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CONTRACT LAW IN MAL AY SIA:REFLECTIONS ON

IT S IDEOL OGIES AND CONCEPTS

NURRETINA AHMA D SHARIFFFaculty o Public Management and LawUniversity Utara Malaysia

ABSTRACTI n tracing the development of Malaysian coriiract law, the articleexaniines and discusses the ideologies and concepts that have beenresponsible in shaping and molding the law of contract in Malaysiaand in its legal system. To achieve these objectives, the social,philosophical, ecorionzic and political thoughts and values that haveinfluenced the law have been analyzed. A brief discussion on thecurrent trend of the law is also included.

ABSTRAKArtikel irii rnerigkaji dan menzbiricangkan teori daii prinsip yaiignienjadi asas kepada undang-undarig kontrak di Malaysia sertaperkenibangannya dalam sistem perundarigan di negara ini. Bagiinericapai objektif ini, nilai-nilai serta pemikiran yang menyokorzgdari menibentuk urzdang-uridang kontrak dikaji dengan terperinci.Kajian ini nzerangkumi aspek ni lai-nilai sosial, ekoizonzi dari politikyang rnernpengaruhi persekitaran undang-undang kontrak. Artikelirii turut nzengerial pasti aktor-faktor yang mendcirong perkembanganuridarig-uridarig kontrak rnoden di Malaysia. Akhir sekali, talzapperkenibangari serta hala tuju undaizg-undang kontrak ini dini laiseca ra keselu ruhar .


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INTRODUCTION

I

Prior to the advent of the British, there had been somesortof judicialsystem in existence in the various places that are now called Malaysia.In each Malay state there was a separate politicail entity with its ownruler, legislature and judiciary. The sultans were the sovereign rulersin whom resided all legislative and executive power. Administrationof justice was the responsibility of theBendahora, theTemenggongand theLaksamana. As the law was based on customary law (withthe relic of Hindu law overlaid by Islamic law), it was thus governedby paternalistic traditions that were mainly patriarchal in nature. InUndang-undang Melaka (a digest of law on Malacca), for example,it has been stated that the urisdiction of this digest covered, all largedlands and by all great rulers and their viziers and on the customs inthe dependent areas and village. The paternalistic character wasreflected in the law of this digest which governed the responsibilitiesof the ruler and his chiefs, prohibitions amongst members of thecommunity, penalties for criminal and civil offences, family law andother matter ^As such, the role of the individual was quite limitedand to some extent appeared to be insignificant. This may also bebecause of the strict application of autocratic patriarchal customarylaw which demand total respect and loyalty to the rulers, the chiefs,the head of the family or the elders. Thus, any form of excessiveindividual freedom, such as the right of rebellion or the right to expressones feeling may be interpreted as an act of disrespect or disloyal tothe rulers, the chiefs, the head of the family or the elder ^However, the beginning of the nineteenth century witnessed somedevelopment in Malaysian legal system. During this colonial era,the British had introduced Western administration in the country, themost important aspect of which was the eflecting of British lawswithout, however; totally obliterating indigenous laws (especially withregard to land administration) and Islamic law. 5 Indeed, Englishlaw was adopted only sofar as it was suitableto local conditions. Insome instances, it was adopted indirectly and without statutory


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authority through the judiciary applying English legal principles tocases that came before them for determinati od In others, statutoryauthority including the Royal Charters of J ustice7 provided for theintroduction of English law that were suitable to local conditions inthe absenceof local laws. This eventually led tothe introduction ofthe democratic process leading in 1957 to the establishment ofparliamentary democracy-with a written constitution, a House ofRepresentatives (to which members are elected based on universalsuffrage) and a Senate. In the process, the Malay K ingdoms werefirst united into a nation.sThe colonial era also witnessed major economic: transformation whichis described by Prof. KhooK ay K im9 as follows:The early 19th century marked the beginning of aneconomy anchored to the export of raw materials. Tinproduction though not new expanded radically inresponse to Britains growing tin-plate industry;commercial agriculture, a new phenomenon, assumedincreasingly greater importance; and the developmentof infrastructure to meet the needs of the new economytook off by the 1800s (railway, urbanization with all itsramifications, and road transport being the mostimportant until World War 1).What ensued from this was the development of law in the area ofcommercial law. In 1878, for example, by virtue of section 6 of theCivil L aw Ordinance 1878, English commercial law was introducedinto the Straits Settlements. It then became clear that English lawrelating to contracts was appli cable to Penang, M alacca andSingapore. Similarly, by 1899, the Contract Enactment which wasmodelled on the Indian Contract Act 1872 (that was based on theEnglish principles) was extended to the four s-tatesof the FederatedMalay States. This Enactment of 1899 was then gradually extendedto the Unfederated Malay States, with Johore as the first state to acceptits application, as early as 1914.


