An exclusion clause refers to any clause in a contract or term in a notice which seeks to restrict, exclude, or modify a liability, duty, or remedy which would otherwise arise from a legally recognized relationship between parties¹.

In commercial agreements, exclusion clauses are common. They are inserted to shield a party against potential liability. While reliance on generic boilerplate language may seem convenient, it may jeopardize the validity and enforceability, if it is not carefully worded. A well-drafted exclusion clause requires precision, foresight, and an understanding of key factors that determines its effect.

When drafting exclusion clauses, the drafter must be mindful of several factors. To start, the clause should not absolutely restrict parties to enforce their legal rights. Otherwise, the clause, to the extent that it does, will be rendered void. Section 29 of the Contracts Act 1950 (“CA 1950”) reads:

“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.”

In CIMB Bank v Anthony Lawrence Bourke & Anor (2019)², house buyers took a loan from the bank to purchase a property. The bank was obligated to make direct payment on a progressive basis to the developer. After about a year, the sum remained unpaid, and the developer terminated the sale and purchase agreement. The house buyers sued the bank. In its defence, the bank relied on clause 12 of the loan agreement to exclude liability which reads:

“Liability

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 Federal Court in ruling that the said clause 12 is invalid held:

“[37]     We agree with the Court of Appeal when it opined that it is not right to think that a right can be dissociated from remedy and as can be clearly demonstrated by the instant appeal, where despite the finding that there is a breach by the bank, if cl 12 of the loan agreement is allowed, it would be an exercise in futility for the plaintiffs to file any suit against it. The plaintiffs are precluded from claiming the remedies against the bank. Clause 12 of the loan agreement negates the rights of the plaintiffs to a suit 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. There is an absolute restriction. Section 29 of the Contracts Act 1950 prohibits such restriction.

[70]      We pause here to state our view on the proposition that courts must be careful not to apply this principle where there are limitations placed on the rights and remedies of the contracting parties. In our view, limitations placed or spelt out in an exclusion clause does not offend s 29 of our Contracts Act 1950 which speaks of absolute restriction. Mere limitations and/or some restrictions added into an exclusion clause is insufficient to invoke s 29.”

Post CIMB case

In London Weight Management (2019)³ and MRA International (2021)⁴, based on the facts of each case, the Courts held that reliance on the exclusion clauses in question is prohibited by section 29, CA 1950.

Other reported cases have distinguished the facts from the CIMB case and discussed on what constitutes an ‘absolute’ restriction. In Magnificient Empire (2022)⁵, an insurer denied a company’s claim under an insurance policy. When the company commenced a claim, the insurer relied on Condition 10 of the insurance policy which reads:

“10.       All differences arising out of this Policy shall be referred to the decision of an Arbitrator to be appointed in writing by the parties in difference or if they cannot agree upon a single Arbitrator to the decision of two Arbitrators one to be appointed in writing by each of the parties within one calendar month after having been required in writing so to do by either of the parties or in case the Arbitrators do not agree of an Umpire appointed in writing by the Arbitrators before entering upon the reference. The Umpire shall sit with the Arbitrators and preside at their meetings and the making of an Award shall be a condition precedent to any right of action against the Company. If the Company shall disclaim liability to the Insured for any claim hereunder and such claim shall not within twelve calendar months from the date of such disclaimer have been referred to arbitration under the provisions herein contained then the claim shall for all purposes be deemed to have been abandoned and shall not thereafter be recoverable hereunder.”

The High Court rejected the company’s argument that the above Condition 10 is void under s.29, CA 1950 and held that the CIMB case was not applicable to the present case:

“[68]     With all due respect to learned counsel for the Plaintiff, the Anthony Lawrence Bourke (supra) is not a case that involved an arbitration clause at all. In Anthony Lawrence Bourke (supra), the appellant (bank) was found liable for breaching its duty under the loan agreement (the banking contract) in failing to pay certain progressive payments. The Federal Court in Anthony Lawrence Bourke (supra) struck down the exclusion clause in that case as it was found to be void pursuant to Section 29 CA 1950 because it was an absolute restriction to proceedings.

[69]      In the present case the Plaintiff was not absolutely restricted from commencing proceedings or more specifically, from bring an action in a Court of law. Pursuant to Condition 10 the Plaintiff was required to fulfil certain condition precedents namely to first refer the dispute to arbitration within the period stipulated under Condition 10. This does not make Condition 10 void under Section 29 CA 1950.”

