This article is the first of our Contract Law Reform in Malaysia series where we will examine the rationale and effects of changes that are proposed to be made to the Malaysian contract law regime, and in particular, the effects on the conduct of commercial transactions in Malaysia.
 
 
The Malaysian government is undertaking a legislative programme to modernise our laws for commerce and business. As part of that effort, the Committee for the Review and Reform of Contract Law (“CRRCL”) was established, chaired by the Honourable Justice  of the Federal Court, Dato’ Seri Vazeer Alam bin Mydin Meera. The CRRCL’s final report, titled the ‘Final Report on the Review and Reform of Contract Law in Malaysia’ (the “Report”),¹ was published on 11 June 2026² and announced by Datuk Seri Azalina Othman Said, the Minister in the Prime Minister’s Department for Law and Institutional Reform, to the Dewan Rakyat on 30 June 2026.³
 
The Report proposes substantial amendments to the Contracts Act 1950 (“CA 1950”) and puts forward two new Bills – the Contracts (Rights of Third Parties) Bill and the Agency Bill.
 
Significant Reforms to the Contracts Act 1950
 
The CRRCL has proposed reforms for a wide range of provisions in the CA 1950. The proposed amendments we set out below are particularly noteworthy and significant.
 
Changes to Factors that Vitiate Free Consent
 
First, the proposed amendments to sections 14 and 15 seek to replace ‘coercion’ with the concept of ‘duress’. ‘Coercion’, under the current regime, is relatively narrow in that it is limited to the commission of acts (or threats to commit acts) prohibited by the Penal Code, as well as the unlawful detaining of (or threat to detain) property. The concept of ‘duress’ that is sought to be introduced would recognise a broader range of unlawful acts and illegitimate pressures, including economic pressures, which may induce or compel a party to contract.
 
Second, the CRRCL has proposed a new section 16A that introduces ‘unconscionable dealing’ as a ground that vitiates consent. What constitutes ‘unconscionability’ is to be assessed on a case-by-case basis, based on considerations such as the bargaining strength of parties, the reasonableness of any conditions imposed, the price or value of comparable goods or services, and the use of unfair tactics by a party.
 
Third, the CRRCL has proposed amendments to section 21 such that a mutual mistake of fact essential to the agreement would not void the agreement if the mistake of fact was the subject of a warranty by one of the parties to the agreement. This new limitation is said to ensure that parties who have expressly or impliedly warranted a fact cannot later avoid the contract on the basis of mutual mistake, consistent with commercial expectations and fairness in contractual dealings.
 
Saving Agreements with an Element of Unlawfulness that is Severable
 
The proposed amendments to section 25 would make express that an agreement with any part of its consideration or object unlawful would not on its own render the entire agreement void and unenforceable. If the unlawful part can be clearly separated from the lawful part(s) of the agreement, the latter would survive.
 
Removing the Rule in Stilk v Myrick & Foakes v Beer
 
A new section 26A seeks to provide that a promise to perform a pre-existing contractual obligation, whether wholly or in part, is capable of being consideration for an agreement to vary a contract.
 
The proposed amendment would mark a departure from the general rule under common law, as enunciated in the seminal decisions of Stilk v Myrick⁴ and Foakes v Beer,⁵ that an agreement to vary an existing contract requires fresh consideration to be valid and enforceable. This rule was recently affirmed by the Malaysian Federal Court in Kuala Dimensi Sdn Bhd v Port Kelang Authority.⁶ The proposed section 26A, if enacted, would have the effect of reversing the effect of the Federal Court’s decision.
 
Clarifying the Ambit of the Right to Restrain Trade of Another
 
Section 28 governs agreements which seek to restrain another party from exercising a lawful profession, trade or business of any kind. The proposed amendments seek to clarify how a permissible constraint on the manner of trade is to be properly construed and enforced.
 
The proposed reforms permit the imposition of limited restraints which are reasonable, proportionate and necessary to protect the legitimate interests of parties, including by reference to duration, geographical area, and the scope of activities sought to be restricted.
 
