 (‘Sale and Purchase Agreement’).
By a separate agreement dated 10 August 2020 made between the plaintiff, the first defendant and the second defendant, a law firm (‘Stakeholder Agreement’), the plaintiff deposited the purchase consideration of USD632,000 (‘the funds’) with the second defendant as stakeholder on the terms set out in the Stakeholder Agreement.
The Stakeholder Agreement provides, inter alia, that:
- every direction to the second defendant for payment from the funds must be (a) in writing; (b) accompanied by a copy of the invoice or invoices rendered to the parties in order to identify the fees and expenses for which the second defendant is required to make payment; and (c) copied to the parties (clause 3.5); and
- the second defendant shall be entitled to retain all interest earned in respect of the funds (clause 3.11).
After several delays, the first defendant failed to arrange for the quality inspection of the gloves or to deliver the gloves for shipment.
The plaintiff then commenced proceedings in the High Court seeking, inter alia:
- a declaration that the first defendant had breached its obligations under the Sale and Purchase Agreement for failing to deliver the gloves;
- a declaration that the Sale and Purchase Agreement has been terminated either by consent of the plaintiff and the first defendant or due to the breach by the first defendant;
- an order that the plaintiff is entitled to the release of the funds by the second defendant pursuant to the Stakeholder Agreement and/or in law and/or in common law;
- an order that the second defendant release the funds to the plaintiff or the plaintiff’s solicitors.
Decision of the High Court
The plaintiff’s claim against the first defendant
In relation to the plaintiff’s claim against the first defendant, the High Court was satisfied that:
- the first defendant’s failure to deliver the gloves constituted a fundamental or repudiatory breach of the Sale and Purchase Agreement and the plaintiff was therefore entitled to terminate the Sale and Purchase Agreement;
- the emails of 22 and 26 March 2021 from the first defendant’s representative to the plaintiff stating that that the funds will be refunded after the refund request has been processed by the first defendant’s accounts department suggests that the first defendant had by conduct agreed to the plaintiff’s suggestion that the Sale and Purchase Agreement be cancelled; and
- there was a total failure of consideration as the plaintiff did not receive the gloves contracted for and there was no prospect of the plaintiff receiving the gloves from the first defendant in the near future; accordingly, the plaintiff was entitled to terminate the sale and purchase agreement and to obtain a return of the funds.
In light of the above, the Court held that the first defendant had breached its obligations under the Sale and Purchase Agreement by failing to deliver the gloves. The Court also declared that the Sale and Purchase Agreement had been terminated either by consent of the plaintiff and the first defendant or due to the breach by the first defendant.
The plaintiff’s claim against the second defendant
The learned Judicial Commissioner, Tee Geok Hock, rejected the second defendant’s argument that clause 3.5 of the Stakeholder Agreement required every direction to release the funds to be in writing by both the plaintiff and the first defendant. According to the Court, such an argument would defeat the very purpose of depositing the advance purchase price with a neutral party which is to ensure that:
- in the event the goods are duly delivered in proper condition to the buyer, the seller by his own letter, accompanied by the proper documentation but without any written consent or confirmation from the buyer, can make a demand on the deposited money and obtain its release as the purchase consideration for the goods delivered; and
- in the event the goods are not delivered at all, the buyer by its own letter, accompanied by the proper documentation but without any written consent or confirmation from the seller, can make a demand for a refund of the deposited money.
The essential function of a neutral stakeholder is to hold the deposited money in trust during the transitional period pending the completion or abortion of the sale and purchase transaction. If the written consent or confirmation of both the seller and the buyer are required before the deposited money can be released, the main purpose of placing the advance payment with a neutral stakeholder would be defeated because:
- an unscrupulous buyer who has received the goods in fine condition would be able to sabotage or frustrate the seller’s claim for the deposited money after having properly delivered the goods; and
- an unscrupulous seller who is unable to deliver the goods would be able to sabotage or frustrate the buyer’s claim for the deposited money after having committed the breach by refusing or failing to deliver the goods.
In either situation (i) or situation (ii), the money would remain in the stakeholder’s hands as long as one party does not give its written consent or confirmation for release and the stakeholder would earn the interest accruing thereon for an indefinitely long period of time. The Court found that this cannot be the intention of the parties in the present case.
The Court was of the view that in the unlikely event that the mutual written consent or confirmation of both contracting parties is required before a stakeholder can release the deposited money to either of the contracting parties, it would still be within the court’s powers to make an order for the release of the deposited money in the event of a deadlock between the contracting parties. In a situation of deadlock or dispute as to which of the opposing claimants is entitled to the release of the deposited money, the stakeholder may seek relief under the provisions on interpleader in the Rules of Court 2012.
The learned Judicial Commissioner added that:
“If the stakeholder in such deadlock situation intends to benefit from his entitlement of interests accruing from the deposited money by refusing or neglecting to apply for a stakeholder’s interpleader relief for an unreasonably long period of time, the arm of the law is sufficient[ly] long to empower the court to order the release of the deposit[ed] money where it is just and fair to do so.” (Emphasis added)
The Court also stated that it is contrary to the principle against unjust enrichment for the second defendant to continue earning interest on the funds and therefore, the second defendant must return the money to the plaintiff for the failed or aborted transaction.
The High Court then ordered the second defendant to release to the plaintiff or the plaintiff’s solicitors the sum of RM2,574,821.23 (being the Ringgit Malaysia equivalent of USD632,000 received by the second defendant under the Stakeholder Agreement) or its equivalent in United States Dollars as at the date of post-judgment conversion within 14 days of the date of the court order.
Comments
The principles expounded by the High Court in this case on breach of contract and the role of a stakeholder and his right to interplead are trite law. The interesting aspect of this decision is the Court’s readiness, in a case where it is fair and just to do so, to grant relief to an aggrieved party when a stakeholder facing an adverse claim in respect of the stakeholder fund held by him does not apply for interpleader relief under Order 17 of the Rules of Court 2012.
The defendants have appealed the decision to the Court of Appeal.
Case summary by Eo Shao Dong (Associate) of the Banking and Finance Practice of Skrine.
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