Court of Appeal Upholds Contractual Clause Allowing Government to Terminate Contract in the National Interest

The Court of Appeal in Kerajaan Malaysia v. PDS Training Camp Sdn Bhd (Court of Appeal, Civil Appeal No. N-01(NCvC)(W)-324-06/2023) recently upheld a contractual clause that allowed the Government of Malaysia (“the Government”) to terminate the contract on the grounds of national interest.

The Government entered a contract with PDS Training Camp Sdn Bhd (“PDS”) for PDS to, amongst others, provide the Government with training facilities and food services for the Program Latihan Khidmat Negara (“PLKN”) at the PLKN Camp PDS (“the Contract”).

The Contract contained a clause (“Clause 36”), which allowed the Government to terminate the Contract with 30 days’ written notice if deemed necessary for national interest, national policy or national security, as follows (translated to English): -

“(36.1) Notwithstanding any provision of this Contract, the GOVERNMENT may terminate this Contract by giving not less than thirty (30) days written notice to that effect to the Contractor (without any obligation to give any reason thereof) if the GOVERNMENT considers that such termination is necessary for national interest, national policy or national security.

(36.2) For the purpose of this clause, what constitutes “national interest”, “national policy” and “national security” shall be solely made and determined by the GOVERNMENT and such determination shall for all intent and purposes be final and conclusive and shall not be open to any challenge whatsoever.

(36.3) The parties agree that the CONTRACTOR shall not be entitled to claim for any losses including loss of income, compensation, claim, damages or the like by reason of the termination of the Contract.”

The Government terminated the Contract early, invoking Clause 36. PDS commenced a suit against the Government seeking, amongst others, a declaration that Clause 36 was void and in contravention of the Contracts Act 1950. PDS argued that Clause 36 contravened Article 8 of the Federal Constitution (equality before the law) and the Contracts Act 1950, particularly section 24 (regarding unlawful considerations and objects) and section 29 (which provides that an agreement in restraint of legal proceedings is void).

The High Court allowed PDS’ claim and found that Clause 36 was a form of exclusion clause that restricted PDS’ right to exercise its rights in Court, was against public policy, and contravened section 29 of the Contracts Act 1950. The High Court also found an imbalance in bargaining power favouring the Government.

On appeal, the Court of Appeal overturned the High Court’s decision and held as follows: -

1. No Violation of Article 8 Federal Constitution: Clause 36 did not violate Article 8 of the Federal Constitution, as there was no discrimination made specifically against PDS by the Government that violated the protection accorded by Article 8 of the Federal Constitution.
2. No Infringement of Section 29 Contracts Act 1950: Clause 36.3 of the Contract did not infringe section 29 of the Contracts Act 1950, as not all of PDS’ rights and remedies were restricted by the Government’s invocation of Clause 36.1. PDS was only disallowed from claiming loss and damage consequential to the termination of the Contract, but not the contract consideration which has already accrued to PDS up to the termination of the Contract.
3. No Unequal Bargaining Power: The Contract was a services contract procured by PDS on an open tender basis at the Government’s invitation. The terms of the Contract required by the Government were made known to all tenderers prior to submission of the tender, and PDS was at liberty not to bid if the requisite terms were unacceptable. There was also no evidence that PDS sought to delete Clause 36 from the Contract at any time.
4. No Infringement of Section 24 Contracts Act 1950: The Contract did not infringe section 24 of the Contracts Act 1950 because the objects therein were not unlawful.
5. Not Contrary to Public Policy: PDS still has legal recourse if Clause 36 was used capriciously in bad faith. However, the Court was satisfied that Clause 36 was invoked in the national interest, particularly due to financial constraints faced by the Government, and the usage of Clause 36 was therefore not improper or in bad faith.

This Court of Appeal decision highlights the importance of reviewing contractual terms carefully before entering any contract. The Courts will seek to uphold the principles of freedom of contract and sanctity of contract, and will therefore hold parties to their agreements, except in limited circumstances.

* Written by Priscilla Faith Lim, Associate

For any related enquiries, please contact our Partner, David Mathew (davidmathew@stsp.my) or Associate, Priscilla Faith Lim (priscillalim@stsp.my).

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