Psychologically Unsafe Working Environments: Grounds for Constructive Dismissal?

An employer has an obligation and a statutory duty to provide a safe working environment to all of its employees. This duty is deeply rooted in an employer-employee relationship and it forms part of an implied contractual obligation whether or not its specifically stated in any handbook or employment contract. This requirement is also entrenched within existing laws such as the Occupation Safety Health Act 1994 which dictates mandatory safety measures for workers.

The threshold for what amounts to a safe working environment differs from case to case and depends on various factors as such as industry, physical location and the job functions of the employee. For example, an employee employed on an oil rig or a construction site would have different safety expectations compared to someone working as an accountant in an office.

Safe working environment not only refers to the physical working condition but could also include a variety of other examples such as a work place free from sexual harassment.

When an employer fails in their duty, it may cause a breach of contract that would permit an employee to walk away from their employment citing constructive dismissal.

Sexual Harassment

Employers have a statutory duty under the Employment Act 1955 to inquire into an employee’s sexual harassment complaints. This protection is provided for all employees regardless of income bracket.

The Court has acknowledged that a failure to address employees’ sexual harassment complaints may amount to constructive dismissal. In Sitt Tatt Berhad v Flora a/p Gnanapragasam [2001] ILJU 39 the Industrial Court held that management’s non-action towards sexual harassment complaints breached the terms of the employee’s contract to provide a safe and healthy working environment.

Victimisation

Harassment and bullying are forms of victimization and such occurrences can come in various scenarios, whether through superiors or colleagues.

In Kuala Lumpur Glass Manufacturers Co. Sdn Bhd v Lee Poh Kheng [1995] 1 MELR 921, the Court held that repeated threats issued to the employee coupled with bullying tactics were an effort to humiliate the Claimant into abandoning his job. This substantiated the Employee’s claim for constructive dismissal.

However, petty disagreements with the employer cannot amount to constructive dismissal (Peter Chew Hoe Teik v Pharmaniaga Marketing Sdn Bhd & Anor [2019] 2 LNS 1805) Otherwise, it would be difficult for any employer to manage its workforce, if an employee can claim harassment or bullying should they receive negative feedback or hear something that upsets them. In Peter Chew (ibid) , the Industrial Court held that it was the employee’s “poor perception” of the matters that resulted in the disagreements. There was evidence that the Company had always supported the Claimant, even when he was on medical leave, so it was surprising for all when the Claimant took the approach of constructive dismissal.

The above are just a few notable examples of how wide-ranging constructive dismissal are in the face of an employer’s failure to provide a safe working environment. The law does not have an exhaustive list of what amounts to a safe working environment, or when an employer can be said to have breached their duty to provide a safe working environment.

What will be assessed is whether the acts complained of amount to a fundamental breach of the employment contract, and whether it showed that the employer was no longer interested in being bound by the terms of the employment. As one may appreciate, this is very fact specific and there is no “one size fits all” when determining what amounts to constructive dismissal.

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Amirul Izzat Hasri is a Senior Associate in the dispute resolution practice group at Donovan & Ho. He has experience in a diverse area of practice, including general civil and corporate litigation, judicial reviews, land related matters, defamation, debt recovery, and shareholder and boardroom disputes. He has also appeared in Industrial Court proceedings, having represented both employers and employees in unfair dismissal claims.

Donovan & Ho is a law firm in Kuala Lumpur, Malaysia. Our practice areas include employment law, dispute resolution (litigation and arbitration), corporate and tax advisory, and real estate/conveyancing. Have a query? Contact us.

Additional things discovered after dismissal: Is it relevant to determine just cause & excuse?

The Federal Court in Maritime Intelligence Sdn Bhd v. Tan Ah Gek [2021] 10 CLJ 663 determined that the Industrial Court should not enquire into reasons raised or discovered by the employer after dismissal in order to determine whether the dismissal is fair.

Brief Facts

The Claimant was employed by the Company as Vice President of its educational institution.

During the interview stage, the Claimant included an impugned academic qualification, into which its qualification and accreditation in Malaysia was not inquired further. The Claimant’s qualifications were also not questioned throughout the course of the Claimant’s employment.

The Claimant had allegedly abused her power and conducted herself unethically and unprofessionally, and this conduct was reported by fellow employees to the Company.

A domestic inquiry was conducted and the panel found there was sufficient evidence to establish the allegations. The Claimant was dismissed with immediate effect.

The Claimant filed an unfair dismissal claim against the Company.

The Industrial Court found that the Company had failed to substantiate the allegations made against the Claimant and that the dismissal was without just cause and excuse.

In its pleadings to the Industrial Court, the Company raised new allegations post-dismissal for the first time, i.e. that the dismissal was justified because the Claimant was never qualified for her position from the outset. However, the Company only came to know about the Claimant’s impugned qualification after the Claimant was dismissed, and this could not have been considered at the time of dismissal.

The Company’s judicial review application to the High Court was dismissed. The High Court held that the Industrial Court did not have to consider the Claimant’s lack of qualifications as this was not one of the reasons for her dismissal.

The Company then appealed to the Court of Appeal, which dismissed the Company’s appeal and upheld the Industrial Court’s rejection of the Company’s new post-dismissal allegation.

However, the Court of Appeal held that the Industrial Court had the right to inquire into grounds that differed from the reasons for dismissal, and had the discretion whether to consider new grounds and the requisite weight to be accorded to the same, which was a new and definitive position on post-dismissal allegations.

Hence, the Company appealed to the Federal Court.

Federal Court’s Findings

As per the rules laid down by the Federal Court in Goon Kwee Phoy v. J & P Coats (M) Sdn Bhd [1981] 2 MLJ 129 (“Goon Kwee Phoy”), the duty of the Industrial Court is to enquire on the reasons advanced by the employer regarding its actions; it cannot go into or find another reason not relied on by the employer.

The Federal Court held that:

Claims in the Industrial Court are based on a Claimant’s representation at the time of dismissal, for reasons that the Claimant feels are without basis or insufficient to warrant dismissal.

Following this, the focus of enquiry of the Industrial Court must be premised and limited to reasons operating in the mind of the employer at or immediately before the dismissal, which comprise the basis of dismissal.

This rule remains applicable whether or not the employer explained the reason for dismissal before terminating the employee; or whether these reasons were communicated by the employer in the termination notice or orally.

It is not open to the Industrial Court, in deciding whether dismissal was justified, to consider an employer’s evidence not in their knowledge at the time of the dismissal, but was discovered after the fact.

The Federal Court acknowledged that the reasons operating on the mind of the employer preceding the decision to dismiss an employee are usually specified in the termination notice. However, the law is not so far reaching as to say that the Court may look to reasons other than those advanced by the employer for the dismissal at the time of the dismissal.