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F reedom of Contract I deology as Reflected in the ContractsAct1950The oldest printed version of the provisions rela.ting to contracts isthe Contract Enactment 1899. However, it was not formally passedby the Federal Legislative Council of the Federation of Malaya until1950. The Contract Ordinance 1950 was then revised in 1974 and itbecame an Act by virtue of the Revision of Laws Act 1968.The Malaysian Contracts Act 1950 has its forbear in the IndianContract Act 1872, thus, naturally the provisions contained in theAct reflect the English model of contract the0r.y of the nineteenthcentury which was closely related to the development of the freemarket and the ideals of classical economics. In other words, the1950 Act would be based on the then prevailing judicial philosophyof laissez-fairebased on the conception of the rugged individualist.Indeed, this was judicially recognised by the Privy Council in theMalaysian case of Ooi Boon Leorig & Ors v CitibankN A. Themain legal issue in this case was whether the parties to a contract cancontract outof the provisions of the Contracts Act 1950. The PrivyCouncil, in allowing the parties concerned to contract out of theprovisions of the Contracts Act, referred to section l(2) of thewhich was strongly relied by the appellants in this case.Section l(2) has no effect on the freedom of contractingparties to decide upon what terms they desire to contract.It would be indeed surprising if sodevastating an inroadinto the common law right of freedom of contract wereintroduced by the legislature in a section which isprimarily devoted to expressing the short title to the Act

and which moreover appear in a part of the Act which ismerely headed Preliminary I4In a similar vein, the Privy Council further observed:Random recognition in certain sections of the Act ofthe fundamental principle that contracting parties are atliberty to express their intentions in their contracts as


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they please is quite insufficient to support the contraryproposition that the absence of such recognition inanother section implies the absence of freedom ofcontract. If freedom of contract is to be curtailed inrelation to a particular subject matter, their Lordshipswould expect the prohibition to be expressed in thestatute, and not left by the legislature to be picked up bythe reader as an implication based upon sections dealingwith different subject matter "'It is significant that the Privy Council in this case emphasized theprinciple of freedom of contract as being paramount in the judicialconsideration of the operation of the Contracts Act. Thus, the aboveobservations illustrate that according to the Privy Council the doctrineof freedom of contract is the superstructure upon which the ContractsAct, 1950 s built. It is also quite apparent that the notion of individualliberty emphasized in the above quoted passage reflects the influenceof the will theory on the law of contract.Indeed, the central themeof the freedomof contract doctrine is theindividual and the choice that he has freely made. This theme appearsto besoembedded in the provisionsof the Contracts Act 1950 thatsection 10of the Act defines contracts as,all agreements made with the free consent i f parties competent tocontract...Hence, the foundation of legal liability is the consent of both parties,freely given, to be bound by their agreement. Factors which vitiatesuch consent, for example, undue influence, fraud, misrepresentationand certain categories of mistake16 are simply il.lustrations of defectiveconsent or unfree will which render the resulting agreement voidable.The Contract Acts obsession with free consent is explained by NoorAlamI7 as being:...deeply rooted in the assumptionof the freedom ofcontract doctrine that every individual is equally capableof making a rational choice. Once that choice has been


