A clause can look simple on paper.
A seller guarantees a certain level of profit. If the target is missed, payment is to be made in a particular way.
But what happens when the agreed payment mechanism never works?
That was the issue before the Court of Appeal in Majlis Amanah Rakyat v Naguib Mohd Nor [2026] CLJU 3155, where the Court overturned the High Court and entered judgment for MARA for RM6.6 million.
For Malaysian business owners, especially SMEs entering into share sale agreements, joint ventures and investment deals, this decision is a useful reminder that a contractual mechanism cannot be used to defeat the commercial obligation it was meant to satisfy.
What Was the Dispute About?
MARA purchased 300,000 shares in Strand Aerospace Malaysia Sdn Bhd for RM33 million.
Under the Share Sale Agreement, the seller warranted and represented that the company would achieve:
- RM21 million profit after tax for the financial year ending 31 May 2014; and
- RM21.3 million profit after tax for the financial year ending 31 May 2015.
If there was a shortfall, the seller was required to make payment by assigning his entitlement to dividends in the company. His total liability was capped at RM6.6 million.
The company did not come close to meeting those profit targets.
Its profit after tax was only about RM1.8 million in 2014 and RM1.9 million in 2015. No dividends were declared.
MARA eventually sued for RM6.6 million.
What Did the High Court Decide?
The High Court dismissed MARA’s claim.
Its reasoning was that the Share Sale Agreement did not expressly state what would happen if no dividends were declared, and the Court declined to imply a term requiring direct cash payment.
The High Court took the view that because the seller had assigned his dividends, he had not breached the relevant clauses, although the obligation to keep assigning future dividends continued.
The Court of Appeal disagreed.
The Court of Appeal: The Seller Had Breached the Agreement
The Court of Appeal held that the High Court had erred in both fact and law.
The appellate court found that the seller had not complied with clause 6 of the Share Sale Agreement.
The key point was this:
The contract did not merely require the seller to issue paperwork.
It required him to make payment of the profit shortfall, subject to the RM6.6 million cap. The assignment of dividends was the agreed mechanism for making that payment.
Where no dividends existed to be assigned, the underlying payment obligation did not simply disappear.
The Payment Instruction Had to Be Issued at the Right Time
The Court of Appeal also focused closely on the wording of clause 6.2(b).
The clause stated that the seller “shall”, upon the occurrence of the 2015 shortfall, execute and deliver a dividend payment instruction.
The evidence showed that the dividend instructions relied upon by the seller had been issued before the 2015 shortfall had even occurred.
The Court held that the obligation to issue the instruction after the shortfall arose was mandatory.
It also noted that the Share Sale Agreement expressly provided that time was of the essence.
For business owners, this is a practical drafting point that is often overlooked.
It is not enough to perform something that looks similar to what the contract requires.
You have to perform it in the manner and at the time required by the agreement.
A Sham Mechanism Will Not Satisfy a Real Obligation
The Court of Appeal went further.
It held that the purported dividend payment instruction was ineffective because the seller knew that no dividends had been declared and that the assignment would not result in any payment being made to MARA.
This is probably the most commercially important part of the case.
A contractual mechanism exists to achieve an outcome.
If the mechanism is used in a way that produces no real result, a party should not assume that it has discharged the underlying obligation simply because a document was signed.
For SMEs, this often arises in clauses dealing with:
- payment by set-off;
- assignment of receivables;
- payment through dividends;
- staged payments;
- performance milestones; and
- guarantees tied to future business results.
The contract needs to make clear whether the mechanism itself constitutes performance, or whether performance is only complete once the intended commercial result is actually achieved.
The Court Also Found a Breach of the Profit Guarantee
The Court of Appeal treated the “warranty” in clause 6 as a form of profit guarantee or undertaking.
Because the company failed to meet the promised profit levels, the seller was liable for the shortfall, subject to the agreed cap of RM6.6 million.
The Court held that the failure to honour the profit guarantee and the failure to issue the dividend payment instruction entitled MARA to recover the RM6.6 million as damages.
This is an important reminder when drafting warranties in share sale agreements.
If a clause is intended to operate as a guaranteed outcome, the party giving it may be assuming a much heavier obligation than merely promising to use reasonable efforts.