While facts discovered post-dismissal can be considered by the Court, however, this would be applicable only in determining the correct remedy and relief to be accorded to the Claimant if a successful claim occurs, and not in deciding whether dismissal was justified. For example, post-dismissal facts may be used to reduce compensation in lieu of reinstatement, or as a basis for not granting reinstatement.

Key Takeaways

The Industrial Court must confine itself to considering specific factors, events or reasons that would have operated on the employer’s mind preceding the decision to terminate an employee.

But how does this apply in practice?

Realistically, employers always know the reason they have dismissed an employee. It is whether they have articulated this fully (or at all) in the termination notice. Whether that reason amounts to just cause and excuse is another story.

It is a very subjective question to ask what was in someone’s mind at a specific period in time. It will not always be an obvious situation (such as this case) where such information is discovered at a specific point, and therefore, logically could not have been considered when the decision to dismiss was made.

As seen, the lower courts have attempted to further define the scope of this subjective test by arguing that the reasons for justifying dismissal should be limited to those written in the notice of termination. However, as the Federal Court explained, it is also not right to confine this solely to reasons written in the termination notice as this would be an overly restrictive interpretation as to what was on the employer’s mind in dismissing the employee.

Through this case, we see how social legislation works to safeguard the interests of employees from arbitrary decision-making processes by employers that come as afterthoughts. It pushes employers to think things through before executing their decision and deters employers from dismissing employees without proper reasons and evidence.

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This article was written by Donovan Cheah (Partner) and Adelyn Fang (Associate). Donovan has been named as a recommended lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020, 2021 and 2022, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.

Case Spotlight: Signing an Employment Contract after an Offer Letter

A candidate can receive an offer for employment in different ways. Some employers will provide an “offer letter” which sets out the basic terms, followed by an employment contract with more detailed terms. For some, there is no separate “offer letter” and the candidate is just asked to sign an employment contract instead. There are also situations where the document is called an “offer letter” but it contains detailed terms just like a contract.

Putting aside labels, what is important is whether a binding employment relationship has been created. That is determined through the usual contractual principles of offer, acceptance, consideration, intention to create legal relations, and the absence of vitiating factors.

What happens when an employee signs an offer letter, starts employment, but is then given an employment contract with different terms?

This unique situation arose in Tadjul Maulud bin Zoor and CRSM Construction (M) Sdn Bhd (Award No. 260 of 2022, 14 February 2022).

Brief Facts

After an interview, the Claimant was offered the position of Project Architect at the Company. The Claimant requested a Letter of Offer to be issued to him so he can secure early release from his previous employment.

The Company issued him a Letter of Offer which the Claimant signed on 13 January 2020. The Letter of Offer contained only basic terms of employment such as his commencement date, starting salary, and position.

The Claimant commenced work, but in July 2020, the Company issued him an Employment Contract that intends to replace and supersede the Letter of Offer.

The Claimant disagreed to the terms in the Employment Contract. The Employment Contract stated:

- that his employment was for a specific construction project (Ampang 3rd Avenue) and for a fixed term (1 year).

- there would be automatic termination of employment if the construction project is completed early or if construction is suspended.

The Claimant refused to sign the Employment Contract.

The Company then terminated the Claimant’s employment with one month’s notice. The reason stated in the termination notice was that parties could not agree on the Employment Contract.

The Claimant alleged unfair dismissal.

Court’s Findings

A job offer letter is an offer of employment from the employer to the prospective employee and is not the actual commencement of employment. Where an employment contract is issued after the job offer letter, the employment contract will supersede the job offer letter.

In the new employment contract, parties may intentionally agree to exclude or contradict what was provided in the job offer letter. In the event the employment contract does not mention some of what has been agreed in the job offer letter, it is assumed that the employment contract takes into account what was already provided in the job offer letter. This is unless the employment contract specifically states it has the intention of cancelling all that was agreed between the two parties.

From the evidence, the Company’s standard operating procedure was to issue employment contracts with detailed terms, and not an offer letter first. However, the Claimant requested that the Letter of Offer be provided so he could obtain an early release. The Claimant always knew he would have to execute an Employment Contract to secure employment with the Company.

The Court held that the Letter of Offer was never intended to be a complete agreement, as it merely summarized the main terms. Other material terms agreed by the parties during the interview was meant to be formalised through an Employment Contract.

The Letter of Offer was silent on many employment terms such as annual and medical leave, bonuses, etc. Therefore, the Letter of Offer cannot stand on its own. It was therefore reasonable that the Letter of Offer is followed by an Employment Contract to incorporate all the relevant contractual terms.

From the testimony of witnesses, the Court noted that the Claimant fully knew of the disputed terms during the interview. For example, he knew he would be assigned to the Company’s Ampang 3^rd Avenue construction project. The Claimant was also made aware during the interview that the nature of the Company’s business depended totally on projects awarded by the Malaysian government, and as such the tenure of his employment would be on a fixed term basis and/or contingent on completing the project. This applied to every employee in the Company and not just the Claimant.

The Claimant’s refusal to sign the Employment Contract therefore justified the Company’s termination of his employment. The Court dismissed the Claimant’s claim of unfair dismissal.

Key Takeaways

This dispute arose because there was a purported inconsistency between the Employment Contract and the Letter of Offer. Here, the Claimant alleged that material terms (eg: the nature of his employment as a fixed term contract) were not stated in the Letter of Offer but suddenly incorporated in the Employment Contract.

The Court was not convinced by the Claimant’s argument as the evidence showed that the Company informed him of these terms during the interview, and that the Letter of Offer was always intended to be brief as it was only issued to allow the Claimant to apply for an early release.

Employers who use a “two-document” process for recruitment (ie: Letter of Offer, followed by an Employment Contract) should be mindful that disputes can arise if there is an inconsistency between the two documents. As a best practice, if a two-document process is used, employers should ensure that both documents are provided to employees before commencement of employment. This way, if there are any disagreements about the terms, it can be resolved before the candidate starts work. Employers do not then have to deal with the awkward situation of an employee who has already started work but is refusing to sign an employment contract.

Employers should also consider whether it is even necessary to have two documents to record the employee’s terms of employment. It is acceptable to just provide the employment contract to the candidate upon making a job offer, without the need to prepare a separate “offer letter” first with summarised terms.

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This article was written by Donovan Cheah. Donovan has been named as a Recommended Lawyer for Labour and Employment by the Legal 500 Asia Pacific 2017, 2018, 2019, 2020, 2021 and 2022, and he has also been recognised by Chambers Asia Pacific and Asialaw Profiles for his employment law and industrial relations work.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.

