It is commonplace that contracting parties will document their meeting of minds into a written agreement for formality and ease of enforceability. The question is whether contracting parties can subsequently come to a mutual agreement to vary the terms of the initial agreement including the agreement in relation to consideration i.e. price. Although a contract is essentially founded on the consent of both the promisor and promisee, this does not mean contracting parties can vary an existing agreement however they wish, even with mutual consent. This position was recently highlighted by the Court of Appeal in Port Kelang Authority v Kuala Dimensi Sdn Bhd [2024] 1 MLJ 252 (Port Kelang Authority case).
Background
Port Kelang Authority (Plaintiff), a statutory corporation established under the Port Authorities Act 1963, appointed Kuala Dimensi Sdn Bhd (Defendant) as a turnkey contractor to construct and develop the Port Klang Free Zone (PKFZ) project. Several agreements were executed between the parties such as:
the development agreement dated 27.2.2003 (DA1)
the supplemental agreement dated 26.5.2003 (DA2)
the supplemental agreement to DA1 dated 27.3.2004 (DA3)
the supplemental agreement for the additional development works dated 30.11.2005 (ADW1)
the supplemental agreement for additional development works dated 26.4.2006 (ADW2)
the supplemental agreement for new additional development works to DA1 dated 26.4.2006 (NADW).
The essence of ADW1, ADW2 and NADW can be summarised as follows:
ADW1: The Defendant was to carry out additional works including works on junction improvements to the PKFZ, construction of electrical infrastructure and construction of a business-class hotel near the proposed exhibition centre. The Plaintiff would pay the Defendant RM 510.38 mil with interest at the rate of 5% p.a.
ADW2: Both the Plaintiff and the Defendant agreed to revise the interest payable under ADW1 from 5% p.a. to 7.5% p.a. This resulted in an additional payment obligation of RM 49.37 million by the Plaintiff.
NADW: The Defendant was to design, construct, finance and complete new additional development works, which comprised of concrete trenching, electrical works, civil infrastructure works and road works. The Plaintiff would pay the Defendant RM 335.8 million with interest at the rate of 7.5% p.a.
Action At The High Court
Before the High Court, the Plaintiff’s action to void ADW2 for want of consideration was dismissed. The High Court found that ADW1 and ADW2 should be read together, and therefore, the consideration for the interest increment in ADW2 could be found in ADW1, namely the additional works undertaken by the Defendant under ADW1. The High Court further found that the parties’ intention in executing ADW2 was to alleviate the Defendant’s financial position so that the Defendant could carry out additional works under ADW1 and NADW.
The Plaintiff’s Appeal
The Plaintiff appealed to the Court of Appeal and maintained its position that ADW2 was null and void as it was solely for the Defendant’s benefit whilst the Plaintiff gained nothing from it.
The Court of Appeal’s Decision
The Court of Appeal referred to Section 26 of the Contract Act 1950 (CA 1950) and ruled that an agreement made without consideration was void. The Court noted that there were three exceptions laid down by Section 26 to this general rule, but none of which was relevant to the factual matrix.
The Defendant argued that the agreements were one composite contract given that PKFZ was a continuing development project spanning from 2003 to 2008 which involved a series of transactions and contracts between both parties. ADW2 was therefore executed to vary ADW1 and given that they should be read together, the want of consideration was a non-issue.
However, the Court of Appeal disagreed with the argument. The court opined that earlier cases such as Sri Kelangkota-Rakan Engineering JV Sdn Bhd & Ors v Arab-Malaysian Prima Realty Sdn Bhd & Ors [2001] 1 MLJ 324 were consistent in that agreements could only be read together if they were executed contemporaneously and for one transaction. In that case, the Court of Appeal held that the four agreements there which were executed contemporaneously for the same transaction had the same effect as if they were one agreement, and a breach of any of the terms of one of the agreements triggered a breach of all the agreements. In the present matter, the court found that ADW1 and ADW2 were not executed contemporaneously, whilst ADW2 and NADW were executed on the same day but involved separate and distinct scopes of works, despite all those works were for the PKFZ project.
As ADW2 had to be read separately from ADW1 and the consideration in ADW1 cannot be imported to ADW2, the question that arose was whether ADW2 was void for want of consideration.
The Court of Appeal found that just as any other agreement, a variation of an existing agreement had to be supported by consideration. The variation was in itself an agreement and the varied agreement formed a new agreement. The court found support for this proposition from 555 Film Sdn Bhd & Ors v Adamancy Construction Sdn Bhd [2023] MLJU 986, where it was held that “something of value must be given in exchange for the variation”. The court further affirmed the High Court’s ruling in Oakwell Engineering International Pte Ltd v PCM Feam (M) Sdn Bhd [2014] 11 MLJ 175, which held, amongst others that: “In many cases, consideration can be found in the mutual abandonment of the existing rights or the conferment of new benefits by each party on the other”.
Here, as ADW2 merely conferred the benefit of extra interest of 2.5% p.a. to the Defendant without any reciprocal benefit to the Plaintiff, the Court of Appeal held that ADW2 was void for want of consideration. The court ordered the Defendant to return the payments received under ADW2.
Conclusion
Although one might assume that a laissez-faire economy allows any form of agreement on a willing buyer, willing seller basis, the law does impose certain restrictions in this regard. Port Kelang Authority case is a timely reminder that an agreement once reached must not be taken lightly but with the utmost solemnity. In the same vein, one cannot be opportunistic to think that Section 26 can be circumvented by harping on the fact that both parties have signed the variation agreement willingly. Despite both the parties’ initial agreement, the door to challenge an unlawful contract is always open to the aggrieved party, as demonstrated by the Plaintiff in the instant case. As the maxim goes, “estoppel cannot do away with the need for consideration”.
26 June 2024