Paving the Way for Permissible Time Limits to Enforce Rights
 
The proposed amendment to section 29 would remove the prohibition against time limits to enforce contractual rights through legal proceedings. This proposal recognises that in modern practice, commercial parties often negotiate and agree to truncated timelines for legal action. It remains to be seen how this provision, if amended, will interact with applicable statutory limitation periods.
 
Streamlining Claims on Agreed Damages Clauses
 
Section 75 which relates to agreed damages clauses, or liquidated ascertained damages clauses, has also received attention. The proposed amendment clarifies that the innocent party to a contract can only receive ‘reasonable compensation’ from the defaulting party, irrespective of the amount that has been stated in an agreed damages clause. In a departure from the Federal Court’s decision in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd,⁷ the proposed amendment places the burden on the innocent party (rather than the defaulting party) to prove that the compensation claimed by them is not exorbitant or disproportionate to the greatest legitimate loss suffered.
 
The amended section 75 would also expressly provide that a party who becomes entitled to forfeit a deposit may do so, provided that the amount forfeited is reasonable.
 
Regulating Unfair Contract Terms
 
An entirely new Part XI is proposed to be added to the CA 1950, establishing a dedicated statutory regime governing the use of clauses which exempt or limit liability. The provisions have been modelled on the United Kingdom’s Unfair Contract Terms Act 1977, with modifications for the Malaysian context. The proposed regime operates in two ways.
 
First, clauses which seek to exclude liability for death or personal injury resulting from negligence (section 193(1)) and exclude liability for the supply of goods without title (section 195(1)) would be prohibited.
 
Second, other exclusions of liability would only be enforceable if they are considered reasonable. These include clauses excluding liability for loss or damage caused by negligence (section 193(2)), exclusion clauses in written standard terms of business (section 194), exclusion of liability for breach of warranties implied by the Sale of Goods Act 1957 (section 195(2)), and the exclusion of liability for misrepresentation (section 197).
 
Extending Rights to Third Parties
 
The Contracts (Rights of Third Parties) Bill seeks to introduce a statutory exception to the common law doctrine of privity of contract. The proposed Bill follows the regime governing third party rights from the United Kingdom and Singapore, recognising that in the modern context, parties who are intended to benefit from a contract may be persons other than the contracting parties.
 
If this Bill is enacted into law, a person who is not party to a contract (i.e. the third party) will be permitted to enforce the contract where (i) the contract expressly provides for the third party to do so and/or (ii) the contract purports to confer a benefit on the third party, unless the contracting parties’ common intention, as construed from the contract, was otherwise.
 
The Bill also proposes to assign other rights and obligations to third parties who benefit from a contract, including measures which limit the entitlement of the contracting parties to vary terms that benefit the third party as well as provisions which ensure that the third party is bound by an arbitration agreement contained in the contract in question.
 
Unifying the Law of Agency
 
The existing Part X of the CA 1950, which currently governs agency, is proposed to be repealed and replaced with a standalone Agency Bill. The Bill seeks to, among other things, consolidate the law of agency and the law on powers of attorney; Part II of the Bill governs the former and Part III governs the latter.
 
Of particular note is Part IV of the Bill, which seeks to address the proliferation of ‘electronic agents’ and artificial intelligence, and will introduce provisions to govern contracts entered or performed through an electronic agent as well as the responsibility of the principal for the acts of an electronic agent.
 
The Agency Bill defines ‘electronic agents’ as a ‘computer program or an artificial intelligence system or an electronic or other automated means used independently to initiate an action or respond to electronic records or performances in whole or in part, without review or action by a natural person’.
 
Looking Ahead
 
The publication of the Report marks an increase in momentum in the ongoing discourse and efforts to update Malaysia’s legal framework for commerce. Whilst the proposed reforms remain subject to further review and the parliamentary process, monitoring their progress and considering their potential implications on contractual arrangements and transactions at this early stage would leave commercial parties better placed once the position is settled.
 
 
Article written by Vijay Raj (Partner), Kailash Kalaiarasu (Partner), and Arif Umar Faruq bin Faiz (Senior Associate).
 
 

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