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made, the law will not go behind it to enquire into thesocial and environmental setting that influence the choiceand render its free characteristic merely illusory.Clearly, the Contracts Act has fostered the idea of freedom of contractand adopted an objective view of agreement which makes the lawmore concerned with the procedural aspect of fairness rather than thesubstantive fairness of a transaction. This characteristic of nineteenthcentury ideology of law is reflected in the general principles embodiedin the provisions of the Act, which will be discus:;ed below.Firstly, as in the classical contract theory, the Contracts Act emphasisesthe rule of offer and acceptance. An agreement arrived at through themechanism of offer and acceptance is regarded as a manifestation ofthe meeting minds of the parties.* Secondly, neither party owes anyduty to volunteer information to the other, thus as theExplanation tosection 17 of the Act19 provides, Mere silence a s to facts l ikely toafect the wil lingnessof a person to enter into a contract is not raud.This is merely a restatement of the common law. It is only if, thecircumstances o the case are such that, ... it is theduty of the personkeeping silence to speak,or unless his silence is, in itselfl equivalentto speechthat the other party is entitled to rely upon them.Nevertheless, the one significant difference is that, under the ContractAct, the misrepresentation or silence which is fraudulent in the contextof section 17 will not render the contract voidable if the other partywhose consent was caused by that misrepresentation or fraudulentsilence had the means of discovering the truth with ordinary diligence.Thirdly, the emphasis on contract law as the lawof the market is alsoreflected in the narrow application of the doctrineof mistake underthe Contracts Act. Under section23, for instance. parties will not beeasily discharged from their contractual undertakings simply becausethey entered into the contract under some mistake. As under theclassical contract theory, the Contract Act takes a predominantlyobjective view of agreement. Thus, an erroneous opinion as to thevalut.of the thing which orms the subject-matterof the agreement is


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not tobedeemed a mistake.20 It is not, in general, the subjectiveintention of the parties with which the Act is concerned, but ratherwhat can be inferred from their conduct. Finally, the concept offreedom of contract being the foundation of the Contracts Act 1950is further emphasised by the fact that the Act contains a provisionwhich renders all contracts in restraint of trade void (subject to thelimited exceptions).21 The object of this provision appears to beprotecting the public interest, in particular to prevent monopoly ofbusiness, trade and profession which seemed appropriate during thenineteenth century as the economy was only beginning to develop.From what was mentioned above, all these rules can probably berationalised in terms of the underlying doctrine of freedom of contractin the Contracts Act. Where both parties are of full age, fully competentto negotiate a deal and to take the necessary and ordinary precautions,the law will not intervene to correct any imbalance in the exchangeor bargain which has been agreed upon by the parties. In the interestsof certainty and commercial convenience, parties are bound by theirapparent agreement. Nevertheless, although the Contracts Act fosteredthe ideology of freedom of contract in most of its provisions, thereare, however, some provisions that restrict the freedom of the partiestocontract, for example, those dealing with contracts which are illegal,immoral or against public policy or agreements, which contraveneany statutory law.22State InterventionApart from the Contracts Act1950,which fostered the idea of freedomof contract, the movement towards economic liberalism had neverquite made any significant mpact in social, economic and legal aspectsof life in theory and practice in Malaysia. This may be partly becauseof the strict application of autocratic patriarchal customary law thathad been in practiced throughout the eighteenth and nineteenth centurywhich to a certain extent restricted individual freedom and his rightof choice. Whatever freedom a man desire had to be within the limitof the customary law and according to the prevailing views in the


