The landscape of Malaysian contract law has undergone a seismic shift with the landmark decision of the Federal Court in Lim Swee Choo & Anor v. Ong Koh Hou @ Won Kok Fong And Another Appeal [2026] 1 MLRA 1 FC. This case represents a profound moment of judicial introspection, as a larger panel of the apex court sat specifically to address and resolve the persistent legal conundrum created by the earlier rulings in Berjaya Times Square Sdn Bhd v. M-Concept Sdn Bhd [2009] 3 MLRA 1 and Damansara Realty Bhd v. Bungsar Hill Holdings Sdn Bhd & Anor [2012] 1 MLRA 311. For over a decade, these precedents had arguably blurred the lines between the law of contract and the law of restitution, causing what scholars and practitioners described as “discomfort to businessmen and lawyers alike”. In a meticulous and authoritative judgment delivered by Ahmad Terrirudin Mohd Salleh FCJ, the Court has finally untangled these principles, declaring that Berjaya Times Square “can no longer be regarded as good law”.
The Core Problem: The Conflation of Termination and Restitution
The primary grievance addressed in Lim Swee Choo was the “wrongful conflation” of the right to rescind a contract for breach with the right to seek restitution of monies paid based on a total failure of consideration. In the now-overruled Berjaya Times Square, the Court had interpreted Section 40 of the Contracts Act 1950—which allows a party to end a contract when the other side refuses to perform their “promise in its entirety”—through the lens of the restitutionary doctrine of total failure of consideration. This led to a restrictive legal proposition: that a party could only terminate a contract if there had been a total failure of performance.
The Federal Court has now clarified that these are distinct legal animals. As noted in the academic literature cited by the Court, “the doctrine of total failure of consideration rightly belongs to the realm of the law of restitution” and “has no place in the area of breach of contract”. By applying restitutionary tests to determine a contractual right to terminate, previous courts had “wrongfully curtailed the ambit of both Sections 40 and 56 of the Contracts Act 1950”.
The Definitive Distinction: Rescission Ab Initio vs. Termination
To restore legal certainty, the Court in Lim Swee Choo articulated a sharp distinction between two types of “rescission”. First, “rescission ab initio” refers to setting aside a contract due to an inherent cause of invalidity, such as fraud or misrepresentation, where “not only does the contract cease to exist but it is deemed never to have existed”. Second, “rescission for breach,” more accurately called “termination,” applies to a valid contract that is brought to an end due to a party’s serious default.
In cases of termination, the contract remains valid until the moment it is ended, and the innocent party is released from future performance but may still sue for damages. This aligns with the principles in Johnson & Anor v. Agnew [1980] AC 367 and Photo Production Ltd v. Securicor Transport Ltd [1980] 1 All ER 556, where Lord Wilberforce clarified that this form of rescission is simply a discharge from further performance. For a breach to entitle termination, it must be a breach of a condition, a sufficiently serious breach of an intermediate term, or a total repudiation.
The “True Test” for Total Failure of Consideration
The Court then turned to the proper test for restitution, specifically for the recovery of money had and received. The Defendant in Lim Swee Choo argued that he was entitled to a refund of RM23,000,000.00 because the “consideration” for his payment had failed. The Court rejected the formulation in Berjaya Times Square, which asked whether the defaulting party had failed to perform their promise “in its entirety”.
Instead, the Court adopted the test formulated by Lord Goff in Stocznia Gdanska SA v. Latvian Shipping Co [1998] 1 WLR 574: “whether the promisor has performed any part of the contractual duties in respect of which payment is due”. Crucially, the test is not whether the promisee received a specific benefit, but whether the promisor did anything they were contractually required to do in exchange for the payment. If there has been partial performance, the failure of consideration is not total, and the claimant is restricted to an action for damages for breach, rather than restitution. This follows the long-standing Malaysian position in Phang Quee v. Virutthasalam & Ors [1965] 1 MLRA 304, which held that “if [the party] once receives such a benefit then he has no remedy in this form of action”.
Factual Matrix and Unconscionable Conduct
The facts of Lim Swee Choo further demonstrated why the Defendant was ineligible for equitable relief. The case involved an Assignment Agreement for four parcels of land (“Rawang 4”). The Plaintiffs had assigned their rights under an SPA to the Defendant, who then unilaterally entered into a separate, illegal moneylending arrangement for three of those parcels with the developer, DA Land. The High Court in related suits, Suit 396 and Suit 88, had already declared the Defendant an “unlicensed moneylender” and held his transaction with DA Land void for illegality.
The Federal Court found that the Plaintiffs had performed their part by assigning the rights, and the Defendant had even received benefit from this, such as using the Plaintiffs’ previously paid RM23 million as a “contra” deposit for his own deal. The Defendant’s eventual loss of the land was caused by his own “greedy actions” and illegal dealings. Invoking the principle from Roxborough v. Rothmans of Pall Mall Australia Ltd [2001] 185 ALR 335, the Court held that equity would not permit a person to assert a legal right in circumstances where it would be “unconscionable” to do so. As the Defendant was the “architect of his own loss and misfortune,” he could not claim a total failure of consideration against the Plaintiffs.
Preserving the Rule of Law and Legal Certainty
In conclusion, the Federal Court emphasized that the “methodological randomness” of conflating these doctrines undermines the Rule of Law. While judges may have the power to overrule their own precedents, such power must be used “with utmost care and circumspection”. Guided by the “plainly wrong” test, the Court found that the errors in Berjaya Times Square were so fundamental they required correction to prevent “chaos in the conduct of civil proceedings”.
However, mindful that a sudden shift in law could cause “significant unfairness,” the Court ruled that this new interpretation of the total failure of consideration test will apply prospectively. This means the ruling will affect future cases and pending litigations that have not yet been finally determined, ensuring that “stability, predictability and certainty” remain the foundations of the justice system. As articulated in Metramac Corporation Sdn Bhd v. Fawziah Holdings Sdn Bhd [2006] 1 MLRA 666, the doctrine of stare decisis must be respected until the apex court finds a departure is truly “fair and sensible”.
Disclaimer: This post is for informational purposes only and does not constitute legal advice. Please consult a qualified Advocate & Solicitor for your specific legal needs.
