Rightways: Contractual term

Remember our series of articles on unfair contract terms? Well, it now seems that the Malaysian Parliament is set to finally come up with a law addressing the issue in the upcoming Consumer Protection (Amendment) Bill 2010.

Preferring the approach of amending an existing statute to enacting a wholly new one, the Bill inserts a new Part into the existing Consumer Protection Act 1999, namely Part IIIA intituled Unfair Contract Terms. This Part contains new sections 24A to 24J all intended to address the issue of when businesses seek, via standard form contracts, to impose on consumers terms excluding or limiting their liability when they arise, as well as other terms thought generally considered unfair. Section 1(3) provides that the Part applies to contracts entered into after the coming into force of the Bill.

Section 24A deals with general interpretation in connection with the Part. The definition of a contract in section 2 of the Contracts Act 1950 is retained and a “standard form contract” is defined as a consumer contract that has been drawn up for general use in a particular industry, whether or not the contract differs from other contracts normally used in that industry. An “unfair term” is defined 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. Section 24B states that notwithstanding the Contracts Act 1950, the Specific Relief Act 1950 and the Sale of Goods Act 1957 as well as other provisions of the law for the time being in force, the Part shall apply to “all contracts”. This presumably addresses implied terms regarding sale of goods in the Sale of Goods Act 1957, specifically sections 14 to 16 of that Act regarding transfer of title and issues of merchantability and fitness for the purpose for which goods are bought. The section fails to mention the Hire Purchase Act 1967, of which section 7 also deals with implied terms in hire purchase agreements. Also should the Part really extend so broadly so as to include all contracts? Presumably if such is the case, a contract or contract term proscribed by law, such as those in the Schedules to the Housing Development (Control and Licensing) Regulations 1989, or financial or securities contracts, or contracts or bills of consignment or lading, be included as well?

Section 24C and 24D are probably the most important sections in the new Part. The Malaysian Parliament has preferred to split the question of unfair terms into two, dealing with terms that are procedurally unfair (section 24C) and substantially unfair (Section 24D). Section 24C(1) proscribes that a contract term is procedurally unfair when

i. It results in an unjust advantage to the supplier (ie. the business relying on the term in question) and/or;

ii. It results in an unjust disadvantage to the consumer;

iii. On account of the conduct of the supplier; or

iv. On account of the manner or circumstances that the contract is entered into between the supplier and the consumer.

Section 24D(1) holds that a contract term is substantially unfair when;

i. it is in itself harsh;

ii. it is oppressive;

iii. it is unconscionable;

iv. it excludes or restricts liability for negligence;

v. it exludes or restricts liability for breach of express or implied terms of the contract “without adaquate justification”.

The approach of splitting the dealing with such terms into procedurally unfair and substantially unfair is rather unique and this author knows not of any other jurisdiction within the Commonwealth that has chosen this approach. It is also, in this author’s view, rather needless and unneccessary. A substantially unfair contract term is neccessarily procedurally unfair as well. The two are not mutually exclusive. There is also the troubling question of what would about to inadaquate justification for breach of express or implied terms of a contract. When is the justification adaquate and when is it not? Presumably this follows the approach of determining if whether the exclusion of such terms are fair and reasonable or not, but for this to work the statute itself must give an account of what “adaquate justification” amounts to rather then just simply leave the matter for the courts. Such an approach would be in tandem with those used in other jurisdictions, such as the United Kingdom in their Law Commission’s proposed Unfair Contract Terms Bill 2005, specifically clase 14(1) which provides a test on how contract terms are deemed not fair and reasonable. It is also noted that Malaysia has decided that exclusion or limitation of liability for negligence is to be disallowed outright rather than having it hang on whether such an exclusion or limitation is fair and reasonable or as the Bill puts it “without adaquate justification”.

