It is common for large conglomerates and financial institutions to require customers to execute agreements with standard boilerplate terms and conditions. Commercial reality dictates that these standard terms and conditions are usually largely one-sided, favouring the corporations by virtue of the unequal bargaining power between the parties.
The fine print of these boilerplate terms and conditions typically contains an exclusion clause which seeks to restrict or limit the liability of the corporations. Such terms, however onerous, must be accepted if the customer wishes to transact with the corporation.
However, what happens when these corporations default under the agreement and then seek refuge behind the exclusion clause to disclaim liability?
In the recent watershed decision of CIMB Bank Bhd v Anthony Lawrence Bourke,(1) the Federal Court struck down an unconscionable exclusion clause which placed an absolute restriction on the customer's right to claim. In doing so, the Malaysian apex court has recognised that judicial intervention is necessary as a matter of public policy to prevent the abuse of freedom of contract.
In 2008 Anthony Bourke and his wife were granted a loan facility by CIMB Bank Bhd to finance their property purchase. CIMB agreed to make direct progressive payments to the developer, as and when due.
In March 2014 the developer sent a notice for progressive payment to the bank. Payment was due at the end of the month.
Internally, CIMB required a site inspection before payment could be disbursed to the developer. However, the CIMB informed neither the developer nor borrowers of this additional condition for disbursement.
No site inspection was carried out and as a result no payment was made by CIMB to the developer.
Consequently, the developer terminated the sale and purchase agreement for the property in April 2015.
The couple then brought an action against CIMB for breach of the loan agreement and negligence and sought damages for, among other things, the loan payments made to CIMB and the losses suffered due to termination of the agreement.
CIMB relied on the exclusion clause in Clause 12 of the agreement to disclaim any liability to the couple. Clause 12 read 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 Kuala Lumpur High Court found that Clause 12 had the effect of absolving any liability against CIMB and dismissed the couple's claim.
On appeal, the Court of Appeal reversed the Kuala Lumpur High Court's decision and found that CIMB's failure to pay the developer breached a fundamental term of the loan agreement. In this regard, the Court of Appeal was of the view that Clause 12 was void by virtue of Section 29 of the Contracts Act 1950 because the exclusion clause was an absolute restraint on legal proceedings. Section 29 provides as follows:
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.
CIMB obtained leave to appeal to the Federal Court regarding whether Section 29 of the Contracts Act 1950 could be invoked to strike down and invalidate exclusion clauses that exonerated or negated a contract breaker's liability for breach of that contract or liability to pay compensation for non-performance of the contract.(2)
The Federal Court affirmed the Court of Appeal's decision and answered the questions of law in the affirmative.
The Federal Court recognised the delicate balance between respecting the sanctity of contractual terms between the parties on the one hand and respecting the statutory prohibition on imposing any contractual restraint on legal proceedings on the other.
In this regard, the Federal Court asked the following question: despite the finding that there had been a breach by the bank, did Clause 12 nevertheless preclude the couple from claiming any remedies against the bank?
The Federal Court found that the exclusion clause did in fact preclude any claim for loss and damage and thus Clause 12 was an absolute restriction.
In its analysis, the Federal Court agreed with the Court of Appeal that a relief or remedy is ancillary to and not separable from a cause of action, since a right as a matter of law cannot be disassociated from its remedy.
As a result, the Federal Court found that there would be patent unfairness and injustice if Clause 12 was allowed to deny the claim and rights of the couple. As a matter of public policy, and recognising that freedom of contract must imply some room for bargaining (which was absent in this case), the Federal Court found that it would be unconscionable for the bank to seek refuge behind the clause.
This decision serves as a useful cautionary tale in respect of the interpretation of exclusion clauses in agreements. Corporations can now no longer wholly rely on broadly drafted exclusion clauses to unconscionably absolve themselves against any liability or damages.
To this end, the Federal Court's approach not only acknowledges the realities of the unlevel playing field in today's commercial world, but also illustrates judicial readiness to intervene to prevent abuse in contractual dealings, particularly in circumstances involving boilerplate clauses in contracts, which were neither subject to negotiation nor bargaining.
Considering that broad exclusion clauses are commonly found in most commercial contracts, it would appear that, in addition to financial institutions, other industries or large conglomerates that employ similar exclusion clauses to Clause 12 may likely be affected by this decision.
(1) Whether section 29 of the Contracts Act, 1950 may be invoked to strike down and invalidate an exclusion clause which exonerates a contract breaker of liability for breach of that contract (exclusion clauses that absolve primary obligations); (2) Whether section 29 of the Contracts Act, 1950 may be invoked to strike down and invalidate an exclusion clause which negates the contract breakers liability to pay compensation for non-performance of that contract (exclusion clauses which absolve general secondary obligations).
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