Selling & Buying Property: Costly mistakes to avoid in your Offer Letter

The process of purchasing a property can be rather daunting as the contents of the offer letter is the first legal document you’ll need to sign. It therefore plays a crucial role in determining the overall framework and success of your transaction. Hence this article highlights specific points that one should consider before signing the offer letter, as well as some common mistakes that we see in our conveyancing practice which could lead to delays, aborted deals or even legal disputes.

Property Information

It is vital to ensure that the offer letter includes specific and accurate information about the property. Not doing so at the outset could lead to a deal breaker eventually. This would include stating whether the property is freehold or leasehold (and its remaining duration). For a buyer, knowing the number of years remaining in a leasehold property can directly affect the buyer’s ability in obtaining a loan financing.

Another common example we often see is leaving out the number of parking bays and their parking bay number(s) that comes with the property, only for the buyer to realize later that the parking bay’s location is unsatisfactory or misrepresented.

Loan Approval

It would be prudent for buyers to confirm that their loan approval is secured, prior to signing the sale and purchase agreement to allow for the completion of the purchase within the required timeframe, thus avoiding late payment penalties or forfeiture of the deposits. Furthermore, due to the ongoing COVID-19 pandemic and lockdowns, banks are taking a longer time to process and approve loans, therefore it would be beneficial to secure a loan approval and to expressly state within the offer letter sufficient time of 2-3 weeks for the loan application to be processed. Not doing so could result in missing the signing deadline and the seller forfeiting the earnest deposit.

“As is where is” basis & repairs

The phrase “as is where is” means that the property is being sold in its current condition, whatever this condition happens to be. A buyer is deemed to have checked the property for defects of quality and have found the property acceptable. Any defects spotted on inspection should be documented and raised with the seller specifically during the offer letter stage. Taking photos during the property inspection could also go a long way in proving the condition of the property at that time, should any damage result during the transaction.

For sellers, on the other hand, it is important to check that the phrase “the property is sold on an as is where is basis” is in the offer letter to ensure that there are no future disputes over the condition of the property after the buyer has inspected it and that such a phrase is also reflected in the sale and purchase agreement without fuss from the buyer.

Signing deadline of the SPA

The time frame given towards signing the SPA should be carefully considered and tailored for both parties, depending on their respective circumstances. For example, parties who may be overseas or stuck outstation due to the unexpected lockdowns will require additional time beyond the typical ’14 or 21 days’ which may not be possible to meet.

Other factors that could legitimately require a slightly longer signing timeframe could include waiting for loan approvals, checking with EPF on eligible withdrawal amounts, additional time for negotiating certain legal points within the SPA during drafting etc. Providing more buffer time is always safer for the buyer than having less time or rushing into a tight timeline.

This is to prevent the earnest deposit being forfeited due to the document not being signed on time, despite the buyer not having any intention to abort the deal.

Tenancy

A clear specification should be made as to whether the delivery of vacant possession shall be with or without tenancy.

If there is a tenancy, it would be beneficial as a buyer to review and assess the terms of the signed tenancy agreement, with a focus as to whether the duration, rental price, conditions, and renewal terms would be considered fair.

It is also important for a seller to leave sufficient time for the tenant to vacate the property prior to completion of the sale.

We have experienced sellers who were under immense pressure as their then tenant wanted to maximize the time remaining on their tenancy, while the buyer was in a rush to move into the property after terminating their existing tenancy. The seller did not have sufficient time to ensure the property was properly cleaned up and repaired, which ended in a dispute with the buyer due to the pressures the parties faced.

Therefore, engaging in open communication and planning of timelines between the buyer, seller and tenant on the move out and handover dates is critical, to be done early at the offer letter stage.

The points above are just a few examples of what buyers and sellers should watch out for before signing a property offer letter. Relying completely on the person preparing the ‘standard’ offer letter (typically the real estate agents who may not be aware of such factors) could result in costly mistakes or unpleasant legal disputes.

Ultimately, the onus is on the party signing the document to ensure it is customized to their needs, wants and particular circumstances. Taking precaution early can reduce the risk of future disputes or misunderstandings, thus ensuring a smooth and straightforward property transaction process.

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This article was written by Shawn Ho (Partner) & Suzanne Fam (Senior Associate) from the property & tax practice group of Donovan & Ho. Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. We also advise on property transactions and real-estate related tax planning. Feel free to contact us if you have any queries.

Case Spotlight: Dismissal due to Pandemic was “done hastily”

As it has been over 2 years since the pandemic began, we are now seeing more decisions from the Industrial Court about employees who were dismissed due to the COVID-19 situation. In Choong Wai Kit v Tropicana Shared Services Sdn Bhd [Award No. 244 of 2022, 14 February 2022], the Industrial Court examined whether the Company had done enough to prevent retrenchment, or if it had acted too hastily in dismissing its employee.

Brief Facts

The Claimant joined the Company on 13 January 2020 and was the General Manager of the International Sales Department of the Company, which is part of the Company’s Marketing and Sales Department.

As General Manager of the International Sales Department, he was involved in the marketing and sales of properties to the international market. He organised potential buyers from outside Malaysia, and coordinated property agents outside of Malaysia to visit and view properties and sites in Malaysia.

Due to the pandemic, the Company shut down the International Sales Department of the Company as it was facing a worldwide shutdown of business and border-crossing and deterioration in overall economic activities in most countries.

The Claimant’s position was made redundant and he was dismissed on 19 April 2020. The Claimant claimed that he was unfairly dismissed.

Court’s Findings

The Court found that the Claimant was unfairly dismissed. The Court was not convinced that the Company had retrenched the Claimant as part of cost containment:

After termination and/or baiting a resignation from employees under the shut-down department, the Company appointed 3 new directors.

The Company was still profitable and revenue positive months after the Claimant’s dismissal.

The dismissal of the Claimant was done in April 2020, during Malaysia’s first movement control order (“MCO”) which started on 18 March 2020. The Claimant’s dismissal was done hastily given that the MCO had not even been in force for 1 complete month.

There was no proof that the Company tried to reduce its financial constraints before retrenching the Claimant. For example, there was no overall paycut for employees, which the Court viewed was “in a grander scale… a more effective way of cost-cutting and cost-saving”.

There was also no evidence that the Company attempted other means to avert retrenchment such as transferring the Claimant to other teams within the same department.

Further, a Senior General Manager of Marketing & Sales who resigned earlier on 4 April 2020, was later reappointed by the Company two months later for the same position. Following the reappointment of this Senior General Manager in less than two months from the Claimant’s dismissal, the Company still needed people to assist with local sales and marketing.