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community of what was right and wrong. Apart from this, Malaysiatoo had never experienced a revolution such as the IndustrialRevolution that took place in England which began around the middleof the eighteenth century. Hence, the effectof such an experiencewas less effective here in Malaysia and it had not influenced anysignificant change in the system.Furthermore, the failure of the free market to conform with the socialand economic reality which led to monopoly and concentration oftrade and industries in England, might also hinder the developmentof this movement in Malaysia. The fact that the market economycould no longer accorded with the reality of the modem world couldhave made the ideology of economic liberalism seems fallacy toMalaysian economist.In modem Malaysia, it will be observed that since independencez3the government of Malaysia24does not seem to favour the free marketideology. This is evident from the governments direct involvementin the Malaysian economy. Most of the public eriterprises at the timeof independence were controlled by the government and although atthe beginning they were engaged in traditional .activities associatedwith public utilities, transportation, communication, agriculturedevelopment and finance, it had since then been extended to themanufacturing and service The rapid expansion of publicenterprises could be seen, in particular, in the 1970s-1980s.Thegovernment believes that such direct involvernent in economy isnecessary in order to promote social-economic development. It isalso to foster racial harmony in Malaysia - by balancing the wealthand advantage between the Malay and non-Malays.26A reflection ofthis belief is noted by Ghazali Yusoff2 when he discusses racialharmony in Malaysia:since independence, the government has recognisedthat economic inequalities could provide flashpointin society. Such an occurrence did take place in 1969and a pragmatic and affirmative social engineeringprogramme was introduced- the New Economic Policy(NEP)28 to review the balance of wealth between the


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Malays and non-Malays. This engineering continues tilltoday and it has taken place with little traumaticresponses from the other races.At this uncture, perhaps it ought to be pointed out that the Malaysiangovernments economic policy appears, to some extent, to resemblethe collectivistic policy. Collectivism was concerned about equalitiesand the protection of the weak against the strong. To them, state helpand intervention were necessary in orde:r to help balance theinequalities of wealth and distribution of the national productionamong the people. Thus, both collectivism and the Malaysiangovernments economic policy seem to be based on the same ground,that is, the faith in the mass of people and the benefit which they willreceive by the action of the state, or its intervention even in the privatesector if necessary.State intervention can also be seen in many government regulationsthat intervene with private contractual relationship. This is reflected,for example, in relation to insurance and employment contracts bythe Insurance Act 1965 and the Road Traffic Act 1958 which dictatemany of the terms of insurance contracts, and the Employment(Termination and Lay-off Benefits) Regulations, 1980 which dealwith an employers liability for termination and lay-off benefits inemployment contracts. However, state intervention in consumerprotection legislation is quite minimal in Malaysia. This in part isdue to the limited acceptance of l ai ssez-f ai re. Nevertheless, somestatutesdoexist which, to some degree, indicate state intervention inprivate contractual relationships. For example, the Saleof Goods Act1957, the Hire-Purchase Act 1967 and the National Land Code 1965which specifically provide that certain terms are to be implied intoparticular contracts. Of a similar effect is the ]MoneylendersAct 195 1which involves some interventions in the express termsof contractsfor consumer credit. In addition, the governments nterest in consumerprotection has recently been renewed with the enactment of theConsumer Protection Act 1999 which, it is claimed, to be the firstcomprehensive protection Act in Malaysia.


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State intervention is also reflected in the administration of Muslimlaw in the country. For example, in each state, Islamic law isadministered according to the A dministration of M uslim LawEnactments or ordinance ^ These Enactments are similar in contentand they mainly govern the laws concerning m.aniage and divorce,maintenance of dependants, guardianship or custody of infants amongMuslims. Recently, Islamic tenets have been extended into other areassuch as banking and insurance law which is governed by the IslamicBanking Act. This is the governments attempit to merge religiouspractices with business law. Although these banking and insurancesystems are offered to Muslim and non-M uslim customers, the lawsare only applicable to those who opt for them.Nevertheless, it is necessary to point out here that although thegovernments presence can be felt in most of the economic, socialand legal aspects of life in Malaysia, recently there has been an attemptto reduce its size and presence in the economy and to allow marketforces to govern economic activities. This is reflected in theprivatisation policy which was introduced in 1983.It made explicitthat excessive governments presence in the economy be reduced,while emphasising an increasing role by the priva.te sector. The factorsunderlying this change signalled the Malaysian governments intentto realign the balance between the public and private sectorsrespon~ibilities,~~nd it also complements other national policiessuch as Malaysia I n~orporated,~ormulated to further strengthenthe role of the private sector as the engine in the economy. However,it is still not clear to what extent these prapati c approaches willaffect the governments ideology. But today, privatisation isincreasingly being expanded by the government through government-owned enterprises as well as new projects.External Influences Affecting Malaysian Contract LawThe evolution of new doctrines and approaches in English law suchas economic duress, inequality of bargaining power and the broaderdoctrine of unconscionability has to a certain degree influenced the


