The Doctrine of Total Failure of Consideration Clarified

After a full trial, High Court dismissed both the plaintiffs’ claim and the defendant’s counterclaim, with no order as to costs.

It found that:

1. There was no illegality, the defendant failed to prove that the SPA or assignment agreements were part of an illegal moneylending scheme. The Court found the agreements valid and enforceable.
2. The plaintiffs had prior knowledge that there was a caveat over one parcel of land from Rawang 4. This showed that the parcel of land had already been sold to a third party who placed the caveat on the parcel of land.
3. There was no breach of the assignment agreement or supplemental agreement by the defendant. The obligation to remove the caveat belonged to DA Land, not the defendant.
4. There was no total failure of consideration. Although the plaintiffs suffered some loss, the court held that the consideration had not failed totally, as the defendant had derived some benefit.
5. The defendant’s losses stemmed from his own conduct and commercial decisions, not the plaintiffs actions.

The Court of Appeal upheld the dismissal of the plaintiffs’ claim but allowed the defendant’s counterclaim, finding that there had been a total failure of consideration under the assignment agreements.

The main findings of the Court of Appeal are as follows:

1. The Court agreed that the defendant bore the burden of proof under section 103 of the Evidence Act 1950. There was no evidence that the SPA between the plaintiffs and DA Land contravened the Moneylenders Act 1951 or that any alleged illegality had tainted the subsequent assignment agreements. Section 66 of the Contracts Act 1950 was therefore not applicable.
2. Relying on Berjaya Times Square and Damansara Realty, the court held that a total failure of consideration had occurred. Since the plaintiffs had no valid right or title to assign, having already lost their interest in Rawang 4, they were not in a position to convey any benefit to the defendant despite receiving RM23 million.
3. The Court dismissed the plaintiffs’ appeal for RM2.5 million, not because the defendant was without fault, but because allowing recovery would be unconscionable and lead to unjust enrichment. The plaintiffs could not claim loss over property they never truly owned or could assign.
4. The Court of Appeal found that the High Court Judge should have applied the restitutionary principle and ordered the plaintiffs to return RM23 million to the defendant, irrespective of the defendant’s greed or altruism or the defendant’s failure to deny the first plaintiff ’s letter of demand, as the defendant would have otherwise paid the sum in vain resulting in an injustice to the defendant and an unjustifiable windfall to the plaintiffs. The plaintiffs’ knowledge of the prior sale to a third party and their failure to disclose it further justified equitable relief.
5. The Court clarified that section 71 of the Contracts Act 1950 (dealing with benefits conferred without contract) did not apply, since valid contracts existed between the parties.

The Federal Court unanimously allowed the appeal, overturning the Court of Appeal’s finding. It held that there was no total failure of consideration, and in doing so, redefined the Malaysian understanding of the doctrine of total failure of consideration.

Key Findings on the Doctrine of Total Failure of Consideration

Test of Total Failure Clarified

In a significant doctrinal shift, the Federal Court adopted the test articulated by Lord Goff in Stocznia Gdanska SA v Latvian Shipping Co [1998] 1 WLR 574. The Court emphasised that the correct inquiry is:

“Whether the promisor has performed any part of the contractual duties in respect of which payment is due.”

This marks a move away from the formulation in Berjaya Times Square Sdn Bhd v M Concept Sdn Bhd [2010] 1 MLJ 597, which had asked whether the party in default had failed to perform ‘his promise in its entirety’.

The distinction is crucial. Under the Stocznia Gdanska test, even partial performance by one party, if it confers a real and tangible benefit on the other, prevents a finding of total failure of consideration. The doctrine operates only where no part of the agreed performance has been rendered or received.

In applying this principle, the Federal Court held that because the appellants had completed their obligations under the assignment agreements by assigning all their rights, title, and interest in the Rawang lands to the respondent, the consideration had not failed totally. The respondent had, in fact, received the contractual benefit that entitled him to deal directly with DA Land.

Berjaya Times Square Overruled

The Federal Court went further to expressly overrule its earlier decision in Berjaya Times Square. It found that Berjaya Times Square had wrongly conflated two separate legal concepts:

1. termination for breach under s 40 of the Contracts Act 1950; and
2. restitution for total failure of consideration under the common law of unjust enrichment.

By blending these distinct doctrines, Berjaya Times Square had effectively recast both as a single ‘right to rescind’, which distorted the true scope of the restitutionary principle. The court clarified that the right to terminate a contract for repudiation does not depend on a total failure of consideration; instead, it depends on whether the defaulting party’s conduct shows an intention not to be bound by the contract.

The doctrine of total failure of consideration only becomes relevant after termination, when the innocent party seeks to recover payments made on the ground that the contractual basis for those payments has wholly failed.

In short, Berjaya Times Square can no longer be regarded as good law on restitutionary principles. This restores doctrinal coherence and aligns Malaysian law with common law authorities.

Performance and Benefit Defeat Total Failure of Consideration

The Court reaffirmed that any degree of performance or benefit received will defeat a claim of total failure of consideration. The appellants had done everything required under the assignment agreements where they transferred their rights and facilitated the respondent’s dealings with DA Land.

The respondent derived clear benefits from this performance:

1. obtaining the ability to contract directly with DA Land; and
2. using the appellants’ RM23 million payment as a deposit for his own SPA with DA Land.

Having enjoyed these advantages, the respondent could not later allege that the consideration had wholly failed merely because his subsequent independent transaction collapsed. The Federal Court made it clear that self-induced loss or mismanagement cannot convert a partial or successful performance into a ‘total failure’.

Illegality Bars Restitution

Finally, the court held that restitutionary relief is unavailable where the claim is tainted by illegality. The respondent’s RM23 million claim was inextricably linked to an illegal moneylending transaction under the Moneylenders Act 1951, as previously determined by the Shah Alam High Court.

Because the respondent had engaged in an unlicensed moneylending arrangement, equity would not assist him to recover funds derived from that illegality. The court reiterated that the doctrine of total failure of consideration is equitable in nature, and a claimant seeking restitution must come to court with clean hands.