No more exclusion clauses in Malaysia?January 2019
No more exclusion clauses in Malaysia?
By Janet Chai Pei Ying
Recently, the Federal Court in the case of CIMB Bank Berhad v Anthony Lawrence Bourke & Anor  1 LNS 1887 held that clauses that absolved a party from all liabilities to pay compensation or damages for non-performance of contracts were in breach of section 29 Contracts Act 1950 (“CA 1950”).
Section 29 of CA 1950 provides that every agreement which restricts absolutely any party thereto from enforcing his rights under or in respect of any contract or which limits the time within which he may enforce his rights is void. In short, section 29 invalidates agreement which:
- restricts absolutely a party from enforcing his rights to sue by usual legal proceeding; or
- limits the time within which a party may thus enforce his right.
The relevant clause (Clause 12) which the Federal Court had to consider is:
“Notwithstanding anything to the contrary, in no event will the measure of damages payable by the Bank to the Borrower for any loss or damage incurred by the Borrower include, nor will the Bank be liable for, any amount for loss of income or profit or savings, or any indirect, incidental consequential exemplary punitive or special damages of the Borrower, even if the Bank had been advised of the possibility of such loss or damages in advance, and all such loss and damages are expressly disclaimed.”
Such a clause which seeks to exclude or restrict liability is generally referred to as exclusion clause in the common law jurisdiction. Exclusion clauses are allowed and accepted in common law jurisdictions, and provided that the language of the restriction or exclusion or limitation is clear, the plain and ordinary meaning of exclusion clauses, and therefore the restriction or exclusion or limitation, would be upheld.
The Borrowers are husband and wife. They had obtained a loan from the Bank to finance the purchase of a property which was under development. Pursuant to the sale and purchase agreement (“SPA”), payment must be made progressively against the certificate of completion issued at each progress billing. Under the loan agreement, the Bank was obligated to make direct payment on a progressive basis on behalf of the Borrowers to the developer after the issuance of invoice by the developer. However, despite having made some payments, the Bank failed to pay the progressive claim to the developer after the issuance of invoice. The developer then terminated the SPA. As a result, the Borrowers filed a claim seeking for damages suffered resulting from the termination of the SPA.
The Borrowers relied on the following causes of action:
- Breach of agreement;
- Negligence in observing the duty of care; and/or
- Fiduciary duty,
And sought the following reliefs:-
- RM273,996.24 being the total amount of loan payments that the Borrowers had paid to the Bank under the loan facility;
- RM747,481.42 being the Plaintiffs’ total losses suffered due to the termination of the SPA;
- RM10,975.30 being all other miscellaneous costs and expenses incurred by the Borrowers due to the Bank’s breach,
- General damages to be assessed;
- Aggravated and/or exemplary damages; and
Among other defences, the Bank raised the defence that pursuant to Clause 12 in the loan facility agreement agreed to by the Borrowers, the Bank was not liable for any loss of income or profit or savings, direct or indirect, incidental, consequential, exemplary, punitive or special damages.
High Court's Decision
The High Court found that Clause 12 absolved any liability or claim against the Bank and on this basis dismissed the Borrowers’ claim.
Court of Appeal’s Decision (allowing appeal)
The Court of Appeal found that the Bank had breached its duty to the Borrowers to exercise reasonable care and skill in disbursing the loan when the loan agreement clearly stipulated an obligation on the part of the Bank to disburse the loan, and such breach was fundamental.
On the defence that Clause 12 absolved all liabilities against the Bank, the Court of Appeal found that Clause 12 in effect was a clause that absolutely restrained legal proceedings which offends section 29 of CA 1950. That even though Clause 12 appears to have the effect of negating the remedy only, since relief is part and parcel of a cause of action, Clause 12 is in effect a clause that makes any action against the Bank futile. Therefore, it falls squarely within section 29 of CA 1950 as it effectively restrained any form of legal proceedings.
Following this finding, the Court of Appeal unanimously held that the Bank was liable to the Borrowers, set aside the order of the High Court and allowed the appeal.
Federal Court’s Decision (dismissing appeal)
Subsequently, leave to appeal to the Federal Court was granted to the Bank on questions of law as to whether section 29 of CA 1950 may be invoked to strike down and invalidate an exclusion clause which:
- Exonerates a contract breaker of liability for a breach of that contract (exclusion clauses that absolve primary obligations); and
- Negates the contract breaker’s liability to pay compensation for non-performance of that contract (exclusion clauses which absolve general secondary obligations).
