Case Commentary: Chang Yun Tai & Ors v. HSBC Bank (M) Bhd and Other Appeals [2011] 7 CLJ 909

  1. Introduction

    In a commercial loan a lender (bank) is entitled to seek and obtain the best terms it can. It may have regard solely to its own commercial in-terest. It is not the lender's obligation as a financing bank to ensure that the borrower has made a correct or wise commercial decision based upon a full understanding of all risks unless the borrower has specifically sought the lender's advice.

  2. Brief Facts

    The Appellant had obtained, via certain Financing Agreements, end financing from the Respondents to purchase apartments in a housing development project from the developer vide sale and purchase agreements ('SPA's'). The Appellants subsequently commenced an action in the High Court alleging that the SPA's were void in law. As a consequence it was argued, the Financing Agreements were rendered similarly void, meaning that the Respondents should be estopped from enforcing them. Both the Appellants and the Respondent therefore were ignorant of such alleged illegality at the material time. In the Financing Agreement, the Appellants gave an undertaking that they have a good right and title to assign the property and made representation to the Respondent that the security documents are not in contravention of any laws. [clause 10(a) of the Loan Agreement cum Assignment]

  3. Issues

    The three (3) questions posed for the Federal Court's determination in this Appeal as agreed by both parties was framed on the assumption that the SPA's are illegal and/or contrary to public policy.

      1st Question

      Where the sale and purchase agreements of properties between housing developer and the purchasers ["the SPA's"] are illegal and/or contrary to public policy, whether the Financing Agreements for the purchase of such properties are also void for illegality and/or contrary to public policy.

      2nd Question

      If the Financing Agreements are not enforceable and/or liable to be set aside on the ground that it is void for illegality or contrary to public policy, whether the Appellants are bound to make restitution and/or otherwise to pay the Respondents.

      3rd Question

      Whether the Respondents are under a duty to inquire and/or ensure that the SPA's are free from illegalities as a pre-condition to the end financing being granted.

  4. Zulkefli Ahmad Makinudin FCJ in delivering the judgment of the Federal Court held :

    The Appellants' cause of action against the Respond-ent as a financial institution is premised not on any impropriety on the Respondent's part but simply on the assertion that it is expected in law to know as a matter of law of the alleged illegality.

    On the 1st Question, it was held:

      The SPA's and the Financing Agreements are two dis-tinct and separate contracts.

      The SPA's are between the Appellants and the De-veloper whilst the Financing Agreements is between the Respondent and the Appellants. Under the SPA's, the Appellants have an obligation to pay the purchase price to the Developer whereas under the Financing Agreements they are required to pay the monies borrowed to the Respondent. Both are distinct contracts.

      Illegality of the SPA is irrelevant to the Appellants' ob-ligation under the Financing Agreement is also consistent with the principles of privity of contract.

      The Respondent's contractual relationship is solely with the Appellants to whom end financing facility was granted.

    On the 2nd Question, it was held:

      Need not be answered because the Financing Agreement is valid.

    On the 3rd Question, it was held:

      There was no duty on the part of the Respondent to enquire into the legality of the SPA's. The Respondents were not parties to the SPA's, which was a contract between the Appellant and Developer.

    The duty was on the Appellants to ensure that the SPA's was free from any legal infirmity.

  5. Conclusion

    The relationship between the Respondent as the lending bank and the Appellants as the borrowers is contractual and is purely com-mercial in nature. It is one of debtor and creditor. The Respondent did no more than to lend the monies as requested. In return, the Appellants promised to repay the monies lent.

    The alleged illegality of the SPA does not in any way discharge the Appellants' obligation.

The Law stated is at 09 August 2011.

Note:

  1. Whether the Financing Facility in this case is Islamic or conventional is not stated in the judgment.

    In Islamic Financing the facility granted must be Sya-riah compliant and Islamic Banks in Malaysia have a duty to ascertain whether the SPA is free from illegalities.

  2. In the context of Malaysian law the doctrine of caveat emptor is applied, [Latin, "Let the buyer beware"]. The concept of 'fully build and then sell' is recommended to protect first home buyers.

For further information please contact Encik Ainul Azam / Terence Phillips

Postscript

The decision of the Federal Court in this case has been referred by the Court of Appeal in:

  1. RHB Bank Bhd v. Malaysian International Trading Corp Sdn. Bhd. [2015] 3 MLJ 864
  2. Zulpadli Bin Mohammad v. Bank Pertanian Malaysia Bhd. [2013] 2 MLJ 915

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