14783057 the malayan law journal articles contract acts (2) copy copy

7/27/2019 14783057 the Malayan Law Journal Articles Contract Acts (2) Copy Copy

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The Malayan Law Journal Articles

2003 LexisNexis Asia (a division of Reed Elsevier (S) Pte Ltd)

The Malayan Law Journal Articles

1998Volume 2

[1998] 2 MLJ ix; [1998] 2 MLJA 9

LENGTH: 4333 words

TITLE:Article: CONTRACTING OUT AND PUBLIC POLICY GROUND UNDER S 24(E)OF THE CONTRACTS ACT 1950

AUTHOR: Artin Vaqari International Islamic University, Malaysia

TEXT:

Introduction

The public policy ground gives a wide discretion to the court when determining the validity of acontract. If exercised properly and judicially, it would provide a significant tool in determiningthe legality of contracts in general and (for See, for example, George Mitchel v Finney LockSeeds [1983] 2 AC 803; RW Green v Cade Bros Farm [1978] 1 Lloyd's Rep 602; Smith v EricsBush [1989] 2 All ER 514 (HL) and St Albans City v International Computers 11 Nov 1994 (TheTimes). See, for example, George Mitchel v Finney Lock Seeds [1983] 2 AC 803; RW Green vCade Bros Farm [1978] 1 Lloyd's Rep 602; Smith v Erics Bush [1989] 2 All ER 514 (HL) and StAlbans City v International Computers 11 Nov 1994 (The Times). the purpose of this article) ofexemption clauses in particular. This 'unruly horse' 1 may become a fully guided horse if therider knows exactly how to deal with it.

The ground of public policy has been used by the courts in striking down part or whole of thecontract when they regard the contract as contrary to public policy.

For example, in the latest case ofKimlin Housing Development Sdn Bhd (Appointed receiver andmanager) (In liquidation) v Bank Bumiputra (M) Bhd & Ors 2 the Federal Court held:

In our view, the provisions of the Code [the National Land Code 1965]setting out the rights and remedies of parties under a statutory charge

over land comprised in Pt XVI are exhaustive and exclusive and anyattempt at contracting out of those rights -- unless expressly providedin the Code -- would be void as being contrary to public policy.

3 Thus, if a provision of the contract attempts to exclude theapplication of a specific statutory provision, then it is void as beingcontrary to public policy.

However, the purpose of this article is not to discuss the headings which constitute the grounds
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of public policy or when the courts have used the ground of public policy, but rather when thecourts have not used this ground, and whether its application may be expanded and not onlyexpounded in its scope, with special reference to s 24(e) of the Contracts Act 1950, so that it bewide enough to avoiding certain clauses which exclude or contract out the liability of the partiesin case of default.

In Malaysia, there are no statutory provisions dealing with exemption clauses and all is left to thecourts when determining the validity or invalidity of an exemption clause.

The Parliament has not enacted any law to deal with the mischief of exemption clauses (unlikeEngland), 4 and the courts should be strict when dealing with the exemption clauses since thesituation is aggravated further by 'the fact that the Malaysian Parliament ... has deemed it fit togive certain authorities providing public services statutory protection to exonerate themselvesfrom liability or to limit their liability. The Port Swettenham Authority (Amendment) Act 1977 isone ... of such protective legislation'. 5 The first part of this article will deal briefly with thejudicial approach taken by the Malaysian courts when dealing with exemption clauses and therules of interpretation they used.

Later, s 24(e) of the Contracts Act 1950 will be considered, and some of the decisions whichhave taken this section into account will be dealt with.

Finally, suggestions will be given as to how this statutory provision can be further utilized by thecourts when dealing with the question of contracting out.The judicial approach of Malaysian courts

The courts in Malaysia have seldom, if ever, used the ground of public policy in striking downexclusion clauses. However, they have adopted the normal rules of construction of contracts indeclaring whether the exemption clauses are valid or invalid.

