Petron Malaysia Refining & Marketing Bhd v Magna Enigma Sdn Bhd (W-02(NCvC)(W)-950-06/2024)

This is an appeal against the decision of the learned Judicial Commissioner of the High Court at Kuala Lumpur delivered on 28 May 2024, wherein the High Court dismissed the Appellant’s claim for breach of contract and damages arising from the Respondent’s withdrawal from a proposed petrol station dealership arrangement. The High Court held that the Letter of Offer dated 7 January 2019 (“LOO”) did not constitute a binding contract between the parties, and that the Respondent was entitled to withdraw.

For the reasons that follow, we will first set out the factual background as found by the High Court.

The dispute arose from a proposed Petron branded petrol station on a piece of land in Bangi, Selangor. Around 2018, the Appellant, through their representatives, PW1 and PW2, had a discussion with S/N AKnq6UubEm629yFUpaew the Respondent on the possibility to construct and operate a Petron-branded petrol station. The Appellant offered three financial aid packages with a recommendation to consider either Option 2 or Option 3.

Option 2 entails the Appellant installing and operating three of its assets, including the POS/BOS Radiant System, signage, and Multi-Product Dispensers (“MPD”), with additional margins on top of fixed margin allocated by the Government at 3.0 cents or lower for Motor Gasoline (“MOGAS”) and a margin of 2.0 cents lower for Automotive Diesel Oil (“ADO”).

Option 3 requires the Appellant to install and operate five of its assets, by adding on top of the three assets in Option 2, underground tanks and fuel piping with additional margins on top of the fixed margin allocated by the Government lower from Option 2 and margin of 1.6 cents lower for ADO. Relying on Plaintiff’s assurance that Option 3 would be discussed further, Defendant selected Option 2, under which Plaintiff would supply and maintain:

POS/BOS Radiant System, (b) Signage, and (c) Multi-Product Dispensers.

On 7 January 2019, a Letter of Offer (“LOO”) based on Option 2 was issued by the Appellant. The Respondent signed the LOO on 15 January 2019 and the confidentiality and non-disclosure agreement (“CNDA”) on 8 August 2019.

The LOO contained core commercial terms on the basis of Dealer Owned Dealer Operated (“DODO”) which include the Appellant to S/N AKnq6UubEm629yFUpaew consider appointing the Respondent to operate the Petron Station, required, among others: a. the Respondent to enter into a 15-year Retail Trading Agreement (“RTA”) once the station was built; b. the Respondent to erect the station at its own cost according to the Appellant’s specifications; c. Respondent to enter into a long-term nominal lease agreement with the Landowners for the right to erect a Petron Station; d. that Respondent shall sell not less than 500-kilo litres of MOGAS and 100-kilo litres of ADO monthly at the Petron Station; e. that for each litre of MOGAS and ADO sold, Respondent will receive the government-approved margin, provided they are duly licensed and complied with the LOO terms (as embodied in the RTA to be executed); f. subject to compliance with the LOO terms (with the RTA to be executed), Respondent shall be eligible for additional margin and, additionally, to a performance-based additional margin; g. Respondent shall obtain all the necessary licenses, and approvals from the relevant authorities and regulators; and h. Respondent shall purchase, maintain and repair all equipment at the Petron Station at its own cost and expense.

On 22 November 2019 (via WhatsApp), the Respondent requested to change from Option 2 to Option 3 (and also from DODO to Company Owned, Dealer Operated (“CODO”). The reason was that the development charge from the Kajang Municipal Council was higher than expected, and the loan from RHB Bank of RM3.9 million, S/N AKnq6UubEm629yFUpaew was insufficient. The Appellant’s management considered the request but, on 27 March 2020, informed the Respondent that Option 3 would not be approved and that the parties would proceed with the original Option 2.

Despite this rejection, the Respondent continued to take steps that suggested commitment to the Petron station. The Respondent provided land conversion approval, letters of undertaking pledging exclusivity to Petron, paid up capital documents, a lease agreement, and a sale and purchase agreement for the land. A pre-construction meeting was held on 13 August 2020 on the specifications for the Petron station. As late as September 2020, underground tanks were being installed. However, the High Court noted that many of these actions were not necessarily for Petron’s exclusive benefit, they could have been general preparations to make the land viable for any oil company.

On 19 October 2020, Petron organised a meeting to remind the Respondent of its obligations, having received indications that the Respondent intended to “flag switch” to a competitor. On 26 October 2020, the Respondent informed the Appellant via WhatsApp that the Respondent would not be able to continue with the Appellant. On 4 December 2020, the Respondent entered into an agreement with Shell Malaysia Trading Sdn Bhd to operate a Shell station on the same land. S/N AKnq6UubEm629yFUpaew

The Appellant commenced an action against the Respondent (as Defendant) for breach of contract, contending that the LOO dated 7 January 2019 constituted a binding agreement between the parties. The Appellant claimed that the Respondent’s withdrawal from the proposed petrol station arrangement amounted to a repudiation of the LOO, which would entitle the Appellant to damages, including loss of expected profits over a 15-year period.

The trial proceeded with oral evidence from three witnesses for the Appellant (PW1, PW2, PW3) and one witness for the Respondent (SD1, the Respondent’s sole director). Documentary evidence included the LOO, letters of undertaking, WhatsApp chats, emails, and agreements with other oil companies.