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development of Malaysian contract law. Although the Contracts Actdoes not incorporate such principles as econclmic duress, inequalityof bargaining power or unconscionability as have recently beendeveloped in English law, there is some evidence to indicate thatsuch principles are udicially recognised in Malaysia. The courts havedealt with such issues although their status and application are still amatter of debate. However, it is beyond the scope of this paper toexamine the matter in depth. Suffice to mention here that, this doesnot mean that the Malaysian courts will blindly adopt all the newdoctrines that have been developed by the English law. Any doctrinesor approaches which do not accord with the moral standards of thesociety or which contravene public policy will1 not be accepted by theMalaysian courts. This was made clear by the Court of Appeal in therecent case of Tengku Abdullah Ibni Sultan Abu Bakar vMohd Latiff& when it refused to extent the doctrine of undue influence tonon-marital relationships on groundsof public policy. The decisionin this case illustrates that the courts recognised the right to modifyprinciples of the common law and doctrines of equity that have theirhistorical origins in England to suit the domestic needs of theMalaysian jurisdiction.

CONCLUSIONAs will be apparent from the above discussion, the significance ofthe role played by an individualist society in the development ofmodern English contract law can scarcely be denied. Indeed, the originand, to a large extent, the heyday of moderri contract law began inthe period of individualism where the emplhasis upon freedom ofchoice, the value of a free market economy and a less paternalisticrole for the state were associated with the classical law of contract.AsWheeleIj3 observes,the modem paradigm of contract owes muchto what is often termed the classical law of contract, a body of rulesprincipally formulated in the nineteenth century, in the search to setout a coherent and consistent operating framework for the exerciseof private autonomy through agreement. However, because of the


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failure of individualism, the classical theory of contract has lessrelevance today. In turn, the interventionist approach paternalismis now seen as a legitimate function of the law. There is formalacknowledgement that certain contracting parties need the protectionof the law against economic exploitation and oppression. Contractlaw is changing to reflect these changes in economic reality.In Malaysia, the growth and development of the classical model ofcontract naturally produced a profound impact on the MalaysianContracts Act 1950. As noted earlier, this classical theory of contractlaw is mirrored in most of the provisions embodied in the Act. Butapart from the 1950 Act, it is probably fair to say that the classicaltheory has played a less significant role over human affairs andconduct in Malaysia. A relatively excessive interventionist approachadopted by the government has inevitably restricted the growth ofthis theory. As a result, some degreeof paternalism can be felt in thegovernments regulations, policies and administrations. But this doesnot seem to hinder the development of contract law in Malaysia.Although the changing process is much slower than in England, it isevident that the contract law in Malaysia is moving towards asignificant change as in English law.

c

REFERENCESCivil Law Ordinance 1878Civil Law Act 1956Contract Enactment 1899.Contract Act 1950Ghazali Yusoff. (1977). The Malaysian conceptofmultireligious andracial harmony. Malaysian Today Towards The NewMillennium: Asean Academic Press.


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KhooKay K im. (1997).Malaysian heri tage and culture: past, presentand future. Malaysian Today Towards the New M illennium:Asean Academic Press.L iaw Y ock Fang. (1976). Undang-undang Melaka: The Hague.Muhammad Yusof Hashim. Tahun Islam Dalani Sejarah PerundanganMelaka: Publication of History Association of M alaysia.Muslim Courts (Criminal Jurisdiction) Act 1965Royal Charter of J ustice 1808, 1826 and 1855Shaikh Mohd Noor Alam. (1993). Pre-Contractual Fairness: Sections15 and 16of the Malaysian Contract Act 1965.Malayan LawJ ournal, Vol.2.Vijayakumari Kanapathy & Ismail Muhd Salleh (edited by). (1994).

