KUALA LUMPUR (Aug 27): Parties to government contracts are entitled to reap the benefits of what was contracted for, but must equally be prepared to bear liabilities or suffer losses that may result from their contractual obligations.

Judicial Commissioner Roz Mawar Rozain made this caution to contractors and added that it is incumbent upon all parties entering into such agreements (with the government or others) to fully understand and appreciate the terms to which they are binding themselves.

"This includes provisions for early termination or changes in government policy,” she said in her judgement in dismissing a suit by national service training programme operator Sri Ledang Ventures Sdn Bhd (in the process of winding up) against the Malaysian government.

Roz Mawar in her judgement dated July 31 this year, where the full written grounds were uploaded on Tuesday, said the termination of the contract on Sri Ledang was a consequence of a significant decision by the government to abolish the national service training programme.

“Such policy decisions, while they may have adverse effects on certain parties, are necessary for the governance of the country and fall squarely within the government’s prerogative.

“This case serves as a salient reminder that government contracts, despite common misconceptions, are not inherently more secure or profitable than other commercial agreements. They are subject to the same principles of contract law that govern all business transactions.

“While parties may enter into such contracts with high expectations of stability and returns, they must also be prepared to bear the risks and potential losses that come with any commercial venture. The court’s role is not to insulate parties from the consequences of their bargains, but to give effect to the terms they have negotiated and agreed upon,” she said in her judgement.

Besides claiming general, exemplary, and aggravated damages, the plaintiff, Sri Ledang, is also claiming RM3.061 million damages for cost of construction in improving the camp, RM5.2 million for the balance of rental infrastructure from October 2018 to December 2020, RM2.244 million for underpaid rental of infrastructure and services from 2014 to 2015, and RM702,282 for underpaid infrastructure from 2017 to 2018.

It was also seeking RM1.161 million for loss of profits because of underpayments for catering services from 2014 to 2018, and another RM2.435 million as loss of profits it ought to have received from April 2018 to 2020. Sri Ledang had taken loans to improve the facility.

The national service training programme began in 2003 pursuant to laws passed, and over the years the programme has been dwindling due to budget cuts. The programme was finally halted by the government on Aug 13, 2018.

Whether Clause 36 was lawful

This led the company to file the action over the purported wrongful termination of the contract and substantial losses that led to its winding-up. The government relied on Clause 36 of the contract as grounds for the termination.

Clause 36 stipulates that the government may terminate the contract at any time by giving a written notice of 30 days in advance to the company without giving any reason, if the termination is for national and security interest, or for public policy.

Roz Mawar noted Sri Ledang questioned whether Clause 36 was lawful in its decision for the government to terminate the contract.

She said evidence in this case showed the contracts were made by the free consent of both parties who were competent to contract.

“The contract between the parties was for a lawful purpose and the consideration that the plaintiff benefited was not for the sums of pittance. The company (the plaintiff) had not shown any evidence that the contract it had entered into with the defendant (the government) were not valid.

“On a balance of probabilities, this court does not find that the contract, in particular Clause 36, offends any law to declare it void,” she said.

Roz Mawar in alluding to the evidence by the then secretary general of the Defence Ministry said the announcement made over the termination undoubtedly fell within the ambit of “government policy” as contemplated in Clause 36.

She also said that Sri Ledang had not adduced any evidence to suggest the termination was done in bad faith or in an unreasonable manner.

While Sri Ledang argued that it had suffered financial losses due to the termination, Roz Mawar pointed out Clause 36.3, which explicitly provides that the contractor shall not be entitled to any form of losses, including loss of anticipated profits, compensation, damages, or any claim arising from the contract termination.

“The plaintiff as a commercial entity must be taken to have understood and accepted this risk when entering into the contract. The chronology of the factual matrix of this case illustrates that the extension of the contract to provide the services to the defendant was not as of a right.

“Yearly renews were done. The business risks on either side were always present, as they usually were in the world of commerce,” she said in her 22-page judgement, where she also noted there were many national service camps that had also closed operations due to the termination.

On the outstanding payments sought by the company, Roz Mawar said they were not tenable.

“While the court acknowledges the potential financial hardship experienced by the company due to the variance in trainee numbers and rental rates from initial projections, it is a well-established principle in contract law that parties are bound by the terms to which they have freely agreed.

“It is a fundamental principle in contract law that parties are bound by the terms to which they have freely agreed…The court is not at liberty to rewrite the parties’ bargain or to relieve the plaintiff from the commercial risks it assumed when entering this agreement,” she said.

Twenty-eight national service training programme operators nationwide had collectively filed a separate legal suit against the government over the termination and loss of income which is still pending, where they are similarly challenging Clause 36.