The High Court framed four principal issues for trial as follows: a. Whether the Letter of Offer is a binding contract between Plaintiff and Defendant, and if so binding, whether it is tenable and/or sustainable in law. b. Whether the Defendant can terminate the Letter of Offer. c. If there is a contract that legally binds Plaintiff and Defendant: i. If Defendant is found to have breached, how much are the appropriate damages (including for loss of expected profit) for Plaintiff? d. If there is no legally binding contract: i. whether Plaintiff has any cause(s) of action against Defendant as pleaded; and S/N AKnq6UubEm629yFUpaew ii. whether Plaintiff is entitled to any relief (equity or otherwise).

After a full trial, the High Court made the following findings. On whether the LOO constituted a binding contract

The High Court held that the LOO was not a binding contract because the Respondent’s request to change from Option 2 to Option 3 (and from the “Dealer Owned Dealer Operated” concept to “Company Owned Dealer Operated”) amounted to a counter-offer. The Appellant rejected that counter-offer on 27 March 2020. Under section 7 of the Contracts Act 1950 which provided that a qualified acceptance is not an acceptance but a counter-offer. It was held that the parties did not reach consensus ad idem on a material term of the agreement, namely the applicable option/concept. The Appellant’s rejection signified that no contract had been concluded.

The RTA, which the LOO expressly contemplated would be executed later, was never signed. The LOO was merely a “pre-nuptial” document containing conditions precedent, and the absence of the RTA indicated that the parties did not intend to be bound by the LOO alone. Even applying the “knock out rule” to resolve conflicting standard terms, the Respondent’s request for a change of concept is a material term to knocked out the contract S/N AKnq6UubEm629yFUpaew On whether the Respondent could terminate the LOO

The High Court also found that even if a contract existed, the Respondent did not breach any term. This is due to the fact that the counter-offer for Option 3 was never accepted, the Respondent’s withdrawal did not constitute a breach of any binding obligation. The Respondent’s communication “saya ambil keputusan tarik diri dari Petron” was not a wrongful termination but a lawful exit from ongoing negotiations. Consequently, Petron’s claim for damages was “displaced”. The High Court further rejected any claim under quantum meruit because Petron had not proved actual losses – the projected future profits were speculative.

The High Court held, in the alternative, that even if the LOO were a binding contract, the Respondent had not breached any of its terms. Specifically, Item 12 of the LOO (restriction on entering into agreements with rival oil companies) applied only at the time of signing the LOO, not thereafter. The petrol station had not yet been built, and the Respondent’s subsequent agreement with Shell did not violate that clause. The High Court further added that the Appellant was lackadaisical in enforcing conditions precedent, such as obtaining a proper letter of undertaking from the registered landowners, and never lodged a caveat to protect its interests over the land. On damages

Having found no binding contract, the High Court held that the Appellant’s claim for damages for breach of contract was displaced. S/N AKnq6UubEm629yFUpaew As for the alternative claim under the equitable doctrine of quantum meruit, the High Court held that the Appellant failed to prove any actual loss or expenditure incurred in assisting the Respondent to set up the petrol station. The projected loss of future profits (RM11,572,200.00 over 15 years, or RM2,314,440.00 over 3 years) was speculative. Quantum meruit does not compensate for lost anticipated profits; it only compensates for the reasonable value of services or goods actually provided. There was no evidence was led to show that the Appellant had conferred any measurable benefit upon the Respondent for which compensation was due.

At the crux of the appeal is the question of whether the LOO amounted to a binding contract between the Appellant and the Respondent. In the event the LOO amounts to a binding contract, then the question of whether the Respondent’s conduct in withdrawing from the LOO amounts to a breach. Consequentially, in the event there was a breach, the next question is whether the Appellant is entitled to damages as a result of this breach by the Respondent. Issue 1: Whether the LOO is a binding contract?

Consensus ad idem at the time of signing the LOO

Under section 10 of the Contracts Act 1950, all agreements are contracts if they are made by the free consent of parties competent to contract, for a lawful consideration and with a lawful object. We S/N AKnq6UubEm629yFUpaew are of the view that the LOO satisfies these requirements. It identifies the parties, the subject matter (construction and operation of a Petron station on the Land), the consideration (the Appellant’s provision of assets and margins in return for the Respondent’s investment and minimum sales volumes), and the term (15 years). The LOO also includes a revocation clause (Clause 11) in favour of the Appellant, which is a strong indicator of an intention to create legal relations.

The LOO provides what the Respondent has to carry out prior to entering the RTA. In this regard, it was argued by the Respondent that the LOO did not amount to a binding contract. These were conditions in the LOO which the Respondent had to fulfil prior to entering the RTA. It was further argued that as these conditions or requirements were not fulfilled or satisfied by the Respondent, there therefore did not exist a binding contract.

The Appellant on the other hand argued that the LOO amounted to a contract between parties. According to the Appellant, the learned Judicial Commissioner had erred when her Ladyship found there was no binding contract. The High Court found there was no mutual understanding of building a Petron Station when the Respondent executed the LOO in that there was purportedly no consensus ad idem between parties that led to a binding contract since parties purportedly had yet to agree on the fundamental terms of the contract (being whether it was DODO or CODO and whether it was ‘Option 2’ or ‘Option 3’).

