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e Malayan Law Journal Articles 1998 Volume 2 [1998] 2 MLJ ix; [1998] 2 MLJA 9 LENGTH: 4333 words TITLE: Article: CONTRACTING OUT AND PUBLIC POLICY GROUND UNDER S 24(E) OF THE CONTRACTS ACT 1950 AUTHOR: Artin Vaqari International Islamic University, Malaysia TEXT: Introduction The public policy ground gives a wide discretion to the court when determining the validity of a contract. If exercised properly and judicially, it would provide a significant tool in determining the legality of contracts in general and (for See, for example, George Mitchel v Finney Lock Seeds [1983] 2 AC 803; RW Green v Cade Bros Farm [1978] 1 Lloyd's Rep 602; Smith v Erics Bush [1989] 2 All ER 514 (HL) and St Albans City v International Computers 11 Nov 1994 (The Times). See, for example, George Mitchel v Finney Lock Seeds [1983] 2 AC 803; RW Green v Cade Bros Farm [1978] 1 Lloyd's Rep 602; Smith v Erics Bush [1989] 2 All ER 514 (HL) and St Albans City v International Computers 11 Nov 1994 (The Times). the purpose of this article) of exemption clauses in particular. This 'unruly horse' 1 may become a fully guided horse if the rider knows exactly how to deal with it. The ground of public policy has been used by the courts in striking down part or whole of the contract when they regard the contract as contrary to public policy. For example, in the latest case of Kimlin Housing Development Sdn Bhd (Appointed receiver and manager) (In liquidation) v Bank Bumiputra (M) Bhd & Ors 2 the Federal Court held: In our view, the provisions of the Code [the National Land Code 1965] setting out the rights and remedies of parties under a statutory charge over land comprised in Pt XVI are exhaustive and exclusive and any attempt at contracting out of those rights -- unless expressly provided in the Code -- would be void as being contrary to public policy. 3 Thus, if a provision of the contract attempts to exclude the application of a specific statutory provision, then it is void as being contrary to public policy. However, the purpose of this article is not to discuss the headings which constitute the grounds

of public policy or when the courts have used the ground of public policy, but rather when the courts have not used this ground, and whether its application may be expanded and not only expounded in its scope, with special reference to s 24(e) of the Contracts Act 1950, so that it be wide enough to avoiding certain clauses which exclude or contract out the liability of the parties in case of default. In Malaysia, there are no statutory provisions dealing with exemption clauses and all is left to the courts when determining the validity or invalidity of an exemption clause. The Parliament has not enacted any law to deal with the mischief of exemption clauses (unlike England), 4 and the courts should be strict when dealing with the exemption clauses since the situation is aggravated further by 'the fact that the Malaysian Parliament ... has deemed it fit to give certain authorities providing public services statutory protection to exonerate themselves from liability or to limit their liability. The Port Swettenham Authority (Amendment) Act 1977 is one ... of such protective legislation'. 5 The first part of this article will deal briefly with the judicial approach taken by the Malaysian courts when dealing with exemption clauses and the rules of interpretation they used. Later, s 24(e) of the Contracts Act 1950 will be considered, and some of the decisions which have taken this section into account will be dealt with. Finally, suggestions will be given as to how this statutory provision can be further utilized by the courts when dealing with the question of contracting out. The judicial approach of Malaysian courts The courts in Malaysia have seldom, if ever, used the ground of public policy in striking down exclusion clauses. However, they have adopted the normal rules of construction of contracts in declaring whether the exemption clauses are valid or invalid. Thus the courts have upheld that an exemption clause is not effective if it is not brought to the notice of the contracting parties before or at the time the contract is made. 6 In Malaysian Airline System Bhd v Malini Nathan & Anor, 7 the Supreme Court held that the airline was not in breach of contract for failing to fly the respondents from London to Kuala Lumpur on the appellant's airline. The respondents were booked and had confirmed tickets to fly on the appellant's airline on a scheduled date. As the flight was fully booked, the appellant was unable to accommodate the respondents on the said flight. The respondents sued the appellant for damages. The appellant relied on condition 9 of the conditions of contract printed on the airline ticket. The said condition provided as follows: Carrier undertakes to use its best efforts to carry the passenger and baggage with reasonable dispatch. Times shown in timetables or elsewhere are not guaranteed and form no part of this contract. Carrier may without notice substitute alternate carrier or aircraft, and may either alter or omit stopping places shown on the ticket in case of necessity. Schedules are subject to change without notice. Carrier assumes no responsibility for making connections. 8

