TOPIC 7 – TERMS OF CONTRACT

1. Terms of a Contract:

These are the specific promises, rules, or conditions that the parties agree upon when forming a
contract. They define the rights and responsibilities of each party. There are two main types of
terms:

• Express Terms: These are the terms that the parties directly state in the contract. They can
be either written or spoken.
o Example: "The rent for the house will be RM1000 per month."
• Implied Terms: These are not specifically stated, but they are assumed by law or based on
what is reasonable in the situation.
o Example: In a service contract, it is implied that the service will be carried out with
reasonable care and skill, even if it is not specifically mentioned.

2. Plain and Clear Language in Contracts:

It is important that the terms of a contract are written or spoken in plain and clear language. This
helps avoid confusion or misunderstanding between the parties. The purpose is to make sure that
both parties understand what they are agreeing to and what their obligations are.

• Plain language means simple, straightforward language that leaves no room for confusion or
multiple interpretations.
• Why it’s important: If a contract is ambiguous (unclear or open to different interpretations),
the court may have difficulty deciding what the parties intended. This can lead to disputes,
as one party may argue that they understood the terms differently from the other party.

3. Oral vs. Written Contracts:

A contract can be either oral (spoken) or written. However, there are important differences
between them.

• Oral Contracts: These are agreements made by spoken words. They can be legally binding,
but they can also be harder to prove in court because there's no physical record of the
terms. For example, if two people agree on a deal over the phone, it is an oral contract.
o Problem: If the terms of the oral contract are unclear, it can lead to disputes about
what was agreed upon. Courts may have to rely on the parties' memory or other
evidence, which is not always reliable.
• Written Contracts: These are agreements that are documented in writing, which helps
avoid confusion. Written contracts are generally more reliable because there is a clear
record of what was agreed upon.
o Problem: Even written contracts can sometimes have unclear language or terms.
This is why it’s essential for written contracts to be drafted in plain and clear
language.
4. Interaction Between Oral and Written Contracts:

Here’s how oral and written contracts come into play:

• Written contract as the final authority: If a contract is written, and it includes specific terms
(like a lease agreement), the written contract is often considered the final, binding
agreement. This means that oral agreements cannot override written terms (unless the
contract allows for oral changes).
o Example: If a landlord and tenant sign a lease agreement that clearly states a 2-year
rental period, an oral agreement to extend the lease for 3 years would not be valid
unless it is added to the written contract.
• Oral contract in the absence of a written one: If there is no written contract, the oral
agreement may be the only evidence of what was agreed. However, if the terms are unclear
or disputed, it can be difficult to enforce or prove in court.
o Example: If two people verbally agree to buy and sell a car, but later one of them
denies the agreement, the court would have to rely on other evidence (like
witnesses or text messages) to determine the terms.

When parties enter into a valid contract, it is crucial to determine the extent of their obligations to
ensure clarity and enforceability. A contract can be formed in various ways:

1. Oral Contract
2. Written Contract
3. Partly Oral and Partly Written Contract

Breach of contract occurs when one party fails to perform their obligations under the agreed terms.
The innocent party has the right to seek remedies under contract law, including damages or specific
performance.

Limitations of the Contracts Act 1950 Regarding Terms of Contract

The Contracts Act 1950 in Malaysia provides the foundational principles of contract law but lacks
specific provisions regarding the contents and terms of contracts. Below are the key limitations:

1. No Provisions on the Classification of Terms

o The Act does not classify terms into categories such as conditions, warranties, or
innominate terms, which are commonly used to determine the significance of
contractual obligations.
2. No Guidance on the Extent of Obligations
o The Act does not clarify the extent of obligations imposed on parties, leaving room
for interpretation based on general principles and case law.
3. Silence on Express and Implied Terms
o The Act does not specify whether parties are:
▪ Bound strictly by the express terms of the contract.
▪ Subject to implied terms that arise through custom, law, or business
efficacy.
4. No Provisions on Admissibility of Evidence
o The Act does not address the extent to which evidence may be introduced to:
▪ Add to the terms of a written contract.
 ▪ Vary or contradict existing terms.
o In practice, this is governed by the parol evidence rule, which generally prohibits
oral evidence from altering a written contract unless exceptions apply.

TERMS OF CONTRACT : 1) Plain and clear language

2) Oral OR/AND Written contract

Construction of Terms of a Contract

The construction of terms in a contract refers to how courts interpret and enforce contractual
clauses based on the plain and clear language of the agreement. Courts focus on ensuring the
intentions of the parties are respected without rewriting or improving the contract.

Principles of Contractual Construction

The construction of contract terms is guided by several core principles that aim to uphold the
sanctity of agreements while ensuring fairness in interpretation:

Plain and Clear Language

When interpreting a contract, courts look at the words used in the agreement and give them their
plain and ordinary meaning. If the terms are straightforward and unambiguous, the court will not
add extra meaning or try to make the contract broader than what was specifically agreed upon by
the parties. The idea is that the parties should be bound by the terms they wrote and agreed to,
rather than what the court might think is fair or reasonable.

Avoiding Judicial Overreach

Courts are not meant to change or improve contracts. Their role is to make sure the terms of the
contract are followed as they are written. This respects the idea of freedom of contract, which
means that people have the right to make their own agreements and decide what their rights and
obligations should be without the court stepping in to alter it.

Fairness in Application
Although courts generally avoid changing the terms of a contract, they still ensure that the
agreement does not lead to unfair outcomes. For example, if a contract includes lies
(misrepresentation) or promotes unfair competition, the court will not allow such practices. This
principle ensures that contracts align with ethical business practices and common fairness, so that
the terms don't result in unjust situations.

Implied Terms and Ambiguity

If a contract has unclear or missing parts, courts can "fill in the gaps" by adding implied terms. These
are terms that weren’t specifically written but are necessary to make the contract work properly.
However, any implied terms must align with what the parties intended and the overall nature of the
agreement. For example, if two parties enter into a contract for a service, it may be implied that the
service will be provided in a reasonable time, even if it's not stated directly in the contract.
The Case of Seet Chuan Seng v Tee Yih Jia Foods Manufacturing Pte Ltd [1994]

This landmark case provides an illustrative example of how courts balance the plain language of a
contract with the need to prevent unfair outcomes.

