Un­con­scionable for banks to seek refuge be­hind ex­clu­sion clauses

The Star Malaysia - StarBiz - - News - Law & Realty ROGER TAN star­[email protected]­tar.com.my

IN APRIL 2008, a British cou­ple liv­ing in the United King­dom ob­tained a loan fa­cil­ity of RM715,487 to fi­nance the pur­chase of their prop­erty in Malaysia. It was a term of the loan fa­cil­ity that the bank would make pro­gres­sive pay­ments to the de­vel­oper against cer­tifi­cates of com­ple­tion is­sued by the ar­chi­tect at each progress billing.

In March 2014, the de­vel­oper sent a no­tice for a pro­gres­sive pay­ment to the bank, sup­ported by an ar­chi­tect’s cer­tifi­cate.

The bank’s dis­burse­ment de­part­ment then sent sev­eral in­ter­nal emails to its branch to con­duct site visit in­spec­tion on the prop­erty.

The branch did not do any­thing, and mean­while, the due date for pay­ment had also ex­pired on March 25, 2014.

Nei­ther did the bank no­tify the de­vel­oper nor the cou­ple that a site visit in­spec­tion was an ad­di­tional con­di­tion prece­dent to draw­down.

The bank also did not re­quest for any ex­ten­sion of time to make the pay­ment pend­ing the com­ple­tion of the site visit.

On April 10, 2015, the de­vel­oper ter­mi­nated the sale and pur­chase agree­ment (SPA), af­ter about one year from the is­suance of the in­voice.

The cou­ple then sued the bank for breach of agree­ment and/or neg­li­gence.

The cou­ple sought (i) RM273,996.24 be­ing the to­tal amount of loan pay­ments that they had paid to the bank un­der the loan fa­cil­ity; (ii) RM747,481.42 be­ing the cou­ple’s to­tal losses suf­fered due to the ter­mi­na­tion of the SPA; and (iii) the sum of RM10,975.30 be­ing all other miscellaneous costs and ex­penses they had in­curred due to bank’s breach and gen­eral, ag­gra­vated and/or ex­em­plary dam­ages.

In de­fence, the bank re­lied on clause 12 of the loan agree­ment which 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 bank ar­gued that the cou­ple’s claim was un­sus­tain­able as the clause had ex­cluded the bank’s li­a­bil­ity on the ground that the fun­da­men­tal prin­ci­ple of free­dom of con­tract re­quires par­ties to be bound by the terms of the con­tract and courts must give ef­fect to the clear and plain mean­ing of the words in clause 12.

The High Court agreed, in that clause 12 had ab­solved the bank from any li­a­bil­ity or claim in con­tract and in the tort of neg­li­gence.

The High Court did not make any find­ing of fact whether the bank was in breach of the loan agree­ment or neg­li­gent when the in­voice was not paid. On ap­peal, the Court of Ap­peal al­lowed the cou­ple’s ap­peal against the de­ci­sion of the High Court.

The bank then ap­pealed to the Fed­eral Court. On Dec 17, 2018, the Fed­eral Court dis­missed the bank’s ap­peal and af­firmed the de­ci­sion of the Court of Ap­peal by strik­ing down clause 12 for hav­ing con­tra­vened sec­tions 24(e) and 29 of the Con­tracts Act, 1950 (Act 136).

Sec­tion 24(e) of Act 136 states that any con­sid­er­a­tion or ob­ject of an agree­ment which is against pub­lic pol­icy will ren­der the agree­ment un­law­ful and void.

On the other hand, sec­tion 29 pro­vides as fol­lows: “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.”

These are in­deed land­mark de­ci­sions of the Court of Ap­peal and the Fed­eral Court.

It is, there­fore, im­por­tant to sum­marise briefly the find­ings of the Fed­eral Court in CIMB Bank Bhd v An­thony Lawrence Bourke & Anor, 2018:

> Given its nat­u­ral and or­di­nary mean­ing, clause 12 has only one mean­ing, that is, it must be given ef­fect to and en­forced, how­ever un­rea­son­able the court may think it is. If that is the case of al­low­ing clause 12, then it would be an ex­er­cise in fu­til­ity for the cou­ple to file any suit against the bank as they are pre­cluded from claim­ing all forms of dam­ages for breach of con­tract or neg­li­gence.

