UNJUST ENRICHMENT AGAINST SANCTITY OF A CONTRACT : TAN CHONG INDUSTRIAL EQUIPMENT SDN BHD V TRANSNASIONAL EXPRESS SDN BHD & 6 ORS

UNJUST ENRICHMENT AGAINST SANCTITY OF A CONTRACT : TAN CHONG INDUSTRIAL EQUIPMENT SDN BHD V TRANSNASIONAL EXPRESS SDN BHD & 6 ORS

The principle of unjust enrichment ensures that no one is allowed to retain a benefit obtained at another’s expense without a valid legal justification. The Court’s role aims to restore fairness by requiring the enriched party to make restitution to the one who suffered a corresponding loss. This often arises in situations such as mistaken payment, services rendered without compensation or benefits obtained through invalid or unenforceable contracts.

BRIEF BACKGROUND

By way of background, in the case of Tan Chong Industrial Equipment Sdn Bhd v. Transnasional Express Sdn Bhd & Ors,[1] the appellant, Tan Chong, leased buses to the respondents, who defaulted on payments, accruing a debt of RM32.92 million. Following the termination of the agreements, Tan Chong repossessed the buses and negotiated a Settlement Agreement (SA), which included transferring a piece of land valued at RM16 million and instalment payments for the remaining debt. The agreed purchase price of the piece of land in the SA and the Sales and Purchase Agreement was RM16 million. When the respondents defaulted on the instalments, they alleged that the land transfer was undervalued, in that the piece of land is valued at RM55.6 million, resulting in unjust enrichment for Tan Chong. They filed a suit for restitution of RM22.7 million based on unjust enrichment.

POSITION OF LAW

Prior to Tan Chong Industrial Equipment Sdn Bhd (supra), the Malaysian Courts have provided a thorough understanding of the principle and application of unjust enrichment and the remedy of restitution. In the landmark decision of Dream Property Sdn Bhd v Atlas Housing Sdn Bhd, the Federal Court held that the measure of restitution must reflect the full extent of the benefit conferred on the defendant. Further, the Court there set out a few criteria for establishing unjust enrichment:- [2]

  • that the Defendant has been enriched;
  • that the enrichment is at the Plaintiff’s expense;
  • that the enrichment at the Plaintiff’s expense is unjust; and
  • that there are no applicable defenses against restitution.

Another crucial deciding factor in Dream Property (supra) in allowing a claim for unjust enrichment is that the pertinent or subject agreement in the said case has been terminated prior to the commencement for unjust enrichment. This, as will be seen is a important and common element in cases deciding in favour of unjust enrichment.

In Kosbina Konsult (K) Sdn Bhd (in liquidation) v Madu Jaya Development Sdn Bhd, Kosbina, the appellant, was awarded a government contract for a construction project and subcontracted the work to Danaukhas Holdings Sdn Bhd. Due to delays, the subcontract was reassigned to Madu Jaya Enterprise Sdn Bhd (MJE), which was owned by the same individual as Madu Jaya Development Sdn Bhd (the respondent). When the government terminated the main contract, Kosbina pursued arbitration against the government, ultimately receiving an award of RM21.87 million. The respondent, arguing it had performed the project works, claimed entitlement to a share of the arbitration award under the principles of unjust enrichment and constructive trust.

The High Court ruled in favor of the respondent, finding it unconscionable for Kosbina to retain the entire arbitration award and awarded the respondent RM8.36 million. However, on appeal, the Court of Appeal overturned this decision, holding that the respondent’s claim was barred by limitation and issue estoppel, as it was a privy to MJE, whose similar claim had been dismissed earlier. The Court emphasized that unjust enrichment could not override the terms of the subcontract.