Facts of the Case

The first appellant, Seet Chuan Seng, co-founded the Tee Yih Jia Popiah Dried Pastry Factory (Pte) Ltd
in Singapore. After selling his shares to a co-shareholder in 1980, Seet set up a competing business in
Malaysia under a very similar name, logo, and packaging. The packaging and branding, including a
distinctive "swastika" logo, closely resembled the respondent's (the original company’s) identifiers.
The respondent claimed that the appellants’ actions amounted to passing off, which is when one
party misrepresents their goods or services as those of another, causing harm to the original
business. The respondent sought an injunction to stop the appellants from using the similar
identifiers and to change their corporate name.

Legal Issue

The primary legal issue was whether the appellants’ use of similar trade identifiers constituted
passing off, despite the existence of a clause in their agreement that allowed for "no restraint of
trade or competition whatsoever." The appellants argued that the use of these identifiers was
permissible under this clause, while the respondent contended that such use amounted to unfair
competition.

Legal Principles

To establish a claim for passing off, the following elements must be proven:

1. Misrepresentation: A false representation made by a trader in the course of trade.

2. Likelihood of Confusion: The misrepresentation must be likely to deceive or confuse the
public about the origin of goods or services.
3. Damage to Goodwill: The misrepresentation must cause actual or potential damage to the
claimant’s business or goodwill, including loss of sales, loss of reputation, or the exclusive
use of a trade name or branding.

In this case, the central issue was whether the appellants' use of trade identifiers similar to the
respondent’s resulted in misrepresentation and caused damage to the respondent’s business
reputation.

Judgment

The court ruled against the appellants, with the majority dismissing their appeal and affirming that
the use of similar trade identifiers by the second appellant amounted to passing off. The judgment
was based on several key findings:

1. Distinctiveness of the Respondent’s Trade Identifiers: The respondent’s trade name, logo,
and packaging had become distinctive identifiers of its products in the market. These
elements were recognizable to consumers as representing the respondent’s business,
making any similar use by the appellants likely to cause confusion.
 2. Likelihood of Consumer Deception: The appellants' use of the same or similar identifiers
was deemed likely to deceive customers into believing that the products were associated
with the respondent. The use of the "swastika" logo, in particular, was seen as misleading
and damaging to the respondent's reputation.
3. Damage to Goodwill: The court inferred that the respondent’s goodwill was harmed due to
the direct competition and the likelihood of confusion between the two businesses. The
appellants’ actions could result in loss of sales and reputation for the respondent, further
exacerbating the damage to its business.
4. Interpretation of Clause 5: The majority of the court interpreted Clause 5 of the agreement,
which allowed for "no restraint of trade or competition," as permitting only fair competition,
not unfair practices like passing off. The court noted that no reasonable businessman would
interpret the clause as permitting such harmful competition.

Dissenting Opinion

Justice Eusoff Chin dissented, arguing that Clause 5 of the agreement was clear and unqualified.
According to the dissenting opinion, the clause explicitly permitted any form of competition,
including the appellants’ actions. Eusoff Chin SCJ contended that the court should not reinterpret or
add terms to the agreement but should uphold the plain meaning of the clause as agreed upon by
the parties.

Conclusion

The majority decision in Seet Chuan Seng v Tee Yih Jia Foods Manufacturing Pte Ltd underscores the
importance of protecting trade names, logos, and packaging from being used in a way that can
confuse consumers and damage business goodwill. The court emphasized that while agreements
may permit competition, they do not authorize unfair practices such as passing off. The majority
judgment clarified that the phrase "no restraint of trade or competition" does not condone unfair
competition, such as misleading consumers about the origin of goods. This case highlights the
principle that courts interpret contractual clauses in their plain meaning, but they also ensure that
such terms do not promote unethical business practices.

2) ORAL AND WRITTEN CONTRACTS

The case of Leong Gan v Tan Chong Motor Co Ltd [1969] 2 MLJ 8 deals with the issue of whether
oral agreements can override the terms of a written contract, particularly when that written
contract is required by law to be registered.

Facts:

• The applicants (landowners) leased a piece of land to the respondents (tenants) under two
registered leases, each for a period of 4 years.
• The respondents claimed that, in addition to the written leases, there was an oral
agreement allowing them to occupy the land for 12 years.
• The applicants wanted to recover possession of the land and asked the court for permission
to sign final judgment.
• The respondents opposed this, arguing that the oral agreement created a triable issue (a
matter that needed to be decided in court) and should be considered in the case.

Legal Principle:
 • Written contracts take precedence: When a contract is required by law to be registered (as
was the case here with the land lease), oral evidence cannot be used to contradict or change
the terms of the written contract.
• In other words, even if the parties had an oral agreement that differs from the written one,
the written, registered lease would be considered the final, binding agreement.

Judgment:

• The court ruled in favor of the applicants, saying the respondents could not use the oral
agreement to change or challenge the terms of the written lease.
• The court granted the applicants’ request to sign final judgment for repossession of the land,
along with costs, meaning the applicants won the case and were entitled to take back
possession of the land.

Conclusion:

This case reinforces the idea that in contract law, if the agreement is in writing and is legally
registered, oral agreements cannot be used to change what is written down.

The case of Tan Chong & Sons Motor Co (Sdn) Bhd v Alan McKnight [1983] 1 MLJ 220 highlights the
issue of oral misrepresentations and the interaction between oral statements and written contracts.

The Facts:

• Alan McKnight, an Australian Air Force officer, bought a car from Tan Chong & Sons Motor
Co. The salesperson told him that the car met Australian Design Regulations, which was
important for him to get tax exemptions in both Malaysia and Australia.
• McKnight then signed a Buyer’s Order, which had a clause saying that the company did not
guarantee the car met the regulations.
• However, it turned out the car did not meet the regulations. McKnight suffered a loss and
sold the car at a loss, so he sued for damages.

The Legal Principle:

• Even though the Buyer’s Order said the company was not responsible for the car’s
compliance, the oral statement made by the salesperson could override that written clause.
This is because oral statements that mislead or deceive a buyer can still be legally binding,
even if there is a written agreement that contradicts them.
• Under Section 92 of the Evidence Act, the court can consider oral statements if they conflict
with what is written in the contract.