Whether it is local or international sales and marketing, there were obviously vacancies in the marketing and sales department of the Company in 2020. The Company had posted advertisements consistently throughout 2020 looking for employees.

There was no evidence why the Company shut down the International Sales Department, and the Company’s witness could not answer important questions about the selection process, the actual financial position of the Company and/or the job scope of the Claimant.

Key Takeaways

In its decision, the Court referred to Mohamad Shahrul bin Kahulan v Lourdes Medical Services Sdn Bhd [2021] 2 LNS 1295, where it was held that the mere reduction of revenue because of the MCO cannot be justification for retrenchment; since a Company’s revenue will fluctuate occasionally, it does not mean that the moment there is some reduction in revenue, the Company can quickly and immediately retrench its employees. There are other meaningful ways a Company can initiate financial austerity measures, so retrenchment of employees should not be the first step in cost cutting measures.

Although financial constraints arising from the pandemic can give rise to genuine redundancy, employers must still carry out retrenchment exercises with due process. It will not be acceptable to rush into a retrenchment at the first sign of financial trouble, since the Court will expect the Company to try alternative measures to prevent retrenchment, since this relates to whether the dismissal was reasonable and fair.

Here, the Court was not convinced that the redundancy was genuine, given that the dismissal took place within 3 weeks of the MCO and before any other alternatives were considered. This, coupled with the evidence that the Company was not really in financial constraints and was looking for new employees, resulted in the Company having to pay further compensation to its dismissed employee.

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Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.

Case Spotlight: Pandemic is Not an Excuse for Delay

To control the spread of the Covid-19 virus, movement restrictions were introduced and various standard operating procedures were put in place. Temporary Measures for Reducing the Impact of Coronavirus Disease 2019 (Covid-19) Act 2020 (“Covid-19 Act”) was passed to provide temporary relief to those affected by the pandemic.

In this article, we’ll look at two recent cases where the Court found that the Covid-19 Act only applied in limited situations and that the Covid-19 pandemic cannot be a “free pass” for delays.

Case #1– SMEB Asset Management Sdn Bhd v Waris Nove Sdn Bhd & Ors [2021] 1 LNS 709

Here, SMEB Asset Management obtained a judgment in default against the defendants. The defendants applied to set aside the judgment in default.

Under the Rules of Court 2012, such an application has to be made within 30 days from receipt of the judgment, failing which good reasons must be provided to the Court. The defendants here only applied 128 days later. The explanation given by the defendants was that they could not obtain advice from their lawyers during the Conditional Movement Control Order (CMCO) in place, and due to exceptional circumstances during the Covid-19 pandemic.

In refusing the application to set aside the judgment in default, the Court considered and rejected the explanation given for the delay as not plausible. Even though the defendants may be physically constrained from moving about during the CMCO, there was no reason they could not communicate with their lawyers through technology.

The Judge warned that the Court will not condone such excuses for delays:

“It appears that the Covid-19 pandemic has become a popular excuse to justify delays which cannot be condoned too readily by the Courts.”

Case #2 – Ravichanthiran a/l Ganesan v Lee Kok Sun & 2 Ors (Case No. JA-12BNCVC-3-02/2021)

Ravichanthiran commenced a suit against his former client for unpaid legal fees. The former client counter-claimed. In the Sessions Court, the Judge dismissed Ravichanthiran’s claim and allowed the client’s counterclaim. Ravichanthiran appealed.

Pending the appeal, Ravichanthiran applied for a stay of the Sessions’ Court’s judgment. Amongst the arguments raised, one was that the Covid-19 Act, particularly Sections 7 and 10, ought to prevent the judgment from being enforced.

Sections 7 of the Covid-19 Act provides that the inability of any party to perform their contractual obligations due to COVID-19 shall not give rise to the other party exercising their rights under the contract. Section 10 of the Covid-19 Act provides that judgment or award granted and any execution carried out before the publication of the Act is valid.

The Court found that the Covid-19 Act was inapplicable. The Court held that:

To rely on Section 7 of the Covid-19 Act, one has to establish that it cannot perform the contractual obligation and that such inability was due to the measures taken under the Prevention and Control of Infectious Diseases Act 1988 to control or prevent the spread of Covid-19.
Since “inability” or “unable” is not defined, the dictionary meaning that is “state of being unable to do something” is taken. “Refusal” or “unwillingness” did not fall within the purview of “inability”
Once inability is established, there must also be evidence that the inability was due to the measures taken by the Prevention and Control of Infectious Diseases Act 1988 to control or prevent the spread of Covid-19. Without such evidence, Section 7 of the Covid-19 Act cannot be invoked.

The Judge also observed that the Covid-19 Act cannot be used to avoid liability or debt merely because the debt arose during the Covid-19 pandemic.

Commentary

Although it has been a tough 2 years and counting, the Covid-19 pandemic cannot be an excuse or reason for everything. Even though there may be physical restrictions on movement, e-mails, text messaging and video conferencing make it easy to communicate and exchange documents. For example, it may seem illogical that a party would take months to contact their lawyer because of the pandemic. Courts will be slow to accept that the pandemic has caused delays in communication, unless a litigant can provide specific circumstances as to how they were disabled or prevented from complying with legal requirements or the Court’s instructions. Evidence that a litigant was or is prevented or disabled by the Covid-19 pandemic (or the measures taken by the government to prevent its spread) must be available.

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Th’ng Yan Nie is a Senior Associate in the dispute resolution practice group at Donovan & Ho. She has a wide range of experience in litigation matters including contractual and commercial disputes, compulsory land acquisition, debt recovery and strata and property management issues.

Case Spotlight: Transport Industry – Court rejects Union’s claim for Fixed Bonus & Increased Allowance

When there is a deadlock in the collective bargaining process, the dispute may be referred to the Industrial Court for determination. Recently, in Kesatuan Pekerja-Pekerja Plusliner Sdn Bhd v Plusliner Sdn Bhd [Award No 1216 of 2021, 21 August 2021], the Industrial Court sided with the employer in the transport industry regarding whether employees should be given additional benefits such as contractual bonus and increased allowance.

Brief Facts

During collective bargaining, the Company and the Union could not agree on 4 clauses:
- Scope of Membership
- Safe Driving Allowance
- Trip Allowance
- Payment of Bonus

Scope of Membership – the Union wanted the Collective Agreement to cover all employees in the Company. The Company said that all employees were already entitled to benefits stipulated under the Collective Agreement, so the status quo should remain.

Safe Driving Allowance – the Union proposed an increase of RM160.00 a month to RM200.00 a month. The Company said this was unsustainable, but put forward other proposals for the improvement of this benefit which were not agreed by the Union.

