Termination of Contract on the Ground of National Interest

Termination of Contract on the Ground of National Interest

The termination of a contract on grounds of national interest is a powerful legal tool enabling governments or designated authorities to end or modify agreements when the welfare of the public or the protection of national priorities demands it. Such authority is essential for balancing the respect for contractual obligations with the need to respond to pressing societal concerns such as: public safety, economic stability or national security.

The Chief Justice Salleh Abas is of the view that the concept of national interest extends beyond national security and, in fact, aligns closely with public interest. National security, however, represents a distinctly different type of interest altogether[1]. According to an Indian case; anything that impacts national interest will, inevitably influence the interests of everyone[2].

However, from the Australian perspective, national interest is a different concept to public interest[3] and what is entrusted as national interest is to be determined by the Minister which must be attained reasonably[4].

Several advantages of termination of contract due to national interest can be derived from the case Sri Ledang Ventures Sdn Bhd (In Liquidation) v Kerajaan Malaysia;[5]

Key Advantages of Invoking National Interest

  1. Flexibility in Government Operations: it allows government to quickly adapt to changing national priorities and security needs.
  2. National Interest Considerations: ensure the government contracts can be aligned with national goals and objectives.
  3. Protection of Public Resources: allows government to terminate contracts that no longer serve public interest, ensuring public resources are used efficiently.

Kerajaan Malaysia v PDS Training Camp Sdn Bhd and another appeal [2024] MLJU 2388

In the High Court, PDS Training Camp Sdn Bhd (PDS) challenged the validity of clause 36 of the contract, arguing it was void under Malaysia’s Contracts Act 1950 and hence, not binding. The clause allowed the Government to terminate the contract at any time with a 30-day notice, citing national security interests, and barred PDS from claiming any losses due to such termination.

The Judicial Commissioner ruled in favour of the PDS, deeming clause 36 as an “exclusion clause” that unfairly prevented PDS from seeking damages, thereby violating Section 29 of the Contracts Act. The court referenced a Federal Court decision that highlighted the imbalance of bargaining power, noting that the clause disproportionately favoured the Defendant and was against public policy, as it oppressed PDS, who had complied with contractual obligations and invested in the project.

Upon appeal, the Court of Appeal found the lower court’s decision to be flawed and upheld the legality of the termination under the terms set forth in the contract. There was no specific discrimination against the PDS and that the termination was justified due to financial constraints faced by the Government. It was concluded that the PDS’s claims for consequential damages were excluded under clause 36.3, this did not completely restrict the PDS’s rights but only barred claims for losses resulting from the termination.

Furthermore, the court highlighted that the High Court judge made a mistake in applying the legal principles concerning unequal bargaining power and exclusion clauses, as these principles did not apply in this instance. This was because the contract was a government tender, and the terms were made available to all potential bidders.

The Pitfalls of National Interest

The concept of national interest is often invoked with the intention of prioritising the welfare and security of the populace. However, despite its noble connotation, the term is not immune to misuse. The case of AK Kontraktor Sdn Bhd v State Government of Sabah & Anor[6] paints a picture where the invocation of national interest serves as a facade for actions that may not genuinely reflect the common good.

In brief, the AK contract was established by the respondents as part of their public duties and responsibilities as public authorities. The wrongful and unlawful termination of the AK contract was justified under the premise of national interest, national policy, or national security in clause 52.1(a) of their contract. Essentially the applicant as never told the real reason for termination nor were they given the opportunity to be heard. Termination can have a significant impact on a business, especially when operations have already commenced. Ending a contract without a valid reason is therefore inherently unjust.

Upon reviewing the evidence, the court was not convinced that the actions of the first respondent genuinely align with the concepts of national interest, national policy, or national security.

Consequently, the decision to terminate the AK contract was unlawful, exceeding its jurisdiction, violating principles of natural justice, and was found to be irrational, unreasonable, and made in bad faith with ulterior motives. This case serves as a reminder that while national interest is a powerful concept, it must be wielded with caution to prevent exploitation.

Conclusion

While termination of contracts for national interest is sometimes inevitable as our country progresses, there are key considerations to keep in mind to ensure your company’s interests are protected.

When contracting with the government, companies should pay close attention to termination clauses to secure fair compensation if the agreement is unexpectedly ended. Clear terms around reimbursement for costs incurred and payment for completed work provide a stronger basis for compensation. These clauses help shield companies from abrupt financial impacts and ensure more predictable outcomes.

Additionally, consulting with legal and contract advisors who specialise in government contracts can provide essential protection. Such experts can help identify potential risks, negotiate favourable terms, and ensure compliance with regulatory protections that govern government contracts. Understanding these protections empowers companies to defend their interests and seek fair treatment if the contract is terminated.

If a government contract is terminated on the grounds of national interest and you believe this decision is unjust, you may have the option to seek a judicial review. Ultimately, the success of this review hinges on whether the termination was genuinely based on national interest.

In cases of successful judicial review, such as in Mohd Faizal bin Musa v Menteri Keselamatan Dalam Negeri[7], the Court of Appeal highlighted that judicial review serves to assess whether an authority acts within its lawful power. While the Minister had broad discretion, it must still be exercised within legal boundaries to avoid misuse. Similarly, in Hong Leong Equipment Sdn Bhd v Liew Fook Chuan and another appeal[8], the court ruled that if the Minister fails to provide sufficient reasons, the decision could be deemed unreasonable, leading to the success of the judicial review.

To conclude, the concept of national interest in contract termination underscores a balance between prioritising societal welfare and upholding fairness and accountability in government actions. The courts play a vital role in ensuring that such terminations genuinely align with national interests rather than serve unrelated or improper purposes.

If you have any questions or queries, please email us at general@nzchambers.com.

Authors:

  1. Wan Tasnima
  2. Alif Mustaqim

References:

[1] Theresa Lim Chin Chin & Ors v Inspector General of Police [1988] 1 MLJ 293.

[2] Christian Medical College, Vellore Association Versus Union of India and Others [2020] 4 MLJ 304.

[3] Acting Minister For Immigration, Citizenship, Migrant Services And Multicultural  Affairs v CWY20 (2021) 395 ALR 57

[4] Madafferi v Minister for Immigration and Multicultural Affairs (2002) 118 FCR 326

[5] [2024] MLJU 1952.

[6] [2023] 11 MLJ 489.

[7] [2018] 3 MLJ 14.

[8] [1996] 1 MLJ 481.