The Supreme Court held that the appellant was entitled to rely on the said condition and was thus not in breach of contract for failing to fly the respondents from London to Kuala Lumpur on the appellant's airline. In arriving at the decision, the court considered that 'the plaintiffs ought to have known condition 9 and they were presumed to have known it as it was printed on the ticket'. 9 Thus a presumption may be raised that a term in a ticket is brought to the knowledge of the other party to the contract. In other cases, the courts have considered exemption clauses as invalid on the ground that the subsidiary legislation which provided for the exclusion of the liability was ultra vires the parent Act. 10 0 This has been the case with by-laws enacted on the authority of the Port Authorities Act, to exclude liability in case of loss of goods by the port authorities. In cases of excluding or limiting liability for negligence, the courts have held that no liability can be excluded. Thus inSekawan Guards Sdn Bhd v Thong Guan Sdn Bhd, 11 the appellant security company was held liable for the theft occurred at the premises of the respondent due to the negligence of the employee of the security company, although there was a clause in the contract excluding the liability of the appellant. The Malaysian courts seem to adopt the view that no matter how wide a clause is, it cannot exclude liability if there is negligence. In Chin Hooi Nan v Comprehensive Auto Restoration Service Sdn Bhd & Anor, 12 the appellant had left his car at the respondents' premises in order to have it waxed and polished for RM295. Due to the respondents' negligence, the car was damaged when being driven by the employee of the respondents. The respondents tried to avoid liability, based on an exemption clause, written on the back of the receipt given to the plaintiff, which stated: The company is not liable for any loss or damage whatsoever of or to the vehicle, its accessories or contents. Vehicle and goods are at owner's risk. Siti Norma Yaakob J (as she then was) in holding the respondents liable said: ... The law on this [exemption clause] is quite settled in that an exemption clause however wide and general does not exonerate the respondents from the burden of proving that the damages caused to the car were not due to their negligence and misconduct. They must show that they had exercised due diligence and care in the handling of the car. 13 From Chin's case, it is seen that no matter how wide a clause is, it cannot exclude liability if there is negligence. This position is quite different from the position in England, where it is a matter of construction only -- regardless of fault or negligence -- whether an exclusion clause applies to the breach in question or not, ie whether the clause is drafted widely enough so that to exclude the liability in any particular case. 14 Section 24(e) of the Contracts Act 1950

Section 24(e) of the Contracts Act 1950 states that the consideration or object of an agreement is lawful, unless: (e) the court regards it as immoral, or opposed to public policy. There is no definition in the Act itself, nor in other legislations, as to what constitutes public policy. 15 In the old case of Egerton v Brownlow (Earl), 16 Lord Truro defined public policy as 'that principle of the law which holds that no subject can lawfully do that which has a tendency to be injurious to the public, or against the public good, which may be termed, as it sometimes has been, the policy of the law, or public policy in relation to the administration of the law'. 17 If one is to regard that something which has a tendency to be injurious to the public is against public policy, it should not be difficult to see that exemption clauses are to be considered contrary to public policy. For, when one excludes liability to the detriment of all of the other contracting parties dealing with him, that is something against the public good. The judicial decisions have already determined what constitutes public policy, or better said, what is against public policy and the view taken by the Federal Court in the case of Theresa Chong v Kin Khoon & Co 18 is that it cannot be expanded anymore to include new cases. In that case, the appellant, an unregistered remisier, agreed to act for the respondent in the sale of certain shares on the stock exchange. The respondent refused to pay her for the services rendered on the ground that she had to pay the cost of the shares bought by her clients, and claimed a sum of $ 38,015.66 in all. The appellant pleaded that the contract was illegal and void as being contrary to public policy because she was an unregistered remisier and this was in violation of the by-laws of the stock exchange. The Federal Court held that the contract was not illegal although it violated the stock exchange rules. Gill CJ said: Not being registered as a remisier is not contrary to public policy because the by-laws of the stock exchange are the by-laws of a private body which have no force of law. ... their dealing with such a remisier did not make the contract as being opposed to public policy. 19 On the facts of the case, the decision of the Federal Court is correct and does not need any comment. However, one should be cautious when considering the reasons that the Federal Court took into account in arriving at the decision. Gill CJ relied on Cheshire and Fifoot's Law of Contract (8th Ed) and Pollock and Mulla on the Indian Contract Act (8th Ed). Regarding the first, he cited the following part of the book (at p 322): First, although the rules already established by precedent must be moulded to fit the new conditions of a changing world, it is no longer legitimate for the courts to invent a new head of public policy. A judge is not free to speculate upon what, in his opinion, is for the good of the community. He must be content to apply, either directly or by way of analogy, the principles laid down in previous decisions. He must expound, not expand, this particular branch of law. 20 (Emphasis added.)