Her Ladyship Tengku Maimun JCA (now the Honourable Chief Justice) expressed in agreement the principles enunciated in Dream Property (supra) held as follows:-[3]

“[35] As propounded by the Federal Court in Dream Property Sdn Bhd v Atlas Housing Sdn Bhd [2015] 2 MLJ 441; [2015] 2 CLJ 453, the law of unjust enrichment is recognised by which justice is done in a range of factual circumstances and the restitutionary remedy is applied to attain justice. Nonetheless we observed that in Dream Property, the law of unjust enrichment was articulated under the context of ‘The Relief Questions’. This is what the Federal Court said:

[93] So far we have dealt with the issue pertaining to the liability questions. We conclude that the defendant only paid 10% deposit of the purchase price and failed to pay the balance of the purchase price even though obliged to do so under the SPA. As correctly decided by the High Court and the majority of the Court of Appeal, the plaintiff had, in our judgment, validly terminated the SPA.

[94] This brings us to the relief questions.

The Relief Questions

Unjust Enrichment and Restitution

[95] To a large extent, this issue deals with the restitution that the defendant claims it is entitled to, over and above the costs of construction of the mall, under the law of unjust enrichment.

[36] The decision of the Federal Court in Dream Property in our view is of no assistance to the respondent. In Dream Property, the Federal Court did not move away or disregard the sanctity of contract between the parties as can be seen below:

[107] … The critical issue that needs to be addressed is what constitutes unjust enrichment and undue benefit, and in what manner should a purchaser of vacant land granted restitutionary relief when he has constructed a building on the said piece of land pursuant to and expressly permitted by a contract between him and the vendor.

[37] We therefore agreed with the appellant that the learned judge erred in law in that His Lordship’s decision is akin to allow the law of unjust enrichment to displace, defeat, override and/or undermine the clear terms of the subcontract between the appellant and the respondent.”

THE DECISION IN TAN CHONG INDUSTRIAL EQUIPMENT SDN BHD (SUPRA)

The Respondents filed a suit alleging unjust enrichment and coercion, claiming the transferred land’s true value was RM55.6 million, far exceeding the debt owed, and sought restitution of the overpaid amount. The High Court initially ruled in favor of the respondents, but upon appeal, the Court of Appeal found that the respondents had not invalidated the Settlement Agreement or the Sale and Purchase Agreement (SPA). The appellate court ruled that without setting aside these agreements, the Respondents have elected to treat both the SA and SPA as valid and binding resulting in claims for unjust enrichment could not stand, emphasizing the sanctity of contracts. The Court in allowing the appeal and setting aside the High Court’s decision held that :-

  • a party is in law bound and cannot resile from the terms of the agreement. The Court has a solemn duty to defend, protect and uphold the sanctity of the contract entered into between the parties, except if the contract is vitiated by vitiating circumstances;
  • it is trite that the Court should not rewrite the terms of the contract between the parties, even if the Court deems it to be fair or equitable;
  • if the parties have explicitly agreed to their respective obligations under a contract, then the issue of restitution or unjust enrichment pertaining to those explicit terms does not arise – their obligations are fulfilled based on the terms of the contract that they have agreed upon.

CONCLUDING REMARKS

This welcome decision highlights the importance of honoring contractual terms and underscores the principle that claims for unjust enrichment cannot override express agreements unless such agreements are invalidated. The Court found that the respondents failed to challenge or set aside the Settlement Agreement (SA) and Sale and Purchase Agreement (SPA), which were entered into voluntarily, and therefore could not claim unjust enrichment based on the overvaluation of the land. This judgment reinforces the sanctity of contracts in commercial dealings, emphasizing that restitutionary claims must align with the agreed contractual framework and cannot subvert its terms unless there is a legal basis for invalidation, such as fraud or coercion.

If you have any questions or queries, please contact our Dispute Resolution Partner, Mr. Brandon Cheah (brandon@nzchambers.com).

Author: Brandon Cheah

References:

[1] [2024] CLJU 1977

[2] [2015] 2 MLJ 441

[3] [2019] 3 MLJ 471