Thus the courts have upheld that an exemption clause is not effective if it is not brought to thenotice of the contracting parties before or at the time the contract is made. 6

InMalaysian Airline System Bhd v Malini Nathan & Anor, 7 the Supreme Court held that theairline was not in breach of contract for failing to fly the respondents from London to KualaLumpur on the appellant's airline. The respondents were booked and had confirmed tickets to flyon the appellant's airline on a scheduled date. As the flight was fully booked, the appellant wasunable to accommodate the respondents on the said flight. The respondents sued the appellant fordamages. The appellant relied on condition 9 of the conditions of contract printed on the airlineticket. The said condition provided as follows:

Carrier undertakes to use its best efforts to carry the passenger andbaggage with reasonable dispatch. Times shown in timetables orelsewhere are not guaranteed and form no part of this contract. Carriermay without notice substitute alternate carrier or aircraft, and mayeither alter or omit stopping places shown on the ticket in case ofnecessity. Schedules are subject to change without notice. Carrierassumes no responsibility for making connections. 8
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The Supreme Court held that the appellant was entitled to rely on the said condition and was thusnot in breach of contract for failing to fly the respondents from London to Kuala Lumpur on theappellant's airline.

In arriving at the decision, the court considered that 'the plaintiffs ought to have known condition9 and they were presumed to have known it as it was printed on the ticket'. 9 Thus apresumption may be raised that a term in a ticket is brought to the knowledge of the other partyto the contract.

In other cases, the courts have considered exemption clauses as invalid on the ground that thesubsidiary legislation which provided for the exclusion of the liability was ultra vires the parentAct. 10 0 This has been the case with by-laws enacted on the authority of the Port AuthoritiesAct, to exclude liability in case of loss of goods by the port authorities.

In cases of excluding or limiting liability for negligence, the courts have held that no liability canbe excluded. Thus inSekawan Guards Sdn Bhd v Thong Guan Sdn Bhd, 11 the appellant securitycompany was held liable for the theft occurred at the premises of the respondent due to the

negligence of the employee of the security company, although there was a clause in the contractexcluding the liability of the appellant.

The Malaysian courts seem to adopt the view that no matter how wide a clause is, it cannotexclude liability if there is negligence.

In Chin Hooi Nan v Comprehensive Auto Restoration Service Sdn Bhd & Anor, 12the appellanthad left his car at the respondents' premises in order to have it waxed and polished for RM295.Due to the respondents' negligence, the car was damaged when being driven by the employee ofthe respondents. The respondents tried to avoid liability, based on an exemption clause, writtenon the back of the receipt given to the plaintiff, which stated:

The company is not liable for any loss or damage whatsoever of or tothe vehicle, its accessories or contents. Vehicle and goods are atowner's risk.

Siti Norma Yaakob J (as she then was) in holding the respondents liable said:... The law on this [exemption clause] is quite settled in that anexemption clause however wide and general does not exonerate therespondents from the burden of proving that the damages caused to thecar were not due to their negligence and misconduct. They must showthat they had exercised due diligence and care in the handling of thecar. 13

From Chin's case, it is seen that no matter how wide a clause is, it cannot exclude liability ifthere is negligence. This position is quite different from the position in England, where it is amatter of construction only -- regardless of fault or negligence -- whether an exclusion clauseapplies to the breach in question or not, ie whether the clause is drafted widely enough so that toexclude the liability in any particular case. 14Section 24(e) of the Contracts Act 1950
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Section 24(e) of the Contracts Act 1950 states that the consideration or object of an agreement islawful, unless:

(e) the court regards it as immoral, or opposed to public policy.

