Q: My husband and I purchased a property that was still under construction. To finance the purchase of the property, we entered into a loan agreement with ABC Bank. Under the loan agreement, ABC Bank was obliged to make progressive payments to the property developer on our behalf when the payment became due. However, ABC Bank missed one payment resulting in termination of our Sale and Purchase Agreement (“SPA”) with the developer. My husband and I wanted to claim damages that we have suffered as a result of the termination of the SPA. However ABC Bank relied on an exclusion clause in the loan agreement to absolve any liability against them. Can they do that?

No.

• The exclusion clause absolutely restricts the bank customers from initiating any claim against the bank for loss and/or damage arising from the contract offends section 29 of Contracts Act 1950 (“CA 1950”).
• Section 29 of CA 1050 prohibits an absolute restriction of a party’s right to enforce his rights by the usual legal proceedings.
• Section 29 of CA 1950 provides that “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.”

Principle of Right to Freedom of Contract (laissez-faire)

• Although it is often assumed that parties are generally free to determine for themselves their obligations under a contract which parties entered into freely and voluntarily, in reality not many contracts are entered as a result of arms’ length deal.
• In the commercial realities of the particular relationship between a bank and a customer, the parties seldom have equal bargaining powers nor deal on equal terms. Most of the time, the customers are compelled to accept the terms and conditions of a standard contract prepared by institutions with stronger bargaining positions.
• A take it or leave it approach has always been the only choice available to the bank customers.
• In this regard, contracts with clauses to absolutely exclude liability were patently unfair and unjust to bank customers.

Our Comments

• Exclusion clauses that do not offend section 29 of CA 1950 will continue to be upheld.
• The court will only interfere if the parties’ rights and remedies to such rights are restricted completely by such clause.
• As for the banks, when drafting exclusion clauses, ensure that any exclusion clause drafted must not wholly deprive the bank customers of any substantial remedy.

Case in point: CIMB Bank Bhd v Anthony Lawrence Bourke & Anor [2019] 2 MLJ 1. Federal Court (Putrajaya) – Civil Appeal no: 02-105-10 of 2017(W)