Trip Allowance – trip allowance is paid to drivers per kilometre. The Union proposed increases of between 10 cents to 17 cents per kilometre depending on the category of driver. The Company refused as this would severely affect the Company’s operational cost.

Annual Bonus – the Union proposed that the Company should provide contractual bonus of 3 months to employees, every year. The Company refused this proposal as this was excessive.

Court’s Findings

Scope of Membership – there was no justification to extend the collective agreement to include all employees of the Company. The Company imposed no restrictions on employees from benefits of the collective agreement. The Court agreed with the Company that the status quo should remain.

Annual contractual bonus – the Union’s demand for a fixed contractual bonus of 3 months is untenable and defeats the whole purpose of awarding gratuitous payments to deserving employees subject to the Company’s performance. As much as the Court sympathises with employees who do not receive annual bonus, the nature of bonus is discretionary to reflect the Company’s appreciation to deserving employees. Bonus is not accorded as of right, as quantum and payment should be linked to profits and productivity.

Safe Driving Allowance and Trip Allowance – the proposed increase of trip allowance would cause an increase in the allowance ranging from 200% to 361%. The Court took cognisance that the public transport industry was one of the most severely affected industries during the pandemic, as the Movement Control Order caused restrictions in inter-state travels. During this period of uncertainty aggravated by the pandemic and time of crisis, it was not appropriate to have an increase in allowances that would have a financial impact on the transport industry.

Key Takeaways

In determining wage structure and wage increases, the Industrial Court will consider three factors:

Wage and salaries prevailing in comparable establishments in the same region;
Any rise in the cost of living since the existing wages or salaries were last revised; and
The financial capacity of the company to pay the higher wages or increases

Of the three factors above, the Company’s financial capacity to pay is “really the limiting factor in dealing with wage increases and with other employees’ benefits, because when other factors may provide prima facie justification, increased wages will normally only be awarded within the limits of the Company’s financial capacity”. The Industrial Court acknowledges that if wage increases are granted when the Company is facing a shaky financial position, the unintended consequence is that the Company would have to close its business which results in loss of jobs.

This recent case illustrates that the Industrial Court will take a balanced approach when dealing with wage disputes, and the allegation that the courts are “always pro-employee” may not be justified (See also our previous case spotlight where the Industrial Court rejected the Union’s claim for increased benefits, due to the pandemic). Here, the Industrial Court took judicial notice that the employer’s industry (public transport) was badly affected by the pandemic and therefore a disproportionate increase in operational costs for the employer would not be in anyone’s best interests.

While trade disputes are determined on their individual facts, the Industrial Court would likely take into account similar factors for employers in industries undisputedly affected by the pandemic (eg: tourism and hospitality, retail, aviation, etc).

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Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.

Case Spotlight: Redundancy of Retail Employee due to Covid-19 Upheld

On 3 January 2022, the Industrial Court in Jayaprakas a/l Ramadass v Anytime Sdn Bhd (Award 24 of 2022) upheld the dismissal of a redundant retail employee. Here, the Industrial Court examined the impact of the pandemic on the employer’s business and held there was a genuine redundancy.

Brief Facts

The Claimant was working with the Company as a retail supervisor, where he was stationed at the Anytime Johor Premium Outlet (“JPO”).

The Company’s operations at the JPO was a new branch which started operations on 31 December 2019. Less than 3 months later, the country was placed under a Movement Control Order (“MCO”) due to the pandemic.

The Company was required to close its retail outlet during the MCO, and faced financial difficulties.

On 3 May 2020, the Company decided to cease operations at the JPO. The Claimant was dismissed with effect from 17 June 2020.

The Company’s JPO outlet was closed completely in June 2020.

The Claimant claimed unfair dismissal.

Court’s Findings

The Claimant’s dismissal was due to redundancy given the MCO. The Company faced financial losses as their outlet at the JPO could not open and there were no customers. There was therefore a need for the Company to reduce its headcount or retrench its employees in stages.

The Company produced its profit and loss statements from 1 January 2020 to 30 June 2020. While there were sales, the Company was still loss making as at June 2020. The Court was satisfied that the Company had established it was facing financial difficulties based on the profit and loss statements; even though there were funds coming into the accounts through sales every month, the Court observed that it has to consider the costs of managing and operating the retail outlet.

The Court held that the Company’s decision to retrench its employees by stages and not simultaneously was not done capriciously or intending to victimise anyone. This was within the Company’s prerogative and the Court refused to interfere with the Company’s managerial decision.

The Claimant’s dismissal on grounds of redundancy was with just cause and excuse, done in good faith, and not done with any intention to victimise the Claimant. The dismissal was upheld.

Key Takeaways

In upholding the dismissal, the Court commented that although the pandemic has caused hardship across the country, not only employees were affected. Many employers were facing difficulties, too. The Court recognised that:

the Company did its best to delay the retrenchment until June 2020, notwithstanding that they could not operate the outlet from March to May 2020; and

The Company also paid the Claimant’s salary in full during this period

In evaluating retrenchment cases, especially those that arose during the pandemic, the Industrial Court will consider all factors including the employer’s hardships, and their good faith efforts to safeguard the welfare of their employees (even if retrenchment ultimately could not be avoided).

While the Industrial Court is sympathetic to the plight of employees who have lost their livelihoods, unfair dismissal claims are still looked at through the lens of equity and good conscience. This is so decisions reached are fair for both employees and employers, especially if they are to be used as precedents. Here, even though the Claimant’s unfair dismissal claim was dismissed, there were no winners. The Company still had to go through a financial hardship and close its retail outlet.

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Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.

Transferring a Property NOT pursuant to a sale – can it be done?

We often receive queries from individuals where a property was jointly purchased with loved ones or business associates, or even with an ‘ex’ and subsequently, one party wishes to transfer their portion of the property so there will now be just one owner. Another common scenario is where a husband / parent wishes to transfer the property to his wife or children while still alive.

In this article, we explore some frequently asked questions relating to situations that do not involve a sale of the property.

What are the documents needed to effect such a transfer?

An “MOT”, also known as “Instrument of Transfer”, is the legal instrument prescribed by the National Land Code 1965, which is used to effect the transfer of property with individual title or strata title. For a property without individual title or strata title issued, a Deed of Assignment (by way of transfer) is used to effect the transfer of the property.

Is a Sale and Purchase Agreement needed if no money is changing hands?

A Sale and Purchase Agreement (SPA) is not needed if no money is changing hands. However, it can be useful to have a simple SPA drawn up on a ‘friendly-party basis’ to capture the transfer, especially for the future disposal of the property to a bona fide third party purchaser.

