Are ‘one-sided’ exclusion clauses enforceable? The Malaysian Federal Court weighs in;
As discussed in our previous post, exclusion clauses are enforceable in general, no matter how wide they appear to the courts, provided that:
- The clause is not found to be unfair under the Consumer Protection Act 1999 (e.g. clause that excludes or restricts liability for negligence);
- The clause unambiguously shows that parties intended to limit certain liabilities; and
- The clause does not offend Section 29 of the Contracts Act 1950 (“CA”).
In this article we will discuss the recent Federal Court’s decision in Cimb Bank Bhd v Anthony Lawrence Bourke & Anor  MLJU 1864 which expounded on the provision under Section 29 of the CA and its interplay with exclusion clauses.
What is Section 29 of the CA?
Section 29 provides that:
“Every agreement, by which any party thereto is restricted absolutely from enforcing his rights under or in respect of any contract, by the usual legal proceedings in the ordinary tribunals, or which limits the time within which he may thus enforce his rights is void to that extent.”
What happened in this case?
- The plaintiffs in this case were purchasers of a property. To finance the purchase of the property, they applied for and were granted a term loan facility by the defendant Bank.
- The property purchased was still under construction and payment was to be made progressively against the certificate of completion issued by the architect at each progress billing.
- It was a fundamental term of the loan agreement between the purchasers and the Bank that the loan was to be disbursed by the Bank directly to the developer of the property to meet each progressive payment.
- Upon receipt of the developer’s invoice, the Bank failed to disburse payment to the developer, and as a result, the developer terminated the sale and purchase agreement (“SPA”) with the purchasers.
- The purchasers filed a claim against the Bank for a breach of contract and/or negligence and breach of fiduciary duty, seeking for damages suffered resulting from the termination of the SPA. In its defence against the purchasers’ claim, the Bank argued that clause 12 of the Bank’s standard loan agreement had absolved them from any liability.
What happened at the High Court and Court of Appeal?
The purchasers’ claim was dismissed at the High Court, which essentially found that clause 12 of the loan agreement absolved any liability against the Bank.
The Court of Appeal found that the High Court did not consider whether or not the Bank was in breach of the loan agreement or was in breach of its duty of care under the tort of negligence to the purchasers, and instead, merely placed whole reliance on the effect of clause 12 (i.e. the exclusion clause). The Court of Appeal found that the Bank had breached its main obligation which was to pay the invoice issued directly to it and thus had breached the most fundamental term which went to the root of the contract. It was also observed that the Judicial Commissioner (JC) did not address the application of Section 29 of the Contracts Act 1950 and had not considered the relevant authorities accordingly.
What was the Federal Court’s decision?
The issue for the Federal Court’s determination was whether clause 12 of the loan agreement had run afoul of Section 29 of CA.
Clause 12 of the loan agreement reads as follows:
“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 amounts 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.”
The court found in favour of the plaintiffs and held that the Bank could not rely on clause 12 because it was rendered void by virtue of Section 29 of CA. In reaching this decision, the court held:
- The Bank’s argument that the clause did not offend Section 29 of CA because it had merely excluded the Bank’s liability in respect of the loss and/or damage specified in the clause (i.e. it does not restrict the plaintiffs from initiating a suit, but merely the remedy for damages) which was a matter that was agreed upon by both parties, was unsustainable;
- A right cannot be dissociated from remedy;
- Clause 12 of the loan agreement negates the rights of the plaintiffs to claim for damages, and the kind of damages as spelt out in the said clause encompasses and covers all forms of damages under a suit for breach of contract or negligence. If the clause is allowed, it would be an exercise in futility for the plaintiffs to file any suit against the Bank as the clause precludes the plaintiffs from claiming the remedies against the Bank. This is an absolute restriction, and Section 29 of CA prohibits such restriction;
- Mere limitations and/or some restrictions added into an exclusion clause is insufficient to invoke Section 29, which only prohibits absolute restrictions.
Even though it is often assumed that parties are generally free to determine for themselves their obligations under a contract (otherwise known as the freedom of contract), in reality not many contracts are entered as a result of arms’ length deal.
It is noteworthy that the Federal court of the above case had recognized the commercial reality of the particular relationship between a Bank and a customer, where the parties did not have equal bargaining power nor deal on equal terms; if a customer wished to buy a product or obtain services, he has to accept the terms and condition of a standard contract prepared by the other party.
The Federal Court recognized that this case was one instance which merited the application of the principle of public policy. There was the patent unfairness and injustice to the plaintiffs had the exclusion clause been allowed to deny their claim against the Bank. It was unconscionable on the part of the Bank to seek refuge behind the clause and an abuse of the freedom of contract.
The Federal Court’s interpretation of the operation of Section 29 of CA is thus useful in limiting the extent to which a party breaching its fundamental contractual obligation can escape liabilities under a one-sided ‘standard form contract’.
This article was written by Shawn Ho (Partner) and Adryenne Lim (Legal Executive). Shawn has been named as a recommended lawyer by the Legal 500 Asia Pacific 2018 for Corporate and M&A. He leads the corporate and commercial practice group of Donovan & Ho.
Donovan & Ho is a law firm in Malaysia. Our practice areas include employment law, dispute resolution, corporate advisory and tax advisory. If you have any queries, please contact us.