There is no definition in the Act itself, nor in other legislations, as to what constitutes publicpolicy. 15In the old case ofEgerton v Brownlow (Earl), 16 Lord Truro defined public policy as'that principle of the law which holds that no subject can lawfully do that which has a tendencyto be injurious to the public, or against the public good, which may be termed, as it sometimeshas been, the policy of the law, or public policy in relation to the administration of the law'. 17

If one is to regard that something which has a tendency to be injurious to the public is againstpublic policy, it should not be difficult to see that exemption clauses are to be consideredcontrary to public policy. For, when one excludes liability to the detriment of all of the othercontracting parties dealing with him, that is something against the public good.

The judicial decisions have already determined what constitutes public policy, or better said,what is against public policy and the view taken by the Federal Court in the case ofTheresa

Chong v Kin Khoon & Co 18 is that it cannot be expanded anymore to include new cases. In thatcase, the appellant, an unregistered remisier, agreed to act for the respondent in the sale ofcertain shares on the stock exchange. The respondent refused to pay her for the services renderedon the ground that she had to pay the cost of the shares bought by her clients, and claimed a sumof $ 38,015.66 in all. The appellant pleaded that the contract was illegal and void as beingcontrary to public policy because she was an unregistered remisier and this was in violation ofthe by-laws of the stock exchange. The Federal Court held that the contract was not illegalalthough it violated the stock exchange rules.

Gill CJ said:Not being registered as a remisier is not contrary to public policybecause the by-laws of the stock exchange are the by-laws of a privatebody which have no force of law. ... their dealing with such a remisierdid not make the contract as being opposed to public policy. 19

On the facts of the case, the decision of the Federal Court is correct and does not need anycomment. However, one should be cautious when considering the reasons that the Federal Courttook into account in arriving at the decision.

Gill CJ relied on Cheshire and Fifoot's Law of Contract(8th Ed) andPollock and Mulla on theIndian Contract Act(8th Ed). Regarding the first, he cited the following part of the book (at p322):

First, although the rules already established by precedent must be

moulded to fit the new conditions of a changing world, it is no longerlegitimate for the courts to invent a new head of public policy. Ajudge is not free to speculate upon what, in his opinion, is for thegood of the community. He must be content to apply, either directly orby way of analogy, the principles laid down in previous decisions. He

must expound, not expand, this particular branch of law. 20(Emphasis added.)
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Regarding the latter, Gill CJ cited from Mulla and Pollock:... It is now understood that the doctrine of public policy will not beextended beyond the classes of cases already covered by it. No courtcan invent a new head of public policy. 21

It seems clear that the Federal Court has taken a narrow view of public policy. As expresslymentioned, the public policy ground is only to be expounded and not expanded. If the 'contractdoes not fit into any of the traditional pigeon holes' 22 of public policy, it is valid and noquestion as to public policy can be raised, since no new head of public policy can be invented.

However, afterTheresa Chong's case, there are other decisions which seem to be more flexibleand have assumed a wider concept of public policy.

InKoid Hong Keat v Rhina Bhar 23 Wan Adnan J (as he then was) referred to an English case24 where it was said:

The law relating to public policy must change with the passage of time,it cannot remain immutable 25

and held that what is and what is not injurious to public welfare in Malaysia must be decided inthe Malaysian context.

InPolygram Records Sdn Bhd v The Search & Anor, 26 Visu Sinnadurai J, after concluding thatin England the doctrine of inequality of bargaining power had gained little judicial support, said:

In Malaysia, ... there is some support for the view that public policymay, in some exceptional cases, demand that certain contracts which aregrossly unfair to one of the parties to a contract ought to be setaside on the grounds of inequality of bargaining power under s 24(e) ofthe Act [Contracts Act 1950] ... . 27

The views expressed by Wan Adnan J and Visu Sinnadurai J are to be welcomed, and hopefullyare going to be utilized and used in later cases, to strike down exclusion clauses which aregrossly unfair to consumers. In the Malaysian context, it seems that excluding liability isinjurious to public welfare. 28

Also, it should be borne in mind that in Malaysia there is no legislation dealing with theprotection of the consumer against exemption clauses. On the contrary, the Parliament has seen it'proper' to enact laws to protect certain authorities from liability. 29 The view that public policymay not be expanded, is unwarranted, at least as far as it concerns the exemption clauses.