In TNT Express Worldwide (2023)⁶, a courier services company relied on the ‘terms and conditions’ to limit its liability against the customer. The clauses in question read:

“12(1)(a)       if the carriage of your shipment is solely or partly by air and involves an ultimate destination or a stop in a country other than the country of departure the Warsaw Convention (1929), or the Warsaw Convention as amended by the Hague Protocol (1955) and/or Montreal Protocol No 4 (1975), or the Montreal Convention (1999), whichever is compulsorily applicable, will apply. These international treaties govern and limit our liability for loss, damage or delay to your shipment to 17 special drawing rights per kilo (approximately 20 Euros per kilo although the rate of exchange is variable).

12(1)(c)         if none of the above conventions apply and we have a liability to you for whatever reason, including without limitation breach of contract, negligence, willful act or default, our liability to you for loss, damage, mis delivery or non- delivery of your of your shipment or the part affected is at all times limited to the lower of the market value of the shipment at the time of carriage or the cost of repairing the shipment or the part affected with in each case an upper limit that does not exceed 17 Euros per kilo limited to a maximum of 10,000 Euros per shipment. In the case of delay where you can show to us you have suffered loss our liability is limited to refunding to you the charge you paid us for carriage in respect of that shipment or the part which was delayed.

13 Exclusions

13(1)           We will not be liable for any loss of income, loss of profits, loss of market, loss of reputation, loss of customers, loss of use, loss of an opportunity even if we had knowledge that such damages or loss might arise or for any indirect, incidental, special or consequential damages or loss howsoever arising including without limitation breach of contract negligence, willful act or default.”

In the reported decision, the High Court considered the CIMB case, and held that in this case, the said clauses did not absolutely exclude liabilities:

“[38]     … In my view, reliance on the CIMB case was erroneous as the facts there were very different. Firstly, the CIMB case concerned a clause which provided for an absolute exclusion of liability. In this case, cl 13(1) only excluded the defendant’s liability which fell within the second limb of the rule in the case of Hadley v Baxendale.

[39]      As such, since cl 13 did not bar claims which fell under the first limb or Hadley v Baxendale, it did not contravene s 29 of the Contracts Act. As such, in my view, cl 12(1)(c) of the terms and conditions are applicable and that the defendant’s liability for the mis-delivery or non-delivery should be limited to 17 Euros per kg.”

In a recent reported decision, the Court of Appeal in PDS Training Camp (2024)⁷ illustrates how an exclusion clause may not be caught by s. 29, CA 1950. Since the ‘Program Latihan Khidmat Negara’ (PLKN) was abolished in 2020, a company sued the Malaysian Government to recover, among others, expenses incurred for the construction of a new camp. The Government resisted the claim by relying on a clause which translates:

“(36.1)  Notwithstanding any provision of this Contract, the GOVERNMENT may terminate this Contract by giving not less than thirty (30) days written notice to that effect to the contractor (without any obligation to give any reason thereof) if the GOVERNMENT considers that such termination s necessary for national interest, national policy, or national security.

(36.2)    For the purpose of this clause, what constitutes ‘national interest’, ‘national policy’ and ‘national security’ shall be solely made and determined by the GOVERNMENT and such determination shall for all intent and purposes be final and conclusive and shall not be open to any challenge whatsoever.

(36.3)    The parties agree that the CONTRACTOR shall not be entitled to claim for any losses including loss of income, compensation, claim, damages or the like by reason of the termination of the contract.”

The Court of Appeal in holding that the contract does not offend s. 29, CA 1950, distinguished the facts with the CIMB case:

“[29]     Firstly, the contract here involves the Federal Government and a private entity, whereas the CIMB case involved two private entitles.

[30]      Secondly, it must foremost be appreciated that cl 36 of the contract is a termination for convenience provision in the national interest and not a termination for default provision. The exclusion cl 36.3 here is triggered upon termination of the contract by the Federal Government without default, whereas the exclusion clause in the CIMB case was triggered due to the claim by the customer for default or breach on the part of the bank.

[32]      Be that as it may, we observed that the Federal Court therein whilst dealing with cl 12 of the loan agreement construed that the clause absolutely restricted the plaintiff from enforcing his rights and remedies under the banking loan contract, which tantamounted to a clause that sought to oust the jurisdiction of the court; thereby violated s 29 of the Contracts Act 1950.

