When a business partner fails to deliver on their promises, or a supplier breaches a critical agreement, Malaysian businesses need to understand their legal options. Breach of contract claims are among the most common types of commercial litigation in Malaysia, yet many business owners remain uncertain about the process, their rights, and the remedies available to them.
This comprehensive guide explains everything Malaysian businesses need to know about pursuing or defending breach of contract claims under Malaysian law.
What Constitutes a Breach of Contract in Malaysia?
Under Malaysian law, a breach of contract occurs when one party fails to perform their obligations under a valid contract. The Contracts Act 1950 governs contractual relationships in Malaysia and provides the framework for understanding when a breach has occurred.
A breach can take several forms:
Actual Breach
This occurs when a party fails to perform their contractual obligations when performance is due. For example, a supplier who fails to deliver goods by the agreed deadline, or a contractor who abandons a construction project midway.
Anticipatory Breach
This happens when a party indicates, before the performance date, that they will not fulfill their contractual obligations. Malaysian courts recognise anticipatory breach, allowing the innocent party to take immediate legal action rather than waiting for the actual breach to occur.
Fundamental Breach
A fundamental breach goes to the root of the contract, depriving the innocent party of substantially the whole benefit they were entitled to receive. This type of breach typically entitles the innocent party to treat the contract as terminated.
Remedies Available for Breach of Contract
The Contracts Act 1950, particularly Sections 74 to 76, outlines the remedies available to parties who suffer from a breach of contract.
Damages (Monetary Compensation)
The primary remedy for breach of contract in Malaysia is damages. Section 74(1) of the Contracts Act 1950 states that when a contract has been broken, the party who suffers by the breach is entitled to receive compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach.
However, Section 74(2) makes clear that compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. This means businesses must prove a direct causal link between the breach and their losses.
Malaysian courts follow the principles established in the landmark English case of Hadley v Baxendale, which requires that damages must be reasonably foreseeable at the time the contract was made.
Liquidated Damages
Many commercial contracts in Malaysia include liquidated damages clauses, which pre-agree the compensation payable upon breach. Section 75 of the Contracts Act 1950 addresses situations where a penalty is stipulated for breach, allowing the court to award reasonable compensation not exceeding the stipulated amount.
Specific Performance
Under the Specific Relief Act 1950, courts may order a party to perform their contractual obligations rather than pay damages. This remedy is typically granted when damages would be inadequate, such as in contracts for the sale of unique property or goods that cannot be easily obtained elsewhere.
Injunction
An injunction is a court order preventing a party from doing something that would breach the contract. This is particularly useful in cases involving non-compete clauses or confidentiality agreements.
Rescission
Section 76 of the Contracts Act 1950 provides that a party who rightfully rescinds a contract is entitled to compensation for any damage they have sustained through the non-fulfilment of the contract.
Limitation Periods: Time Limits for Filing Claims
One of the most critical aspects of breach of contract claims that Malaysian businesses must understand is the limitation period. Under the Limitation Act 1953, there are strict time limits within which legal action must be commenced.
General Limitation Period
For most breach of contract claims, the limitation period is six years from the date the cause of action accrued. This means businesses must file their claim within six years of the breach occurring.
Contracts Under Seal
For contracts executed as deeds (under seal), the limitation period extends to twelve years.
When Does Time Start Running?
Time typically begins to run from the date of the breach, not from when the innocent party discovered the breach. However, the Limitation (Amendment) Act 2018 introduced important exceptions for negligence claims not involving personal injuries, where the starting date may be when the damage became discoverable. Businesses should seek legal advice promptly upon discovering any potential breach.
The Litigation Process in Malaysian Courts
Understanding the litigation process helps businesses prepare for what lies ahead when pursuing a breach of contract claim.
Pre-Action Steps
Before commencing litigation, the innocent party should issue a letter of demand to the breaching party. This letter should clearly state the breach, the losses suffered, and the remedy sought. Many disputes are resolved at this stage without court involvement.
Commencing Proceedings
If the dispute cannot be resolved, proceedings are typically commenced by filing a Writ of Summons in the appropriate court. The jurisdiction depends on the claim amount—claims up to RM100,000 are heard in the Magistrates Court, claims between RM100,001 and RM1,000,000 in the Sessions Court, and claims exceeding RM1,000,000 in the High Court.
Pleadings Stage
The plaintiff files a Statement of Claim setting out the facts, the breach alleged, and the remedies sought. The defendant must file a Defence within the time specified under the Rules of Court 2012. Failure to file a Defence may result in judgment in default under Order 19 of the Rules of Court 2012.
Discovery and Interlocutory Applications
Parties exchange relevant documents through the discovery process. Various interlocutory applications may be made, including applications for summary judgment where there is no real defence to the claim.
Trial
If the matter proceeds to trial, witnesses give evidence and are cross-examined. The court then delivers judgment, determining liability and, if applicable, the quantum of damages.
Appeals
Unsuccessful parties may appeal to higher courts within the prescribed timeframes.
Practical Advice for Malaysian Businesses
Prevention Is Better Than Cure
The best approach to breach of contract claims is to prevent them from arising. Ensure all significant commercial agreements are properly documented, clearly drafted, and reviewed by legal professionals before signing.
Include Dispute Resolution Clauses
Consider including arbitration or mediation clauses in your contracts. These alternative dispute resolution mechanisms are often faster and more cost-effective than litigation.
Document Everything
Maintain comprehensive records of all contractual dealings, including correspondence, delivery receipts, payment records, and any variations to the original agreement. This documentation will be invaluable if a dispute arises.
Act Promptly
If you suspect a breach has occurred, seek legal advice immediately. Delay can prejudice your position and may result in your claim becoming time-barred.
Consider the Commercial Relationship
Before commencing litigation, consider whether the business relationship is worth preserving. Sometimes, negotiation or mediation may achieve a better outcome for all parties involved.
Assess the Cost-Benefit
Litigation is expensive and time-consuming. Before proceeding, carefully assess whether the potential recovery justifies the legal costs involved.
Conclusion
Breach of contract claims are a significant aspect of commercial litigation in Malaysia. Understanding your rights under the Contracts Act 1950, the available remedies, the applicable limitation periods, and the litigation process empowers Malaysian businesses to protect their interests effectively.
Whether you are pursuing a claim or defending against one, early legal advice is essential to ensure the best possible outcome for your business.
Disclaimer: This article provides general information only and does not constitute legal advice. The information contained herein is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. Each legal situation is unique, and you should consult with a qualified legal professional regarding your specific circumstances before taking any action based on the information provided in this article.