In coming to its decision, the Federal Court reiterated and propounded principles of law set out below.
Right to Freedom of Contract (laissez-faire)
The Federal Court reiterated the principle of freedom of contract in that the parties to a contract are free to determine for themselves what their obligations are and the agreed terms in a contract which parties entered into freely and voluntarily are to be held sacred. In this regard, the court is obliged to give full effect to the clear and plain meaning of the words of the terms or clauses including exclusion clauses.
However, this is provided that such exclusion clauses are not opposed to public policy or are not hit by any provision of the law of the land. And an agreement that ousted absolutely the jurisdiction of the court is unlawful and void as being against the public policy.
It was also observed that public policy is not static, and that a court of justice must be vigilant and must not shrink from properly applying the principle in deserving cases.
Therefore, it was pertinent to examine whether the Borrowers were absolutely restricted from enforcing their rights under or in respect of the contract.
Clause 12 and Its Effect
The Federal Court rejected the Bank’s contention that the effect of Clause 12 merely excludes the Borrowers’ right to certain type of losses and damages expressly stated therein and that it does not in any way, under contract or tort, prohibits the Borrowers’ access to court nor the right of the Bank, namely Clause 12 does not restrict the Borrowers’ right to commence legal action against the Bank for the breach of the loan agreement and thereby ouster the court’s jurisdiction which offended section 29 CA 1950.
The Federal Court found that a relief or remedy is ancillary to and not separable from a cause of action, and that there is no distinction between the existence of right and its enforcement as a matter of law in the jurisprudence of Malaysia.
Therefore, considering the fact that Clause 12 excludes the Borrowers from claiming any loss or damage and provides that the Bank will not be liable for any amount for loss of income or profit or savings, or any indirect, incidental, consequential, exemplary, punitive or special damages, the Federal Court concluded that Clause 12 encompasses all forms of damages under suit for a breach of contract or negligence, and the effect of Clause 12 would be to preclude the Borrowers from claiming any remedies against the Bank. In this regard, the effect of Clause 12 is to restrict the Borrowers absolutely from enforcing their rights in respect of the contract. This is an absolute prohibition which is not allowed under section 29 of CA 1950.
It is also worth noting that in coming to this decision the Federal Court also had considered several other cases including the Federal Court’s decision in the case of Pacific Bank Bhd (sued as guarantor) v Kerajaan Negeri Sarawak  6 MLJ 153 which had specifically remarked that the Court should be mindful in following the decision of New Zealand Insurance.
In Pacific Bank Bhd, the Federal Court had held that the exclusion clause contained in the letter of guarantee issued by the guarantor which excluded all claims made after the one-year guarantee period to be valid and thus should be given its plain and ordinary meaning. Specifically, the Federal Court found that there is a distinction between the accrual of cause of action and enforcement of cause of action, and time limitation on the accrual of cause of action does not infringe section 29 CA 1950.
Thus, following Pacific Bank Bhd, section 29 CA 1950 only invalidates agreement which limits the time within which a person has to enforce his rights, and agreements which determine when a right arises or the time when a right will arise will not be held void as against section 29 CA 1950.
The Federal Court in Pacific Bank Bhd distinguished New Zealand Insurance as in New Zealand Insurance, a claim demand was submitted within the validity period but was rejected and this fell squarely within the second limb of section 29 CA 1950; while in Pacific Bank Bhd, the exclusion clause only prescribes a time limit for a demand to be made before a cause of action can arise and thus it does not amount to restricting one’s right to enforce.
The Federal Court sitting in the case of CIMB Bank Berhad v Anthony Lawrence Bourke & Anor criticised the decision in Pacific Bank Bhd which the Federal Court remarked had failed to give any consideration to the ratio of New Zealand Insurance that there is no distinction between a right and remedy in Malaysia’s jurisprudence. The Federal Court in any event also went on and distinguished Pacific Bank Bhd on the following grounds:
- Exclusion clause in the instant appeal is one on the right to enforce rights under the first limb of section of 29 CA 1950 while the clause in Pacific Bank Bhd was in respect of the limitation of time to enforce those rights;
- The instant appeal is on the issue of exclusion of rights of access to the courts while Pacific Bank Bhd only dealt with matters in respect of insurance policy claim and on guarantees; and
- More importantly, Pacific Bank Bhd failed to consider the issue of law on the distinction between rights and remedy as expounded in New Zealand Insurance.
