Federal Court: An Agreement to Vary a Contract requires Consideration

In Port Kelang Authority v Kuala Dimensi Sdn Bhd (Civil Appeal No: 02(f)-7-04/2024(B)), the Federal Court was called upon to consider, among others, whether an agreement to vary an existing agreement requires consideration to be enforceable, the manner in which such consideration could be proved, and whether the doctrine of estoppel could be invoked against the application of a statutory provision.
 
Background
 
In 1993, the Government of Malaysia sought to develop and transform Port Klang into a national load centre and regional transhipment hub. Port Kelang Authority ("PKA"), a statutory corporation established under the Port Authorities Act 1963, appointed Kuala Dimensi Sdn Bhd ("KDSB") as the turnkey contractor to construct and develop this Port Klang Free Zone ("PKFZ") Project (“PKFZ Project”).
 
To this end, PKA and KDSB executed various agreements, including: 
  • The Development Agreement dated 27 February 2003 (“DA1”)1;

  • The Supplemental Agreement for Additional Development Works dated 30 November 2005 ("ADW1");

  • The Agreement on the Supplemental Agreement for Additional Development Works dated 26 April 2006 ("ADW2"); and

  • The Supplemental Agreement for New Additional Development Works dated 26 April 2006 ("NADW"). 
The crux of the dispute arose from the execution of ADW2. ADW2 was entered into solely for the purpose of varying the interest chargeable by KDSB to PKA under ADW1 from 5% to 7.5% per annum. This resulted in PKA having to bear an additional payment obligation of RM49.367 million. Notably, KDSB was not required to carry out any additional works for this increased payment beyond the scope of works it was already contractually obliged to do under ADW1.
 
PKA later challenged ADW2, asserting it was void for want of consideration under Section 26 of the Contracts Act 1950 (“CA 1950”).
 
Proceedings before the High Court and Court Of Appeal
 
After a full trial, the High Court ruled in favour of KDSB, holding that ADW2 was furnished with consideration. The High Court found, among others, that: 
  • PKA did agree to enter into ADW2 with KDSB and hence cannot subsequently challenge the validity of ADW2; 

  • The parties intended to enter into ADW2 to alleviate the financial difficulties faced by KDSB in carrying out the additional works under ADW1 and NADW; and 

  • ADW2 should be read together with ADW1. Therefore, the consideration for increasing the interest rate in ADW2 for KDSB is the completion of the additional works under ADW1 for PKA’s benefit. 
However, on appeal, the Court of Appeal reversed the High Court’s decision, declaring ADW2 null and void for want of consideration. The Court of Appeal unanimously found, among others, that: 
  • There was nothing in the KDSB’s pleaded defence to suggest that the consideration for the interest rate increase under ADW2 was the completion of works for PKA under ADW1 as found by the Learned High Court Judge; 

  • In construing the terms of ADW1, ADW2, and NADW, they should be looked at separately as the scope of works, obligations and considerations under ADW1 and NADW are separate and distinct; 

  • Even if ADW2 was viewed as a variation of ADW1, ADW2 would have to be supported by consideration from KDSB to PKA; 

  • As ADW2 merely conferred the benefit of extra interest of 2.5% to KDSB without any reciprocal benefit to PKA, ADW2 was void for want of consideration; 

  • There was no mention in ADW2 of any financial difficulties faced by KDSB in carrying out the works under ADW1 and/or NADW which was the pleaded basis for KDSB seeking an increase in the chargeable interest pursuant to ADW2; and 

  • Estoppel cannot be used to defeat clear statutory provisions of the law; in this case being the clear statutory requirement for consideration to constitute a valid contract. 
Consequently, the Court of Appeal ordered KDSB to make repayment of the sums received under ADW2 to PKA.
 
Proceedings before the Federal Court
 
Circa March 2024, the Federal Court granted KDSB leave to appeal on four questions of law: 
  1. Where it is alleged that there was no consideration for the agreement between the parties, is consideration to be proved only within the four corners of the said agreement or can the same be proved by extrinsic evidence? 

  2. Whether the practical benefit test, as laid down in Williams v Roffey Bros and Nichollas (Contractors) Ltd [1991] 1 QB 1 (“Williams v Roffey Bros”) is good law? 

  3. Whether parties who had made their intention clear by entering into legal relations, are bound by an agreement to vary their previous agreement when they have acted upon the former, namely the variation agreement? 

