The Federal Court in Kuala Dimensi Sdn Bhd v. Port Kelang Authority [2025] 3 CLJ 497 held, an agreement without consideration is void under section 26 of the Contracts Act 1950.
Background of the Case
The Port Kelang Authority (PKA) launched the Port Klang Free Zone (PKFZ) project to transform Port Klang into a regional transshipment hub. PKA hired Kuala Dimensi as the turnkey contractor, leading to several contracts, including three supplemental agreements:
- Additional Development Works 1 (ADW1): Kuala Dimensi agreed to finance and build additional works, such as junction improvements and electrical infrastructure for RM510.38 million. PKA was to repay this amount plus 5% annual interest per a payment schedule.
- Additional Development Works 2 (ADW2): This agreement increased the interest rate on ADW1 to 7.5%, adding RM49.367 million to PKA’s payments, without stating any consideration for PKA.
- New Additional Development: This contract tasked Kuala Dimensi with new works, like concrete trenching, for RM335.8 million, with PKA paying this sum plus 7.5% interest. It did not mention ADW2.
In 2009, PKA challenged ADW2 in the High Court, arguing it was invalid due to no consideration. The High Court upheld the agreement, finding consideration in Kuala Dimensi’s completion of ADW1. The Court of Appeal reversed this, ruling ADW2 void. Kuala Dimensi appealed to the Federal Court.
Federal Court’s ruling
The Federal Court unanimously dismissed Kuala Dimensi’s appeal, confirming ADW2 was void under section 26 of the Contracts Act 1950, which requires consideration for a valid contract.
- Consideration Must Be in the Contract: Under sections 91 and 92 of the Evidence Act 1950, consideration must be proven within the contract’s written terms. ADW2 did not contained any benefit or consideration for PKA, and Kuala Dimensi could not use external evidence, like financial strain or links to New Additional Development Works, to prove consideration. Completing ADW1 was an existing obligation, not new consideration.
- Rejection of the “Practical Benefit” Argument: Kuala Dimensi argued PKA benefited from its continued work, justifying ADW2. The court rejected this and does not recognize “practical benefits” as consideration. ADW2 only increased Kuala Dimensi’s profits, offering no benefit to PKA.
- Variations Require Fresh Consideration: Even if ADW2 was a variation of ADW1, the law requires new consideration for the variation to be binding. Without fresh consideration, ADW2 was unenforceable and void under Section 26 of the Contracts Act 1950.
- Estoppel Cannot Validate a Void Contract: Kuala Dimensi contended that PKA was estopped from challenging ADW2 after making the additional payment. The Court held that estoppel cannot override the statutory requirement for consideration. PKA’s payment, made after litigation commenced and under a demand did not waive its rights, and Kuala Dimensi failed to show any detrimental reliance or change in position beyond fulfilling its existing contractual duties.
Key Laws Applied
- Section 26 of the Contracts Act 1950: An agreement without consideration is void unless it meets specific exceptions (e.g., made on account of natural love and affection), none of which applied here.
- Sections 91 and 92 of the Evidence Act 1950: Written contracts must contain evidence of consideration; external evidence cannot be used to add or contradict terms unless specific exceptions apply, which Kuala Dimensi did not meet.
Key Takeaways
- Include Clear Consideration: Ensure all contracts and variations state consideration for both parties to meet section 26 requirements.
- Rely on Written Terms: Courts will only enforce what is written in the contract; avoid relying on external claims or undocumented understandings.
- Prove Financial Needs: Justify any contractual variations with documented evidence of genuine financial necessity, as unsupported claims will be rejected.
- Limit Estoppel Claims: Statutory bodies can challenge void contracts, as estoppel cannot override statutory requirements for consideration.
- Handle Payments Carefully: Make disputed payments “without prejudice” to preserve legal rights, as PKA did in this case.
Conclusion
The Federal Court decision upheld the contract law by voiding ADW2 for lack of consideration. Applying section 26 of the Contracts Act 1950 and sections 91 and 92 of the Evidence Act 1950, the court clarified that contracts require clear mutual benefits to be valid. This case guides all relevant stakeholders to draft precise agreements and protect against invalid variations.
– By George Miranda, Joy Sam Jia Qian, Nurafiqah ‘Izzati –
This article is for general information purposes only and does not constitute legal or professional advice. It should not be used as a substitute for legal advice relating to your particular circumstances. Please note that the law may have changed since the date of this article.