> Clause 12 is, there­fore, an ab­so­lute restric­tion and sec­tion 29 of Act 136 pro­hibits such restric­tion.

How­ever, mere lim­i­ta­tions and/or some re­stric­tions added into an ex­clu­sion clause are in­suf­fi­cient to in­voke sec­tion 29. Sec­tion 29 speaks of only ab­so­lute restric­tion.

> Free­dom of con­tract must surely still im­ply some choice or room for bar­gain­ing, even in stan­dard form loan agree­ments. In this case, the cou­ple have un­equal bar­gain­ing pow­ers with the bank.

This is against pub­lic pol­icy. It is there­fore patently un­fair and un­just to the cou­ple had clause 12 been al­lowed to deny their claim/ rights against the bank.

In the words of Jus­tice Balia Yu­sof Wahi who de­liv­ered the judg­ment of the Fed­eral Court: “It is un­con­scionable on the part of the bank to seek refuge be­hind the clause and an abuse of the free­dom of con­tract.”

It fol­lows that con­tracts which seek to oust the ju­ris­dic­tion of the courts are in­valid.

Hence, in the ab­sence of an all-en­com­pass­ing leg­is­la­tion that deals with un­fair con­tract terms such as in Sin­ga­pore and the United King­dom, it is time for the gov­ern­ment to in­tro­duce such a leg­is­la­tion or ex­tend the pro­tec­tion cur­rently given to con­sumers un­der the Con­sumer Pro­tec­tion Act, 1999 (Act 599) to all types of con­tracts in­clud­ing fi­nan­cial deal­ings and trans­ac­tions, in­volv­ing, par­tic­u­larly, pur­chasers and bor­row­ers of hous­ing devel­op­ment.

The rea­son be­ing notwith­stand­ing sec­tion 24B of Act 599, it has been ar­gued that Part IIIA of Act 599 ap­plies only to con­sumer con­tracts.

Sec­tion 24D of Part IIIA of Act 599 states that a con­tract or a term of a con­tract is sub­stan­tively un­fair if the con­tract or the term of the con­tract (a) is in it­self harsh; (b) is op­pres­sive; (c) is un­con­scionable; (d) ex­cludes or restricts li­a­bil­ity for neg­li­gence; or (e) ex­cludes or restricts li­a­bil­ity for breach of ex­press or im­plied terms of the con­tract with­out ad­e­quate jus­ti­fi­ca­tion. Sec­tion 24A(c) of Act 599 de­fines an “un­fair term” as a term in a con­sumer con­tract which, hav­ing re­gard to all the cir­cum­stances, causes a sig­nif­i­cant im­bal­ance in the rights and obli­ga­tions of the par­ties aris­ing un­der the con­tract to the detri­ment of the con­sumer.

All in all, the Malaysian Bar Coun­cil wel­comes this de­ci­sion which pro­tects bor­row­ers who are of­ten at the mercy of this un­equal bar­gain­ing with the pow­er­ful fi­nanciers.

Datuk Roger Tan is the chair­man of the Con­veyanc­ing Prac­tice Com­mit­tee, Bar Coun­cil, Malaysia. This col­umn is brought to you by the Malaysian Bar Coun­cil for your in­for­ma­tion only. It does not con­sti­tute le­gal ad­vice.

Pro­tec­tion needed: It is time for the gov­ern­ment to in­tro­duce a leg­is­la­tion or ex­tend the pro­tec­tion cur­rently given to con­sumers un­der the Con­sumer Pro­tec­tion Act, 1999 to all types of con­tracts, in­clud­ing fi­nan­cial deal­ings and trans­ac­tions, in­volv­ing, par­tic­u­larly, pur­chasers and bor­row­ers of a hous­ing devel­op­ment.

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