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Constructive Dismissal: The Applicable Test – “Contract Test” vs The “Reasonableness Test”

posted 1 month ago

The recent Federal Court judgment in Tan Lay Peng v RHB Bank Berhad (Civil Appeal No.01(f)-10-04/2023(P), brings into focus the intricate balance between the contract test and the reasonableness test in cases involving constructive dismissal cases in Malaysia.

Our Apex Court reaffirmed the traditional reliance on the contract test, aligning Malaysian position with longstanding common law principles.

The Principle of Constructive Dismissal

Constructive dismissal occurs when an employee resigns/walk out of the employment allegedly due to the employer’s conduct which can be regarded as fundamentally breaching the terms of the employment contract thus creating an untenable work environment for the subject employee. Unlike straightforward summary dismissals, constructive dismissal encapsulates situations whereby the termination is forced/triggered by the employer’s actions.

Brief background facts

This case involves a former employee one Mr. Tan (“Mr Tan/Appellant”) of RHB Bank Berhad (“the Bank/Respondent”). Mr. Tan was later deceased and was represented by his administratrix, one Ms. Tan. Mr. Tan was employed by the Bank as its Operations Head, Thailand Operations in Bangkok, the sole branch of the Bank at the material time.

In November 2013, the Bank opened its second branch in Sri Racha which was placed under the supervision of Mr. Tan. Not long after, the bank issued a transfer order for Mr. Tan to assume the role of Branch Manager of the Ayutthaya branch. The order stipulated that such assignment is for a period not more than 9 months. Mr Tan complied and transferred to the Ayutthya branch since then.

However, despite such assignment, the bank subsequently appointed a Thai national as the Branch Manager and issued another transfer order to Mr Tan to the International Infrastructure, PMO and Operation Support, Group International Business in Malaysia. Mr Tan objected vigorously to his repatriation to Malaysia because he opined that such transfer will ‘kill his career’ and was done without any reasonable justification. Therefore, he did not comply with the order and claimed that he was constructively dismissed by the bank.

The Industrial Court gave an award in favour of Mr Tan, which the decision was maintained by the High Court. The Bank being dissatisfied with the decision, appealed to the Court of Appeal.

Court of Appeal

The Court of Appeal reversed the decision on the ground that the Industrial Court had applied the wrong test ie the reasonableness test in determining whether there was constructive dismissal.

Question of law posed before the Federal Court

“Is there a difference in the contract test or reasonableness test in light of major developments in industrial jurisprudence?”

Grounds of judgement of the Federal Court

The Federal Court upheld the decision of Court of Appeal. It referred to the trite law in Pan Global Textiles Bhd Pulau Pinang v Ang Beng Teik [2002] 1 CLJ 181 whereby the following observation was made, that the court ought to apply the contract test to determine if the employer was guilty of any breach which went to the root of the contract or had evinced an intention not to be bound by it.

In the present case, the Federal Court unanimously reaffirmed the primacy of the contract test being the settled law for the applicable test for constructive dismissal cases, The reasonableness of an employer’s actions, while relevant, should not alone determine constructive dismissal. The test of reasonableness refers to what a reasonable man, in his right mind considers fair and proper based on the particular facts and circumstances of the case. The assessment must relate to the contract of employment and its fundamental breach or repudiatory breach.

The rationale is that the reasonableness of an employer’s conduct is very subjective and depends on the circumstances of the situation and other related factors. It is too wide and indefinite to be made as a legal requirement for a constructive dismissal case. The reasonableness of the employer’s conduct could also be easily subject to different opinions by tribunals or courts. Any departure from the contract test to reasonableness test will entail unsettled industrial relations by introducing uncertainty and confusion.


The adherence to the contract test in fact aligns with other jurisdictions like the UK, Singapore and Australia, where the contract test remains foundational, notwithstanding the contextual assessment of reasonableness in determining whether an employer’s conduct amounts to a fundamental breach. Put it simple, our court in determining constructive dismissal cases, should consider whether there was a breach of contract by the employer on such conduct/exercise being complained of instead of go in the bone fide and reasonableness of such conduct.

About the authors

Thoo Yee Huan
Senior Partner
Dispute Resolution
Halim Hong & Quek
[email protected]

Esther Lee Zhi Qian
Dispute Resolution
Halim Hong & Quek
[email protected]

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