On the face of it, based on the wording of the LOO, particularly that on the Respondent accepting such terms and conditions, the Appellant would consider appointing the Respondent as a Petron dealer and enter into the RTA for the sale and supply of Petron products for resale at the petrol service station, it would appear that LOO may not be a binding contract. Nonetheless, it is necessary to consider the conduct of parties when determining whether the LOO amounts to a binding contract.

The phrase “would consider appointing” must be read in context. This is because, the LOO also contains an express obligation that the Respondent shall enter into the RTA (Item 2). The Appellant’s “consideration” of appointment is not unfettered, rather, it is conditioned only upon the Respondent fulfilling the preliminary conditions set out in the LOO (such as erecting the station at its own cost and obtaining the necessary approvals). Read as a whole, the LOO is not a mere expression of intent but a binding framework that obliges both parties to take steps towards the establishment of the station. The objective intention, as revealed by the parties’ subsequent conduct, confirms this interpretation.

Concisely, the High Court found the LOO is not a binding agreement because there was no mutual understanding between the parties to build a Petron Station at the time the Respondent executed the LOO. Her Ladyship found there was no consensus ad idem (meeting of minds) sufficient to form a binding contract, despite the Respondent’s execution of the LOO. Even if consensus ad idem existed, the High Court found the Respondent did not breach any of the LOO’s terms and the Respondent’s request to revise the LOO’s S/N AKnq6UubEm629yFUpaew terms constituted a counter-offer which was rejected by the Appellant. Hence, no concluded or binding agreement arose between the parties.

As the High Court found no legally binding contract existed, the Appellant’s claim for damages cannot be sustained. The High Court further found the Appellant is not entitled to damages on a quantum meruit basis or by way of compensation, as there is no proof of any loss suffered that would justify such an award.

The High Court placed undue emphasis on the fact that the RTA was to be executed later. However, The LOO and the RTA are two separate documents. While they are two documents, the purpose of these documents is for the establishment of the petrol station. The commercial relationship between the parties involves a two-stage contractual process requiring the execution of the LOO and RTA. The LOO sets out the preliminary conditions the Respondent must fulfil to establish the Petron-branded station, such as obtaining the necessary regulatory approvals and the construction of the petrol station. It also contains the key commercial terms agreed upon, including the financial assistance package (e.g., assets to be provided and maintained by the Appellant), the minimum sales volumes for petroleum products, and the dealers’ corresponding revenue margins.

The RTA on the other hand governs the ongoing supply, sale, and purchase of petroleum products between the Appellant and the Respondent as well as the operational management of the service station.

We find that the RTA cannot be entered into if the terms of the LOO are not fulfilled. The LOO relates to the commercial terms between parties, while the RTA provides for the operational terms, when the petrol station has been built. The LOO states that the Respondent SHALL enter into an RTA with the Appellant for the operations of the Petron Station.

The LOO constitutes a valid, binding, and enforceable agreement because it contains all the essential terms governing the parties’ commercial relationship, including the Appellant’s investment obligations, the minimum sales volumes, and the Respondent’s profit margins.

In this present case, there is no “subject to contract” clause in the LOO. Indeed, the Respondent’s witness, SD1, conceded under cross-examination that there was no express term in the LOO stating that it was subject to a final agreement between the parties (see HC GOJ, para 57; and Notes of Evidence, where SD1 agreed “Tiada, tiada”).

The facts which are not in dispute is that the Respondent had executed the LOO. At the time of signing the LOO, the Respondent had agreed to Option 2 which was offered by the Appellant. The Respondent executed the LOO on 15 January 2019. The request for Option 3 was made on 22 November 2019 (via WhatsApp) and 10 December 2019 (by letter) nearly 11 months later. It is logically impossible for a request made 11 months after execution to have been “at the forefront of negotiations” prior to execution. In this regard, we are of the view that the learned Judicial Commissioner S/N AKnq6UubEm629yFUpaew had erred when Her Ladyship made the finding that there was no binding agreement because there was no mutual understanding between the parties to build a Petron Station at the time the Respondent executed the LOO and that there was no consensus ad idem (meeting of minds) sufficient to form a binding contract, despite the Respondent’s execution of the LOO.

With respect, we find there is no evidence to support this finding by the learned Judicial Commissioner. It is clear that the Respondent was fully cognisance of the terms of the LOO when the Respondent executed the LOO. This can be seen or deduced from the conduct of the Respondent who took steps toward constructing the station, including preparing drawings and submitting planning approvals to relevant authorities, as evidenced by communications in a WhatsApp group created in December 2018.

On 8 August 2019, after executing the LOO, the Respondent signed a Confidentiality and Non-Disclosure Agreement (CNDA) to formalise the parties’ legal and commercial arrangements. If there was no meeting of minds or consensus ad idem, why did the Respondent then proceed to do the necessary actions as required under the LOO? It is incomprehensible for someone to carry out the requirements of the LOO if there was no mutual understanding.

Pertaining to the Respondent’s request for Option 3, the facts demonstrate that the Respondent’s request for Option 3 was a result of an increase in the expenses incurred by the Respondent in obtaining planning approvals from the local authority and the insufficiency of the RHB Bank loan (which was only approved on 25 S/N AKnq6UubEm629yFUpaew September 2019). These were new circumstances that arose after the LOO was signed. They do not evidence any lack of consensus ad idem at the time of signing. In other words, had there not been an increase in the Respondent’s financial outlay (due to increased costs by the local authority), the Respondent would have not requested for Option 3. This means that the Respondent would have been able to proceed with Option 2, as reflected in the LOO.