  4. Whether the doctrine of estoppel should be invoked against PKA, when it had agreed to the proposal to increase the interest rate and made payment of the same without reservation? 
Analysis of the Four Leave Questions 
  1. Whether consideration must be proved solely within the four corners of the contract or can be proved by extrinsic evidence? 
Firstly, KDSB argued that the existence of consideration could be established through extrinsic evidence beyond the written agreement. KDSB contended that the contemporaneous documents support its position that there was consideration for ADW2 because it would not have been able to carry out the works under ADW1 or NADW, if ADW2 was not entered into, thereby resulting in it obtaining a larger payment from PKA.
 
In this regard, the Federal Court found that it is trite law that, where the terms of a contract have been reduced to writing, the contract could only be proved by the document itself, and it is not open to a defendant to seek to introduce and for the court to admit extrinsic evidence that would add new terms to it. Pursuant to section 91 of the Evidence Act 1950 (“EA 1950”), no evidence shall be given to prove the terms of the contract, except that it should be gathered from the four corners of the contract itself.
 
The Federal Court also found that, on a factual level, there was no extrinsic evidence present to support the assertion that ADW2 is supported by consideration. In other words, KDSB has not made out the relevant circumstances under any of the provisos in section 92 of the EA 1950 to enable extrinsic evidence to be admitted to interpret ADW2.
 
Secondly, the Federal Court observed that the agreements pertaining to the PKFZ Project, including ADW1, ADW2 and NADW, are separate and distinct contracts and their terms should be construed separately. This was given that: 
  • The agreements, except ADW2 and NADW, were not executed simultaneously;
  • The agreements involved separate and distinct scope of works for separate and distinct considerations;
  • The considerations, obligations and terms under the agreements were different;
  • There was no common objective to be achieved for these agreements; and
  • A breach of any of the terms of the agreements would not trigger a breach of all of the agreements relating to the PKFZ Project.2 
Premised on the above, the Federal Court found that, from the four corners of ADW2, there was no consideration due to PKA for entering into ADW2. The agreements, even if read together, failed to indicate that the execution of ADW2 was necessary for NADW to be executed as pleaded by KDSB.
 
Thirdly, the Federal Court observed that even if ADW2 is a variation of ADW1, it still requires consideration for it to be valid. The Federal Court noted that if the parties cannot establish all the elements of a valid contract in ADW2, the agreement is void and the parties’ obligations are only confined to the original contract. For a variation to be contractually binding, all of the legal requirements to form a valid contract must be established, including the provision of valuable consideration by each party. 3 If there is no such consideration, the validity of the variation can be subject to challenge.
 
The Federal Court also observed that the general rule is that past consideration is not sufficient consideration and traditionally, a promise to perform an existing obligation will not be good consideration. In other words, the performance of existing contractual obligations under the original contract is not to be taken as sufficient consideration for any subsequent variation.4 This means that fresh consideration, in addition to that already owing, will need to be provided for the variation to be binding.
 
The Federal Court declined to answer this question given its finding that there was not any extrinsic evidence present to support the assertion that ADW2 is supported by consideration and neither was there extrinsic evidence relied upon by the Court of Appeal in arriving at its decision. 
  1. Whether the practical benefit test in Williams v Roffey Bros applies as good law in Malaysia? 
The practical benefit test from Williams v Roffey Bros allows a variation of contract to be furnished with consideration in the event that practical benefits are derived, even when the party making the promise was already obligated to carry out the said promise under the original contract. KDSB relied on this case to argue that PKA had received a practical benefit from ADW2, such as cost savings and timely project completion due to KDSB’s continued involvement in the PKFZ Project, which amounts to consideration for ADW2. KDSB argued that the Court of Appeal failed to apply the practical benefit test, which led to an erroneous conclusion about the lack of consideration in ADW2.
 
The Federal Court found that the Williams v Roffey Bros principle had not been explicitly accepted in Malaysia5 and that the full impact of Williams v Roffey Bros was never argued and adjudicated in the Courts below in the present case. The Federal Court also noted that the Williams v Roffey Bros principle is inconsistent with the long-standing rule that consideration, being the price of the promise sued upon, must move from the promisee.6
 
On a factual level, the Federal Court found there was no evidence led by KDSB that it would have been unable to perform its obligations under ADW1 and/or enter into NADW if ADW2 was not executed. The Federal Court reaffirmed the finding of facts by the Court of Appeal that: 
  • KDSB did not have to incur any financial obligation on its own to complete the works under ADW1 and NADW as it has raised sufficient financing for the same; and 

  • The performance of the works under NADW and ADW1 would not have caused any financial strain to KDSB so as to require the execution of ADW2. 
Given that there was no evidence of financial strain suffered by KDSB, be it under ADW1 or NADW, the Federal Court held that the issue of whether practical benefit would amount to sufficient consideration to PKA need not be considered.
 