The situation is exacerbated because of s 62 of the Sale of Goods Act 1957. 30It reads:

Where any right, duty or liability would arise under a contract of saleby implication of law, it may be negatived or varied by expressagreement or by the course of dealing between the parties, or by usage,if the usage is such as to bind both parties to the contract.

The consequences of this provision are clearly understandable.

All the implied conditions in a contract of sale provided by the Sale of Goods Act, for example,
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conditions as to quality or fitness, merchantability and undertaking as to title can be avoided byexpress agreement between the parties. What this 'express agreement of the parties' would be inmost cases is that a stronger party has included a provision as to the negation of liability, and theweaker party either has to accept the contract or go without it at all. The choice he would have atthis contract is to 'either take it or leave it'. 31

The utilization of s 24(e) of the Contracts Act 1950 then becomes imperative. The courts shouldinvoke it whenever it is seemed that the freedom of contract is being exploited by one of theparties to the contract to exclude liability for which he would otherwise be liable.

The suggestion that public policy be used to avoid exemption clauses is not new, and in theUnited States and India, 32this ground has been used by the courts in striking down exemptionclauses.

InHennigsen v Bloomfield Motors, 33 the leading case in the United States, the court held thatan exemption clause in a contract of sale of a car to be against public policy. The court held asfollows:

Courts keep in mind the principle that the best interests of societydemand that persons should not be unnecessarily restricted in thefreedom to contract. But they do not hesitate to declare void asagainst public policy contractual provisions which clearly tend to theinjury of the public in some way ... . 34

In India, in the case ofLily White v Muniswami, 35the court held that a provision in a contractlimiting liability of a dry cleaner for any negligence or loss caused to his customers' clothes wasunenforceable as being against public policy, and said:

... the court will not enforce such a term which is not in the interestof the public and which is not in accordance with public policy.

36

Thus, the courts in Malaysia should not find it difficult to declare void contracts as being againstpublic policy in the case of exemption clauses, where liability is contracted out.Conclusion

Although the courts in Malaysia are not really 'friendly' to the incorporation of exemptionclauses in contracts, and have used different rules of construction to declaring them invalid, thepublic policy ground as envisaged in s 24(e) of the Contracts Act 1950 is not being made use of

It is submitted that s 24(e) of the Contracts Act 1950 should be utilized, perhaps through a

concept of fairness, 37 which may be introduced in Malaysia by the judiciary. If it is found thatone party was not fair to the other, for example inserting a provision in the contract excludingliability, without which he would have otherwise been liable, the court may make use of s 24(e)of the Contracts Act 1950, and hold the clause void, as not being fair and as a result, contrary topublic policy.

As an addition to this, a rebuttable presumption may be raised that in a contract, an exclusionclause is unfair and contrary to public policy, unless otherwise proven. Certainly, the courts may
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develop other rules as to what can be considered fair, for example whether an exemption clauseis reasonable or not. 38 Thus, if it is proved that the exemption clause is reasonable, thepresumption is rebutted and the clause should be held valid. There are many English decisionswhich may be considered by the courts in Malaysia regarding reasonableness. 39 What islacking is not the precedents, but the 'will' of the courts to expand the law. Hopefully, this 'will'will be forthcoming.