The facts further reveal that after the Respondent was informed by the Appellant that his request for Option 3 was rejected, the Respondent continued to honour the terms of the LOO.

There is no evidence that the Appellant ever assured the Respondent that Option 3 would be available after signing the LOO, or that the Respondent could simply “select” Option 2 in the meantime. PW3, the Appellant’s representative who presented the options, gave unchallenged evidence that he never informed the Respondent that it could change options after executing the LOO, as this would affect the Appellant’s downstream investment plans. No question was put to PW3 suggesting otherwise. Below is the reproduced Witness Statement of PW3: “8. Q: What do you have to say about the Defendant’s contentions in this suit? A: I had never informed Zaid that he can change the ‘option’ after signing the letter of offer. I never gave any investor, let alone Zaid, any impression whatsoever that they can switch at their discretion, to another option after signing the letter of offer, which if change was allowed at the investor's whims and fancies, would definitely affect the Plaintiff's broader down-S/N AKnq6UubEm629yFUpaew stream investment plans and the progress of arrangements as they are in business, on binding commercial terms. That is why, if any investor wants to “change” the ‘option’ previously selected and agreed to, it would only be allowed if approval was obtained from the Plaintiff's management. In any event, the investor is always in the best position to determine, ahead of time, whether it may be able to meet inter alia the financial obligations of constructing and operating the petrol station because it is a capital-intensive investment, especially if the investor intends on purchasing the land involved as wl;l (as is the case herein). Investors are encouraged, before making an election on any options made available by the Plaintiff, to plan and budget according to their means. In fact, when the estimated volume of petroleum products sold is low and by the Plaintiff's estimated projection, the revenue earned would not be sufficient to meet their loan repayment obligations (if the investor applied for a bank loan to fund the construction of the station), then I would caution the prospective investor and ask whether they really want to It proceed. It is always up to the investor and it does not benefit the Plaintiff nor does it make any commercial sense for the Plaintiff to force investors into a commercial relationship as the Plaintiff is also required to expend capital into each site depending on the option chosen by the said investor.”

Additionally, the Respondent’s subsequent conduct in progressing the establishment of the station and even after the rejection of Option 3 on 27 March 2020 unequivocally demonstrates their clear intention to be bound by the LOO and their treatment of it as a binding agreement.

In the words of His Lordship Edgar Joseph Jr, SCJ, the Supreme Court in the case of Ayer Hitam Tin Dredging Malaysia Bhd v YC Chin Enterprises Sdn Bhd [1994] 2 MLJ 754 at page 764, said as follows: “But, bearing in mind the familiar saying that a person's beliefs or his state of mind are just as much facts as the state of his disgestion or the existence of a tangible object, from what factors may the existence of an agreement be inferred? The authorities show that such inference must be drawn from the language the parties have used, their conduct, regard being had to the surrounding circumstances, and the object of the contract. In other words, in its task of ascertaining the intention of the parties, the court will, generally speaking, apply an objective test; more particularly, it will ask itself, what would the intention of reasonable men be if they were in the shoes of the parties to the alleged contract. As clear and helpful an enunciation of the principles as any which should guide the court in determining the ever-recurring question of whether there has been a contract between the parties is provided by Saville J in Vitol BV v Compagnie Europeene des Petroles 2 at p 576 in the following words: S/N AKnq6UubEm629yFUpaew The approach of the English law to questions of the true construction of contracts of this kind is to seek objectively to ascertain the intentions of the parties from the words which they have chosen to use. If those words are clear and admit of only one sensible meaning, then that is the meaning to be ascribed to them – and that meaning is taken to represent what the parties intended. If the words are not so clear and admit of more than one sensible meaning, then the ambiguity may be resolved by looking at the aim and genesis of the agreement, choosing the meaning which seems to make the most sense in the context of the contract and its surrounding circumstances as a whole. In some cases, of course, having attempted this exercise, it may simply remain impossible to give the words any sensible meaning at all in which case they (or some of them) are either ignored, that is to say, treated as not forming part of the contract at all, or (if of apparent central importance) treated as demonstrating that the parties never made an agreement at all, that is to say, had never truly agreed upon the vital terms of their bargain.”

The principle of consensus ad idem is to be determined objectively. It is well settled that the existence of an agreement depends upon the intention of the parties, and for there to be an agreement the parties must be ad idem, that is, there must be a consensus between them. The existence of such an agreement is to be inferred from the language the parties have used, their conduct, regard being had to the surrounding circumstances, and the object of the S/N AKnq6UubEm629yFUpaew contract. In other words, in its task of ascertaining the intention of the parties, the court will, apply an objective test.

Applying that objective test to the present case, any reasonable person observing the conduct of the parties that is the signing of the LOO, the execution of the CNDA, the provision of exclusivity undertakings, the site visits, the pre-construction meetings, and the installation of tanks, would conclude that the parties intended to be bound. The High Court’s reliance on the subjective and after-the-fact assertion by SD1 that he did not intend to be bound is legally misplaced.

