Contract 101: Can A Third Party Indemnify The Original Parties To A Contract?

Scenario:

1. Ali and Muthu entered into a contract.
2. Muthu breaches the contract and was ordered by Court to pay Ali damages.
3. Ali and Ah Hock entered into a contract.
4. Ali breaches the contract and Ah Hock sues for damages.

Since Muthu is contractually liable to Ali in the previous suit, can Ali make Muthu a third party in the current suit and ask Muthu to indemnify him by paying damages directly to Ah Hock?

We will briefly tackle this question by looking at the case of Majlis Bandaraya Petaling Jaya v Digital Viva Sdn Bhd & Anor.

Brief facts of the case

Digital Viva entered into a contract with Tyewei Marketing Sdn Bhd, whereby, Tyewei marketing agreed to grant Digital Viva the exclusive right to utilize the advertising panels of its 500 recycling 3R boxes in Petaling Jaya in return for a sum of monies. However, Tyewei Marketing only managed to install 200 3R boxes (instead of the 500 as per the contract). Digital Viva sued. The court sided with Digital Viva and ordered Tyewei Marketing to pay Digital Viva damages for the loss suffered as a result of the breach of contract.

Tyewei Marketing then sought leave from the High Court to file a third-party notice against MBPJ seeking an order asking MBPJ to indemnify them against Digital Viva. The High Court granted Tyewei Marketing’s request.

Why was MBPJ caught in the crossfire?

1. Tyewei Marketing entered into a contract with MBPJ in which MBPJ granted Tyewei Marketing the rights to install and maintain 500 3R boxes in PJ for 5 years for a certain amount of monies.
2. Along the way, MBPJ breached the contract, and Tyewei Marketing (similarly) only managed to 200 3R boxes at the end of the day.
3. Tyewei sued MBPJ. The court found in favor of Tyewei Marketing and ordered MBPJ to pay Tyewei Marketing damages; and
4. Consequently, MBPJ made a full payment to Tyewei Marketing.

It was the above incident that lead to Tyewei Marketing breaching the current contract (they were unable to install the remaining 300 3R boxes via the contract between them and Digital Viva).

What did the court say?

The High Court sided with Tyewei’s application and ordered MBPJ to pay damages to Digital Viva.

MBPJ appealed the High Court’s decision to the Court of Appeal. On appeal, the court reversed the findings of the High Court and sided with MBPJ.

The court’s rationale

In coming to its decision, the Court of Appeal, amongst others,  held that:

1. Third-party proceedings constitute a separate action between a defendant (in this present suit, Tyewei Marketing) against a third party (MBPJ) within the main action.
2. If Tyewei Marketing won the case against MBPJ (as it with this case), a judgment can be ordered (according to  Order 16 Rule 7 of the Rules of Court) in favour of Tyewei Marketing against MBPJ- MBPJ can be liable to pay damages to Tyewei Marketing assuming Tyewei Marketing has won the case.
3. However, the order cannot be made in a way in which to order MBPJ to directly pay damages to Digital Viva as this would contradict the Rules.

This was further compounded by the fact that:

1. MBPJ was never a party or a co-defendant to the present action between Digital Viva and Tyewei Marketing- MBPJ was the defendant in an earlier suit between Tyewei Marketing and MBPJ. For a third party proceeding to succeed, the Court held that MBPJ must be a party to the present action.
2. Both the earlier suit and the present suit are not correlated nor is it relevant in any way to one another- the earlier suit was premised upon a contract entered between Tyewei Marketing and MBPJ whereas the present suit is premised upon a contract entered between Digital Viva and Tyewei Marketing. The court held that Tyewei Marketing cannot breach its obligations in the present suit and then rely on the breaches of MBPJ in the earlier suit to deny their liability.
3. It must also be noted that the earlier suit has been settled (when MBPJ paid Tyewei Marketing damages for their breaches) and as such, bears no relevance to the present suit.

And there you have it. Hopefully, you have learned something new today!!

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