The Judgment:

1. False Representation: The court found that the salesperson’s false claim that the car
complied with the regulations led McKnight to buy it. This was seen as deceptive.
2. Oral Statement Over Written Contract: The court ruled that the oral statement made by
the salesperson had more legal weight than the written disclaimer in the contract.
3. Damages: McKnight was awarded damages for his loss, which included the price of the car
and extra costs he incurred because the car didn’t meet the regulations.
 4. Costs and Interest: McKnight was also awarded interest and legal costs.
5. Appeals Dismissed: The appeals by Tan Chong & Sons were dismissed, and the court allowed
changes to McKnight’s claims to include extra costs.

Conclusion:

The case shows that oral statements made by a salesperson that mislead the buyer can override
written terms in a contract. Even if a contract says "no guarantees," if the salesperson lied or made
false claims that led the buyer to make a decision, the company can still be held responsible for the
loss. This case highlights the importance of being truthful in sales and how oral promises can be just
as important as what’s written in a contract.

2) EXPRESS TERMS

Introduction to Express Terms in Contracts

This chapter explores express terms in contracts, which are terms explicitly made through words,
either orally or in writing. According to Section 9 of the Contracts Act, a promise made in words is
considered an express promise, while promises made in any other way are considered implied.

The main topics of this chapter include:

1. Terms and Representations: Understanding the difference between statements that form
part of a contract (terms) and statements made to persuade someone to enter into a
contract (representations).
2. Conditions and Warranties, as well as Innominate Terms: Exploring the classification of
terms based on their importance in a contract. Conditions are essential to the contract,
while warranties are less critical. Innominate terms fall in between, depending on the
consequences of a breach.
3. The Parol Evidence Rule: This rule limits the use of oral evidence to change or add to the
written terms of a contract. It ensures that once parties have reduced their agreement to
writing, no conflicting oral promises will be considered.
4. Collateral Contracts: These are separate contracts that exist alongside the main contract
and may be based on promises made outside the written terms of the main agreement.

Although the Contracts Act does not explicitly categorize terms in the above manner, the Malaysian
courts follow common law principles to interpret and apply these classifications. Before entering
into a contract, parties typically negotiate, and during this negotiation, they make statements either
orally or in writing. Some of these statements are meant to influence the other party to enter into a
contract, while others are intended to form part of the contract itself. The distinction between these
different types of statements is crucial in determining their legal status and impact on the contract.

Pre-Contractual Statements

Before a contract is finalized, statements are often made during negotiations. These statements
generally fall into two main categories:

1. Statements Made to Induce a Party to Enter into the Contract:

o These are statements made to persuade or influence another party to enter into the
agreement.
 o These statements are not part of the contract itself and do not have contractual
force.
o However, if a party has been misled by these statements into entering the contract,
they may be entitled to relief for misrepresentation. Misrepresentation occurs
when one party makes false statements to induce the other party to enter into a
contract, causing them harm or loss.
o Example:
Imagine you're buying a used car. The seller tells you, "This car has never been in an
accident." Based on this statement, you decide to buy the car. After a few months,
you find out the car was involved in a major accident, which the seller didn't
disclose.
o Result: The seller's statement is not part of the contract itself, but it was made to
persuade you to buy the car. This statement was false, so you may have a claim for
misrepresentation. You could seek damages for the harm caused by the false
statement
o
2. Statements Made Which Form Part of the Contract:
o These statements are intended to become part of the contract and have legal force
once the contract is formed.
o A statement in this category is treated as a term of the contract, meaning that if it is
breached, it gives rise to remedies under the contract (such as damages or specific
performance).
o Example:
Let's say you hire a contractor to renovate your house. In the contract, the
contractor promises, "I will use high-quality marble for the kitchen countertop." This
statement is written in the contract and is part of the agreement.

o Result: If the contractor installs low-quality marble instead of the promised high-
quality material, this would be considered a breach of contract. You could seek legal
remedies, such as damages or specific performance (requiring the contractor to fix
the issue).

A.TERMS AND REPRESENTATIONS

When statements are made before a contract, their legal effect depends on whether they are
representations or terms:

1. Representations:
o These are statements made only to persuade the other party to agree to the
contract.
o They do not form part of the contract and are not legally binding.
o However, if these statements are false and mislead someone into entering the
contract, the affected party can seek relief for misrepresentation (under Section 19
of the Contracts Act).
2. Terms of the Contract:
o These are statements that are meant to be part of the contract itself.
o They are legally binding, and if one party fails to fulfill them, the other party can sue
for breach of contract.
EXAMPLE : Representations (Not legally binding but may lead to misrepresentation claims):

1. Furniture Example:
o A salesperson claims, "This sofa is made of 100% genuine leather," but the sofa is
actually synthetic.
o This statement persuades the buyer to make the purchase but is not written in the
contract, so it is a representation.
o The buyer can claim misrepresentation if the statement is false.
2. Tour Example:
o A tour operator says, "You will see dolphins on this boat trip," but no dolphins are
seen during the tour.
o This is not guaranteed in writing, so it’s a representation.
o If the promise was false and misled the customer, they may claim
misrepresentation.

Terms of the Contract (Legally binding):

1. Furniture Example:
o The written purchase agreement states, "The sofa is made of 100% genuine leather,
as specified in the product description."
o This becomes a term of the contract, and if the sofa is not leather, the buyer can sue
for breach of contract.
2. Tour Example:
o The written booking contract includes, "The package includes a dolphin-watching
activity, and customers will receive a refund if no dolphins are spotted."
o This is a term of the contract, and if the tour fails to deliver, the customer can sue
for breach of contract.

Guidelines to Determine Whether a Statement is a Term or a Representation

The courts use the following four guidelines to decide if a statement is a term (legally binding) or a
representation (not binding but may lead to misrepresentation claims):

1. When the Statement Was Made

• Guideline: The closer the statement is made to the time of entering into the contract, the
more likely it is to be considered a term.
• Example:
o A seller promises, "This car is accident-free" right before the contract is signed. This
is likely a term.
o If the same statement was made weeks before signing and not repeated, it might
only be a representation.