The request for Option 3 was not a counter-offer

The High Court held that the Respondent’s request for Option 3 amounted to a counter-offer under section 7 of the Contracts Act 1950, and that since the Appellant rejected it, no contract was concluded (HC GOJ, paras 84–85).

The law is settled. A counter-offer is a response to an original offer that varies the terms of that offer, thereby rejecting the original offer and proposing a new one. In this case, the LOO was already accepted by the Respondent on 15 January 2019. A contract was formed at that point. The Respondent’s subsequent request for Option 3 on 10 December 2019 was not a counter-offer to the original offer because the original offer was no longer open for acceptance. It was, at best, a request to vary an existing contract or a proposal for a new contract.

As the Appellant correctly submits, had the Appellant agreed to the Respondent’s request, that would have amounted to an agreed variation of the terms of the LOO. The Appellant did not agree. Therefore, the original terms (Option 2) remained binding. The High Court erred in treating the Respondent’s request as a counter-offer that somehow nullified the already-concluded contract.

The applicable legal principles are well-established. In The Ka Wah Bank Ltd v Nadinusa Sdn Bhd & Anor [1998] 2 MLJ 350, the Federal Court, citing Chitty on Contracts, held at page 370: “Even assuming we are wrong in holding P11 was not a letter of offer, then, in our opinion, P15 could not in law constitute an acceptance. According to Chitty on Contracts, 26th Ed

Vol I, para 54, p 44, ‘an acceptance is a final and unqualified expression of assent to the terms of the offer’. But, where the reply is qualified or attempts to vary the terms of the offer or attempts to accept an offer on new terms (not contained in the offer), then such a reply is not a communication of an acceptance but may be a rejection accompanied by a counter-offer which the original offeror can accept or reject (paras 56, 95, pp 46, 72). In the light of the conditions put forward by Sri Ram & Co in P15 that the bank gave an undertaking to withdraw the two suits and that each party to pay their own costs, which terms were not in P11, it is our conclusion that P15 does not constitute a final acceptance of the bank's terms of the offer, but an attempt by the offeree to vary the original offer in P11 to include new S/N AKnq6UubEm629yFUpaew terms on undertaking and costs. In the circumstances, there was no concluded contract.” [Emphasis added]

This passage makes clear that a counter-offer can only arise before acceptance has been communicated. Once the Respondent accepted the LOO on 15 January 2019, the offer was extinguished. The Respondent's later request for Option 3 could not, as a matter of law, constitute a counter-offer to an offer that no longer existed.

The distinction between a counter-offer (which prevents contract formation) and a post-contractual request to vary terms (which presupposes an existing contract) is fundamental. This was affirmed by the Federal Court in Charles Grenier Sdn Bhd v Lau Wing Hong [1997] 1 CLJ 625 where His Lordship Gopal Sri Ram, JCA (as he then was), ruled at page 633: “…An agreement to make an agreement does not result in a contract. It is for the Court in each case to construe the correspondence exchanged between the parties and to say whether that is the result intended by the parties. If the Court reaches an opposite conclusion, then there is an enforceable contract. Unless the approach we have stated is adopted, a party to a contract who, after having concluded his bargain, entertains doubts as to the wisdom of the transaction may be in the unfairly advantageous position to invent all sorts of imaginary terms upon which disagreement may be expressed when the more formal document is being prepared in order to escape from his solemn promise. Businessmen would find the S/N AKnq6UubEm629yFUpaew law to be a huge loop-hole and commerce would come to a virtual standstill. The law leans in favour of upholding bargains and not in striking them down willy-nilly. And its declared policy finds expression in the speech of Lord Wright in Hillas & Co. v. Arcos Ltd. [1932] All ER (Rep.) 494, where he said: Businessmen often record the most important agreements in crude and summary fashion; modes of expression sufficient and clear to them in the course of their business, may appear to those unfamiliar with the business far from complete or precise. It is, accordingly, the duty of the Court to construe such documents fairly and broadly, without being, too astute or subtle in finding defects; but, on the contrary, the Court should seek to apply the old maxim of English law, verba ita sunt intelligenda ut res magis valeat quam pereat. That maxim, however, does not mean that the Court is to make a contract for the parties, or to go outside the words they have used, except in so far as there are appropriate implications of law, as, for instance, the implication of what is just and reasonable to be ascertained by the Court as matter of machinery where the contractual intention is clear but the contract is silent on some detail.” [Emphasis added]

This principle prevents a party from escaping a concluded contract by characterising a subsequent request as a counter-offer. The High Court’s approach here, which allowed the Respondent's post-S/N AKnq6UubEm629yFUpaew acceptance request to nullify the contract, would improperly strike down an already formed bargain, contrary to this established principle. The court should give effect to their intentions rather than allowing one party to resile by characterising a subsequent request as a counter-offer.

