The sanctity of contracts is a key principle in contract law, rooted in the idea that any agreements entered into freely by parties must be upheld, unless vitiating factor such as fraud, duress or illegality come into play. In Tan Chong Industrial Equipment Sdn Bhd v Transnasional Express Sdn Bhd & 6 others [2024] CLJU 1977, the Court of Appeal re-examined this fundamental principle, affirming that the integrity of contractual obligations holds firm even against claims of unjust enrichment.
Brief Facts
The dispute arose when the 1st to 5th Respondents, who were express bus operators and subsidiaries of the 6th Respondent, defaulted on payments due under a series of lease and maintenance agreements with the Appellant, resulting in an accumulated debt of approximately RM32.9 million. Consequently, the Appellant terminated the agreements in April 2016 and repossessed 49 buses from the Respondents.
Subsequently, a Settlement Agreement (SA) was executed in July 2016, whereby the 1st to the 6th Respondents agreed to resolve the outstanding debt by transferring a piece of land valued at RM16 million (Land) and settling the remaining of the debts through monthly instalments. The 7th Respondent was the owner of the Land. As a result, a Sale and Purchase Agreement (SPA) was executed between the Appellant and the 7th Respondent to effect the transfer of Land at the agreed purchase price of RM16 million.
However, following the Respondents’ default of the instalments, the Appellant terminated the SA and repossessed the buses. The Respondents then initiated a suit to claim restitution based on unjust enrichment and coercion, arguing that the value of the Land transferred far exceeded the outstanding debt and in fact, there was an overpayment to the Appellant.
The High Court Decision
The High Court found in favour of the Respondents, holding that the Appellant was enriched at the Respondents’ expense by the transfer of land, which had a true market value significantly higher than the settlement sum. The High Court found that this enrichment was unjust given the substantial disparity between the actual value and the agreed amount. Consequently, the Respondents’ claim for unjust enrichment was allowed.
Dissatisfied with the decision, the Appellant appealed.
The Court Of Appeal Decision
The main issue before the Court of Appeal was whether the Respondents could pursue a claim for restitution based on unjust enrichment and coercion without invalidating or setting aside the SA and the SPA. Notably, the Respondents acknowledged the validity of both agreements, including the agreed purchase price of the Land at RM16 million.
The Court of Appeal held that the Respondents’ election to treat both the SA and SPA as valid and binding constituted a complete bar to the Respondents’ claim for restitution on the grounds of unjust enrichment. The Court reasoned that the Respondents were bound by their contractual agreement and could not now claim that the Appellant had been unjustly enriched through the arrangement that they had voluntarily agreed to.
In light of this, the Court of Appeal reversed the High Court’s decision.
Commentary
Under contract law, parties are legally bound by the terms of the agreement unless the contract is vitiated by recognised legal grounds such as, fraud, coercion, or undue influence. In this case, the Respondents’ decision not to challenge or set aside the agreements ultimately rendered their claim untenable, as they remained bound by the contractual terms.
This Court of Appeal’s decision underscores the judiciary's vital role in upholding the sanctity of contracts and preventing parties from circumventing their contractual obligations under the guise of equitable remedies, such as unjust enrichment.
In any contractual disputes, the court bears the solemn duty to defend, protect and uphold the sanctity of the contract. Courts are not tasked with rewriting or improving the terms of a contract, even if doing so may appear fair or equitable. The House of Lords articulated this principle in the landmark case of Trollope and Cools Ltd v North West Metropolitan Regional Hospital Board [1973] 1 WLR 601:
“The court does not make a contract for the parties. The court will not even improve the contract which the parties have made for themselves, however desirable the improvement might be. The court’s function is to interpret and apply the contract which the parties have made for themselves. If the express terms are perfectly clear and free from ambiguity, there is no choice to be made between different possible meanings: the clear terms must be applied even if the court thinks some other terms would have been more suitable.”
This principle is particularly applicable where the terms of the contract are explicit and unambiguous. In such instances, claims of restitution or unjust enrichment cannot arise unless the contract is first invalidated on recognised legal grounds. Thus, as long as the contract stands, parties are bound by their agreed-upon obligations.
In this regard, the Court of Appeal made reference to Kosbina Konsult (K) Sdn Bhd (in liquidation) v Madu Jaya Development Sdn Bhd [2019] 3 MLJ 471, where Low Weng Tchung’s commentary on The Law of Restitution and Unjust Enrichment in Malaysia, was cited with approval:
“[2.26] … While it is now beyond question that the law of restitution and unjust enrichment is separate and distinct category of the law of obligations, it must always be borne in mind that the law of restitution and unjust enrichment cannot be utilized so as to override, subvert or defeat the terms of any contract between the parties, especially where such contract has made express provision as to the allocation of risk between the parties.”
This case serves as a timely reminder for parties to fully understand their obligations when entering into contracts. Once an agreement is executed, the courts will uphold its terms unless there are clear legal grounds for invalidation. Equitable remedies like unjust enrichment cannot be invoked to circumvent contractual obligations; any risks assumed in the contract will remain the parties’ to bear.
9 October 2024
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