Case Updates

Case Update: Federal Court rules termination clause in a contract ought to be construed strictly

Share:

Print
CONTRACT LAW
Interpretation of the terms of a contract – Termination clause – Whether in Malaysia termination clauses ought to be construed strictly – Whether headings in a contract can be used to assist in the interpretation of that contract.

Catajaya Sdn Bhd v Shoppoint Sdn Bhd and Ors
[2020] 1 LNS 2037, Federal Court
- see the grounds of judgment here

Facts In 2008, the Appellant and the Respondents had entered into a Share Sale Agreement (SSA) where the Appellant agreed to purchase all of the first and second Respondents’ issued and paid-up capital. However, the Appellant failed to pay the balance of the purchase price by the agreed Completion Date stipulated under the SSA. The Appellant had applied for an extension of time which was rejected by the Respondents on the basis that time was the essence of the SSA. Upon the rejection of the extension of time, the Appellant lodged a private caveat on the piece of land which was the Respondent’s sole asset at that material time. As a consequence, the Respondents had notified the Appellant that they wanted to exercise their right of termination pursuant to Section 11 of the SSA and to forfeit the deposit and then proceeded to file an action to remove the caveat. Despite the Letter of Termination of the SSA, the parties continued to negotiate with regard to the completion of the SSA. Following this, the Appellant notified the Respondents of their intention to terminate the SSA on the ground that the Appellant had failed to settle the balance purchase price on or before the Completion Date despite the numerous reminders given. Aggrieved, the Respondents sued the Appellant in the High Court with respect to the termination of SSA and a Power of Attorney cum Agreement for the sale of the shares. The Appellant had also filed a counter-claim against the respondent seeking reliefs under the SSA. The High Court had allowed the claim on the ground that Section 11 of the SSA is an independent and stand-alone provision with the main purpose to effect a valid termination of the SSA in the event of a fundamental breach of the agreement and concluded that the termination of the SSA by the second and third Respondents was valid and effective. Aggrieved with the decision of the High Court the Appellants appealed to the Court of Appeal. The Court of Appeal dismissed the appeal. Hence, this appeal.

Issue The main issues in this case are, whether in Malaysia termination clauses ought to be construed strictly and whether headings in a contract can be used to assist in the interpretation of that contract.

Held In allowing the appeal, the Federal Court held that termination clause in an agreement ought to be construed strictly on the ground that it is pertinent to take into consideration the context of the agreement as a whole, to examine the relevant clauses in detail and to consider the relevant factual matrix to give guidance as to the true intent of the parties. When one has to choose between two rival interpretations, the one which made more commercial sense should be preferred if the natural meaning of the words were unclear. Additionally, the Court ruled that headings to a particular provision in an agreement will not have any effect on the interpretation of that agreement or have any substantive meaning or interpretive value. This is because headings are like marginal notes in a statute. Its function is merely to serve as a brief guide to the content of the section and for reference and identification purposes only.

ZUL RAFIQUE & partners
{15 January 2021}

Please email your details to [email protected] if you would like to subscribe to our Knowledge Centre.

Let's Connect!
➭ LINKEDIN: Zul Rafique & Partners
➭ INSTAGRAM: @zrplaw