Understanding Contract Law in Malaysia: Novation and Breach
(An in-depth analysis on novation, breach of contract, and remedies under Malaysian law — with insights from JY Ko Advocates & Solicitors)
Introduction
Contract disputes are some of the most common cases that end up in Malaysian courts. Whether you are a supplier, buyer, business partner, or investor, contracts form the backbone of every commercial relationship. But what happens when one party fails to deliver goods or services, or when there’s a disagreement over whether a contract has been legally transferred from one party to another?
The recent High Court decision in Pelle International Ltd v XYFre (M) Sdn Bhd [2024] CLJU 181 sheds light on these exact issues. At its heart, the case was about:
- Whether there was a novation of contract (a legal transfer of contractual rights and obligations).
- Whether the defendant had committed a breach of contract by failing to deliver goods and unilaterally changing terms.
- Whether the plaintiff was entitled to refunds and compensation under the Contracts Act 1950.
This case is not just important for lawyers — it has real-life lessons for businesses in Malaysia, especially those involved in supply, distribution, and import/export industries.
At JY Ko Advocates & Solicitors, we regularly advise and represent clients in disputes involving contract breaches, debt recovery, and commercial litigation. In this article, we will explain the case in detail in simple language, so that business owners, corporate clients, and the general public can better understand their rights.
Background of the Case
To understand the dispute, let’s break it down step by step:
- The Parties
- Plaintiff: Pelle International Ltd, a company incorporated in Hong Kong.
- Defendant: XYFre (M) Sdn Bhd, a Malaysian company.
- The Original Contract
- Pelle International had an agreement with Formogen Co Ltd to purchase 150,100 boxes of gloves.
- Pelle International paid Formogen the full purchase price.
- The Sub-Contract
- Formogen then entered into a separate supply contract with XYFre (the defendant) for the same gloves.
- Formogen paid XYFre in full, with the money placed in escrow.
- The Delivery Problem
- XYFre only delivered 45,793 boxes, leaving over 104,000 boxes undelivered.
- Pelle International then sued XYFre directly, claiming refunds and damages.
- The Plaintiff’s Claim
Pelle International sought:- USD 677,995.50 refund for undelivered gloves.
- USD 250,000 refund for air freight costs.
- USD 12,315.50 reimbursement for freight charges paid to its own forwarder.
- The Defendant’s Argument
- XYFre argued that Pelle International had no contract with them.
- They claimed their contract was only with Formogen, not Pelle.
- They said that any “transfer” of the contract (novation) had failed because all parties never agreed to new terms.
This background set the stage for two major legal questions:
- Was there a valid novation of contract from Formogen to Pelle?
- If yes, did XYFre breach the terms of that contract?
Legal Issues Before the Court
1. What is Novation of Contract?
Novation means that a new contract replaces the old one, with the consent of all parties. Under Section 63 of the Contracts Act 1950, the original contract does not need to be performed if the parties agree to substitute a new one.
The requirements for novation include:
- Intention to novate (clear intention to substitute parties).
- Consent of all parties involved.
- Consideration (something of value exchanged).
- Conduct showing acceptance of the new arrangement.
In this case, the court had to decide whether the contract between Formogen and XYFre had been legally transferred to Pelle and XYFre.
2. Breach of Contract
If novation existed, then Pelle International had a valid contract with XYFre. The next issue was whether XYFre breached it by:
- Failing to deliver more than 100,000 boxes of gloves.
- Unilaterally changing the contract price and logistics payment.
Under Malaysian law, when one party fails to perform as agreed, this amounts to a breach, giving the other party a right to claim compensation.
3. Unjust Enrichment (Section 71, Contracts Act 1950)
Even if novation was in dispute, the plaintiff also relied on Section 71, which provides that if one party enjoys the benefit of something provided by another, they must pay compensation. This principle is known as unjust enrichment.
High Court’s Reasoning
Judicial Commissioner Choong Yeow Choy carefully examined the facts and law.
- On Novation
- The court found clear evidence of novation.
- Pelle had sent letters to XYFre informing them that Formogen was no longer involved.
- XYFre did not deny or reject this, and even issued delivery orders naming Pelle as the buyer.
- This conduct showed that XYFre accepted Pelle as the contracting party.
- On Breach of Contract
- Once novation was established, XYFre was bound by the same terms of the original contract.
- By failing to deliver over 100,000 boxes and changing terms unilaterally, XYFre had breached the contract.
- On Remedies
- XYFre was ordered to refund Pelle International USD 677,995.50 and USD 250,000 (air freight).
- Pelle was also entitled to reimbursement of USD 12,315.50 for its forwarding expenses.
- XYFre was ordered to pay RM 30,000 in costs.
Important Tips for Businesses in Malaysia
This case offers valuable lessons for companies and individuals entering into contracts:
- Put Agreements in Writing
- Always document changes or transfers of contracts clearly.
- Emails and letters can serve as evidence of novation or consent.
- Silence Can Amount to Consent
- If you receive notice of a contract transfer and do not object, the court may see this as acceptance.
- Breach of Contract Has Serious Consequences
- Failing to deliver goods or unilaterally changing terms can lead to heavy financial liability.
- Importance of Escrow Accounts
- Using escrow is a good practice for large transactions, but disputes can still arise if delivery fails.
- Know Your Rights Under Malaysian Law
- Section 63 (novation) and Section 71 (unjust enrichment) of the Contracts Act 1950 are powerful tools for protecting businesses.
Why Choose Us, JY Ko Advocates & Solicitors for Contract Disputes?
At JY Ko Advocates & Solicitors, we understand how stressful and costly contract disputes can be. Whether you are a supplier, buyer, investor, or business owner, our firm offers:
- Experience in contract law and litigation — We have successfully handled cases involving breach of contract, debt recovery, tenancy disputes, and commercial litigation.
- Strategic negotiation — Often, disputes can be resolved before reaching trial. We help clients negotiate favourable settlements.
- Aggressive representation in court — When litigation is unavoidable, we fight to protect our clients’ rights and recover their losses.
- Personalised service — As a boutique firm with 1 partner and 2 lawyers, we offer direct, dedicated attention to every client.
If you are facing a breach of contract, supplier dispute, or unpaid debt, you don’t have to go through it alone. Our team can advise you on the best strategy to recover your losses.
Conclusion
The High Court’s decision in Pelle International Ltd v XYFre (M) Sdn Bhd may be a clear reminder that:
- Contracts can be legally transferred through novation, even without a brand-new written agreement, if conduct shows consent.
- Businesses that fail to perform contractual obligations will face liability.
- Our Malaysian law provides remedies to protect innocent parties from unfair losses.
At JY Ko Advocates & Solicitors, we are committed to helping clients navigate these legal challenges. Whether it’s a supplier dispute, unpaid contract, or a business partner failing to honour their commitments, we can help you to enforce your rights and recover your money.
Written on 9th September 2025
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Disclaimer: The above proposition is subject to actual facts and circumstances and shall never be referred as the actual law without seeking legal advice. Consult us for more information!