2. Importance of the Statement

• Guideline: If the recipient of the statement considers it crucial to their decision to enter into
the contract, it is more likely to be a term.
 • Example:
o A buyer tells a seller, "I will only buy the car if it has never been in an accident," and
the seller confirms it. This makes the statement a term, as it was important to the
buyer’s decision.

3. Existence of a Written Contract

• Guideline: If a statement is included in the written contract, it is usually considered a term.

If it is not included, it is more likely to be a representation.
• Example:
o A written contract for a furniture purchase states, "The sofa is 100% leather." This is
a term.
o If the salesperson verbally says, "This leather will last 20 years," but it is not in the
contract, it may only be a representation.

4. Knowledge and Expertise of the Maker of the Statement

• Guideline: If the person making the statement has special knowledge or expertise, it is more
likely to be treated as a term.
• Example:
o A mechanic selling a car states, "The engine is in perfect condition." Given the
mechanic’s expertise, this is likely a term.
o If a non-expert seller makes the same claim, it might be treated as a representation.

1) When the Statement Was Made

This test considers the time gap between when the statement was made and when the contract was
formed. The longer the duration, the more likely the statement is a representation rather than a
term.

1. Short Time Gap:

o If the contract is entered into shortly after the statement is made, the statement is
more likely to be considered a term.
2. Long Time Gap:
o If there is a significant delay between the statement and the formation of the
contract, the statement is more likely to be treated as a representation.

Case Examples:

1. Routledge v McKay [1954]

o Facts:
The defendant told the plaintiff during negotiations (on October 23) that a
motorcycle was a 1942 model, based on the registration book. However, the
contract was only entered into one week later (October 30), and it did not mention
the motorcycle's model. Later, the plaintiff discovered that the motorcycle was
actually a 1930 model and sued, claiming the defendant's statement was a term.
o Held:
The statement was not a term because there was a one-week gap between the
 statement and the contract formation. This suggested that the statement was only a
representation.
o Key Point: The longer time gap implied that the statement was not intended to have
contractual force.

2. Bannerman v White (1861)

o Facts:
A seller stated during negotiations that hops were not treated with sulfur, and the
buyer immediately entered into the contract based on this assurance.
o Held:
The statement was a term because the contract was formed almost immediately
after the statement, showing that the buyer relied on it as a critical condition of the
agreement.
o Key Point: The short time gap indicated that the statement had contractual
significance.

1) Importance of the Statement

The importance placed on a statement by a party during negotiations is a key factor in determining
whether it is a term or a representation. If one party makes it clear that the statement is crucial to
their decision to enter into the contract, it is more likely to be treated as a term:

1. High Importance:
o If a party explicitly states that the truth of a statement is critical to their decision to
contract, the statement will likely be a term.

Scenario:
A buyer is looking to purchase a car and says to the seller, “I will only buy this car if the engine was
fully replaced with a new one last year.”
Seller’s Statement:
The seller responds, “Yes, the engine was replaced with a brand-new engine last year.”

Outcome:
Since the buyer has explicitly stated that the engine replacement is crucial to their decision, this
statement will likely be treated as a term of the contract. If the engine was not replaced as stated,
the buyer could claim a breach of contract and seek damages.

2. Low Importance:
o If a party does not place much weight on the statement, it is more likely to be a
representation.

Scenario:
A customer asks a seller, “Is this a brand-new model?”
Seller’s Statement:
The seller says, “Yes, it is.”
 Outcome:
If the customer doesn’t explicitly say that they are only buying the item if it’s brand-new, this
statement may be treated as a representation rather than a term. The customer could still claim
misrepresentation if the item turns out to be not brand-new, but it would be harder to argue that it
was a fundamental term of the contract.

Case Example:

Bannerman v White (1861)

• Facts:
The buyer was interested in purchasing hops but specifically asked if sulfur was used in their
cultivation. He made it clear that if sulfur had been used, he wouldn’t even inquire about the
price. The seller assured him that sulfur was not used. Based on this assurance, they entered
into a sales contract. Later, it was discovered that sulfur had been used on a small portion of
the hops. The buyer refused to pay, arguing that the seller's statement was a term of the
contract and had been breached.
• Held:
The court ruled that the seller's statement was a term of the contract. The buyer's explicit
emphasis on the importance of sulfur-free hops demonstrated that the statement was
integral to the contract.
• Key Point: The importance placed on the statement by the buyer, combined with the
immediate contract formation, led the court to treat the statement as a term.

Schawel v Reade [1913] 2 IR 81

Facts:

• The claimant purchased a horse from the defendant, intending to use it for stud purposes.
• During the examination, the defendant told the claimant that the horse was "sound" and
assured him that if there was anything wrong, he would inform him. The defendant also told
the claimant that there was no need for a vet to inspect the horse.
• The claimant relied on these assurances and purchased the horse, which later turned out to
have a hereditary eye disease, preventing it from being used for breeding.

Held:

• The statement that the horse was "sound" (good condition ) was treated as a contractual
term, not just a representation.
• The importance of the statement was high because the defendant had assured the claimant
that the horse was suitable for its intended use.
• The claimant's reliance on the defendant's assurance, particularly in relation to the specific
purpose of using the horse for stud purposes, meant that the statement became part of the
contract.
• Result: The defendant was in breach of contract because the horse was not "sound" as
assured.
Ecay v Godfrey [1947] 80 Lloyds Rep 286

Facts:

• The defendant sold a boat to the claimant and stated that, as far as he was aware, the boat
was sound and free from defects. However, the defendant also advised the claimant to have
the boat surveyed.
• The claimant purchased the boat based on this statement, but the boat later turned out to
be defective.

Held:

• The statement that the boat was "sound" was treated as a representation, not a term of the
contract.
• The advice to have the boat surveyed indicated that the defendant did not want the
claimant to rely solely on the statement.
• Result: The statement about the boat being "sound" was not sufficiently emphatic to be
considered a term, and the defendant's advice to survey the boat suggested that the
claimant should seek independent verification.