Regarding the latter, Gill CJ cited from Mulla and Pollock: ... It is now understood that the doctrine of public policy will not be extended beyond the classes of cases already covered by it. No court can invent a new head of public policy. 21 It seems clear that the Federal Court has taken a narrow view of public policy. As expressly mentioned, the public policy ground is only to be expounded and not expanded. If the 'contract does not fit into any of the traditional pigeon holes' 22 of public policy, it is valid and no question as to public policy can be raised, since no new head of public policy can be invented. However, after Theresa Chong's case, there are other decisions which seem to be more flexible and have assumed a wider concept of public policy. In Koid Hong Keat v Rhina Bhar 23 Wan Adnan J (as he then was) referred to an English case 24 where it was said: The law relating to public policy must change with the passage of time, it cannot remain immutable 25 and held that what is and what is not injurious to public welfare in Malaysia must be decided in the Malaysian context. In Polygram Records Sdn Bhd v The Search & Anor, 26 Visu Sinnadurai J, after concluding that in England the doctrine of inequality of bargaining power had gained little judicial support, said: In Malaysia, ... there is some support for the view that public policy may, in some exceptional cases, demand that certain contracts which are grossly unfair to one of the parties to a contract ought to be set aside on the grounds of inequality of bargaining power under s 24(e) of the Act [Contracts Act 1950] ... . 27 The views expressed by Wan Adnan J and Visu Sinnadurai J are to be welcomed, and hopefully are going to be utilized and used in later cases, to strike down exclusion clauses which are grossly unfair to consumers. In the Malaysian context, it seems that excluding liability is injurious to public welfare. 28 Also, it should be borne in mind that in Malaysia there is no legislation dealing with the protection of the consumer against exemption clauses. On the contrary, the Parliament has seen it 'proper' to enact laws to protect certain authorities from liability. 29 The view that public policy may not be expanded, is unwarranted, at least as far as it concerns the exemption clauses. The situation is exacerbated because of s 62 of the Sale of Goods Act 1957. 30 It reads: Where any right, duty or liability would arise under a contract of sale by implication of law, it may be negatived or varied by express agreement or by the course of dealing between the parties, or by usage, if the usage is such as to bind both parties to the contract. The consequences of this provision are clearly understandable. All the implied conditions in a contract of sale provided by the Sale of Goods Act, for example,

conditions as to quality or fitness, merchantability and undertaking as to title can be avoided by express agreement between the parties. What this 'express agreement of the parties' would be in most cases is that a stronger party has included a provision as to the negation of liability, and the weaker party either has to accept the contract or go without it at all. The choice he would have at this contract is to 'either take it or leave it'. 31 The utilization of s 24(e) of the Contracts Act 1950 then becomes imperative. The courts should invoke it whenever it is seemed that the freedom of contract is being exploited by one of the parties to the contract to exclude liability for which he would otherwise be liable. The suggestion that public policy be used to avoid exemption clauses is not new, and in the United States and India, 32 this ground has been used by the courts in striking down exemption clauses. In Hennigsen v Bloomfield Motors, 33 the leading case in the United States, the court held that an exemption clause in a contract of sale of a car to be against public policy. The court held as follows: Courts keep in mind the principle that the best interests of society demand that persons should not be unnecessarily restricted in the freedom to contract. But they do not hesitate to declare void as against public policy contractual provisions which clearly tend to the injury of the public in some way ... . 34 In India, in the case of Lily White v Muniswami, 35 the court held that a provision in a contract limiting liability of a dry cleaner for any negligence or loss caused to his customers' clothes was unenforceable as being against public policy, and said: ... the court will not enforce such a term which is not in the interest of the public and which is not in accordance with public policy. 36 Thus, the courts in Malaysia should not find it difficult to declare void contracts as being against public policy in the case of exemption clauses, where liability is contracted out. Conclusion Although the courts in Malaysia are not really 'friendly' to the incorporation of exemption clauses in contracts, and have used different rules of construction to declaring them invalid, the public policy ground as envisaged in s 24(e) of the Contracts Act 1950 is not being made use of It is submitted that s 24(e) of the Contracts Act 1950 should be utilized, perhaps through a concept of fairness, 37 which may be introduced in Malaysia by the judiciary. If it is found that one party was not fair to the other, for example inserting a provision in the contract excluding liability, without which he would have otherwise been liable, the court may make use of s 24(e) of the Contracts Act 1950, and hold the clause void, as not being fair and as a result, contrary to public policy. As an addition to this, a rebuttable presumption may be raised that in a contract, an exclusion clause is unfair and contrary to public policy, unless otherwise proven. Certainly, the courts may

