“Ali Baba” Contracts in Malaysia

In Malaysia, some government procurement and construction projects come with Bumiputera participation requirements. These requirements aim to promote meaningful Bumiputera participation in the economy.

In the construction industry, securing a lucrative project is a major business opportunity. But how the project was won can decide whether the parties can legally get paid for their work. Problems arise when a contractor “lends” its Bumiputera status or licence to another company to secure a project, in exchange for a commission.

As the High Court’s decision in Alor Setar Development Corporation Sdn Bhd v EE Engineering (Malaysia) Sdn Bhd [2026] MLJU 2170 shows, this kind of arrangement can leave a party unable to recover payment, even after the work is finished.

What Is an “Ali Baba” Scheme?

An “Ali Baba” scheme is where a qualifying contractor uses its status, name or licence to secure a project, but another company actually does the work. In return, the qualifying contractor is paid a commission for letting its credentials be used.

This is different from legitimate subcontracting, where a subcontractor really does part of the work, and the arrangement is allowed by the main contract and the procurement rules.

What Happened in This Case?

The dispute concerned the construction of a four-storey building for Sekolah Tahfiz Al-Islah in Tasek Gelugor, Penang.

The appellant (the main contractor) was a Bumiputera construction company registered with the Construction Industry Development Board (CIDB) under the G5 category. The respondent, a non-Bumiputera company, was appointed as its subcontractor under a Letter of Award dated 1 June 2018.

After the work was finished and the project owner had paid the appellant in full, the respondent claimed RM538,000 in unpaid sums from the appellant.

The appellant disputed the claim. It argued that the respondent had decided the tender documents and pricing, and had carried out the works itself. According to the appellant, it had only lent its CIDB licence in return for a fixed 2% commission.

On 3 June 2026, the High Court allowed the appeal and overturned the Sessions Court’s decision. It held that the subcontract was void from the start (void ab initio) under Section 24 of the Contracts Act 1950. The subcontractor cannot enforce the contract and cannot claim the sum.

Why Was the Subcontract Unenforceable?

1. The Court examined the actual arrangement.

The progress claims showed a fixed 2% cut taken from the value of the works. The Court looked at the documents, the witness evidence and what each party actually did. It found that this 2% was payment for the use of the appellant’s CIDB licence, not for any construction work, materials or expertise the appellant provided.

The Court concluded that the arrangement was not genuine subcontracting but an “Ali Baba” scheme.

2. The arrangement undermined procurement policy.

The Court found that the arrangement was designed to get around the relevant Bumiputera procurement policies and undermine the integrity of the tender process.

Under Section 24 of the Contracts Act 1950, an agreement can be void if its purpose (its “object”) or what is exchanged under it (its “consideration”) is unlawful. This includes where it defeats the purpose of a law or goes against public policy.

The Court also found the arrangement went against Clause 17.3 of the PAM Contract 2006, a standard-form building contract entered by the appellant and the employer. This clause stopped the contractor from subcontracting all or most of the works, unless the contract allowed it. The employer/project owner had not given its consent.

3. Completion of the works did not secure payment.

The respondent argued that it had done the work and should be paid the outstanding RM538,000. But because the subcontract was void from the start, the respondent could not rely on it to claim payment.

The Court also refused to let the respondent recover the money another way, through restitution or unjust enrichment. This was because the respondent had not included these claims in its pleadings, and because of the public policy concerns involved.

The lesson: finishing the work does not guarantee payment if the agreement behind it is unlawful.

Practical Considerations for Contractors

Before entering into a subcontracting arrangement, contractors and businesses should:

• Ensure genuine participation: A qualifying contractor should play a real role in the project, not just lend its status or licence for a commission.
• Check procurement requirements: Verify the eligibility conditions and restrictions applicable to the project.
• Review the main contract: Confirm whether subcontracting is permitted and whether the project owner’s approval is required.
• Assess legal and financial risks: Consider whether the arrangement is lawful and enforceable before committing resources or commencing work.

Conclusion

Commercial opportunities should not come at the expense of legal compliance. A subcontract may be formally documented and the works may be fully completed, but neither guarantees that the courts will enforce the agreement.

The decision in Alor Setar Development Corporation Sdn Bhd v EE Engineering (Malaysia) Sdn Bhd is a stark reminder that parties who enter into sham arrangements to circumvent procurement requirements risk losing their contractual rights, including the right to recover payment for work already performed. As the respondent’s unsuccessful claim for RM538,000 demonstrates, the law will not necessarily come to the aid of a party seeking to enforce an unlawful agreement. What appears to be a commercially convenient shortcut may ultimately result in substantial financial loss.