Thereby, the Federal Court went on to affirm the Supreme Court’s decision in New Zealand Insurance:
 “In that respect, we are of the considered view that the statement of law and the principle as stated by the Supreme Court in the New Zealand Insurance case is a correct statement of law on the efficacy of exclusion clauses under section 29 of the Contracts Act 1950.”
In conclusion, the Federal Court found that Clause 12 absolves the Bank from both primary obligation (breach of contract) and general secondary obligation (liability to pay compensation for breach), and bearing in mind that relief and remedy is ancillary to and not separable from cause of action, it is an absolute bar to the Borrowers from suing the Bank for a breach of the loan agreement. The Federal Court therefore answered both the questions of law in the affirmative.
It is the humble opinion of this author that Clause 12 does not in fact exclude direct losses and wasted expenditure caused by the Bank’s breach of contract. Instead, Clause 12 is expressly constrained to “loss of income or profit or saving” and “indirect, incidental consequential exemplary punitive or special damages”. Besides, Clause 12 also does not exclude equitable remedies such as specific performance (although this would not have been applicable or practical to sought for in the instant case).
It is worthwhile noting that the parties in the case had at the outset agreed that the effect and implication of Clause 12 exclude liability not only in respect of the Bank’s primary obligation but also general secondary obligation and there was no dispute between the parties as to the effect and implication of Clause 12. The crux of the dispute between the Borrowers and the Bank was premised on the distinction between the existence of the right and the enforcement of the right.
Unequal Bargaining Powers / Patent Unfairness of Clauses
The Federal Court also addressed the issue of unfair bargaining powers that existed in today’s commercial world. In addressing this issue, the Federal Court noted that the parties seldom deal on equal terms, and in reality, the exemption clauses similar to Clause 12 may typically be found in most banking agreement where the customer who wishes to buy a product or service, has no choice but to accept the terms and conditions of a standard contract prepared by the bank. A take it or leave it approach has always been the only choice available to the customers.
The Federal Court cited in approval the House of Lord’s dicta in the case of Suisse Atlantique Societe D’armement Maritime S.A v N.V Rotterdamsche Kolen Centrale  2 All ER 61 that freedom of contract must surely imply some choice or room for bargaining, and found that in this instant appeal, there is no freedom of contract but an abuse of such rights to freedom of contract should the bank be allowed to seek refuge behind the once all-mighty clause.
Hence, considering that the widespread use of exclusion clauses and the fact that they are often widely drafted to protect the stronger party in the contract from each and every possible situation that might hold them liable, the court may have felt compelled, or perhaps should be obliged, to intervene judiciously in the application of such clause by imposing strict scrutiny on it.
Perhaps this Federal Court’s decision that removed the “bulletproof vest of banks” which prevented its customers from filing suits against them would improve the standards of the banking industry to exercise its duty of care towards its customers more carefully in day-to-day dealings. As commented by the media, this decision seeks to balance the bargaining position between bank and its customers in the absence of a legislation similar to Unfair Contract Terms Act applicable in United Kingdom.
Exclusion clauses that do not offend section 29 CA 1950 will continue to be upheld. Therefore, exclusion clauses that merely restrict or limit the kind of damages or extent of liability and which do not absolutely absolve a party from any liability or any form of damages would not offend section 29 CA 1950 and will continue to be upheld by the courts.
 The Federal Court adopted the definition in Pullock and Mulla on Indian Contract Act and Specific Relief Act, 10th Ed which describes “public policy” as “…principle which declares that no man can lawfully do that which has a tendency to be injurious to the public welfare.”
 ABS Laminart Pvt. Ltd and Ausher v A.P. Agencies, Salem  AIR SC 1239.
 Merong Mahawangsa Sdn Bhd & Anor v Dato’ Shazryl Eskay b. Abdullah  5 MLJ 619.
 Following the Supreme Court case of Hock Hua Bank Bhd v Leong Yew Chin  CLJ (Rep) 126.
 Following the Supreme Court case of New Zealand Insurance Co Ltd v Ong Choon Lin (t/a Syarikat Federal Motor Trading)  1 CLJ Rep 230.
 New Zealand Insurance Co Ltd v Ong Choon Lin (t/a Syarikat Federal Motor Trading)  1 CLJ Rep 230.