develop other rules as to what can be considered fair, for example whether an exemption clause is reasonable or not. 38 Thus, if it is proved that the exemption clause is reasonable, the presumption is rebutted and the clause should be held valid. There are many English decisions which may be considered by the courts in Malaysia regarding reasonableness. 39 What is lacking is not the precedents, but the 'will' of the courts to expand the law. Hopefully, this 'will' will be forthcoming. Return to Text FOOTNOTES: n1 Richardson v Mellish(1824) 2 Bing 229; 130 ER 294. n2 1997] 2 MLJ 805. n3 Ibid at p 824. n4 See The Unfair Contract Terms Act 1977 and Unfair Terms in Consumer Contracts Regulations 1994, giving effect to the European Community Directive on Unfair Terms. The former is also applicable in Singapore by virtue of Pt II of the First Schedule of the Singaporean Application of English Law Act 1993. n5 Visu Sinnadurai, 'Exemption Clauses v Public Policy and Inequality of Bargaining Power' [1978] MLJ cxxx at p cxxxvi. n6 Goh Gok Hoon v Eusuff Bross Sdn Bhd [1990] 2 MLJ 421. n7 [1986] 1 MLJ 330. n8 Ibid at p 332. n9 Ibid at p 333. n10 See, for example, the case of Port Swettenham Authority v TW Wu & Co (M) Sdn Bhd[1978] 2 MLJ 137 (PC); Jackson's Malaya Bhd v Penang Port Commission [1973] 2 MLJ 27. n11 [1995] 1 MLJ 811.

n12 [1995] 2 MLJ 100. n13 Ibid at p 103. n14 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827. n15 Some Malaysian decisions which have considered the ground of public policy are: Tunku Kamariah Aminah v Dato James Ling Beng King [1989] 2 MLJ 249 (HC); The Aspinall Curzon Ltd v Khoo Teng Hock[1991] 2 MLJ 484 (HC); Ooi Kiah Inn Charles v Kukuh Maju Industries Sdn Bhd [1993] 2 MLJ 224(SC). See also, Syed Ahmad Alsagoff, Principles of the Law of Contract in Malaysia (1996) Malayan Law Journal Sdn Bhd at pp 182-185. n16 [1843-60] All ER 970. n17 Ibid at p 995. n18 [1976] 2 MLJ 253 (FC). n19 Ibid at p 256. n20 Ibid at pp 255-256. n21 Ibid at p 256. n22 Ibid. n23 [1989] 3 MLJ 238 (HC). n24 Nagle v Feilden [1966] 2 WLR 1027. n25 In another English case, Naylor Benzon & Co Ltd v Krainische Industrie Gesellschaft [1918] 1 KB 331, McCardie J at p 342 stated that public policy is a variable thing. It must fluctuate with the circumstances of the time. n26 [1994] 3 MLJ 127.

n27 Ibid at p 160. This view has been suggested by Visu Sinnadurai, as long ago as 1978, in his article, supra n 6. However, only in 1994 he had the chance to express this view when sitting as a judge of the High Court, which at least may have the opportunity to be considered and acted upon by the courts in cases to come. n28 However, both of these decisions are decisions of the High Court and as such not binding. Further, the opinion of Visu Sinnadurai J was per curiam and not the ratio of the case. n29 Supra n 6. n30 Act 382. n31 Per Lord Diplock in Schroder Music Publishing Co Ltd v Nacaulay [1974] 3 All ER 616 at p 624, used in relation to the division of standard form contracts. n32 For a more detailed discussion on the US and Indian position, see Visu Sinnadurai, supra n 5 at pp cxxxii-cxxxiii. n33 75 ALR 2d 1. n34 Ibid at p 31. n35 AIR 1966 Mad 13. n36 Ibid at p 14. n37 The position as to fairness is lately adopted in England through statutory reform. So, reg 5 of the Unfair Terms in Consumer Contracts Regulations 1994 provides that an unfair term in a contract concluded with a consumer is not binding on the consumer. n38 8 In England, a clause which excludes liability is subject to the requirement of reasonableness: ss 2(2), 3, 4(1), 7(3) of the Unfair Contract Terms Act 1977. As to what is reasonable, see s 11 and Schedule 2 of the Act. n39 9 See, for example, George Mitchel v Finney Lock Seeds [1983] 2 AC 803; RW Green v Cade Bros Farm [1978] 1 Lloyd's Rep 602; Smith v Erics Bush [1989] 2 All ER 514 (HL) and St Albans City v International Computers 11 Nov 1994 (The Times).

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