What if the property is still subject to bank loan / charged to the bank?

If the property is still charged to a Bank, the outstanding loan must first be fully redeemed with cash OR from a completely new loan facility. Getting a new loan could mean a new (and lower) loan interest rate, but it will also involve additional legal fees and stamp duty (0.5% on the borrowed amount) on the loan documents.

The solicitor will then simultaneously register both the bank charge documents (for the new loan) and the MOT at the land office. It is also likely that the bank will insist for an SPA to be signed.

What is the time needed for such a transfer?

The whole process might take between 3 to 4 months, or more, depending on the tenure type of property, i.e. freehold or leasehold, whether there is a loan to redeem, or whether a developer is involved the property where the strata title is not yet issued.

Will state authority consent be required for such a transfer?

For a leasehold property, state authority consent will be required for the transfer. The state authority consent will take between 2 to 3 months depending on the location of the property.

What is the stamp duty involved in such a transfer?

You are also required to pay for the stamp duty to effect the transfer. The rates of stamp duty under the Stamp Act 1949 are as follows: –

First RM100,000 – 1%

Next RM400,000 – 2%

Next RM500,000 – 3%

Amounts above RM1,000,000 – 4%

The stamp duty will be based on the property’s current market value which will be valued by the Inland Revenue Board and not based on original purchase price.

However, there are full or partial stamp duty exemptions if the transfer is done between spouses, parents and children:

Transferor	Transferee	Exemption Rate
Husband	Wife	100%
Wife	Husband	100%
Father / Mother	Child	50%
Child	Father / Mother	50%

Be mindful that transfers between siblings, friends, boyfriends and girlfriends, or grandparents are subject to the full stamp duty rate.

Will the transferor need to pay RPGT on such a transfer?

Under the Real Property Gains Tax Act 1976 (RPGT Act), there is a 100% RPGT exemption in the transfer of property between family members by way of love and affection between spouses, parents and children. The transferor is deemed to have received “no gain and suffered no loss” and not subject to any RPGT.

Apart from the above, any forms of transfer between siblings, friends, boyfriends and girlfriends, or grandparents are not entitled to apply for the RPGT exemption.

What is the RPGT implication to the transferee / recipient in the subsequent disposal?

The transferee should be aware that he is deemed to have acquired the property at the acquisition price that was previously paid by the transferor. Therefore, upon subsequent disposal by the transferee, he might be exposed to significant capital gains, especially if the property was previously owned by the transferor for a long amount of time.

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It is always advisable to seek professional legal advice to first determine your exact situation after conducting the updated searches and a review of your documents, in order to assess the multiple variable factors and costs that would apply to your specific situation.

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Key Provisions of the Anti-Harassment Bill 2021

The much anticipated Anti-Sexual Harassment Bill 2021 (“Bill”) was finally tabled for its first reading in parliament on 15 December 2021.

Below is a summary of the key provisions of the bill:

Establishment of a Tribunal to hear redresses relating to sexual harassment complaints.

Under the bill, a tribunal will be established to hear redresses relating to sexual harassment complaints.

The tribunal shall consist of: i) members/individuals who have held office of the Judicial and Legal Service; ii) advocates and solicitors with not less than 7 years’ standing; iii) individuals who have knowledge of or practical experience in matters relating to sexual harassment.

To hear a sexual harassment complaint, a tribunal consisting of 3 members will be empanelled, and at least one member shall be a woman.

Exclusive jurisdiction of the tribunal to hear and determine any complaint of sexual harassment.

If a complaint is lodged with the tribunal, the tribunal shall have exclusive jurisdiction to hear the matter unless: i) proceedings had already commenced before a court; ii) the complaint involves conduct which constitutes a criminal offence; iii) the complaint is withdrawn/struck out.

This means that once a complaint is lodged with the tribunal, only the tribunal has the jurisdiction to hear the matter, unless any of one the exceptions mentioned above applies.

However, the tribunal is empowered under the bill to refer to a Judge of the High Court a question of law if it is of the view that such question is of sufficient importance to merit such reference.

Legal representation is not allowed at the hearing.

Awards/orders that may be made by the tribunal.

The tribunal may order the respondent (the individual against whom the complaint is made) to issue a statement of apology; order the respondent to pay any compensation or damages not exceeding RM250,000.00; order the parties to attend any programme as the tribunal thinks necessary; dismiss the sexual harassment complaint if it considers it to be frivolous or vexatious.

Any awards/orders made are by the tribunal are binding and enforceable. Failure to comply with the tribunal’s award is a criminal offence which is punishable with imprisonment.

Right to challenge the tribunal’s award.

Any party to the proceedings of the tribunal may apply to the High Court to challenge the tribunal’s award. However, the right to challenge is limited; parties are only allowed to challenge the award if there is a “serious irregularity” affecting the award. Serious irregularity under the bill means i) failure of the tribunal to deal with all the relevant issues that were put to it; or ii) uncertainty or ambiguity as to the effect of the award.

Establishment of an administrator

Under the bill, an administrator will be established to develop policies, programs, etc. relating to sexual harassment.

Commentary

The Bill is mainly to stablish a tribunal and administrator to create an avenue to redress sexual harassment complaints and to develop policies, programs, etc. relating to sexual harassment. The Bill is short in many ways:

The Bill does not classify any specific conduct as sexual harassment or an offence under the Bill (save for non-compliance with an order of the tribunal)

The Bill also imposes no obligations on employers. Given that sexual harassments often occur in the workplace, the lack of provisions to specifically deal with such issues in the workplace (especially since it is also not addressed in the Employment Act 1955) may still leave many individuals vulnerable. For example, there is no requirement for employers to establish channels for reporting, and the Bill does not prohibit retaliation against complainants.

Parties cannot be legally represented at the Tribunal hearings. Sexual harassment cases often involve an imbalance in power dynamics (eg: subordinate being harassed by their supervisor). A complainant required to attend Tribunal hearings without legal representation may find it daunting and challenging especially where the complaints are made against someone in a position of power; this could disincentive complainants from pursuing their grievances, and render the Tribunal meaningless if complainants are too intimidated from raising complaints. Legal representation can level the playing field and ensure the imbalance in power dynamics is not carried forward into the Tribunal hearings.

The orders that the Tribunal may make may be inadequate to address the harm caused by the sexual harasser. For example, the order to pay damages does not protect the complainant from future harassment. The cap on damages (RM250,000) also appears to be arbitrary, given there is no such cap if a complainant commenced civil proceedings.

