Malaysian court rules on the validity of an employment contract executed by the chairman without board approval during the state assembly dissolution
A chief executive officer (CEO) serving under his second fixed-term employment contract received a third contract extending his tenure for thirty months, signed by the foundation's chairman during a caretaker period when the state assembly was dissolved.
Several months later, the foundation's board of directors determined that the third contract was invalid because it lacked proper board approval as required under the foundation's terms and conditions of service.
The worker challenged the foundation's decision to annul the contract and terminate his services, arguing the agreement was legally binding and enforceable.
The foundation maintained that the chairman exceeded his authority by executing the contract without board approval during the caretaker government period.
Employment history and contract renewals
The worker commenced employment with the foundation in March 2021 as general manager under a fixed term contract. The first contract ran for two years from March 2021 until March 2023.
His employment was renewed upon expiry of the first contract. The worker was appointed as CEO for twelve months from March 2023 until March 2024.
The worker applied for contract extension around July 2023 during the second contract period. The foundation offered a third contract appointing him as CEO for thirty months. The third contract commenced in August 2023 and was scheduled to expire in February 2026. His salary remained unchanged from the previous contract.
The foundation issued a letter in December 2023 stating the third contract was invalid. The letter informed the worker that the contract did not accord with foundation guidelines.
The foundation maintained that only the second contract was valid and applicable. The worker's employment would terminate in March 2024 based on the second contract expiry.
Foundation's board decision and worker's challenge
The foundation's board of directors met in December 2023 and discovered irregularities in the third contract. The board found that the contract was offered without board approval.
This violated the foundation's terms and conditions of service which required board approval for such appointments. The relevant policy had been passed and approved at a board meeting in November 2019.
The foundation informed the worker via letter that the third contract was null and void. Only the second contract would be considered valid and applicable. The worker met with a board member to discuss the decision. He subsequently wrote to the foundation arguing that contract renewal did not require board approval.
The foundation rejected the worker's appeal at a board meeting in February 2024. The board decided that the worker's employment would end in March 2024. The termination would be based on the expiry of the second contract. The foundation maintained that the second contract was a genuine fixed term agreement ending naturally.
Worker's service record and contract requirements
The worker maintained a clean service record throughout his employment with the foundation. He contributed significantly to the foundation's development during his tenure.
The foundation acknowledged the worker's achievements when renewing his contract for the second time. His performance had been stellar during his entire period of service.
Both the first and second contracts contained specific renewal provisions. The contracts required the worker to provide at least six months' notice for renewal.
The worker had to formally apply for a contract extension before expiry. This requirement meant the worker needed to reapply rather than receive automatic renewal.
The worker argued his contract was permanent in nature despite the fixed term language. He contended that the term contract designation was a misrepresentation. The foundation disputed this claim. It maintained that all three contracts were genuine fixed-term agreements with clear expiry dates.
Chairman's authority and caretaker government status
The third contract was signed by both the worker and the chairman in August 2023. The contract was subsequently stamped following proper procedures.
The foundation's charter granted the chairman certain powers for foundation management. Clause five point zero point two specifically allowed the chairman to approve matters for proper foundation management.
The state assembly was dissolved in late June 2023 before the third contract was signed. State elections were held in mid-August 2023. The chairman was serving in a caretaker role during this transitional period. The foundation argued the chairman lacked capacity to enter contracts during the caretaker government period.
The foundation's legal advisor testified that the chairman could not function fully during caretaker status. She stated that although the chairman retained his appointment, he could not exercise full powers.
The foundation maintained the chairman acted beyond his authority. The worker argued the chairman possessed requisite approval powers under the charter regardless of caretaker status.
Court's examination of charter provisions and board powers
The foundation's charter contained several relevant clauses regarding board and chairman authority. Clause one point three stated that in cases of uncertainty or inconsistency, the foundation's constitution and Malaysian laws would prevail over charter terms.
Clause two point two point two designated the chairman as the main channel between board and management group. Clause two point two point three required the chairman to ensure the board was informed of relevant matters.
Clause five point zero point two allowed the board to delegate approval powers to various bodies. These bodies included board committees, the chairman, the general manager and other appropriate entities.
Any delegated power originated from the board and did not replace board authority. The legal advisor acknowledged these charter provisions during testimony.
