by Ira Biswas
The recent decision of the Federal Court in SPM Membrane Switch Sdn Bhd v Kerajaan Negeri Selangor  1 MLJ 464 is welcomed as it settled the question as to whether particularised reasons need to be provided in the termination of an agreement. This decision also highlights the importance of drafting terms of an agreement unambiguously to provide clarity and certainty to the parties.
B. Background facts
By way of an agreement dated 27 September 2001 (“Agreement”), the State Government of Selangor (“Respondent”) appointed SPM Membrane Switch Sdn. Bhd. (“Appellant”) to assist it with the collection of outstanding annual quit rent in Selangor. The Agreement provided a term that allowed the respondent to terminate the agreement unilaterally by giving thirty days’ notice to the appellant in the event that one of the eight grounds, as set out in Clause 8.1 of the agreement, was to occur. Clause 8.1(b) provided the right to terminate the Agreement if the Appellant was unable to perform its services under the Agreement. In clause 9, the Agreement provided the Respondent a procedure to review the Appellant’s performance under the Agreement.
The respondent sought to unilaterally terminate the agreement on the grounds that the appellant had breached terms of the Agreement. A notice of termination was issued by the respondent on 22 November 2004, providing the Appellant with 30 days’ notice. The termination was effected by a subsequent letter dated 27 December 2004. However, neither letter specified any reason for the termination.
As a result, the Appellant submitted that the termination was bad in law and defective, as the Respondent had failed to give its reason for the termination. In addition, the Appellant argued that clause 8.1(b) could only be invoked after the procedure in clause 9 of a performance review of the Appellant’s performance of services under the Agreement had been satisfied.
C. Decision of the Trial Judge
The Trial Judge ruled in favour of the Respondent. It was held that:
- the Agreement was lawfully terminated under clause 8.1(b) and that clause 9 need not be invoked before clause 8.1(b) was exercised;
- no reasons needed to be provided for a termination by the respondent under clause 8.1(b) as the Appellant had appeared to have received the termination notice “graciously” and had not objected to the termination, even though such a letter was neither pleaded nor tendered in evidence;
- the words ‘unable to perform its services’ included not only the ‘inability’ to perform, but the ‘failure’ to do so as well;
- the Appellant had breached various terms in the agreement.
D. Decision of the Court of Appeal
The decision of the trial judge was upheld by the Court of Appeal unanimously which held that although there was a requirement imposed upon the Respondent in the contract to supply the reasons upon which termination was based upon with reference to clause 8.1 to avoid arbitrariness, there was no obligation to provide reasons in the notice of termination in this case as the Appellant had demonstrated by the letter (that was not pleaded or adduced in evidence) that it was fully aware of the reasons for the termination.
E. Decision of the Federal Court
The Appellant appealed to the Federal Court on the question of whether a notice to terminate a privatisation agreement which is vague, unspecified and uncertain is defective and bad in law. Amongst the principal issues before the court were the following:
- Whether clause 8.1 required the provision of particularised reasons in the notice of termination;
- Whether clauses 8.1(b) and 9 should be read conjunctively or disjunctively, and whether clause 9 had to be satisfied before clause 8.1(b) of the agreement can be relied upon; and
- Whether the breaches found by the trial judge are correct and relevant in determining a contractual right of termination.
The Federal Court allowed the appeal with costs and set out the following principles:
- In construing a contract, the natural meaning of the words is to be given effect to. However, when the words are not clear and there is an ambiguity, resort is made to extrinsic evidence to objectively determine the meaning of the contract to a reasonable person having all the background knowledge available to the parties i.e. the court looks at the factual matrix which forms the background of the transaction.
- The admissibility of extrinsic evidence to aid in the interpretation of a contract is governed by the rules of evidence found in the Evidence Act and the common law. Sections 92(f) of the Evidence Act must be read with sections 93 and 94. Whilst extrinsic evidence of the surrounding circumstances is generally admissible under section 92(f), oral evidence of the drafter’s intentions is generally inadmissible.
- The court must approach the interpretation holistically meaning that no term is to be interpreted in isolation.
- When one has to choose between two competing interpretations, the one which makes more commercial sense should be preferred if the natural meaning of the words is unclear.
- If a party refuses to perform a contract (ie wishes to terminate), giving a wrong or inadequate reason or no reason at all, he may justify his refusal if there were at the time facts in existence which would have provided a good reason, even if he did not know of them at the time of his refusal. The question of valid termination, therefore, turns upon whether or not there was in fact a valid reason at the time of termination and not on whether or not the terminating party subjectively knew or believed to be one.
- Evidence of pre-contractual negotiations given by the lawyer who drafted the contract is not admissible to aid in the construction of the contract.
F. Commentary and practical solutions
The intentions of the parties must be ascertained at the outset and be clearly set out in the contract. Do not leave things which need to be said unsaid in the contract. This will give the parties a chance to submit an interpretation that suits them best when things go wrong even if it was not intended to be so by the parties.
This material is for general information only and is not intended to provide legal advice. If you have any queries regarding the above, please feel free to contact us at firstname.lastname@example.org.