While parties may challenge the Tribunal’s award on the ground of serious irregularity, it is unclear whether this is to be done by way of judicial review, appeal or some other process. The Bill also does not specify the procedures that parties must follow.

As it is still in the early stages of being debated in parliament, it is hoped there will be further amendments to the Bill to address the issues highlighted above.

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This article was written by Donovan Cheah (Partner) and Adryenne Lim (Pupil). Donovan is an Advocate and Solicitor of the High Court of Malaya. He is a Fellow at the Singapore Institute of Arbitrators and the Malaysian Institute of Arbitrators. He is also a registered foreign lawyer with the Singapore International Commercial Court.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.

Why a tailored Constitution is important for your company

Why a tailored Constitution is important for your company

A Company Constitution (“constitution”) is vital for a company, no matter big or small, because the default rules found in the Companies Act 2016 (“CA 2016”) will automatically apply without a constitution. “Replaceable Rules” are the provisions provided in CA 2016 that may be incorporated into a constitution. These rules are customisable and modifiable depending on what suits the company best.

There are currently 62 identifiable replaceable rules that can be divided into “presumptive provisions” and “optional provisions”. However, these replaceable rules are scattered across the CA 2016, making it potentially difficult to locate.

Presumptive provisions & Optional provisions

Presumptive provisions do not require an active opt-in on the part of the company. Meaning, these clauses will operate by default in accordance with the CA 2016 and can be amended. Presumptive provisions commonly employ phrases like “unless otherwise stated in the constitution” or “subject to the constitution” to indicate that the provision shall apply by default, unless the constitution provides otherwise.

Optional provisions, on the other hand, will apply only if the company chooses to expressly adopt them in the constitution. Companies that seek to incorporate these provisions must explicitly state them in the constitution, as the CA 2016 does not recognise them by default. By illustration, a constitution may dictate a fixed duration in which the company may be wound up voluntarily, in accordance with section 465 CA 2016.

What happens if your company does not have a Constitution?

Without a constitution, the relevant provisions of the CA 2016 will act as the default constitution for all companies pursuant to section 31(3) CA 2016. In the context of replaceable rules, not adopting a constitution means that companies will miss the boat on adapting a tailored constitution most suitable for their nature of business. As the internal management and governance of each company comes with its own nuances and shareholder dynamics, it is hardly realistic to suggest that the CA 2016 provides a one-size-fits-all solution to all possible scenarios that may arise from the management and governance of the company.

This may lead to some hiccups as elaborated below:

It makes it harder to interpret the rules governing the company. These rules are significantly more difficult to locate because the CA 2016 is extremely lengthy and contains a lot more provisions. These rules are scattered throughout the CA2016 making it difficult to locate them for different situations. With a written constitution, it’s far easier to locate the rules for the different situations or scenarios which a company may from time to time face.

There are times when the founders of the company find that the default rules in the CA 2016 are inappropriate for their company, or worse, may even have unintended adverse consequences on the company. By the time an issue has arisen, it may be too late as a dispute or an ongoing lawsuit could have commenced between the shareholders. Having a customized constitution would help to avoid this.

Some examples of default rules that founders may wish to modify are illustrated as follows:

Quorum

The CA 2016 provides for Board Proceedings by default in the Third Schedule. Some founders may find the provisions not appropriate for their administration and may wish to customize the default provisions. One example may be the quorum at directors’ meetings, where founders may want to customize the constitution such that a particular class of director or directors (representing certain shareholders) must be present in order for the quorum to be met.

Pre-emptive rights

The CA 2016 also applies its own default rules for pre-emptive rights. This means shares must first be issued to shareholders on a pro-rata basis to maintain the existing shareholding proportions, after which the directors can dispose of the unsubscribed shares in their discretion. In this situation, some founders/shareholders may want to ensure that the shares are offered to them or specific individuals first (rather than on a pro-rata basis), before being offered or disposed of by the directors. (section 85 of CA 2016).

Variation of Rights

Section 91(5) of CA 2016 also deems further issuance of preference shares as a “variation of rights”. This means that the approval from the existing class of preference shareholders must be obtained before a new issuance of preference shares, and also allows a certain percentage of the preference shareholders to go to Court to invalidate the new issuance of preference shares. Founders who need to raise capital in subsequent rounds may face some difficulty in this scenario.

Power of Interested Directors to Vote

The default rule under section 222 of CA 2016 does not bar directors of private companies (except for private companies which are subsidiaries of public companies) from voting in transactions and agreements where they are personally interested in as long as their interest has been declared. Some founders/shareholders may be uncomfortable with this and want to incorporate stricter provisions in the constitution to exclude them from voting in such matters.

The Board’s Right to Approve Directors’ Fees

The default rule under section 230 of CA 2016 allows the Board to approve directors’ fees in private companies (except for private companies which are subsidiaries of public companies). Shareholders or founders may be uncomfortable with this arrangement and may want to ensure that this approval is done by shareholders.

*** If you wish to know more, please click here to access our article on the importance of having a company constitution.***

What if your company has an existing Memorandum and Articles of Association (“M&A”) which was drafted before CA 2016 was in force?

Potential conflicts between Memorandum and Articles of Association (“M&A”) and CA 2016 could lead to disputes between shareholders and lawsuits due to the inconsistencies.

In the Fourth Schedule of the Companies Act 1965 (“Old Act”), we can find a table comprising of internal management rules (“Table A”). The regulations in Table A are a good refence for specimen clauses, available for companies to cherry-pick to include in their M&A. While some of these Table A clauses have already been incorporated into the CA 2016 itself, several provisions have been amended and the CA 2016 requires companies to update some of these provisions. Hence, companies should review their Articles of Association and decide the next step forward to reduce the possibility of disputes between members of the company.

What should your company do now?

Companies limited by shares incorporated prior to 2016
- These companies were statutorily required to adopt a M&A prior to 2016. Companies may amend and update the Table A provisions in their M&A to be aligned with the CA 2016; or
- Revoke the M&A and operate without a constitution. This would mean that all the default rules of the CA 2016 would apply with no tailoring or modifications made to suit the management and governance of the company. The founders/shareholders may not be aware of the implications of such default rules and this may lead to a difficult situation or a conflict later when it is discovered; or
- Revoke the M&A and adopt a new constitution in line with the CA 2016. This is probably the best and cleanest option.
Newer companies incorporated after the enactment of the CA 2016
- The most strategic choice is to have a constitution tailored to their needs; or
- Companies may also choose to operate without a constitution. This would mean that all the default rules of the CA 2016 would apply with no tailoring or modifications made to suit the management and governance of the company. The founders/shareholders may not be aware of the implications of such default rules and this may lead to a difficult situation or a conflict later when it is discovered.

