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  • Writer's pictureGavin Jayapal

Are you terminated? A discussion as to termination clauses and the FC decision of Catajaya


Image source: https://movies.mxdwn.com/reviews/classic-movie-review-the-terminator-1984/


Sarah Connor‘s assessment of the situation was exceedingly correct, when she dispatched with the T-800. Swift, decisive and brutal action was the only thing that could keep a cybernetic organism (living tissue over a metal endoskeleton) from the future down.


Not so with contractual clauses. These tend to keep rearing their unwelcome heads repeatedly, until put-down by a sound judgment.


Such was the recent decision of the Federal Court in Catajaya v Shoppoint [2020] 1 LNS 2307.


The Federal Court was tasked with:


1. determining whether the law in Malaysia regarding termination clauses ought to be strictly interpreted; and


2. deciding whether headings in a contract could be used to assist in the interpretation of said contract.


The decision in Catajaya


Catajaya involved the intepretation of the terms under a Share Sale Agreement that had gone awry.


The FC held that termination must be done strictly in accordance with the terms of the SSA. Of important note would be the following passage:

[49] In any written agreement there must be strict adherence to the agreed terms of the agreement by the parties unless expressly provided otherwise. The SSA represents the intention of the parties, defining the obligations and commitments of the parties. Whether there was a valid termination would be based on whether in the first place there was a valid reason to terminate as stipulated by the terms of the agreement. There must be a proper construction of the terms of the agreement, in this case the SSA. The reasons or grounds for termination are defined with particularity in the SSA. Section 11 of the SSA gives a right of notice to rectify the breach. If no notice is given the party allegedly in breach would not have any knowledge of the breach complained of and thus unable to take the necessary steps to rectify.

As such, not only must termination be in accordance with the terms of the contract; the reason for terminating should also be consonant with the contract.


The FC went on to discuss SPM Membrane v Kerajaan Negeri Selangor [2016] 1 MLJ 464. Importantly, the following passages from SPM Membrane were considered in Catajaya:


[23] It is trite law that there is a need for there to be a valid reason to terminate, and that reason must have existed at the time of termination, even if the wrong reason was given at that time (see Chitty on Contract, 31st edn, E. Peel (eds) at 24-014). At common law, that usually means repudiatory breach, or breach of condition, or that there is a particular circumstance which gives rise to a contractual right to terminate. However, there appears to be no need for termination, where it happens by notice, to include particularised reasons as a matter of general common law, unless there are circumstances that give rise to a duty to do so, as in the case of a statutory duty or by the terms of a contract upon proper construction.

[41] Thus in addition to the above in interpreting the contract, the court must approach it holistically. No term is to be taken or interpreted in isolation. This canon of construction is so long established, it is almost banal.

The FC then emphasised that “[57] The terms and conditions of an agreement that have been agreed to by the parties of the agreement cannot be simply brushed aside and ignored.”

The FC then concluded as follows:

[60] The judicial observations in the authorities as we have stated above represent a clear, consistent and principled approach that termination clauses in a contract must be interpreted strictly. Both the High Court and the Court of Appeal in the instant appeal viewed that termination clauses must be interpreted strictly.
[63] Reading the terms of the SSA in its entirety, we find that there is no latent ambiguity; the obligations of the parties are specifically defined. Termination is not permitted unless as expressly stipulated under SSA. Notice must be given to the Appellant to rectify the identified breach and take steps to rectify that breach within the prescribed time as agreed. There must be strict adherence to the clauses in an agreement which relates to termination.
[64] Termination of an agreement results in the end of the parties obligations. Reading the provisions of Sections 11 and 12 of the SSA the party in breach must be notified of the identified reason for termination as well as be given the opportunity to rectify the breach.


2nd Question


So much for termination. The Court then went on to consider whether headings could assist in interpretation. Pithily, the FC held that it would not.


Conclusion


Practitioners would do well to read Catajaya. There are several important maxims outlined vis-à-vis the canons of interpretation and they provide for a timely refresher.

GAVIN JAYAPAL

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