EMPLOYMENT – TERMINATION TANGLES: WHEN PERFORMANCE REVIEWS PRECEDE CONTRACT ENDINGS

ILLUSTRATIVE SCENARIO

X and Y entered into an agreement where X appointed Y to assist with a delivery service in Selangor. The agreement included a review procedure (Clause 8) for X to follow if Y’s performance was deemed unsatisfactory.

A few months later, X alleged multiple breaches of contract by Y and issued a termination notice giving 30 days’ notice under Clause 7. However, X’s letter did not specify any reason for the termination.

Clause 7 – Termination X shall be entitled to terminate this agreement by giving thirty (30) days notice to Y if Y is unable to provide satisfactory services as provided under the agreement.

Clause 8 – Performance Review 8.1 In the event that X shall determine Y’s performance of its obligations under this Agreement as unsatisfactory, Y shall be given thirty (30) days to remedy the unsatisfactory situation.

8.2 If X finds the unsatisfactory situation is not remedied at the end of thirty (30) days given under Clause 8.1, X shall have the option of treating such unsatisfactory performance as an event of default which entitles X to terminate this Agreement pursuant to Clause 7 and accordingly X shall be entitled to all reliefs provided under Clause 7.

KEY ISSUES

The issue is whether X can unilaterally terminate the contract under Clause 7 without specifying reasons in the termination notice?

LEGAL PRINCIPLES

There are two possible interpretations of Clauses 7 and 8:
1. Clause 7 can only be invoked after the procedure in Clause 8 is completed, requiring a notice with specific reasons.
2. Clause 8 does not need to be invoked before Clause 7, as Clause 7 does not explicitly require reasons in the termination notice.
Case law suggests that a termination notice is not always invalid if reasons are not provided. However, if the contract includes a ‘grace period’ for the defaulting party to remedy its performance, the non-defaulting party may be required to communicate reasons for termination.
Clause 8’s review procedure is not unilateral and aims to protect both parties’ interests, ensuring that unsatisfactory situations are remedied and Y can avoid breach and termination.
Therefore, interpreting Clause 8 as a mandatory precursor to Clause 7 makes more commercial sense. X should have initiated a review and provided specific reasons before terminating the contract.

APPLICATION TO SCENARIO

X was obligated to initiate a performance review under Clause 8 before terminating the contract and to provide specific reasons for termination. The failure to do so likely makes the termination notice invalid.

REFERENCE CASE

SPM Membrane Switch Sdn. Bhd. v. Kerajaan Negeri Selangor [2016] 1 MLJ 464

Sorotan Terkini

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