Privatisation and deregulation in A4alaysian: progress,problems and prospects. Malaysia Economy: Selected Issuesand Policy Directions: ISIS Malaysia.Wheeler S. & Shaw J . (1996). Contract law: cases, material andcommentary. Oxford: Claredon Press.Y usoff Iskandar & Abd Rahmad. (1978). Sejarah Melayu: satuperbincangan kritis dari pelbagai bidang. K uala Lumpur:Heinemann.

ENDNOTESThe power of theBendahara could be equated with the power of the PrimeMinister today, whilst the Temenggonghad the power of a Chief of Policeand theLaksamanahad the power of an oficer who executed the sentencedpassed, aside from being the Commander-in-Chief.


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L iaw Yock Fang, Undang-undang Melaka, (1976)at 62.See Muhammad Yusof Hashim,Islam dalam Sejarah Perundangan Melaka[Islam nMalacca Legal History] in Islam diMalaysia,Publication of HistoryAssociation of M alaysia.For general discussion see Y usoff I skandar and Abd Rahman, SejarahMelayu, Satu Perbincangan Kritis dari P elbagai Bldang,[Sejarah Melayu,

An analysisfromvarious Aspect] (1978).Prof. Khoo Kay K im, M alaysian Heritage and Ciilture: Past, Present andFuture in Malaysia Today Towards The New Mil lennium (1997) at 305-306.Leonard v Nachiappa Chetty(1923) 4 FMSLR 26. 5;Haji Abdul Rahman vMohamed Hassan (1917) AC 206.

The first Charter of J ustice was introduced in 1807, ollowed by the secondand third Charters in 1826 and 1855 respectively.Prof. Khoo Kay K im, Malaysia Heritage and Culture: Past, Present and1997) at 306.uture in Malaysia Today Towards The New MilLenniumIbid.

l o This provision is now found in section 5(2) of the Civi(Act 67) (Revised 1972). Law Act 1956

I 1 English law relating to contracts continued to apply to Penang and M alaccaup to 1974, when Contracts Act was extended to these two states.l 2 Section l (2) of the Contracts Act 1950 provides that: Nothing hereincontained shall effect any written law or any usagc or custom of trade, orany incident of any contract, not inconsistent with this Act.l 3 Ibid at 226.l 4 Ibid.l 5 See section 14 of the Contracts Act 1950.


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%ee Part I1 of the Contracts Act 1950, in particular sections 4-9.l 7 Section 17 of the Contracts Act deals with the element of fraud.l 8 SeeExplanation to section 21 of the Contracts Act 1950.l 9 See for example Exceptions 1-3 of section 28 of the Contracts Act1950.2oSee for example section 24 (a) - (e) of the Contracts Act 1950.?Malaysia gained independence in 1957.** There has only been one government in Malaysia since independence,that is, the Barisan National and it has been in power for nearly 47 yearsnow.23 For further study see Vijayakumari K anapathy and Ismail Muhd Salleh,Malaysia Economy: Selected Issues and Policy Dinvztions (1994) at 167.24The majority population in M alaysia consists of M alay, Chinese and Indian.25 Ghazali Y usoff, The Malaysian Concept of M ultireligious and RacialHarmony in Malaysia Today Towards the New Millenium (1997) at 316.26 I n 1990, the New Economic Policy is replaced by the NationalDevelopment Policy (NDP).27 See the Muslim Courts (Criminal Jurisdiction) Act 1965, as amended bythe Muslim Courts (Criminal Jurisdiction) (A mendment) Act 1984 with effectfrom 1stJ anuary 1985.28Ismail Muhd Salleh, Privatisation and Deregulation in Malaysia: Progress,Problems and Prospects, in V ijayakumari Kanapathy,Malaysian Economy:Selected Issues and Policy Directions (1994) at 165.29 The term M alaysia Incorporated is used to describe the specialrelationship the nation aspires to achieve between the public and privatesectors as a means to mould the nation into an advaince, affluent industrialsociety.


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30[199614MLJ 331.31Wheeler, Contract Law: Cases, Material and Commentary (1996)at52.

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