As stated earlier, we are of the view that the Respondent’s request for Option 3, made nearly 11 months after the LOO was signed, is at best a proposal to vary the contract. It presupposes the contract’s existence and validity. However, the original contract remains in full force if the proposal is rejected. This is postulated in Federal Court case of Kuala Dimensi Sdn Bhd v Port Kelang Authority [2025] 3 CLJ 497 through the judgment of Her Ladyship Zabariah Mohd Yusof FCJ at para 91 as follows: “[91] It is trite that in contract law, the validity of a variation can be subject to challenge if there is no such consideration. The issue of variation of contract and the requirement of consideration is extensively explained by the Court of Appeal in 555 Film Sdn Bhd & Ors v. Adamancy Construction Sdn Bhd [2023] CLJU 884; [2023] 1 LNS 884. For a variation to be contractually binding, all of the legal requirements to form a valid contract, including the provision of valuable consideration by each party. [92] The general rule is that past consideration is not sufficient consideration and traditionally, a promise to perform an existing obligation will not be good consideration (see Wigan v. Edwards [1973] 47 ALJR 586 at 594). In other words, the performance of existing contractual obligations under the original contract is not to be taken as S/N AKnq6UubEm629yFUpaew sufficient consideration for any subsequent variation. This means, fresh consideration in addition to that already owing will need to be provided for the variation to be binding.” [Emphasis added]

Additionally, the Kuala Dimensi Sdn Bhd (supra) case also made the distinction between a new contract (or variation) and the pre-existing contract at para 90 as follows: “[90] However, even if ADW2 is to be taken as a variation of ADW1, that does not absolve of the requirement of a valid consideration from the defendant to the plaintiff in ADW2. In this respect we refer to s. 63 of the Contracts Act 1950 which states that if parties agree to alter the said contract, the original contract need not be performed. When the plaintiff and the defendant here altered the rate of interest in the original contract ADW1, essentially, they were altering the original contract. As a result, a new contract is formed, ie, ADW2. If the parties cannot establish all the elements of a valid contract in ADW2, the agreement is void and the parties' obligations are only confined to the original contract (refer to the FC case of Yong Mok Hin v. United Malay States Sugar Industries Ltd [1967] CLJU 220; [1967] 1 LNS 220; [1967] 2 MLJ 9, at p. 16).”

The recent Federal Court decision in Kuala Dimensi Sdn Bhd (supra) reinforces the distinction between a pre-contractual counter-offer and a post-contractual request to vary terms. In that case, the Federal Court held that a variation of an existing contract is itself a new agreement requiring fresh consideration. If the variation is invalid for want of consideration, the parties’ obligations remain S/N AKnq6UubEm629yFUpaew confined to the original contract (see para 94). Critically, the Federal Court affirmed that a party cannot unilaterally escape its obligations under an original contract by requesting a variation and then claiming that the failure to agree on the variation nullifies the original bargain. Applying this to the present appeal, the LOO was accepted and became binding on 15 January 2019. The Respondent’s subsequent request for Option 3 on 10 December 2019 was, at best, a proposed variation of the existing contract. The Appellant rejected that proposal. Therefore, the original LOO (Option 2) remained in full force. The High Court’s characterization of the Respondent’s request as a “counter-offer” that destroyed the original offer is inconsistent with the principles reaffirmed in Kuala Dimensi Sdn Bhd (supra).

This is not a “battle of forms” case where parties are exchanging standard terms before contract formation. The contract was already formed on 15 January 2019 upon the Respondent’s execution of the LOO. The “knock-out rule” applies only to resolve conflicts in standard terms exchanged during pre-contractual negotiations. It has no application to a post-contractual request to vary terms. Therefore, we are of the view that the High Court’s reliance on the “knock-out rule” (HC GOJ, para 85) was therefore misplaced.

The absence of the RTA does not negate the binding nature of the LOO

The High Court placed significant weight on the fact that the RTA was never signed (HC GOJ, paras 39, 44, 67). With respect, this confuses the distinction between an agreement that is binding but S/N AKnq6UubEm629yFUpaew contemplates a further formal document, and a non-binding “agreement to agree”.

The Appellant’s witnesses consistently explained that the RTA could only be issued after certain conditions precedent were fulfilled (such as land conversion and issuance of individual title). Those conditions were only fulfilled by 23 July 2020. The Respondent withdrew on 26 October 2020 – a mere three months later. The Appellant cannot be faulted for not having issued the RTA within that short window, especially when the Respondent was actively representing that construction was progressing.

In any event, the condition precedent in Item (e) of the LOO was that the Appellant would enter into the RTA once the conversion process was completed and the individual land title was granted. That condition was for the Appellant’s benefit, and the Appellant could waive it. More importantly, the failure of a condition precedent does not render the entire LOO non-binding, it may suspend the obligation to perform, but the mutual promises and the framework of the relationship remain binding. The Respondent cannot rely on its own delay in fulfilling conditions (or the Appellant’s alleged lackadaisical attitude) to deny the existence of the contract.

Before concluding on Issue 1, we must address the High Court’s reliance on the Federal Court decision in Deutsche Bank (M) Bhd v MBf Holdings Bhd & Anor [2015] 6 MLJ 310. With respect, that case is distinguishable on its facts and does not assist the Respondent.

In Deutsche Bank (supra), the mandate letter contained an express condition that the bank’s obligation to underwrite the notes or provide financing was “subject to” internal credit approval and separate agreements. The Federal Court held that no binding contract could come into being because those conditions precedent were never satisfied. Importantly, the court stated (at para 81): “To ensure that no premature binding contract is concluded through negotiations and exchanges, whether written or oral, it should be made amply clear that all negotiations and exchanges are subject to contract and that parties are not bound until execution and exchange of a formal contract.”