Key Differences:

1. Schawel v Reade:
o The statement was treated as a contractual term because it was a clear assurance
made in the context of the claimant's specific purpose for purchasing the horse.
o The defendant's statement was highly emphasized and made with the intent to
induce the claimant to rely on it.
2. Ecay v Godfrey:
o The statement was treated as a representation, not a term, because the defendant
explicitly advised the claimant to have the boat surveyed.
o The claimant was not expected to rely solely on the defendant's statement, which
diminished its weight as a contractual term.

2) EXISTENCE OF WRITTEN CONTRACT

• General Principle:
If there is a written contract, and the statement in question is not included in the written
terms, it is more likely to be considered a representation rather than a term.
• Reasoning:
This is because important statements are usually included in the written contract. If the
statement was not deemed significant enough to be written down, it suggests that the
parties did not intend it to be a legally binding term.

Example: Routledge v McKay [1954] 1 All ER 855

• Facts:
The seller told the buyer that a motorcycle was a 1942 model based on the registration
book.
One week later, the parties entered into a written contract that did not mention the model
 of the motorcycle.
The motorcycle was later discovered to be a 1930 model.
• Held:
o The statement about the model year was considered a representation, not a term of
the contract.
o One key reason was that the written contract did not include the statement,
indicating that it was not intended to be legally binding.
o The existence of a written contract that omits a particular statement suggests that
the statement is more likely a representation. However, this is not an absolute rule;
the courts also consider other factors such as the importance of the statement,
timing, and the conduct of the parties.

Oscar Chess Ltd v Williams, CA

• Key Observation by Lord Denning:

The presence (or absence) of a statement in a written contract is an important piece of
evidence in determining whether it was intended to be a term or a representation, but it is
not decisive.

Key Points from Lord Denning's Statement:

1. If the Statement is Recorded in Writing:

o It is strong evidence that the statement was intended to be a term or warranty (i.e.,
legally binding).
2. If the Statement is NOT Recorded in Writing:
o It is evidence against the statement being intended as a term or warranty, but it is
not conclusive.
o Courts have often found that oral statements can form a collateral warranty even if
they are not included in a written contract.
3. No Written Contract at All:
o In the absence of a written agreement, the court must evaluate whether a particular
oral statement was intended as a legally binding warranty or merely a
representation.

Key Test:

• The ultimate question is intention: Did the parties intend for the statement to have
contractual force (as a warranty or term), or was it a mere representation made during
negotiations?
• The existence of a written contract helps determine the status of a statement but is not the
sole factor. Courts will assess the overall context, conduct of the parties, and importance of
the statement to decide whether it is a term or a representation.

3) KNOWLEDGE AND EXPERTISE OF MAKER OF STATEMENT

• The knowledge, expertise, or skill of the person making the statement is crucial in
determining whether the statement is a term or a mere representation. If the maker of the
statement has greater knowledge or expertise than the person relying on it, the courts are
more likely to treat the statement as a term of the contract, as the maker is presumed to
have special credibility in the matter.
 • Thus, in relation to statements made about second hand cars, it was held that the statement
made by a car dealer was a term whereas a statement made by a private seller was regarded
as a representation.This is shown in the two Court of Appeal cases below wherein Lord
Denning gave his views accordingly

Case: Dick Bentley Productions Ltd v Harold Smith (Motors) Ltd [1965]

Facts:

1. The plaintiff (buyer) wanted a reliable second-hand Bentley car and trusted the defendant
(a car dealer) to find one.
2. The defendant (car dealer) claimed the car's engine had only done 20,000 miles since being
replaced.
3. The actual mileage was 100,000 miles, far more than stated, so the seller's statement was
false.
4. The buyer trusted the seller’s statement, bought the car, and later discovered the mileage
was much higher and the car had problems..

Issue:

Was the mileage statement a warranty (a contractual term) or a mere representation (which
doesn’t allow for damages)?

Held:

The Court of Appeal decided:

1. The statement about mileage was a warranty (a term of the contract), not just a
representation.
2. The defendant, as a car dealer, had special knowledge and was in a position to verify the
mileage.
3. Since the buyer relied on the dealer’s expertise, the statement was binding, even though the
dealer didn’t act fraudulently.
4. Since the statement was false, the seller breached the contract, and.The buyer was entitled
to damages for breach of warranty

Key Takeaway:

If a seller (especially an expert, like a car dealer) makes a statement that the buyer relies on, it is
more likely to be treated as a term of the contract, meaning the buyer can claim damages if the
statement turns out to be false.

Case: Oscar Chess Ltd v Williams [1957]

Facts:

1. The defendant, a private seller, sold a second-hand Morris car to Oscar Chess Ltd, a
company of motor dealers, for £290.
2. The seller believed the car was a 1948 model based on the information in the registration
logbook.
 3. The car was later discovered to be a 1939 model, much older and less valuable.
4. The buyer (motor dealers) sued the seller for breach of warranty, claiming the price
difference.

Issue:

Was the statement about the car's model year a warranty (a contractual term) or a mere
representation?

Held:

The Court of Appeal held that the statement was not a warranty but a mere representation. The
defendant was not liable for damages.

Reasoning:

1. The defendant was a private seller, not an expert in cars.

o He relied on the logbook, which he honestly believed to be correct.
o He had no special knowledge or means to verify the car's actual model year.
2. The plaintiff (buyer) was a motor dealer, with expertise in cars and the ability to verify the
information but chose not to.
3. Lord Denning’s observation:
o A reasonable person would infer that the seller did not intend to guarantee the
car’s model year because he was relying on the logbook, not personal knowledge.
o The seller only expressed his belief, not a binding promise.

Key Distinction from Dick Bentley v Harold Smith:

1. In Dick Bentley, the seller was a car dealer with special knowledge and expertise, making his
statement more likely to be a term of the contract.
2. In Oscar Chess, the seller was a private individual without expertise, and his statement was
based on information from the logbook, making it a mere representation.
3. The status of the seller (expert vs. layperson) and their knowledge or ability to verify the
statement are crucial in determining whether a statement is a term or a representation.

