On 17 December 2018, the Federal Court in CIMB Bank Berhad v Anthony Lawrence Bourke and Alison Deborah Essex Bourke (Federal Court Civil Appeal No. 02-105-10/2017(W)) held that an exclusion clause in a loan agreement was void and unenforceable as it was an agreement in restraint of legal proceedings under section 29 of the Contracts Act 1950 (‘the Act’) and was also contrary to public policy.
 
Background
 
The Plaintiffs, Anthony Lawrence Bourke and Alison Deborah Essex Bourke, are foreigners residing in the United Kingdom. The Defendant, CIMB Bank Berhad, granted a loan of RM715,487 to the Plaintiffs to finance the purchase of a property in Malaysia pursuant to a loan agreement dated 22 April 2008 (‘Loan Agreement’). As the property was under construction, the loan was to be disbursed progressively against certificates of completion issued by the architect.
 
Under the Loan Agreement, the Defendant was to make direct payment to the developer on behalf of the Plaintiffs when the progressive payments became due for payment. On or around 12 March 2014, the developer sent an invoice and an architect’s certificate to the Defendant seeking payment of RM25,557.12. The documents were received by the Defendant on 13 March 2014 and the payment was due on 25 March 2014 (‘payment due date’).
 
After receiving the invoice, the disbursement department of the Defendant requested its branch to conduct a site visit to inspect the property. Three months after the payment due date, and despite five internal emails by the Defendant’s disbursement department, the branch did not conduct the site visit or respond to the e-mails.
 
The Defendant did not inform the developer or the Plaintiffs of the requirement for a site visit as a condition to disburse payment. The Defendant also did not request the developer to extend the payment due date in order to conduct the site visit.
 
After about one year, the sum remained unpaid and the developer terminated the sale and purchase agreement with the Plaintiffs on 10 April 2015.
 
The Plaintiffs filed a claim against the Defendant seeking damages resulting from the termination of the sale and purchase agreement on grounds of breach of contract and/or negligence and breach of fiduciary duty.
 
The Plaintiffs’ claim was dismissed by the High Court which held that Clause 12 of the Loan Agreement (“Clause 12”) absolved the Defendant from any liability to the Plaintiffs. The Plaintiffs’ appeal was allowed by the Court of Appeal.
 
Appeal to the Federal Court
 
Leave was granted to the Defendant to appeal to the Federal Court on two questions of law –

Clause 12 and section 29 which are central to this appeal, read as follows –
 
Clause 12 of the Loan Agreement -
 
“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.”
 
Section 29 of the Act -
 
“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.”
 
Decision of the Federal Court
 
The Federal Court summarised that the issue for determination by their Lordships is whether Clause 12 offends section 29.
 
According to Balia Yusof FCJ who delivered the judgment of the Court, Clause 12 precludes the Plaintiffs from claiming any loss or damage and the Defendant will not be liable for any amount for loss of income or profit or savings, or any indirect, incidental, consequential, exemplary or special damages. 
 
The Court agreed that the Court of Appeal was correct in relying on the Supreme Court decision in New Zealand Insurance Co Ltd v Ong Choon Lin (t/a Syarikat Federal Motor Trading) [1992] 1 CLJ Rep 230 to conclude that Clause 12 was caught by section 29. Their Lordships also agreed with the Court of Appeal’s opinion that a right cannot be disassociated from its remedy. Balia FCJ added that if Clause 12 is allowed, it would be an exercise in futility for the Plaintiffs to file any suit against the Defendant as they are precluded from claiming the remedies against the Defendant. Clause 12 negates the rights of the Plaintiffs to a suit for damages, and the kinds of damages spelt out in that clause encompasses all forms of damages under a suit for breach of contract or negligence.
 
The learned judge added that based on the plain meaning of the words used, Clause 12 is an absolute restriction in that whatever the Plaintiffs are claiming has been negated and as such, section 29 of the Act ought to be invoked.
 
The Federal Court rejected the Defendant’s reliance on the Federal Court’s decision in Pacific Bank Berhad (sued as guarantor) v Kerajaan Negeri Sarawak [2014] 6 MLJ 153. Relying on case authorities on section 28 of the Indian Contracts Act (which is in pari materia with section 29), the Court in Pacific Bank held that section 29 only invalidates agreements which limit the time within which a person has to enforce his rights. It does not invalidate agreements which determine when a right arises or the time when a right will arise. In other words, a distinction must be made between the accrual of a cause of action and the enforcement of a cause of action.
 