What If the Contract Does Not Say What Happens When the Mechanism Fails?
This was another important part of the appeal.
The seller argued that the agreement did not expressly say he would be personally liable if the company failed to declare dividends.
The Court of Appeal rejected the idea that this prevented recovery.
It held that the absence of an express term did not prevent an award of damages for breach, and also said that a term could be implied where necessary to give the agreement business efficacy and commercial common sense.
Applying Luggage Distributors (M) Sdn Bhd v Tan Hor Teng, the Court considered that an implied term could arise so that the seller remained liable for the profit guarantee, particularly in circumstances where his own conduct had impaired the company’s ability to generate profits and dividends.
For SMEs, the safer approach is obvious:
Do not leave important commercial consequences to implication.
If you know a payment mechanism might fail, the agreement should expressly state what happens next.
You Cannot Defeat Your Own Contractual Obligation
The Court of Appeal also found that the seller had moved business and commercial activities away from the company into another entity owned by him.
The Court considered that this conduct had impaired the company’s ability to generate profit and declare dividends, effectively undermining the very mechanism through which the profit shortfall was supposed to be paid.
This is a useful broader principle for business owners.
If your contractual obligation depends on a particular event or mechanism, you should be very careful not to take steps that prevent that event from occurring.
A party should not assume it can escape liability by making performance impossible through its own conduct.
A Written No-Waiver Clause Can Matter
The seller also argued that MARA had waived its rights.
The Court of Appeal rejected this.
Clause 13.3 of the agreement expressly provided that a waiver would only be effective if it was in writing, and that delay or failure to exercise a right would not itself amount to waiver.
There was no written waiver.
This is a very practical lesson for SMEs.
A properly drafted no-waiver clause can help prevent arguments that a party has given up its rights simply because it did not act immediately.
That does not mean such clauses solve every waiver or estoppel issue, but they can materially strengthen contractual certainty.
The Final Outcome
The Court of Appeal unanimously allowed MARA’s appeal.
The High Court’s decision was set aside, and judgment was entered against the seller for the sum of RM6.6 million plus costs.
What Malaysian SMEs Should Take From This Case
For me, there are four main lessons.
First, do not confuse the payment mechanism with the payment obligation. If the commercial bargain is that money must ultimately be paid, make that clear.
Second, have a contingency plan. If payment is supposed to come from dividends, receivables, insurance proceeds or another future source, the agreement should say what happens if that source never materialises.
Third, timing matters. Where the contract says something must be done upon a particular event, doing it earlier, later or differently may not amount to compliance.
Fourth, do not undermine your own performance mechanism. If your conduct prevents the agreed payment structure from working, you may still remain liable for the underlying obligation.
Frequently Asked Questions
1. Are profit guarantees enforceable in Malaysia?
They can be. In MARA v Naguib Mohd Nor, the Court of Appeal treated the warranty in the Share Sale Agreement as a form of profit guarantee or undertaking and held the seller liable for the agreed shortfall.
2. Can a party avoid payment because the agreed payment mechanism failed?
Not necessarily. The Court of Appeal held that the failure of the dividend mechanism did not extinguish the seller’s underlying liability under the profit guarantee.
3. Can Malaysian courts imply terms into commercial contracts?
In appropriate circumstances, yes. The Court of Appeal referred to the principle of implying terms to give a contract business efficacy and commercial common sense.
4. Does delay automatically amount to waiver?
Not necessarily. In this case, the contract expressly stated that a waiver had to be in writing and that delay or failure to exercise a right would not itself amount to waiver.
Final Thoughts
The decision in MARA v Naguib Mohd Nor is a useful reminder that commercial contracts should be drafted around real-world outcomes, not just formal mechanisms.
If a clause is intended to guarantee payment, profit or performance, make sure the agreement clearly states what must happen, when it must happen, what counts as performance, and what happens if the intended mechanism fails.
For SMEs, that level of clarity is often the difference between a workable commercial agreement and years of litigation.
To learn more about Malaysian contract law, explore Contract Law in Malaysia: A Practical Guide to Contracts, Agreements and Legal Rights for practical articles covering everything from contract formation to breach of contract and legal remedies.
