In a landmark legal battle that reached the heart of Malaysia’s founding principles, the Sabah Law Society took on the Federal Government over a promise made more than half a century ago. The core of the conflict was a special financial grant, a key condition for Sabah’s agreement to help form the nation in 1963. For 48 years, this constitutional promise was not properly fulfilled, leaving the state shortchanged by an amount tied to its own economic growth. So contentious was the issue that the Sabah Law Society first had to overcome significant government challenges and fight all the way to the Federal Court just to earn the right to have its case heard.
This document tells the story of that broken promise. We will explore what the grant was, how a temporary fix became a 48-year problem, and how a court case finally sought to uphold the foundational agreements of the Federation.
1. The Foundation: What is the “40% Entitlement”?
A. A Special Promise for a New Nation
When Sabah (then North Borneo) agreed to join the Federation of Malaysia in 1963, it was not unconditional. Special promises and safeguards were negotiated to protect the state’s unique interests and ensure its development. These agreements were documented in the Inter-Governmental Committee Report (IGC Report) and were so crucial that they were embedded directly into the Federal Constitution.
One of the most significant of these was a special financial grant, commonly known as the “40% Entitlement.” This was not just a budgetary item; it was a constitutional condition for Sabah joining the Federation, designed to guarantee that the state would have the financial resources necessary to build its public services and infrastructure.
B. Understanding the 40% Formula
The “40% Entitlement,” outlined in Article 112C and the Tenth Schedule of the Federal Constitution, was a unique type of grant based on revenue growth. It promised that Sabah would receive two-fifths (40%) of the increase in the net revenue that the Federal Government collected from Sabah each year.
A simple way to understand this is to think of it as a growth-sharing agreement:
Imagine Sabah’s contribution to the national wallet in 1963 was a fixed baseline amount. For every new dollar the Federal Government collected from Sabah above that original baseline, Sabah was constitutionally promised 40 cents back.
This was not just a theory; it was put into practice. In the early years of the Federation, the grant was calculated and paid, as shown in the government’s own records.
| Year | “Share of growth of Federal Revenue” (40% Grant) |
| 1964 | RM4,965,167.00 |
| 1965 | RM8,199,340.00 |
| 1966 | RM13,271,238.00 |
| 1967 | RM22,178,172.00 |
| 1968 | RM21,097,923.00 |
It is important to note that this special grant was in addition to other standard federal grants (like Capitation and State Road Grants) that all states received. It was a specific financial safeguard recognizing Sabah’s unique position in the Federation, a promise whose integrity would soon be tested when a temporary change led to a 48-year problem.
2. The Conflict: A Temporary Fix Becomes a Long-Term Problem
A. The First Review Order (1970)
The Constitution allowed for the 40% formula to be reviewed and, if both the Federal and Sabah governments agreed, replaced with a different arrangement. The first such review took place in 1969.
This resulted in the Sabah Special Grant (First Review) Order 1970. Instead of the 40% formula, the governments agreed on fixed annual payments for a five-year period, from 1969 to 1973. The amount for the final year, 1973, was set at RM26.7 million.
B. The “Lost Years” (1974-2021)
The Federal Constitution made it a mandatory constitutional duty for the governments to conduct a second review for the period beginning in 1974. This was not optional.
Here, the system broke down. This second review never happened.
For 48 years, from 1974 to 2021, the Federal Government simply continued to pay Sabah the RM26.7 million amount that had been frozen in 1973. This fixed payment completely ignored decades of economic growth and the corresponding increase in federal revenue collected from the state. The government’s legal justification rested on the flawed argument that the 1970 order “remained in force” indefinitely until a new one was made, a claim the court would later reject.
The court observed the devastating real-world impact of this financial failure. Despite being rich in natural resources like oil, gas, and palm oil, Sabah remains “appallingly poor” and struggles with basic infrastructure, a reality directly linked to the failure to receive its constitutionally guaranteed grant. This decades-long failure finally came to a head when a new official agreement in 2022 ignored the past, forcing the Sabah Law Society to take legal action.
3. The Climax: A Battle in the Courtroom
A. Why the Sabah Law Society Stepped In
The Sabah Law Society (SLS), acting in the public interest, filed a judicial review application to challenge the government’s actions. The direct trigger for the lawsuit was the publication of the “Second Review Order” in 2022.