The Federal Court declined to answer this question on the basis that the practical benefit test was never discussed or adjudicated in the Court below. 
  1. Whether parties who had made their intentions clear in entering into legal relations are bound by a subsequent variation agreement if they acted upon it?
KDSB argued that the execution of ADW2 indicated the parties’ clear intention to be bound by the revised terms under ADW2. They asserted that PKA had made payments under ADW2 without reservation, which should prevent them from challenging its validity.
 
The Federal Court rejected this argument, holding that despite the parties’ actions, the lack of consideration under ADW2 rendered the same void pursuant to Section 26 of the CA 1950. The Federal Court emphasised that an agreement without consideration is legally unenforceable, regardless of whether the parties had intended and agreed to enter into legal relations and acted on the same.
 
The Federal Court answered this question in the negative. 
  1. Whether the doctrine of estoppel should be invoked against PKA, given their agreement to the interest rate increase and their payment without reservation? 
KDSB contended that PKA should be estopped from asserting the invalidity of ADW2 given that PKA had made payments under the same. However, the Federal Court affirmed that it is a trite and fundamental principle of law that the doctrine of estoppel cannot prevail against a statute or protect against illegality. In other words, estoppel cannot override clear statutory provisions.7
 
Accordingly, the Federal Court held that there can be no application of the doctrine of estoppel in order to defeat PKA’s claim for a declaration that ADW2 is void pursuant to Section 26 of the CA 1950. The void ADW2 cannot be legitimised due to the conduct of parties and/or by the doctrine of estoppel. It is automatically void due to a lack of consideration. The Federal Court further traced back the English doctrine of equity and observed that a promissory estoppel cannot be used to create an enforceable contract because of the absence of consideration.8 Promissory estoppel cannot be freely interpreted and applied by the courts as compared to statutory provisions.
 
In respect of KDSB’s assertion that the payment by PKA of RM49.367 million under ADW2 amounts to waiver of PKA’s rights under Section 26 of the CA 1950, the Federal Court found that the payment cannot amount to a waiver of PKA’s rights by reason that PKA had already commenced the proceedings in the High Court for a declaration that ADW2 is void for want of consideration more than two years before making the said payment, and that the payment was made with a reservation of rights after receipt of a demand from KDSB.
 
The Federal Court answered this question in the negative given its finding that PKA is not estopped from proceeding with its claim to have ADW2 declared void under the CA 1950 and that PKA’s payment under ADW2 cannot amount to a waiver of its rights.
 
Conclusion
 
The Federal Court’s decision in this case reinforces the fundamental principle that consideration is pivotal for enforceability of a contract under Section 26 of the CA 1950. The Federal Court affirmed that consideration must be evident within the written agreement and that extrinsic evidence, except for those which falls under any of the provisos to Section 92 of the EA 1950, cannot be used to establish it. Additionally, the Court’s non-acceptance of the practical benefit test from Williams v Roffey Bros highlights the necessity for consideration, even in the case of the variation of contract. This decision further clarifies that parties acting upon an agreement without valid consideration would not result in the same being rendered enforceable, and the doctrine of estoppel cannot be invoked to override statutory provisions.
 
The Federal Court's decision is welcomed as a guiding precedent. It notes that all contracts and their variations must be furnished with consideration to avoid being rendered void under Section 26 of the CA 1950 and that they must comply with the statutory requirements of the CA 1950. The decision also serves as a cautionary point for parties drafting variation or supplemental agreements to ensure that valid consideration is provided and ideally, can be found within the four corners of the agreement.
 
Nimalan Devaraja (Partner) and Wong Shun Yong (Associate) of Skrine acted for Port Klang Authority in this case.
 
 
 

1 DA1 was supplemented by two supplemental agreements dated 26 May 2003 and 27 March 2004 which are not subject of dispute in the case.
2 Sri Kelangkota-Rakan Engineering JV Sdn Bhd & Ors v Arab-Malaysian Prima Realty Sdn Bhd & Ors [2001] 1 MLJ 324.
3 555 Film Sdn Bhd v Adamancy Construction Sdn Bhd [2023] MLJU 986.
4 Wigan v Edwards (1973) 47 ALJR 586.
5 Aspac Lubricants (M) Sdn Bhd (Formerly known as Castrol (M) Sdn Bhd) v Ketua Pengarah Dalam Negeri [2007] 6 MLJ 65.
6 Stilk v Myrick [1809] 2 Camp 317; Foakes v Beer [1884] UKHL 1.
7 Silver Corridor Sdn Bhd v. Gallant Acres Sdn Bhd [2016] 5 MLJ 1 (FC).
8 Hughes v Metropolitan Railway Co [1877] 2 AC 439.

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