Case: Esso Petroleum Co Ltd v Mardon [1976]

Facts:

1. Esso, the plaintiff, negotiated a tenancy with the defendant for an Esso petrol station.
2. During negotiations, an Esso representative with 40 years' experience in the petrol industry
stated that Esso estimated the station’s petrol throughput would be 200,000 gallons per
year by the third year of operation.
3. The defendant relied on this statement and entered into a three-year tenancy agreement,
incurring losses because the station only had an actual throughput of 70,000 gallons per
year.
4. Esso issued a writ for possession of the station when the defendant could not pay for the
petrol supplied, and the defendant counterclaimed for damages for breach of warranty
regarding the throughput forecast.
Issue:

Was the statement made by Esso a representation or a warranty? Did Esso breach a warranty?

Held:

The Court of Appeal held that Esso was liable for breach of warranty.

Reasoning:

1. Lord Denning’s reasoning:

o Esso’s statement was not a guarantee that the throughput would reach 200,000
gallons. However, the statement was still a forecast made by a party with special
knowledge and skill.
o Esso had special knowledge due to its long experience in the petrol trade, its
knowledge of the town's traffic, and the throughput of similar stations.
o Esso was in a better position than the defendant to make an accurate forecast
about the station's throughput.
o The forecast was made with the intention that the defendant would rely on it when
entering the contract, which makes it a warranty that the forecast was made with
reasonable care and skill.
2. The forecast could be interpreted as a warranty, meaning Esso warranted that the forecast
was reliable and sound. The defendant could rely on it to make business decisions, including
the rent calculation for the station.
3. Breach of Warranty: The forecast turned out to be inaccurate, and since it was made with
special skill and knowledge, the court held that it was a breach of warranty, entitling the
defendant to damages.

Key Takeaways:

1. Special knowledge and skill of the party making the statement plays a key role in
determining whether the statement is a warranty or representation.
2. Even if a statement is not a guarantee, it can still be a warranty if made by a party with
better knowledge and skill, with the intention that the other party relies on it.
3. If a forecast or prediction is made with reasonable care and reasonable grounds, it may be
considered a warranty even if it does not guarantee the outcome.

In the case of Ecay v Godfrey (1947), the court ruled that if the person making a statement suggests
that the other party should verify the accuracy of the statement independently, it is more likely to
be considered a representation rather than a term of the contract.

Why?

1. Representation: A statement made as a representation is typically not legally binding. It is

just an assertion of fact or opinion. In this case, the maker of the statement encouraged the
other party to check the information for themselves, which suggests that the maker didn’t
intend for the statement to be a guaranteed part of the contract.
2. Implication: If the person says, "I believe this is true, but you should check it," it implies that
they are not guaranteeing the truth of the statement. This makes it less likely to be treated
as a warranty (which is a binding term of the contract) and more likely to be viewed as a
non-binding representation.
In Ecay v Godfrey, the defendant, who was selling a boat, told the buyer that the boat was in good
condition, but also suggested that the buyer should have it surveyed to check its condition. Because
of this, the court ruled that the statement was a representation, not a warranty or term of the
contract. Summary: If the seller encourages the buyer to verify the statement, it shows that the
seller isn't promising the truth of the statement, making it more of a representation rather than a
binding term of the contract.

B. CONDITIONS,WARRANTIES AND INNOMINATE TERMS

■ The Contract Act 1950 does not make any distinction between a condition and a warranty.

■ Once a statement has been established as a term of a contract, it is necessary to consider its
significance and effect.

■ Traditionally, each term of a contract has been classified as a condition or a warranty. It is

important to determine whether a term is a condition or a warranty because not all breaches have
the same effect. In other words, the remedy for breach will depend on the type of term that has
been breached. '

1. Conditions:

• Definition: A condition is a crucial term in a contract that goes to the heart of the
agreement.
• Effect of Breach: If a condition is breached, the innocent party has the right to:
o Rescind the contract (cancel the contract as if it never happened).
o Claim damages (compensation for the loss caused by the breach).
• Example: If you buy a car with the condition that it will be delivered by a certain date, and
the car is not delivered on that date, you can cancel the contract and claim damages.

2. Warranties:

• Definition: A warranty is a less important term that is not central to the contract.
• Effect of Breach: If a warranty is breached, the innocent party cannot cancel the contract
but can only:
o Claim damages (compensation for the loss caused by the breach).
• Example: If you buy a car and the seller promises it will have leather seats but it does not,
you can't cancel the contract but can claim damages for the difference in value.

3. Innominate (Intermediate) Terms:

• Definition: An innominate term is a term that is not classified as either a condition or

warranty but is based on the consequences of the breach.
• Effect of Breach: The remedy depends on the severity of the breach:
o If the breach is serious enough to affect the main purpose of the contract, the
innocent party may be allowed to rescind the contract (cancel it).
 o If the breach is minor, the innocent party may only be entitled to damages.

• Example: If a supplier agrees to deliver goods by a certain date, and they deliver late, but
the goods are still acceptable and usable, the breach might be minor, and you may only be
entitled to damages. However, if the delay causes you to miss an important event, the
breach could be serious enough to allow you to cancel the contract.

Legal Framework in Malaysia:

Under the SEC. 12 OF Sale of Goods Act 1957 (Revised), the act provides a structure for conditions
and warranties in the context of goods sale contracts:

• Section 12 (1) : When two parties enter into a contract of sale (a contract where goods are
bought and sold), they may include promises or statements about the goods in the contract.
These promises can be classified into two categories: conditions or warranties.
• Section 12(2): A condition is essential to the contract, and its breach allows the innocent
party to repudiate the contract.
• Section 12(3): A warranty is collateral to the main purpose of the contract, and its breach
allows only a claim for damages but not repudiation of the contract.
• Section 12(4): The nature of a stipulation in a contract (whether a condition or warranty)
depends on the construction (interpretation) of the contract itself.

Important Considerations:

• Intentions of the Parties: Whether a term is a condition or warranty depends on what the
parties intended when they made the contract. The court will look beyond labels (like calling
something a warranty) to decide what the term truly means.
• Innominate Terms: These terms are more flexible. The court decides whether the breach
allows rescission or only damages based on the actual impact of the breach on the
contract's purpose.