While this new order finally set new grant amounts for the years 2022-2026, it had a glaring and unconstitutional flaw: it made a complete omission of any payment or acknowledgement of the debt owed for the 48 “Lost Years” from 1974 to 2021. The SLS argued that this omission was illegal, irrational, and a breach of the Federal Constitution.
B. The Arguments Laid Bare
The case presented two starkly different interpretations of constitutional duty.
| The Sabah Law Society’s Case | The Federal Government’s Defense |
| A second review in 1974 was a mandatory constitutional duty, which was breached. | The 1970 agreement remained in force for 48 years until it was officially replaced in 2022. |
| The 2022 Review Order is illegal and irrational because it completely ignores the 48 “Lost Years” where the proper grant was not paid. | There were “on-going negotiations” between 1974 and 2021, so the process was being followed. |
| Because no new valid agreement was made, the original 40% Entitlement is still due and payable for every year from 1974 to 2021. | The yearly payment of RM26.7 million was correct during this period, and no money is owed for the past. |
With both sides having made their case, the court was left to decide which argument aligned with the Constitution.
4. The Verdict: Upholding a Constitutional Promise
A. The Court’s Decisive Ruling
The High Court ruled decisively in favor of the Sabah Law Society. It found that the Federal Government had failed in its constitutional duties and that its decision-making regarding the grant was illegal, irrational, and procedurally improper.
B. Key Reasons for the Decision
The court’s judgment was built on several clear and powerful findings:
- No Evidence of a 48-Year Review The court completely rejected the government’s claim of “on-going negotiations.” It noted there was “no evidence at all produced” to support this assertion, finding the lack of documentation “rather troubling, to say the least” and calling the argument “untenable.”
- A Breach of Duty The court affirmed that the review scheduled for 1974 was mandatory. The failure to conduct it was a clear breach of the Federal Constitution.
- An “Irrational and Unreasonable” Outcome The court found it “absurd” to suggest that a grant amount from 1973 could possibly meet Sabah’s needs decades later. It pointed out that the government’s flawed logic would allow the two governments to “embark on a never-ending ongoing review” and for the 1973 grant to “continue to apply indefinitely and even, ad infinitum.”
- The 40% Entitlement is Owed The court’s most crucial conclusion was that because no valid review took place for the period of 1974-2021, the original 40% Entitlement “remains due and payable by the Federation to the State of Sabah for each of those Lost Years.”
A decision is one thing, but making it happen is another. To rectify the breach, the court issued a series of powerful legal orders to compel government action.
5. The Aftermath: The Court’s Orders
The court did not just declare a winner; it issued powerful legal orders designed to rectify the constitutional breach and ensure its enforcement.
- 1. An Order of Certiorari (To Quash) This order legally “quashed” or cancelled the part of the government’s decisions that ignored the money owed for the Lost Years. The court explicitly applied this to the review orders published in 2022, 2023, and 2025, legally invalidating the government’s omission across multiple years.
- 2. An Order of Mandamus (To Compel) This order served as a direct command. The court compelled the Federal and Sabah governments to finally hold the mandatory review for the 1974-2021 period, specifically to calculate and give effect to the 40% Entitlement that is owed to the state.
- 3. An Order for an Account (To Ensure Accountability) To ensure its commands were followed, the court ordered the governments to account for the review and its results. This was a crucial enforcement tool to guarantee transparency and prevent a situation where the “fruits of the Sabah public were not to be frustrated.”
6. Conclusion: Why This Case Matters
The Sabah Law Society’s victory was about far more than just money. It was a profound affirmation of constitutional supremacy and the rule of law. The court’s ruling reinforced that the promises made during the formation of Malaysia are not mere historical artifacts but living, enforceable duties.
Most powerfully, the court connected this constitutional right directly to the “fundamental right to life of the people of Sabah.” It recognized that these financial provisions are not abstract legal principles; they are essential for funding “public services” and providing the “bare necessities of life.” In essence, this case was about ensuring the people of Sabah receive their fair share for building the roads, schools, and hospitals necessary for their well-being and livelihood. The decision stands as a landmark, upholding a foundational promise made to Sabah over half a century ago.
On 11/11/2025, the Federal Government of Malaysia announced that it would not appeal against this decision.
Disclaimer: This post is for informational purposes only and does not constitute legal advice. Please consult a qualified lawyer for your specific legal needs.