[33]      Upon our construction of cl 36.3 of the contract here, we do not find that all the plaintiff’s rights and remedies have been absolutely restricted by the defendant’s invocation of cl 36.1 of the contract. In this regard, the plaintiff is only disallowed from claiming loss and damage consequential to the termination of the contract, but not the contract consideration which has already accrued to the plaintiff up to the termination of the contract. As the result, we do not find that cl 36.3 of the contract infringes s 29 of the Contracts Act 1950.”

In addition, care must be taken to ensure the clause does not offend public policy. This will cause it to be void⁸. Coming back to the CIMB case, the Court considered the fact that parties have an unequal bargaining power which demonstrates patent unfairness and injustice:

“[65]     Clause 12 may typically be found in most banking agreements. In reality, the bargaining powers of the parties to that agreement are different and never equal. The parties seldom deal on equal terms. In today’s commercial world, the reality is that if a customer wishes 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 plaintiffs, as borrowers in the instant case, are no different. They have unequal bargaining powers with the defendant. As succinctly put by Lord Reid in the House of Lords in Suisse Atlantique Société D’armement Maritime SA v NV Rotterdamsche Kolen Centrale [1966] 2 All ER 61:

Exemption clauses differ greatly in many respects. Probably the most objectionable are found in the complex conditions which are not so common. In the ordinary way the customer has no time to read them, and if he did read them he would probably not understand them. And if he did understand and object to any of them, he would generally be told he could take it or leave it. And if he then went to another supplier the result would be the same. Freedom of contract must surely imply some choice or room for bargaining.

[66]      In our considered view, this is one instance which merits the application of this principle of public policy. There is the patent unfairness and injustice to the plaintiffs had this cl 12 been allowed to deny their claim/rights against the defendant. It is unconscionable on the part of the bank to seek refuge behind the clause and an abuse of the freedom of contract. As stated by Denning LJ in John Lee & Son (Grantham) Ltd and Others v Railway Executive [1949] 2 All ER 581:

Above all, there is the vigilance of the common law while allowing for freedom of contract, watches to see that it is not abused.”

Whereas, in PDS Training Camp, the Court of Appeal had this to say:

“[35]     The contract in the CIMB case is a banking loan contract. It must be appreciated that, in such instances, it is the customer who bargains with the bank during the procurement of the loan, but the bank prevailed on its terms of the contract because of its stronger bargaining position. The position is quite different here. This is a services contract procured by the plaintiff on an open tender basis at the invitation of the defendant. The terms of the contract required by the defendant were made known to all tenderers prior to submission of tender. The plaintiff was at liberty not to bid if the requisite terms are unacceptable to the plaintiff. There is also no evidence that the plaintiff has sought to delete cl 36 of the contract at all material times. Factually, there was hence no bargaining here that attracted the notion of unequal bargaining power.”

In conclusion, the validity of exclusion clauses hinges on two key factors: avoiding absolute restrictions and complying with public policy. When drafting an exclusion clause, one must carefully balance protecting one party from potential liabilities with ensuring the other is not absolutely restricted from legal recourse, while also considering fairness in terms of bargaining power to ensure the clause aligns with public policy.

Authors: SM Shanmugam and Hafiiz Rashid

References

1. CIMB Bank Bhd v Anthony Lawrence Bourke & Anor [2019] 2 MLJ 1. ↩︎
2. Note 1. ↩︎
3. Thene Arulmani Chelvi a/p Arumugam v London Weight Management Sdn Bhd [2019] 6 MLJ 439. ↩︎
4. MRA International Sdn Bhd v SPC Diatech, LLC [2021] MLJU 1052. ↩︎
5. Magnificient Empire Sdn Bhd v MPI Generali Insurans Bhd [2022] MLJU 21. ↩︎
6. TNT Express Worldwide (M) Sdn Bhd v Mega Security Devices (M) Sdn Bhd [2023] 7 MLJ 284. ↩︎
7. Kerajaan Malaysia v PDS Training Camp Sdn Bhd and another appeal [2024] 6 MLJ 196. ↩︎
8. See: Section 24 (c), Contracts Act 1950. ↩︎

The views and opinions attributable to the author(s) of this publication are not to be imputed to the firm, Shan Chambers. The contents of this publication are intended for purposes of general information and academic discussion only. It should not be construed as legal advice or legal opinion on any fact or circumstance.