Contractual Dispute – An Objective or Subjective Approach?

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Contractual Dispute occurs when parties have conflict over the term of contracts. The basic principle of construction of contracts is that effect must be given to the intention of the parties. This issue was one of the issues that were tackled in the Court of Appeal case of Abdul Razak Jundar Khan & Ors v Mustapha Mohammed & Ors1.

Contractual Dispute in Malaysia – Brief facts of the case

The parties who filed the appeal (Abdul Razak and Co) were residents of Padang Meiha Estate (the Estate) and the former employees of East Asiatic Company (M) Bhd (East Asiatic), who owns the Estate. The Estate was sold to one of the parties objecting to this appeal, MBF Holdings Bhd (MBF), subject to the terms of the SPA. Subsequently, Abdul Razak and Co’s employment was terminated by East Asiatic.  At this juncture, a sequence of event occurred:

  1. The parties who are objecting to this appeal (Mustapha Mohammed & Co) actually offered employment to the former employees of East Asiatic. Abdul Razak & Co did not accept the offer;
  2. Mustapha Mohammed & Co commenced legal action against East Asiatic for failure to deliver vacant possession of the Estate;
  3. A settlement agreement was entered between Mustapha Mohammed & Co and East Asiatic, whereby East Asiatic agreed to pay a certain sum to Mustapha Mohammed & Co to amicably settle the matter.

One of the terms of the settlement agreement stipulated that a portion of the money that was paid to Mustapha Mohammed & Co was intended to compensate the former employees of East Asiatic (as termination and lay-off benefits and services rendered by them to East Asiatic). However, the proviso to the terms of the settlement agreement also states that Mustapha Mohammed & Co has the discretion to utilize the monies as they see fit.

See where this is going? The monies mentioned above were never used to pay off Abdul Razak & Co. This is where the current dispute kicks in- Abdul Razak and Co claiming for the monies that  Mustapha Mohammed & Co owes them.

The court’s decision

The High Court sided with Mustapha Mohammed & Co. In coming to its decision, the High Court (amongst others) held that as per the proviso to the terms of the settlement agreement, Mustapha Mohammed & Co has the discretion to use the sum provided as they see fit, even though it the sum was initially meant to compensate former employees of East Asiatic as termination and lay-off benefits and services rendered by them to East Asiatic.

On appeal, the Court of Appeal held otherwise.

The court’s rationale – how did the court ascertain the parties’ intention?

In coming to its decision, the Court of Appeal held in construing the intention of the parties in a contract, a court must not take a simplistic approach and ignore the true purport and intent of the parties when they enter into a contract. In other words, the court must look at the intention of the parties objectively in the event there is a contractual dispute i.e. why did the parties enter into a contract.

So what was the intention of the parties in this matter? The court noted that one of the intentions of the parties was to compensate the former employees of East Asiatic. There was ample evidence to back up this notion:

  1. The terms of the settlement agreement which clearly stipulated the need to pay compensation to the former employees of East Asiatic;
  2. The recitals to the settlement agreement further purport the intention of the parties. (FYI, the court has held that the recitals of an agreement form a part of the agreement2);
  3. Schedule 1 of the settlement agreement listed down the names of the former employees of East Asiatic (which includes Abdul Razak & Co); and
  4. There were specific provisions in the SPA relating to the entitlement of compensation to the former employees of East Asiatic.

Conclusion

Long story short, the court must take an objective approach when it comes to construing the intention of the parties in a contract. To ascertain the intention of the parties, the court must read the terms of the contract as a whole including the recital to the agreement if any, must not take a simplistic approach to the issues at hand, and must not fixate on one particular word or phrase or clause to the neglect of the overall purpose of the document.


1. [2020] 2 CLJ 769
2. Luggage Distributors (M) Sdn Bhd v Tan Hor Teng & Anor [1995] 3 CLJ 520.

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