In the present case, the LOO contains no such “subject to contract” clause. Indeed, the Respondent’s own witness, SD1, conceded under cross-examination that there was no express term in the LOO stating that it was subject to a final agreement between the parties (see Notes of Evidence: “Tiada, tiada”). The LOO was executed by both parties. The only conditions precedent in the LOO (such as land conversion and issuance of individual title) were for the benefit of the Appellant and did not render the entire LOO non-binding. Unlike Deutsche Bank, there is no missing internal approval or unmet condition that was expressed as a prerequisite to any binding obligation.

The Federal Court in Deutsche Bank (supra) was concerned with a situation where no contract had ever been formed. Here, a contract was formed on 15 January 2019 when the Respondent accepted the LOO. The subsequent request for variation does not undo that S/N AKnq6UubEm629yFUpaew formation. Accordingly, the High Court’s reliance on Deutsche Bank (supra) was misplaced.

For all the above reasons, we find that the LOO is a valid, binding, and enforceable contract. The High Court erred in holding otherwise. We therefore set aside that finding. Issue 2: Whether the Respondent’s withdrawal constituted a breach

The High Court held, in the alternative, that even if a contract existed, the Respondent did not breach any term because the restriction in Item 12 of the LOO (not entering agreements with rival oil companies) applied only at the time of signing the LOO, not thereafter (HC GOJ, para 90).

We are of the view, that the Respondent’s breach is not merely the entering into the Shell agreement on 4 December 2020. The breach is the repudiation of the LOO on 26 October 2020 when the Respondent informed the Appellant that it had decided to “withdraw from Petron”. By that communication, the Respondent evinced an intention no longer to be bound by the LOO. That is a clear anticipatory breach or repudiatory breach of the contract.

The Respondent was obliged under the LOO to: (a) erect the Petron station at its own cost (Item 3); (b) enter into the RTA (Item 2); (c) sell minimum monthly volumes (Item 4); and (d) not to do anything that would frustrate the commercial purpose of the agreement. By withdrawing and subsequently contracting with Shell, the S/N AKnq6UubEm629yFUpaew Respondent made it impossible for itself to perform these obligations. That is a fundamental breach.

The High Court’s finding that Item 12 only applied at the time of signing is legally correct as a matter of strict construction of that particular clause, but it does not mean the Respondent was free to withdraw from the entire contract without consequence. The obligation to perform the contract (to build the station, enter the RTA, and sell Petron products) is the primary obligation. Item 12 was merely a warranty at the time of signing. The Respondent’s withdrawal is a separate and distinct breach of the primary obligations.

We also note that the Respondent provided letters of undertaking as late as May and September 2020 pledging exclusivity to the Appellant. Those undertakings are inconsistent with the Respondent’s subsequent conduct. The Respondent cannot, on the one hand, give undertakings of exclusivity and, on the other hand, claim that it was free to walk away.

Therefore, we find that the Respondent wrongfully repudiated the LOO on 26 October 2020. The Appellant was entitled to treat the contract as discharged by the Respondent’s breach and claim damages.

Having found that the LOO is a binding contract and that the Respondent breached it, the next question is the quantum of S/N AKnq6UubEm629yFUpaew damages. The High Court did not assess damages because it found no contract. However, the High Court also made observations that the Appellant’s claim for loss of future profits was speculative (HC GOJ, paras 103–108). We now turn to the quantum of damages.

The correct measure of damages

The governing provision is section 74 of the Contracts Act 1950, which states:

“Compensation for loss or damage caused by breach of contract

When a contract has been broken, the party who suffers by the breach is entitled to receive, from the party who has broken the contract, compensation for any loss or damage caused to him thereby, which naturally arose in the usual course of things from the breach, or which the parties knew, when they made the contract, to be likely to result from the breach of it.

Such compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach.”

Under section 74 of the Contracts Act 1950, the Appellant is entitled to compensation for any loss or damage caused to it by the breach which naturally arose in the usual course of things, or which the parties knew, when they made the contract, to be likely to result from the breach. The principle underlying section 74 is restitutio in integrum – to place the injured party in the same financial position as if the contract had been performed. In Karun Klasik Sdn Bhd v Tenaga Nasional Bhd [2023] 2 MLJ 566, the Court of Appeal held S/N AKnq6UubEm629yFUpaew at para [52] that expectation loss (loss of profit) is recoverable where the loss is not speculative and can be reasonably calculated, stating: “[52] We would conclude on this main aspect of the pleaded claim that the LJ had plainly erred in law and fact when she held that the appellant was not entitled to loss of profits on the ground that it had not been pleaded. There was a failure by the LJ to judicially appreciate the actual nature of the claim being the market/sale value of the products that perished the determination of which would reasonably include both cost and loss of profit. Despite there being ample evidence before the court, both oral and documentary, which was not contradicted. In our view, the LJ had unreasonably rejected the evidence and decided to merely award nominal damages of RM1,000.”

In this present appeal, the Appellant claims expectation damages are the profits it would have earned had the Petron station been built and operated by the Respondent for the 15-year term of the RTA. The Appellant has quantified this in two ways: a. Method 1 (15-year full term): RM11,572,200 for the full 15- year term; or b. Method 2 (3-year replacement period): RM2,314,440 being the average time to get an alternative site operational.

We are mindful that the Petron station was never completed, and the RTA was never executed. In such cases, a claim for loss of future profits must be approached with caution. If there is a reliable evidentiary basis for the projection, the court may award damages.

