Establishing the reasonable price of disloyalty

KUALA LUMPUR (Dec 28): The recent Court of Appeal decision in the case of Zuraida Bte Kamaruddin v Saifuddin Nasution bin Ismail stirred interest not just within the legal fraternity but caused public disquiet due to its wide-reaching implications on the political scene and society at large. First and foremost, the case is about a common practice among local politicians that many feel strongly about — colloquially referred to as ‘party-hopping’. This practice of elected Members of Parliament or the State Assembly changing political parties can be said to undermine the democratic process and had even led to the passing of what is known as the “anti-hopping” legislations.

Parti Keadilan Rakyat (PKR) had fielded the appellant/defendant, Zuraida Kamaruddin, as its candidate in the 14th General Election in the Ampang parliamentary seat thereby giving her the opportunity to be elected by the people. Her subsequent resignation from the party along with 10 other MPs was generally perceived to have brought down the Pakatan Harapan government. The respondent/plaintiff in his capacity as the Secretary General of PKR sued the appellant on a bond which had been executed by her to pay the sum of RM10 million in the event of her resignation from the party. Both the High Court and the Court of Appeal held that the bond was a validly executed contract and enforceable against the appellant. Furthermore, the learned High Court judge was of the view that the whole purport of the bond was to deter an elected candidate from being disloyal to the party. This being the case, the sum of RM10 million was considered to be not an excessive or a punitive sum and would act as a deterrent to any disloyalty. According to the learned High Court judge, any lesser amount might not be an effective deterrence.

Based on the above facts, one of the issues argued before the Court of Appeal was the reasonableness of the sum of RM10 million agreed to be paid under the bond vis-a-vis Section 75 of the Contracts Act 1950. Datuk See Mee Chun JCA discussed at length the landmark decision in the case of Cubic Electronics Sdn Bhd (In liquidation) v Mars Telecommunications Sdn Bhd (Cubic) and explained the application of the legal principles set out in Section 75 of the Contracts Act as restated by the Federal Court in that case. In discussing the issue of whether the agreed payment amounted to a penalty, the Court of Appeal came to the conclusion that while there was a legitimate interest of PKR to maintain its political position, the RM10 million was out of proportion to such interest of PKR in the enforcement of the obligation of the bond. Her Ladyship then went on to make the following finding:

“It behoves upon us to determine what the reasonable compensation ought to be. We are of the opinion that such amount ought to consider the maximum amount to be spent in GE14 for a parliamentary seat which is RM200,000.00, the appellant’s 22 months as a Member of Parliament and the contribution of the appellant in the party and the GE14 election campaign. We think that these are valid factors which go towards proportionality. Towards this end, we find RM100,000.00 to be reasonable compensation.”

It is this writer’s opinion that the Court of Appeal was mistaken in making the assumption that it was then within the purview of the court to summarily determine what would be reasonable compensation. The overall correct legal position is that when a sum agreed to be paid in a contract is held to be a penalty and the provision is unenforceable as being in contravention of Section 75 of the Contracts Act, what follows logically is that it is then incumbent upon the aggrieved party to prove actual loss in accordance with Section 74 of the Contracts Act. Further arguments and submission of evidence by the parties would be required for the trial judge to consider on a factual basis as to what was the actual loss suffered by PKR. In the interest of justice, the Court of Appeal should have afforded such opportunity to the respondent to prove the actual loss suffered by sending this matter back to the High Court.

Both the High Court and the Court of Appeal accepted that the recital in the bond is a statement of fact that the party had provided the appellant substantial value exceeding RM10 million. This appeared to refer to the granting of the use of the party logo, insignia and party flag in appointing the appellant as a candidate of the party and the provisions of services and support by members of the party which was stated to be of substantial value to a person desiring to contest in the 14th general election. As such, it could be said that the appellant acknowledged owing a substantial debt to the party in being selected and fielded as a candidate, and it is this substantial debt in the sum of RM10 million that the appellant undertook to repay in the event she resigns as a member of the party. This writer takes the position that such a term is to be considered as a primary obligation of the contract (meaning a basic term of the contract) and not a secondary obligation (which arises only on a breach of contract). A primary obligation would not engage the application of the penalty test set out in Section 75 of the Contracts Act.

In the Cubic case, Tun Richard Malanjum CJSS in delivering the Federal Court judgement stated that in determining whether a damages clause is a penalty, the court has to identify “whether the damages clause is a secondary obligation and not a primary obligation which would be enforceable per se…” His Lordship was no doubt in agreement with the decision of the UK Supreme Court in Cavendish Square Holding BV v Talal El Makdessi where it was held that “the penalty rule regulates only the remedies available for breach of a party’s primary obligations, not the primary obligations themselves”. In other words, if the provision to repay the RM10 million is a primary obligation, it is not the role of the court to review the fairness of the contractual obligation as it would not be a damages clause but merely a deferment of payment of a debt (which could be waived by the party if a candidate was to fulfil her obligations to the party).

The question remains whether the Court of Appeal was correct in its application of the penalty test to the provision of the bond as Cubic and other landmark cases clearly differentiate a primary obligation from a secondary obligation, the former being a contractual provision the court would be slow to interfere with while the latter falls within the domain of judicial oversight as to its ambit. The author is of the view that the Court of Appeal’s decision in this case requires further deliberation in light of the wide implications raised by the issues discussed and it is hoped the legal position can be further expounded should there be an appeal to the apex court.

Choong Shaw Mei is a senior lecturer at the Faculty of Law, Universiti Malaya.