The court examined whether the chairman exceeded his delegated authority when executing the third contract. The foundation argued that written authorization was required for the chairman to approve such contracts.
The court found no charter requirement for formal written authorization from the board. The charter itself provided sufficient authority for the chairman to act for proper foundation management.
Court's determination on contract formation elements
The legal advisor agreed that the third contract was signed by both parties and properly stamped. However, she disagreed that the contract was valid despite the signatures and stamp.
She maintained that board approval was necessary regardless of the contract's execution. The foundation contended that absence of board approval rendered the contract void.
The court examined whether a concluded contract existed based on contract law principles. The worker's counsel cited court of appeal and high court decisions on contract formation.
These decisions established that valid contracts require offer, acceptance and lawful consideration. The court found all three elements were present in the third contract.
The parties entered the contract freely with competent contracting capacity. The worker commenced serving as CEO under the third contract immediately. This service constituted lawful consideration supporting the contract.
The court concluded that a valid concluded contract existed between the parties under section ten of the Contracts Act.
Analysis of caretaker role and operational continuity
The court examined whether the chairman's caretaker status invalidated his authority to execute employment contracts. Caretaker governments typically avoid major policy decisions or large scale contracts with significant financial implications.
The third contract was routine employment agreement with reasonable terms similar to previous contracts. The contract did not constitute extraordinary decision-making requiring full government authority.
The foundation needed to continue functioning during the caretaker period without disruption. All operational needs, including human resources, finance and operations required ongoing attention.
The chairman had a duty to ensure the foundation operated normally. Essential decisions like renewing contracts for key positions could be undertaken by the chairman in caretaker role.
The foundation's charter required the foundation to maintain a general manager position at all times. This position was later redesignated as CEO.
The worker held this key position within the organisation. The court found the chairman properly exercised his delegated authority to ensure operational continuity during the transitional period.
Board irregularity versus contract validity
According to records (case no. 18/4-978/24), the board meeting minutes in December 2023 referenced an irregularity in the worker's appointment. The irregularity concerned the third contract not being brought to the board for approval.
The board decided to annul the worker's appointment under the third contract. The foundation argued this decision was proper under its governance requirements.
The legal advisor confirmed during testimony that the charter was subject to existing contract law. She acknowledged that offer, acceptance and signatures create valid contracts under Malaysian law. The court found the legal advisor should have advised the board about the contract's legal validity. The board should have approved the contract rather than annulling it.
The court determined the board acted mechanically without regard to Malaysian contract law. The decision to annul disregarded section ten of the Contracts Act regarding valid contract formation.
The termination amounted to unilateral breach of a legally enforceable contract. The court found the board's decision was made without proper consideration of the contract's binding nature.
Court's findings on security of tenure and constitutional rights
The court examined the constitutional implications of the foundation's termination decision. Article five of the Federal Constitution recognises security of tenure as a proprietary right to livelihood.
Workers lawfully appointed through employment contracts possess this constitutional protection. Employers cannot terminate employment without just cause or excuse.
The worker was legally appointed through a valid concluded contract. His right to gainful employment constituted a proprietary interest protected by constitutional guarantees.
The foundation terminated the worker based solely on procedural irregularities regarding board approval. Mere irregularities cannot justify depriving workers of their constitutional right to livelihood.
The court emphasised that board approval requirements must be weighed with reasonableness and objectivity. The third contract could have been approved at the December 2023 board meeting based on existing contract law.
The worker could have continued employment until February 2026 as contracted. Procedural irregularities alone do not constitute just cause for dismissal.
Court's determination on premature termination and remedy
The court found the second contract was a genuine fixed term contract expiring in March 2024. However, the third contract was also genuine fixed term agreement running simultaneously during the second contract period.
The foundation's termination based on second contract expiry constituted premature termination of the third contract. The third contract had twenty-two months remaining when the worker was dismissed.
The court found the foundation failed to prove the premature termination was done with just cause or excuse. The termination was harsh and unjust given the worker's stellar performance and clean service record. The foundation acted in total disregard of the legally binding third contract. The court concluded the dismissal was without just cause or excuse.
The court declined to order reinstatement because the worker found alternative employment. Reinstatement would place both parties in a difficult and intolerable situation.
The court awarded compensation for the unexpired portion of the third contract. Backwages were calculated at twenty-two months' salary less five percent for post-dismissal earnings, totalling over three hundred thousand ringgit.
