Richallenge Corporation Sdn Bhd v Poteck Enterprise Sdn Bhd

RICHALLENGE CORPORATION SDN. BHD v POTECK ENTERPRISE SDN BHD [2020] MLJU 176

COURT OF APPEAL

Unlawful Termination (Breach of Contract)

Facts 1.     The Appellant (Plaintiff in High Court) in this case is Richallenge Corporation Sdn Bhd, who is a subcontractor appointed by the Respondent (Defendant in the High Court), Poteck Enterprise Sdn Bhd for the project awarded by the Ministry of Education (“the Employer”), described as “Cadangan Pembangunan Projek Pendidikan Bagi SMK Tandek 2 Kota Marudu, Sabah (“the Project”).  Whereby the contract entered into between the Employer and the Respondent is known as (“the Main Contract”).

2.     According to the terms in SCA, it was agreed by the parties that the Respondent’s entitlement was 15% of the total SCA sum which is RM 6,216,750.00.

3.     The Respondent terminated the subcontract agreement (“the SCA”) with the Appellant  since the Appellant had failed to commence the works as scheduled and delayed the completion of the Project.

4.     The Appellant then denied the accusation as there were many factors such as inclement weather and sued the Respondent for unlawful termination.

5.     The High Court dismissed the claim made by the Appellant and allowed the Respondent’s counterclaim for losses and damages. The Appellant than appealed to the Court of Appeal.

Issue(s) 1.     Whether termination is wrong under the law and invalid?

2.     Whether there is any facts that shows the subcontractor had not committed any fundamental breach?

Ratios 1.   Valid termination of the SCA.

(a)      In order to determine a valid termination, such terms must be expressly stated in the SCA.  In this case, the SCA specified the grounds for termination as well as the right to give notice in order to rectify the breach.

(b)      The Court of Appeal after examining the terms in SCA found that the termination in this case is invalid. This is because, termination is only permissible as per clause 10 of the SCA which stipulates that termination can only take place if the Main Contract with the Employer was terminated.

(c)      As specified in clause 11.3 of the SCA (the termination clause), such clause only permits the Respondent to engage with another contractor to complete the works provided that the Appellant is given notice to identify and rectify the breach.  If the Appellant fails to rectify, then the Respondent has the option to appoint a new contractor.

(d)      This Court founds that the Respondent had ignored the term stated in the termination clause and decided to terminate the SCA.

2.   Fundamental breach of the terms of SCA.

(a)  It was found that the Appellant’s alleged refusal to commence works was a fundamental breach.

(b)     Clause 10 of the SCA stipulates that the Respondent may not terminate the SCA unless and until the Main Contract itself between the Employer has been determined, and the determination was made as a result of breach of the sub contract by the Appellant.

(c)     In this case, the Main Contract was still in effect and there was no evidence that the Employer intended to terminate the Main Contract.

(d)   Clause 11.3 of the SCA expressly mentioned that the Appellant must strictly adhere to the approved work schedule.  If the Appellant fall behind 5% (or more) of the approved work schedule for whatever reason, and a notice was issued by the Employer to the Respondent, then the Appellant shall, rectify the breach.

(e)      As for that, there is an evidence adduced by the General manager of the Respondentthat the Appellant had completed more than 5% of the approved work schedule.

(f)   Based on the SCA, the grounds for termination are specified in the SCA and the same provides a right of notice in order to rectify the breach.

(g)     In this case, the Respondent decided to terminate the SCA and disregard the express contractual term.  Hence, the Court of Appeal emphasised that it cannot change the terms of the contract that the parties have agreed to.

(h)      Section 40 of the Contract Act 1950 (“CA”) (Repudiation) states that –

“Effect of refusal of party to perform promise wholly

40. When a party to a contract has refused to perform, or disabled himself from performing, his promise in its entirety, the promisee may put an end to the contract, unless he has signified, by words or conduct, his acquiescence in its continuance”.

(i)    In relation to this, the Court of Appeal referred to the case of Ching Yik Development v Setapak Heights Development Sdn. Bhd [1997] 1 CLJ 287 where the Court explained that the application of section 40 CA is that, a contract is not automatically brought to an end by repudiatory breach.  Such right is depending on the nature of the breach of the contract and conducts of the parties and to determine whether the breach is sufficient to allow the other party to rescind the contract.

(j)      Under section 40 CA, the rights of the non-defaulter to repudiate a contract only arises when the defaulter efused to perform the whole of his promise.

(k)    If there is any performance done by the Appellant, the Respondent may not terminate the contract and as in this case, the Appellant had partially performed its obligations under the SCA.

Decision

1.     The Court of Appeal set aside the High Court’s decision and allowed the appeal with costs of RM50,000.00 in the Court of Appeal and the High Court to the Appellant, subject to payment of allocator.

Key Take Away

1.     Parties to a contract are bound by their obligations as provided in the contract, and they must either execute, or undertake to perform their promises.

 

2.     Fundamental breach of the contract occurs when one of the parties to the contract fails to fulfil the obligations.  To assess whether there is a fundamental breach, the compliance of the parties to the terms in SCA must be firstly determined. In doing so, the factual matrix of the case must be analysed alongside the terms of the SCA.

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