Sections 24C(2) and 24D(2) at least partially follow the approach of Clause 14 of the UK Bill (specifcally Clause 14(4) )when they list the considerations to be had when determining when a contract term is procedurally or substantially unfair. The considerations are mostly the same between the soon to be Part IIIA of the Consumer Protection Act 1999 of Malaysia, and Clause 14(4) of the Unfair Contract Terms Bill 2005 of the United Kingdom, and again the latter does not contain needless distinction between what is substantively and what is procedurally unfair. The new section also fails to provide an example of a list of terms that can be thought unfair unlike the corresponding Clause in the UK Bill.

Section 24E states that it is for the supplier (ie the business) to prove that the contract term is with adaquate justification. This is the same as Clause 16(1) of the UK Unfair Contract Terms Bill 2005. Section 24F provides that a court or the Tribunal established by the 1999 Act may deal with any issue of any unfair contract term even if none of the parties has raised the matter, again similar to Clause 21 of the UK Bill.

Section 24G(1) enacts that a court or the Tribunal may declare an unfair contract term under sections 24C and 24 D to be void and subsection (2) is not unlike Clause 24 of the UK Unfair Contract Terms Bill which provides that other clauses of the contract affected are to continue in force without the offending term. Section 24H further provides that a term of a contract can still be held void even if it has been partially or wholly executed. This is a novel idea as it provides more certainty as to the position of the parties in the midst of a continuing contract.

Section 24I makes the contravention by “any person” (as defined under subsection (1)) of the Part an offence. The section is silent on how exactly is the Part contravened. First of all, why “any person”? Is it possible for the consumer to commit an offence under the Part? Or is the inclusion of any unfair contract term by a supplier/business to be made an offence? If this is so, it should have been clearly spelt out. There is also a host of other matters that arise by making unfair contract terms an offence, for instance, it could inhibit freedom of contract. The high penalties involved (RM 250,000 for a first offence and RM 500,000 for a subsequent offence, as well as RM 2,000 a day in which the offence continues) could also be pontentially crippling for small businesses. Other jurisdictions have so far not seen the need to make any inclusion of an unfair contract terms an offence and while the merits of such a move are debatable, it is suggested that a comprehensive study on the move be done at first.

Section 24J empowers the Minister to make Regulations in connection with the Part. This section could provide an avenue to remedy two important defects discovered so far, namely the failure to indicate the extent of the application of the Part and the types of contracts involved and secondly, the failure to provide an list of examplary contract terms that might be thought unfair.

The proposed new Part IIIA of the Consumer Protection Act 1999 as will be introduced by the Consumer Protection (Amendment) Act 2010 contains many weaknesses, all of which could and should be addressed by enacting a single comprehensive piece of legislation on unfair contract terms, rather then by simply amending an existing statute. It does not, for example, include unfair notices. Thus while a consumer can now worry less about whether he or she may claim under a defective contract, the same might not be said for a notice, for example, one notice excluding liability for negligence when using a swimming pool or car park, for example, is not covered by the new Part on a plain reading of the Bill, which clearly limits its scope to standard form contracts, and does not mention notices. This is in spite of Domestic Trade and Cosumer Affairs Minister Datuk Seri Sabri Yaakob’s claims to the contrary.

The Bill also makes an unneccesary distinction between procedural and substantive unfair contract terms. It fails to make provision as to what types of contracts exactly are covered by the Part and extending the application to “all” contracts could possibly have unexpected and unfavourable ramifications. It crucially also fails to address the issue of application taking into account where the contract is concluded (ie whether in or outside Malaysia) or what happens when a contract applies foreign law. A test for determining what amounts to “without adaquate justifiaction” is absent, as well as a list of examples of unfair contract terms. What offence created is not clearly defined and the potential effects not carefully studied.

On the other hand, initiative is demonstrated by providing that a term of a cotinuing contract can also be struck down on account of being unfair. On the whole, it is remarked that some form of bulwark against unfair contract terms in consumer contracts is better then nothing but there is room for improvement. It is hoped that those that be can revisit the issue in the future and consider seperate, more comprehensive legislation on the matter instead. It would be interesting, however, to see how the Malaysian courts react to the new legal provisions on unfair contract terms, especially concerning if they would follow the approach of their foreign counterparts in deducing unfair terms, or create their own notions based on the new provisions.

5 July 2010 by Alistaire