The innominate term (or intermediate term) approach differs from the traditional approach of
classifying terms as conditions or warranties. Here's a simple breakdown:

Traditional Approach:

• Conditions: Major promises in a contract. If broken, the innocent party can usually cancel
the contract (rescind) and claim damages.
• Warranties: Minor promises in a contract. If broken, the innocent party can only claim
damages, but cannot cancel the contract.

Innominate or Intermediate Term Approach:

• This approach doesn't strictly classify terms as conditions or warranties. Instead, it looks at
the effect of the breach to decide what remedy the innocent party gets.
• Key idea: Whether the breach is serious or minor.
• Under the innominate term approach, the remedy depends on how severe the breach is. If
the breach is major, the contract may be cancelled; if it's minor, only damages can be
claimed.
 • distinctions between Conditions, Warranties, and Innominate Terms:

Type of
Definition Breach Consequence Remedy Options
Term
Essential terms that go Breach entitles the innocent party
1. Terminate + Damages
Condition to the root of the to discharge from the contract
2. Damages Only
contract. and claim damages.
Less essential terms, Breach entitles the innocent party
Warranty subsidiary to the main only to claim damages, no Damages Only
purpose of the contract. discharge from contract.
Terms that are not Breach may or may not be 1. Yes (Serious breach):
Innominate classified as conditions serious. If serious, the innocent Terminate + Damages 2.
Term or warranties by the party can discharge from the No (Minor breach):
parties or the law. contract and claim damages. Damages Only

Difference between condition and warranty ;

■ Whether a term is a condition or a warranty depends on the intention of the parties as to the
importance they had placed on the term concerned

. ■ The court will look at the nature of the contract and the surrounding circumstances. This can be
illustrated by comparing the cases of Bettini v Gye (1876) 1 QBD 183.and Poussardv Spiers and Pond

• Bettini v Gye (1876):

o The plaintiff agreed to sing for the defendant during the London season and also
agreed to arrive in London six days prior to rehearsals.
o The plaintiff fell ill and only arrived two days before the first show. The defendant
refused to employ the plaintiff.
o The court found that the term regarding rehearsals was not essential to the
contract's main purpose. The breach of this term was not serious enough to justify
rescinding the contract.
o Result: The term was treated as a warranty, and the defendant could not rescind
the contract over the plaintiff's late arrival.
• Poussard v Spiers and Pond (1876):
o The plaintiff agreed to sing in the lead role in a new opera. She was unable to
perform at the opening night due to illness.
o The defendants replaced her with another person and refused to accept her service
when she recovered.
o The court found that her failure to perform at the opening night was central to the
contract, and this breach went to the root of the contract.
o Result: The breach was treated as a condition, allowing the defendant to rescind the
contract.

Conclusion:

• In Bettini, the plaintiff's late arrival for rehearsals was not seen as a major issue (a
warranty), so the defendant couldn't rescind the contract.
 • In Poussard, the plaintiff’s failure to perform at the opening night was vital to the contract,
thus it was a condition and allowed the defendant to rescind the contract.
• Thus, whether a term is a condition or a warranty depends on the importance the parties
place on that term in the contract. If the breach affects the core of the contract, it's a
condition; if it’s less important, it’s a warranty.

In the case Tan Chong & Sons Motor Sdn Bhd v Alan McKnight [1983] 1 MLJ 220, the Federal Court,
through the judgment of Salleh Abas FJ, explains the distinction between a condition and a
warranty:

Key Points:

1. Warranty in Contract Law:

o The word "warranty" can cause confusion because it can either refer to:
▪ A term of the contract (as in condition vs warranty), or
▪ A separate promise collateral to the contract.
o The term "warranty" is used to distinguish conditions (which are essential terms)
from warranties (which are less essential terms).
2. Condition:
o A condition is an essential part of the contract, and its breach entitles the innocent
party to:
▪ Repudiate (terminate) the contract and be discharged from any further
obligations under the contract.
▪ Claim damages for the breach.
o The breach of a condition gives the innocent party a right to terminate the contract.
3. Warranty:
o A warranty is a less important term.
o The breach of a warranty only allows the innocent party to claim damages.
o The innocent party cannot repudiate the contract for a warranty breach.
4. Electing to Treat a Breach as a Warranty:
o Even if a term is classified as a condition, the innocent party has the option to waive
the condition or choose to treat the breach of condition as a breach of warranty.
o This is allowed under Section 13(1) of the Sale of Goods Act 1957 (Revised 1972).
This provision enables a party to elect to treat a condition breach as a warranty
breach, limiting the remedy to damages only.

For example, in the case Tham Cheow Toh v Associated Metal Smelters Ltd (1971), the
Federal Court upheld that a breach of a condition (regarding the metal melting furnace's
temperature requirement) could be treated as a warranty breach, allowing the innocent
party to waive the condition and pursue damages only.

5. Traditional Method of Classifying Terms:

o The traditional approach classifies contract terms based on their importance:
▪ Conditions: Essential to the contract’s purpose, and breach allows
repudiation.
▪ Warranties: Secondary to the contract’s purpose, and breach results in
damages only.
o Whether a term is a condition or warranty is determined based on judicial
impression (legal judgment) and can vary depending on the circumstances of the
case, as seen in the case of Abdul Razak bin Datuk Abu Samah v Shah Alam
Properties Sdn Bhd [1992] 2 MLJ 500.
Conclusion:

• The distinction between a condition and a warranty is crucial because it determines

whether the innocent party can rescind the contract or is only entitled to damages.
• Conditions allow the innocent party to terminate the contract, while warranties allow for
damages only.
• However, the party can elect to treat a breach of condition as a breach of warranty under
certain conditions, thus limiting the remedy to damages.