Balia FCJ was of the view that the Federal Court in Pacific Bank had not given any consideration to the ratio in New Zealand Insurance where the Supreme Court had expressed the view that “the distinction between a right and a remedy which as a matter of law does not appear to exist in our jurisprudence.”
 
The Federal Court then distinguished Pacific Bank on the ground that the instant appeal is on the right to enforce rights by the usual legal proceedings under the first limb of section 29 of the Act whereas Pacific Bank was in respect of the limitation of time to enforce rights.
 
The Federal Court then considered, as a separate ground, whether Clause 12 was contrary to public policy. Section 24(e) of the Act provides, inter alia, that the consideration or object of an agreement is not lawful if it is opposed to public policy.
 
The Court first referred to New Zealand Insurance where it was stated that –
 
“… The primary duty of a Court of law is to enforce a promise which the parties have made and to uphold the sanctity of contracts into which the parties have an unfettered right to enter provided they are not opposed to public policy or are not hit by any provision of the law of the land …”
 
The Court then referred to Pollock and Mulla on Indian Contract Act and Specific Relief Act, 10th Ed., wherein the principle of ‘public policy’ is described as “ex dolo malo non oritur actio (i.e. from a fraud a right of action does not arise). Lord Brougham defines public policy as the principle which declares that no man can lawfully do that which has a tendency to be injurious to the public welfare.”
 
The Court cited ABS Laminart Pvt Ltd and Ausher v A.P, Agencies, Salem [1989] AIR SC 1239 where the Indian Supreme Court held that an agreement to oust absolutely the jurisdiction of the court will be unlawful and void as being against public policy.
 
Clause 12, said the Judge, may typically be found in most banking agreements. His Lordship added that in reality, the bargaining powers of the parties to the Loan Agreement are different and never equal. In the opinion of the Court, this is an instance which merits the application of the principle of public policy. According to Balia FCJ –
 
“There is patent unfairness and injustice to the Plaintiffs had Clause 12 been allowed to deny their claims/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.”
 
The Defendant, relying on a Singapore Court of Appeal case of CKR Contracts Services Pte Ltd v Asplenuim Land Pte Ltd and another appeal and another matter [2015] SGCA 24, contended that courts should be careful not to apply illegality and public policy to every contract in which limitations are placed on the rights and remedies of the contracting parties and that contracts should be held void as being contrary to public policy only on rare occasions. The Court rejected this contention as Clause 12 was an absolute restriction to the Plaintiff’s right to damages which is distinguishable from the relevant clause in CKR Contract Services which did not attempt to restrict or limit an innocent party’s right to damages at common law but sought to limit a contracting party’s right to an injunction in equity.
 
For the aforesaid reasons, the Court dismissed the Defendant’s appeal and answered both leave questions in the affirmative.
 
Comments
 
Although the decision is made in respect of a particular provision in a loan agreement, it may have wider ramifications on the validity of limitation of liability clauses in Malaysia. The principles laid down by the Federal Court in this case can be applied equally to exclusion clause in other types of agreements. In each case, it will be for the court to determine whether an exclusion clause in effect operates as an absolute restriction to a party’s right to claim damages.
 
Although Balia FCJ criticised the decision in Pacific Bank for not considering the principle laid down in New Zealand Insurance that Malaysian jurisprudence does not recognise the distinction between a right and a remedy as a matter of law, the Federal Court did not expressly overrule Pacific Bank but distinguished it on grounds that the present appeal concerned the right to enforce rights by the usual legal proceedings under the first limb of section 29 whereas Pacific Bank relates to the limitation of time to enforce rights. Hence Pacific Bank appears to remain good law insofar as it decided that section 29 does not only invalidate agreements which determine when a right arises or the time within which a right will arise.
 
It does not appear from the judgment that an argument was canvassed that Clause 12 did not contravene section 29 of the Act as it only precludes the claimant from claiming the types of damages described in that clause and not from claiming, and being awarded, general damages for breach of contract and/or negligence.