Mutual Variation of Written Contract: Port Kelang Authority v Kuala Dimensi Sdn Bhd [2024] 1 MLJ 252
Background Facts
In 1993, the Government of Malaysia initiated efforts to develop and transform Port Klang into a national load centre and transhipment hub through the Port Klang Free Zone (“PKFZ”) project. The Plaintiff, Port Kelang Authority, appointed the Defendant, Kuala Dimensi Sdn Bhd as a turnkey contractor to construct and develop the PKFZ project. The parties entered into a series of agreements to facilitate this development:
- Development Agreement dated 27 February 2003 (“DA1”)
- Supplemental Agreement dated 26 May 2003 (“DA2”)
- Supplemental Agreement dated 27 March 2004 (“DA3”)
- The Supplemental Agreement for the additional development works dated 30 November 2005 (“ADW1”)
Under ADW1, the Defendant was appointed to design, construct, finance and complete additional works, including works on junction improvements to the PKFZ, construction of electrical infrastructure and construction of a business-class hotel near the proposed exhibition centre. The Defendant agreed to finance the costs amounting to RM510.38 million, repayable by the Plaintiff at 5% per annum interest.
- The Supplemental Agreement for additional development works dated 26 April 2006 (“ADW2”)
In ADW2, the parties agreed to revise the interest chargeable on the additional development works in ADW1 from 5% to 7.5% per annum, resulting in an additional payment of RM49.367 million to the Defendant.
- The supplemental agreement for new additional development works to DA1 dated 26 April 2006 (“NADW”)
In the NADW, the Defendant was appointed as a turnkey contractor to design, construct, finance and complete new additional development works, which comprised of concrete trenching, electrical works, civil infrastructure works, road works for an estimated cost of RM335.8 million, also repayable by the Plaintiff at 7.5% per annum interest.
High Court Decision
The Plaintiff filed an action at the High Court, seeking a declaration that the ADW2 was null and void due to lack consideration. However, the High Court dismissed the claim, on the following grounds:
- ADW2 should be read together with ADW1 as the consideration for the increased interest rate in ADW2 was the completion of additional works under ADW1;
- The Plaintiff did agree to enter ADW2 with the Defendant in the first place; and
- The parties intended to enter ADW2 to alleviate the financial difficulties faced by the Defendant in carrying out the additional works as agreed in ADW1 and NADW.
Court of Appeal Decision
The Plaintiff further appealed to the Court of Appeal, arguing that:
- The Defendant did not expressly plead in its defence that the completion of additional works under ADW1 constituted consideration for the interest rate increase in ADW2.
There is nothing in the Defendant’s pleaded defence, either expressly or by implication, to suggest that the consideration for ADW2 was the works completed under ADW1. Hence, the learned High Court Judge’s finding that the consideration for ADW2 was the completion of the additional works under ADW1 was clearly misconstrued since the Defendant did not plead this issue or fact.
- ADW2 lacked considerations from the Defendant, rendering it void under Section 26 of the Contracts Act 1950
The general position of the law is that a contract without consideration is void.
26. An agreement made without consideration is void, unless —
it is in writing and registered
(a) it is expressed in writing and registered under the law (if any) for the time being in force for the registration of such documents, and is made on account of natural love and affection between parties standing in a near relation to each other;
or is a promise to compensate for something done
(b) it is a promise to compensate, wholly or in part, a person who has already voluntarily done something for the promisor, or something which the promisor was legally compellable to do; or
or is a promise to pay a debt barred by limitation law.
(c) it is a promise, made in writing and signed by the person to be charged therewith, or by his agent generally or specially authorized in that behalf, to pay wholly or in part a debt of which the creditor might have enforced payment but for the law for the limitation of suits.
In the present appeal, the Plaintiff submitted that based on the plain reading of the terms in ADW2, there is no consideration on the Defendant’s part to the Plaintiff for the interest rate increase from 5% to 7.5% per annum. The Plaintiff claimed that the sole purpose of ADW2 was to increase the interest chargeable under ADW1, which resulted in the additional payment of RM49.367 million to the Defendant. Under ADW2, there was nothing provided by the Defendant in return as consideration.
The Defendant’s first contention is that all contracts between the parties on the development of the PKFZ project should be read together as they were all one composite contract. This is because the PKFZ was a continuing development project from 2003 to 2008, which involved a series of transactions and contracts between the Plaintiff and the Defendant. It was also submitted that there was a nexus between ADW2 and ADW1, and the effect of ADW2 was to vary the contractual terms under ADW1. It was further submitted that the ADW2 should be read together with ADW1.
The Court of Appeal disagreed with the High Court’s reasoning and rejected the Defendant’s argument that all contracts related to the PKFZ project should be treated as one composite contract. Citing Sri Kelangkota-Rakan Engineering JV Sdn Bhd & Ors v Arab-Malaysian Prima Realty Sdn Bhd & Ors,[1] the court reiterated that agreements could only be read together if they were executed contemporaneously and for a single transaction.
In the present matter, the court found that ADW1 and ADW2 were not executed contemporaneously. Eventhough ADW2 and NADW were executed on the same day, it involved separate and distinct scopes of works, despite all those works were for the PKFZ project. The parties already agreed that the Plaintiff was to pay for the additional works to be carried out by the Defendant in the agreed sum under ADW1 plus 5% interest per annum is the consideration in ADW1 and not in ADW2. There is no mention of any consideration on the Defendant’s part in ADW2.
Further, referring to Sritharan Naidu a/l Sundara Rajoo v Dato’ Dr Gengatharan @ Jeganathan a/l Venkatesan & Anor,[2] the Court reiterated that consideration is fundamental to the validity of any contract. Again reiterated, an agreement without consideration is void unless it falls under the exceptions in Section 26 of the Contracts Act 1950.
- The Plaintiff is not estopped from challenging the validity of ADW2
The Defendant contended that the Plaintiff is estopped from challenging the validity of ADW2 since the Plaintiff has agreed, in its own volition, to enter into ADW2 with the Defendant. In the Federal Court case of Silver Corridor Sdn Bhd v Gallant Acres Sdn Bhd & Anor,[3] estoppel, being an equitable principle cannot operate to defeat clear statutory provisions of law.
Therefore, the Court of Appeal agreed with the Plaintiff that the doctrine of estoppel which the Defendant raised cannot operate against the clear requirement for consideration in a valid contract as statutorily provided under section 26 of the Contracts Act 1950 unless the contract falls under any of the exceptions mentioned therein, which is not the case here.
Conclusion
This ruling reaffirms the sanctity of the principle of consideration in Malaysian contract law. The decision not only underscores the necessity of consideration in variations to existing contracts but also serves as a cautionary tale for parties attempting to enforce one-sided contractual terms without establishing mutual benefit to the other party.
From a commercial perspective, this case demonstrates the importance of ensuring that any variation or supplemental agreement is accompanied by a clearly defined and mutual exchange of value. Without such consideration, the risk of unenforceability looms large, potentially leading to significant financial consequences.
As a conclusion, consideration is not a mere formality but rather, the lifeblood of a valid and enforceable agreement. Parties must ensure that every contract and variation thereof is supported by genuine and reciprocal obligations to withstand legal scrutiny. This decision not only upholds the integrity of contract law but also serves as a reminder that fairness and reciprocity remain central to enforceable of any given agreements.
If you have any questions or inquiries, contact our Associate, Ms. Nurul Husna Shariff (husna@nzchambers.com).
Author: Nurul Husna Shariff
References:
[1] [2001] 1 MLJ 324
[2] [2019] MLJU 289
[3] [2016] 5 MLJ 1