Return to Text

FOOTNOTES:

n1 Richardson v Mellish(1824) 2 Bing 229; 130 ER 294.

n2 1997] 2 MLJ 805.

n3 Ibid at p 824.

n4 See The Unfair Contract Terms Act 1977 and Unfair Terms in Consumer ContractsRegulations 1994, giving effect to the European Community Directive on Unfair Terms. Theformer is also applicable in Singapore by virtue of Pt II of the First Schedule of the SingaporeanApplication of English Law Act 1993.

n5 Visu Sinnadurai, 'Exemption Clauses v Public Policy and Inequality of Bargaining Power'[1978] MLJ cxxx at p cxxxvi.

n6 Goh Gok Hoon v Eusuff Bross Sdn Bhd[1990] 2 MLJ 421.

n7 [1986] 1 MLJ 330.

n8 Ibid at p 332.

n9 Ibid at p 333.

n10 See, for example, the case ofPort Swettenham Authority v TW Wu & Co (M) SdnBhd[1978] 2 MLJ 137 (PC);Jackson's Malaya Bhd v Penang Port Commission [1973] 2 MLJ27.

n11 [1995] 1 MLJ 811.
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n12 [1995] 2 MLJ 100.

n13 Ibid at p 103.

n14 Photo Production Ltd v Securicor Transport Ltd[1980] AC 827.

n15 Some Malaysian decisions which have considered the ground of public policy are: TunkuKamariah Aminah v Dato James Ling Beng King[1989] 2 MLJ 249 (HC); The Aspinall CurzonLtd v Khoo Teng Hock[1991] 2 MLJ 484 (HC); Ooi Kiah Inn Charles v Kukuh Maju IndustriesSdn Bhd[1993] 2 MLJ 224(SC). See also, Syed Ahmad Alsagoff,Principles of the Law ofContract in Malaysia (1996) Malayan Law Journal Sdn Bhd at pp 182-185.

n16 [1843-60] All ER 970.

n17 Ibid at p 995.

n18 [1976] 2 MLJ 253 (FC).

n19 Ibid at p 256.

n20 Ibid at pp 255-256.

n21 Ibid at p 256.

n22 Ibid.

n23 [1989] 3 MLJ 238 (HC).

n24 Nagle v Feilden [1966] 2 WLR 1027.

n25 In another English case,Naylor Benzon & Co Ltd v Krainische Industrie Gesellschaft[1918] 1 KB 331, McCardie J at p 342 stated that public policy is a variable thing. It mustfluctuate with the circumstances of the time.

n26 [1994] 3 MLJ 127.
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n27 Ibid at p 160. This view has been suggested by Visu Sinnadurai, as long ago as 1978, inhis article, supra n 6. However, only in 1994 he had the chance to express this view when sittingas a judge of the High Court, which at least may have the opportunity to be considered and actedupon by the courts in cases to come.

n28 However, both of these decisions are decisions of the High Court and as such notbinding. Further, the opinion of Visu Sinnadurai J was per curiam and not the ratio of the case.

n29 Supra n 6.

n30 Act 382.

n31 Per Lord Diplock in Schroder Music Publishing Co Ltd v Nacaulay [1974] 3 All ER 616

at p 624, used in relation to the division of standard form contracts.

n32 For a more detailed discussion on the US and Indian position, see Visu Sinnadurai, supran 5 at pp cxxxii-cxxxiii.

n33 75 ALR 2d 1.

n34 Ibid at p 31.

n35 AIR 1966 Mad 13.

n36 Ibid at p 14.

n37 The position as to fairness is lately adopted in England through statutory reform. So, reg5 of the Unfair Terms in Consumer Contracts Regulations 1994 provides that an unfair term in acontract concluded with a consumer is not binding on the consumer.

n38 8 In England, a clause which excludes liability is subject to the requirement of

reasonableness: ss 2(2), 3, 4(1), 7(3) of the Unfair Contract Terms Act 1977. As to what isreasonable, see s 11 and Schedule 2 of the Act.

n39 9 See, for example, George Mitchel v Finney Lock Seeds [1983] 2 AC 803; RW Green vCade Bros Farm [1978] 1 Lloyd's Rep 602; Smith v Erics Bush [1989] 2 All ER 514 (HL) and StAlbans City v International Computers 11 Nov 1994 (The Times).
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