Fraudulent misrepresentation can have significant repercussions in business transactions, particularly for SMEs navigating complex business contracts.
We recently represented a Polish company specializing in the production, import, and distribution of disposable protective clothing and health and safety products for the food sector. This Client sought recovery of a deposit following allegations of fraudulent misrepresentation against a Sdn. Bhd. and its Director. The case, presided by Judge HMS Yasmin Abdul Razak in the Sessions Court of Kuala Lumpur, highlighted the critical elements needed to prove fraudulent misrepresentation and demonstrated how such claims can be effectively pursued.
Defining ‘Fraudulent Misrepresentation’
Fraudulent misrepresentation involves false statements made knowingly, recklessly, or without genuine belief in their truth, intended to induce the other party’s reliance. The critical elements required to establish this claim include:
- A representation of fact made by the defendant.
- The defendant’s knowledge or recklessness regarding its falsity.
- Reliance by the plaintiff leads to financial loss.
In this case, our Client was led to believe that the Defendants could supply large orders of nitrile gloves during the COVID-19 pandemic. This was supported by repeated representations by the Director that the gloves could be delivered promptly despite known supply challenges.
Our Case Overview
Our Client, a business based in Poland, engaged with the Defendants based on assurances of consistent large orders of glove supplies and reliable delivery times. These representations were made during a period of high demand, and the large deposit payment was made in reliance on these assurances. However, after the deposit was fully paid, it became evident that the assurances were misleading, as the Defendants failed to deliver.
Key evidence presented during the trial included emails and message records showing the Director’s repeated representations made, prior to the deposit payment. Under cross-examination, the Director acknowledged the difficulties in meeting the demand, which contradicted his earlier claims or promises to our Client.
Legal Findings and Judgment
After a Full Trial Conducted over 8 days, Judge HMS Yasmin Abdul Razak ruled in favor of our Client, issuing the following declarations and orders:
- A Declaration that the Director of the Sdn Bhd. had committed fraudulent misrepresentation against our Client.
- A Declaration that the Director of the Sdn. Bhd. had engaged in fraudulent trading against our Client.
- An order mandating the Director of the Sdn. Bhd. to return the deposit payment to our Client.
The Court concluded that fraudulent misrepresentation had occurred, supported by:
- Compelling evidence showing that the representations were knowingly false or made without a genuine belief in their truth.
- Proof that our Client relied on these false assurances/promises, resulting in significant financial loss.
- Confirmation that the representations were made to induce the Deposit payment without any realistic plan to fulfil the agreement.
This judgment highlighted the principle that the corporate structure of a Sdn. Bhd. does not shield its directors from personal liability in cases involving fraudulent conduct.
Practical Takeaways for Businesses
This case underscores the importance of careful measures in cross-border transactions, especially for foreign businesses. Key considerations include:
- Verification: Ensuring that representations from business partners are substantiated through due diligence, particularly during periods of high demand.
- Contractual Protections: Strengthening agreements with clear terms can provide added security, outlining each party’s obligations and recourse in case of non-performance.
- Awareness of the Limitations of Sdn. Bhd. Structures: Understanding that while Sdn. Bhd. structure offers corporate protection, fraudulent misrepresentation can still expose Company Directors to personal liability beyond these protections.
- Proactive Legal Action: Seeking legal advice early can help secure important evidence and reinforce a claim if issues arise.
Broader Implications for Business Practices
This case highlights the necessity of vigilance and due diligence in commercial transactions. While ‘trust’ is an integral part of business relationships, it should be balanced with strategic legal safeguards. This example illustrates that when misrepresentation is suspected, pursuing a well-founded legal claim promptly, can facilitate the recovery of losses and ensure accountability.
Note: This Article does not constitute legal advice. For further information, don’t hesitate to contact us.