What Can You Do If You Are Being Misled To Enter Into A Business Agreement?

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Can you sue if you are misled to enter into a business agreement? The short answer is, yes, you can sue. The long answer will be dealt with below.

Can You Sue a Director of a Company?

In normal circumstances, no. In legal terms, we call this a ‘corporate veil’ – a layer of protection that is accorded to the directors/ shareholders of the company while they are managing the affairs of the company. Generally, the courts are disinclined (very disinclined) to lift the corporate veil i.e. allowing others to sue the members of the company.

Why? This is because it was put in place, in the beginning, to ensure that the members of the company (especially its directors and shareholders) are able to make decisions for the company without the constant fear of being sued by members of the public. By not lifting the veil, it encourages the members of the company to take bold steps to advance the company for the benefit of the members of the company (provided that the decisions are made in good conscience/ good faith). As noted by the court1:

“Judges exercise caution in the knowledge that every business has some elements of risk. Where a director takes commercial or financial steps which are in essence recommended by professionals it would be going too far against that background to come to the view that he is dishonest…”

A keen eye will tell you by now that this principle is not immune from abuse. There will be instances where members of the company blatantly use the protection accorded to commit fraud or improper conduct i.e. misled an innocent party to enter into a business agreement.

In these circumstances, you can actually sue the director for fraudulent misrepresentation.

What is Fraudulent Misrepresentation?

A fraudulent misrepresentation is an act that occurs when a person intentionally makes a false statement to deceive you (in this case) to enter into a business agreement, and you suffered losses because you relied upon the false statement whilst entering into the agreement.

In order to raise fraudulent misrepresentation, you will have to prove:

  1. A representation (a false one) was made to you either by words/ conducts;
  2. The person making it must know that the representation is false/ does not believe that it is true;
  3. The person making it know that you will rely upon the representation;
  4. The acted upon the representation; and
  5. You suffered losses.

If all the elements above are proven, you can lift the corporate veil in such circumstances to sue the director. In fact, court2 in Victor Cham & Anor v Loh Bee Tuan3 noted that:

“Ordinarily an agent is subject to the control of another person, his principal. A company perforce is only able to act through its agents and servants. Consequently, while company directors are referred to as 'agents', the cold fact is that they control the company. As the directors pull the strings so the company must of necessity jump. Particularly is this true where, as here, the individual defendants were in 'complete control of the company. This court in the exercise of its common-law jurisdiction in the field of tort considers the realities of the situations which come before it for decision, and the court is not restricted in so doing because individual carries out intentional tortuous acts through the medium of a puppet corporation whose every action they control. Individuals guilty of intentional tortuous acts do not escape personal liability by this device of clothing themselves in a corporate veil of their own spinning...So a director is not to be held liable merely because he is a director but may be liable when he participates in or orders a tortuous act and cannot escape personal liability by asserting that his act was merely the act of the corporation. In other words, the 'corporate veil' is not to be used as a shield to protect shareholders and directors when they have been guilty of wrongdoing…”

What the court meant is this: the person is not strictly made liable because he is a director of a company. He is made liable because he, in his personal capacity, and not that of a director of a company, has made a fraudulent misrepresentation against you.

What Can You Claim at the End of All This?

You can actually rescind the contract. If you do:

  1. Both parties is relieved of his obligations under the contract and each party can recover any benefit which the party may have conferred upon either party;
  2. You can also claim compensation/ damages for the losses you suffered as a result of the fraudulent misrepresentation.

And there you have it. Hopefully, it helps!!

Don’t let your legal problems cause you a sleepless night. Consult with Lawyer Malaysia now:

1. Vibelko Nigeria Ltd and Another v Nigeria Deposit Insurance Corporation [2004-2006] 13 NBLR (Part II) 256.

2. Adopting the case of Einhorn v Westmount Investment Ltd and Belzberg et. al (1969) 69 WWR (NS) 31.

3. [2006] 5 MLJ 359.