In its recent judgment in the landmark case of CIMB Bank Bhd v Anthony Lawrence Bourke & Anor  2 CLJ 1, the Federal Court held that an exclusion clause which provides absolute restriction of a party’s rights to claim for all forms of damages under a suit for breach of contract or negligence, offends section 29 of the Contracts Act 1950.
What is the significance of this judgment and how would it affect the validity or enforceability of various exclusion clauses found in contracts in Malaysia?
The respondents (“the plaintiffs”), a British couple residing in the United Kingdom commenced a suit in the High Court against the appellant (“the defendant”), CIMB Bank Berhad for breach of contract, negligence and breach of fiduciary duty, claiming for loss and damages together with aggravated/exemplary damages, interests and costs.
It all began when the defendant granted a term loan facility of RM715,487 to the plaintiffs to finance a property purchase. The property purchased by the plaintiffs was still under construction. Pursuant to the loan agreement, direct payment was to be made by the defendant on behalf of the plaintiffs to the property developer on a progressive basis upon issuance of invoices to the defendant.
On 13 March 2014, the defendant received an invoice from the developer which is due for payment on 25 March 2014. Subsequently, on 20 March 2014, the defendant’s disbursement department sent an email requesting its branch to conduct a site visit inspection on the property. However, there was no confirmation of any site visit inspection being conducted on the property for 3 months after the due date of the invoice despite email reminders by the defendant. The need of a site visit inspection as an additional condition to disburse payment of the invoice was never communicated to the plaintiffs nor the developer. There was also no request by the defendant to the developer to extend the due date of the invoice for the purpose of the site visit inspection. The invoice remained unpaid for about a year and as a result, the developer terminated the sale and purchase agreement of the property.
High Court – Plaintiffs’ claim dismissed
The High Court held that clause 12 of the loan agreement clearly excludes any and all forms and amount of loss and damage and it effectively excludes the defendant’s liability in contract and in tort. The plaintiffs’ claim was therefore dismissed. The plaintiffs were dissatisfied with the High Court’s decision and filed an appeal to the Court of Appeal.
Court of Appeal – Plaintiffs’ appeal allowed
Essentially, the Court of Appeal allowed the plaintiffs’ appeal and held as follows:
(a) The defendant had breached its main obligation under the loan agreement when it failed to pay the invoice. It was a breach of the most fundamental term of the loan agreement which went to the root of the contract.
(b) The defendant had breached its duty of care to the plaintiffs as its customer in the handling of the loan disbursement which gave rise to the termination of the sale and purchase agreement by the developer and thereby causing the plaintiffs to suffer loss and damage.
(c) Clause 12 of the loan agreement was in effect a clause that absolutely restrained legal proceedings and was void under section 29 of the Contracts Act 1950.
The argument that clause 12 was void under section 29 of the Contracts Act 1950 was first brought up by the plaintiffs’ counsel in the Court of Appeal without objection from the defendant’s counsel. Dissatisfied with the outcome in the Court of Appeal, the defendant appealed to the Federal Court.
Federal Court – Defendant’s appeal dismissed
Clause 12 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 issue before the Federal Court was to determine whether clause 12 of the loan agreement offends section 29 of the Contracts Act 1950.
Section 29 of the Contracts Act 1950 reads:
Agreements in restraint of legal proceedings void
29. 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.
Clause 12 is an absolute restriction
The Federal Court rejected the defendant’s contention that clause 12 merely excludes the plaintiffs’ right to certain types of damages to be claimed against the defendant and not a total ouster of the court’s jurisdiction and therefore does not offend section 29 of the Contracts Act 1950. The Federal Court found that a relief or remedy is part and parcel of a cause of action and not severable from it.
While the law recognises the principle of freedom of contract and that the parties are bound by the terms of the contract which they entered into and that it is the court’s duty to give effect to the clear and plain meaning of the words in the contract, the Federal Court agreed with the Court of Appeal after examining the Supreme Court decision in New Zealand Insurance Co Ltd v Ong Choon Lin  1 CLJ 44 and found that if clause 12 of the loan agreement is allowed, it would be “an exercise of futility for the plaintiffs to file any suit against it [the defendant]”.
It was found that clause 12 negates the rights of the plaintiffs to a suit for damages, and the kind of damages spelt out in the clause encompasses and covers all forms of damages under a suit for breach of contract or negligence. Clause 12 provides that “the defendant 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 held that clause 12 is clearly an absolute restriction, and thereby prohibited by section 29 of the Contracts Act 1950.
Public policy and unconscionability
It was also pointed out by the Federal Court that the bargaining powers of the parties to most banking agreements are different and never equal. The reality is that a customer has to accept all the terms and conditions of a standard contract prepared by the product or service provider. The Federal Court held that the plaintiffs have unequal bargaining power with the defendant – an ordinary customer would probably not be aware of or understand the exclusion clause in the standard contract and ultimately be told to take it or leave it.
Therefore, premised on the principle of public policy and unconscionability, the Federal Court held that there is patent unfairness and injustice to the plaintiffs had clause 12 been allowed to deny their claim or rights against the defendant. The Federal Court further held that it is unconscionable and an abuse of the freedom of contract for the bank to seek refuge behind the clause.
It is pertinent to note that clause 12 specifically excludes liability for “any amount for loss of income or profit or saving” and “any indirect, incidental, consequential, exemplary, punitive or special damages.” It may be argued that clause 12 does not expressly preclude a claim for direct losses or damages arising from the defendant’s breach of contract or negligence such as progress payments forfeited by the developer upon termination of the sale and purchase agreement; monthly interest paid on the loan amount disbursed prior to the termination; and all expenditure incurred in the preparation of the sale and purchase agreement and the loan agreement (e.g. legal fees and stamp duty).1
Despite the Federal Court’s decision, exclusion clauses in contracts in Malaysia are still valid and enforceable if they do not offend section 29 of the Contracts Act 1950. In other words, based on the existing or current position of law, exclusion clauses will continue to be upheld by the courts so long as they do not constitute an absolute restriction to absolve a party from any liability or any form of damages.
For ordinary customers or consumers, the decision by the Federal Court was a landmark in allowing claims against banks for acts of negligence despite the presence of exclusion clauses in a slew of the banks’ standard forms and contracts. To avoid such claims by customers in the future, it is necessary for banks in Malaysia to enhance their daily operations and improve management of their dealings with all parties involved.