Employment Bond is very popular in Malaysia and everyone might have heard of it. However, do you know if it is enforceable?
And if so, what are the circumstances that may render the employment bond unenforceable?
A bonded contract is a contract entered into by an employee who has agreed to continue working for the employer for a predetermined period of time in return for either financing of the employee’s education through a scholarship or the provision of an expensive training course.
There are several conditions that need to be fulfilled for a bonded contract. Generally, the following issues must be addressed clearly:
In order for a bonded contract to be deemed enforceable, the contract must be fair in relation to the employee and the employer. It should not be drafted to favour only one party.
This means that a bonded contract under the laws of Malaysia can be enforced provided that there is a consideration in the form of training or otherwise and provided that the contract is fair and reasonable.
It is provided by Section 26 of the Contracts Act 1950 that an agreement made without consideration void.
Therefore, in an Employment Bond too, a consideration is must. If there is no consideration for the bond, then, the Employment Bond is void.
In the High Court case of Sathiyaselan a/l Krishnan & Ors v Firefly Sdn Bhd [2015] MLJU 1895, the court held as follow:
“Besides, I am also of the view that the amount of the stipulated sum of RM 100,000.00 cursorily seems rather high and possibly a deterrent against pilots prematurely leaving the employment of the Respondent. A provision for deterrence is unconscionable and will variably be struck down by the court as an unenforceable penalty.”
In the abovementioned case, there First Appellant was employed by the Respondent as a pilot with the rank of captain to fly aircrafts operated by Respondent for a fixed term.
Later, the First Appellant had prematurely resigned from his employment. According to the employment contract, the First Appellant is supposed to be an employee for a fixed period of five years and if he wishes to resign or abandon his employment without the consent of the Respondent, the Respondent may demand from the First Appellant and his guarantors for the amount of RM 100,000.00 within 30 days from the date of termination.
In that case, the Appellant was already ATR rated prior to the entering of the employment contract, hence, he was not required and did not undergo the ATR training programme conducted by the Respondent and he instead was required to join ATR LHS training programme. Due to the fact that the penalty clause was inserted to cover for the training costs, the Court was of the view that the award of the RM 100,000.00 as per the clause in the agreement cannot be sustained.
Based on the above, it is clear to that for an Employment Bond to be enforceable, it must be reasonable, or else, it can be struck down by the court.
In the High Court case of Kejuruteraan Bintai Kindenko Sdn Bhd v Serdang Baru Properties Sdn Bhd [2017] MLJU 528, the judge has referred to the case of Dunlop Pneumatic Tyre Company Ltd v New Garage and Motor Company Ltd [1915] AC 79, in which Lord Dunedin in that case explained the term ‘penalty’ as:
“The essence of a penalty is the payment of money stipulated as in terrorem of the offending party … If the sum is ‘extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed the breach’, it will be regarded as a penalty and unenforceable…”
The law relating to provision of penalty is provided under Section 75 of the Contracts Act 1950 on compensation for breach of contract where penalty is stipulated for.
The interpretation of the abovementioned provision is provided in the case of Selvakumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817 in which the Federal Court had laid down an approach of interpreting Section 75 of the Contracts Act 1950, it is to prove that there is indeed an actual loss suffered unless the nature of it is such that it is difficult or impracticable for the court to assess.
Similarly, in the case of Johor Coastal Development Sdn Bhd v Constrajaya Sdn Bhd [2009] 4 MLJ 445, the Federal Court reiterated the approach laid down in Selvakumar a/l Murugiah v Thiagarajah a/l Retnasamy whereas the Court held that in pursuant to Section 75 of the Contracts Act 1950, a party claiming liquidated damages is legally obliged to prove its damages in accordance with the principles set out in Hadley v Baxendale (1854) 9 Exch.
As such, the Federal Court has decided that the Defendant could not simply rely on the amount stipulated as liquidated damages as damages but instead has to prove its damages.
Therefore, the company in claiming for the damages as per the penalty clause must prove that there is an actual loss suffered. Failure to do so will render the penalty clause unenforceable.
Generally, Employment Bond is enforceable in Malaysia. However, there must be a consideration for the bond and the bond must be reasonable.
Seri can't describe herself—she is an eclectic mix of complication and simplicity wrapped in the form of a petite hijabi lawyer. She does have unusually colourful vocabulary though, but only when most people aren't listening. Much.
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