The Appellant has adduced evidence of four comparable Petron stations with similar Total Motor Fuel (TMF) targets, supported by SAP ERP data showing actual monthly sales volumes. The Appellant adduced the following objective and empirical evidence: a. PW2 gave unchallenged evidence that, on average, a Petron branded station requires three years from execution of the LOO to commence operations (see Q&A 16 of PW2’s witness statement, CCB Vol 2, p 462). b. Four comparable Petron stations (in Perak, Johor, Selangor and Terengganu) with similar Total Motor Fuel (TMF) targets (550–600 kL) were identified. Their actual monthly sales volumes for 2019–2022, extracted from the SAP ERP system (a computer generated record with no human intervention), provided a reliable empirical baseline for projecting the subject station’s likely sales. c. The Respondent did not challenge or rebut this quantification evidence at trial. The failure to challenge is significant: the Respondent’s own witness, SD1 (DW1), admitted that had he withdrawn in March 2020 (when Option 3 was rejected), the Appellant would have had an additional seven months to find an alternative site (Encl. 21, para 77.1).

PW3 further explained the commercial significance of the LOO. Once the LOO is signed and accepted, the Appellant “locks” the entire trade area for that site and rejects other potential investors. By relying on the Respondent’s continued representations of commitment, the Appellant forewent other profitable opportunities. This is a real, non-speculative loss of chance as recognised in the case of Karun Klasik (supra).

Nevertheless, we note that the 15-year claim (RM11,572,200) assumes that the station would have operated profitably for the full term without interruption. That may be vulnerable to arguments of remoteness and insufficient mitigation. The 3-year claim (RM2,314,440), being the income over the average replacement period, is more defensible as it directly compensates the Appellant for the delay and the lost opportunity during the period it would take to secure an alternative site.

The High Court dismissed the claim for loss of future profits as “speculative”. With respect, that finding is erroneous. The fact that the station was never completed does not automatically render a claim for loss of profit speculative. Where there is reliable, objective data from comparable operations, and the loss flows naturally from the breach, compensation is recoverable under section 74(1). The Appellant’s 3-year claim is grounded on an actual industry experience (3-year average from LOO to operation), empirical sales data from four comparable stations; and an unchallenged evidentiary record. Moreover, the Appellant was entitled to treat the LOO as continuing after March 2020 because the Respondent repeatedly represented that construction was progressing (providing letters of undertaking, attending site meetings, installing tanks).

In the Karun Klasik (supra) case, the Court of Appeal awarded loss of profits despite the fact that the perishable goods never reached the market, because there was ample evidence of market value. Similarly, here, the Appellant has provided a measurable, evidence-based projection.

We also reject the High Court’s suggestion that the claim is “remote and indirect” under section 74(2). The loss that is the income the Appellant would have earned from the Petron station over the period it would take to establish an alternative site arose naturally from the Respondent’s repudiation. The parties, when they made the LOO, knew that the Appellant would forgo other opportunities in the trade area and would suffer delay in realising income if the Respondent walked away.

The 3-year claim of RM2,314,440.00 represents the income the Appellant would have earned during the average replacement period. This is the very period during which the Appellant is deprived of the benefit of its bargain. This measure directly compensates the Appellant for the delay caused by the Respondent’s breach and avoids speculation about the long-term future of an unbuilt station. It is consistent with the principle that damages should put the injured party in the position it would have been in had the contract been performed – which, in this context, means having an operational Petron station generating income. Since the Respondent’s breach forced the Appellant to restart the process, the 3-year replacement income is a fair and reasonable measure of the loss naturally flowing from the breach.

Therefore, we are of the view that RM 2,314,440.00 as damages for the Respondent’s breach of contract is a reasonable award. This sum is the income the Appellant would have earned over the 3-year average replacement period, as quantified by the Appellant and unchallenged by the Respondent.

This should come with interest on the said sum at the rate of 5% per annum from the date of judgment of the High Court (28 May 2024) until full payment, pursuant to section 11 of the Civil Law Act 1956.

For the reasons set out above, we allow the appeal with costs here and below. The decision of the High Court dated 28 May 2024 is set aside.

We make the following orders:

It is declared that the Letter of Offer dated 7 January 2019 constitutes a valid and binding contract between the Appellant and the Respondent.

It is declared that the Respondent’s withdrawal on 26 October 2020 amounted to a wrongful repudiation and breach of the said contract.

The Respondent shall pay the Appellant damages in the sum of RM2,314,440.00 (Ringgit Malaysia Two Million Three Hundred Fourteen Thousand Four Hundred and Forty only), together with interest at the rate of 5% per annum from 28 May 2024 until full payment.

The Respondent shall pay the Appellant costs of RM70,000.00 for the proceedings here and below, subject to allocator.

The deposit, if any, shall be refunded to the Appellant. S/N AKnq6UubEm629yFUpaew Dated : 23 June 2026 - sgd - (SHAHNAZ BINTI SULAIMAN) Judge Court of Appeal Malaysia Putrajaya Counsel: For the Appellant : Mark Yu Kee La Brooy Yenne Chow Steven Ramesh (Messrs. Raja, Darryl & Loh) For the Respondent : Datuk Adnan bin Seman @ Abdullah (Messrs. Adnan Sharida & Associates) S/N AKnq6UubEm629yFUpaew