In a nutshell

The Constitution of a company is an extremely important document. It provides the structure for the management and governance of the company. Although the CA 2016 has default rules applicable where the company has no Constitution, it would be risky to just rely on the default rules without considering the implications of the default rules on their specific company. The ability to tailor the Constitution of a company is an important consideration for founders, investors and shareholders. It provides the flexibility to adopt a Constitution which they feel is optimal for their specific company. It is submitted that founders and shareholders should take advantage of this flexibility and have a tailored Constitution which provides the best framework for the management and governance of their company.

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This article was written by Shawn Ho with assistance from Tiffany Chin (Intern). Shawn leads the corporate practice group of Donovan & Ho, and has been recognised as a Notable Practitioner, whilst the firm has been recognised as a Notable Firm for Corporate and M&A by Asialaw Profiles 2020 and 2021. We are also ranked as a Recommended Firm by IFLR1000 2020 and 2021.

Our corporate practice group advises on corporate acquisitions, restructuring exercises, joint venture arrangements, shareholder agreements, employee share options and franchise businesses, Malaysia start-up founders and can assist with venture capital funds in Seed, Series A & B funding rounds. Feel free to contact us if you have any queries.

Injunctions on Performance Bonds

Stopping the Call on Performance Bonds

A performance bond serves as a guarantee to a beneficiary for the performance of contractual obligations owed by a third-party. Performance bonds are widely adopted in the construction industry, whereby the third-party subcontractor (a person hired to do the work) provides a performance bond (typically in a bank guarantee) to guarantee their performance. The performance bond gives financial security to the beneficiary main contractor if the subcontractor’s non-performance occurs. If default occurs or breach of contract by the subcontractor, the main contractor may claim the money from the bank guarantee. This claim is known as a “call” on the performance bond.

A main contractor may sometimes threaten to call on the performance bond for reasons disputed. The subcontractor may get a court order to restrain the main contractor from making a call on performance bond. An injunction may be granted if the applicant can demonstrate either fraud or unconscionability.

Fraud

In the past, fraud was viewed as the only ground in which one could obtain an injunction to restrain a call on a performance bond.

In 2000, the Court of Appeal in LEC Contractors (M) Sdn Bhd (Formerly Known As Lotteworld Engineering & Construction Sdn Bhd) v Castle Inn Sdn Bhd & Anor [2000] 3 MLJ 339 refused to grant an injunction against the bank to make payment on an on-demand performance bond as “all that was required to trigger them (on demand performance bond) was a demand in writing”. It was found that a proper demand had been made and the bank had to pay the main contractor the amount stated in the bond. Injunction was refused as fraud was not pleaded. The court was adamant that to justify any injunction to stop payment, there must be clear evidence of fraud by the defendant which came to the knowledge of the bank. Bad faith or unconscionable conduct is not fraud.

(NB: LEC Contractors must be viewed in light of its facts – it involved an application to restrain the bank/issuer from making payment on an on-demand bond. It did not involve an injunction to restrain the beneficiary from making a demand on the bond.)

Unconscionability

In recent years, Federal Court case Sumatec Engineering and Construction Sdn Bhd v Malaysian Refining Co Sdn Bhd [2012] 4 MLJ 1 recognized unconscionability as a valid ground for courts to grant an injunction. Even though clear guidelines on what constitutes unconscionability in relation to calls on performance bond have not yet been forthcoming, the court provided that ‘the concept of unconscionability involves unfairness, as distinct from dishonesty or fraud, or conduct so reprehensible or lacking in good faith that a court of conscience would either restrain the party or refuse to assist the party’.

A lack of good faith (bona fide) will also play into the court’s consideration in such matters, although the court clarified that it is determined case-by-case in that “what kind of situation would constitute ‘unconscionability’ would have to depend on the facts of each case”.

Besides lack of good faith and moral reprehension, the Court of Appeal in Kejuruteraan Bintai Kindenko Sdn Bhd V. Nam Fatt Construction Sdn Bhd & Anor [2011] 7 CLJ 442 added that the pre-requisite is the plaintiff must have a strong prima facie case of unconscionability against the defendant. Unconscionability may be proven if a defendant sought to obtain unjust enrichment through unconscionable conduct.

Recently, another Court of Appeal case KNM Process Systems Sdn Bhd v Lukoil Uzbekistan Operating Company LLC [2020] MLJU 85 applied the test of unconscionability. Based on the facts, various reasons were cited as “unconscionable” by the respondent. The court granted an injunction to restrain the call of the performance bonds pending arbitration. The allegations made by the appellant against the respondent included:

The respondent issued simultaneous demands on 3 guarantees, one of which was a conditional demand bond;
The calls did not comply with the terms of the main contract;
The call was only available upon termination, which did not arise in the case;
The respondent showed there was no objective entitlement on its part to make a call on the guarantees and that the respondent knew that it could not make the call;
The respondent had agreed that following multiple extensions of the Warranty Guarantee, there would be no further extensions and the Warranty Guarantee would be returned to the appellant;
The simultaneous calls on the guarantees issued were made under 2 unrelated and independent contracts.

The Court held:

“Absence or “lack of good faith” has long been accepted as a basis to restrain a beneficiary from calling a bond or guarantee… We are of the view that the above circumstances display a seriously arguable and realistic inference case of want of good faith on the part of the respondent such that an interim injunction restraining the respondent’s substantive rights is warranted.”

Key takeaways

The position of Malaysian courts in restraining a main contractor’s right to call on performance bonds has shifted over the years. The criteria has been extended to include unconscionability of the defendant, thus giving the courts more flexibility to inspect the “unconscionable behaviour” of the defendants. There is no concrete delineation of what constitutes unconscionable acts, which turns this into a question of fact which requires the court to look into the facts of each case individually.

Before calling on a performance bond, there should be a proper examination on the performance bond and the main contract between the parties. If contractual conditions must be met before a bond can be called, the party seeking to call on the bond must meet all those conditions, failing which their call may be considered unconscionable. A party seeking to call on the bond should also know how its behaviour may be construed – for example, pressuring or threatening the other party to extend the bond.

Material facts of the case may be significant to the court’s deliberation in granting an injunction, although the plaintiff must first prove that they have a strong case against the defendant and that the action of the defendant lacked good faith.

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This article was written by Donovan Cheah with assistance from Tiffany Chin (Intern). Donovan is an Advocate and Solicitor of the High Court of Malaya. He is a Fellow at the Singapore Institute of Arbitrators and the Malaysian Institute of Arbitrators. He is also a registered foreign lawyer with the Singapore International Commercial Court.

Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, tax advisory and corporate advisory. Have a question? Please contact us.