Innominate or Intermediate Terms:

The innominate or intermediate term is a relatively modern classification in contract law that
emerged due to the limitations of the traditional distinction between conditions and warranties.
Here's how it differs from the classic classification:

1. Traditional Classification (Condition vs Warranty):

o Under the traditional approach, terms were either conditions (essential, going to
the root of the contract) or warranties (subsidiary, less important).
o This approach was often seen as inadequate, especially when dealing with contracts
where terms could not be easily categorized as either a condition or a warranty.
2. Introduction of Innominate or Intermediate Terms:
o The innominate term (also called intermediate term) was introduced to address
cases where it was difficult to categorize terms strictly as conditions or warranties.
o In this approach, the focus is not on whether the term is essential (like a condition)
or subsidiary (like a warranty), but rather on the consequences of the breach.
o Focus on Consequences: The determination of whether the breach of an innominate
term allows for termination (rescission) or only damages depends on the severity of
the consequences.
▪ If the breach results in serious consequences, such that the innocent party is
substantially deprived of the contract's main benefits, the innocent party
may have the right to rescind the contract and be discharged from further
obligations.
▪ If the breach results in a minor consequence, meaning it does not
substantially affect the performance or benefits of the contract, the
innocent party is only entitled to damages.
3. Example:
o In cases where the term cannot easily be classified as essential or subsidiary, the
court will look at how significant the breach is in terms of the overall contract. If the
breach defeats the very purpose of the contract, rescission might be appropriate,
whereas, for a lesser breach, damages alone might suffice.

Hongkong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, CA:

The Hongkong Fir Shipping case is a landmark decision in which the Court introduced the
innominate term (or intermediate term) doctrine. This case clarified the approach to contractual
terms, especially when it was difficult to classify terms strictly as conditions or warranties.

Facts:

• The shipowners chartered the vessel Hongkong Fir to the charterers for 24 months.
 • Clause 1 required the vessel to be "seaworthy," and Clause 3 obliged the owners to maintain
it in good condition.
• Upon delivery, the vessel was in reasonably good condition, but frequent maintenance was
required due to its age.
• The vessel's chief engineer was incompetent, leading to machinery breakdowns and delays.
• The charterers repudiated the contract, alleging a breach of the seaworthiness obligation.

Issues:

1. Whether the seaworthiness obligation was a condition of the contract, and if its breach
would entitle the charterers to repudiate the contract.
2. Whether the delays caused by the breach were severe enough to justify repudiation.

Court's Decision:

• The Court ruled that the seaworthiness obligation was not a condition but an innominate
term. This meant that the breach did not automatically lead to repudiation.
• Instead, the breach would give the charterers the right to claim damages, depending on the
severity of the breach.
• The delays caused by the breach, although significant, did not amount to a frustration of the
contract. Therefore, the charterers were not entitled to treat the contract as repudiated,
but could only claim damages.

Later Case Development on Innominate Terms:

• After Hongkong Fir, several cases further discussed the innominate term approach:
o Cehave NV v Bremer Handels GmbH (The Hansa Nord) (1960)
o Federal Commerce & Navigation Co Ltd Molena Alpha Inc & Ors (The Nanfri, The
Benfri, The Lorfri) (1979)

These cases adopted the "goes to the root of the contract" or "fundamental breach" test to classify
terms based on their impact.

However, the innominate term approach has faced criticism for its uncertainty, especially in
commercial contracts where predictability is crucial. For instance:

• The Mihalis Angelos [1962] 1 QB 164, CA and Bunge Corporation v Tradax Export SA [1980]
1 Lloyd's Rep 294, HL emphasized the need for certainty in commercial agreements,
particularly charter parties.

In Malaysia:

• The Malaysian courts have used both the traditional condition/warranty classification and
the innominate term approach.
• In Ching Yik Development Sdn Bhd v Setapak Heights Development Sdn Bhd [1997] 1 AMR
89; [1996] 3 MLJ 675, CA, Gopal Sri Ram JCA explained that:
o If the breach goes to the root of the contract, it is a fundamental breach, and the
innocent party may treat the contract as repudiated.
o If the breach does not affect the core of the contract, it is subsidiary and the
remedy is limited to damages.
 • Similarly, in Datuk Abu Samah v Shah Alam Properties Sdn Bhd & Anor Appeal [1992] 2 MLJ
500, CA, Gopal Sri Ram JCA reiterated the importance of assessing the consequences of the
breach rather than its relative importance.

C. PAROL EVIDENCE RULE

The parol evidence rule is a legal principle that prohibits the introduction of oral or extrinsic
evidence to modify, add to, or contradict the written terms of a contract once the terms have been
reduced to writing. Essentially, if a written contract purports to contain the entire agreement
between the parties, the court will not allow external evidence to alter that agreement.

Key Points:

1. Written Document is Binding: The rule applies when the terms of the contract are reduced
to writing. Once a contract is in written form, any prior oral agreements or statements are
generally excluded from being used as evidence in a court dispute.
2. Purpose of the Rule:
o The rule aims to preserve the integrity of written contracts. By excluding external
evidence, it helps ensure that the original content of the agreement is maintained,
which is particularly important in business dealings for certainty and stability.
o Without this rule, it would be possible for parties to continuously alter the terms of
an agreement by introducing new or conflicting evidence, which could undermine
the predictability of contractual obligations.
3. Case Reference (Tindok Estate Besar Sdn Bhd v Tinjar Co [1979] 2 MLJ 229, FC):
o Chang Min Tat FJ in the case expressed the concern that if parol evidence were
generally admissible to add terms to an agreement, it could lead to an uncontrolled
re-writing of contracts. This would create a legal risk for any party entering a
contract, as the terms of the agreement could be altered post hoc based on what
one party later claims.
o He stressed that allowing such claims would undermine the certainty of the
contractual process, as parties would be able to revise the terms by introducing
evidence of prior, unwritten negotiations or statements.

Parol Evidence Rule under Malaysian Law:

In Malaysia, the parol evidence rule is codified in sections 91 and 92 of the Evidence Act 1950:

• Section 91: States that when the terms of a contract are reduced to writing by consent of
the parties, no oral evidence shall be admitted to prove the terms of the contract unless the
written document itself is in dispute.
• If the terms of a contract are written down and both parties agree to them, no oral
statements or verbal agreements will be allowed in court to prove what the contract meant
or to change the terms.
• Section 92: Prohibits the introduction of oral agreements or statements that would
contradict, vary, add to, or subtract from the terms of a written contract that has been
proven under Section 91.
• This section goes a step further and says that oral statements (things you say) cannot
contradict or change what’s written in a valid contract. If the contract is already written,
 oral statements made later are irrelevant if they change or add to what’s already in the
written agreement.

The exceptions to the parol evidence rule under Section 92 of the Evidence Act 1950 significantly
reduce its strictness and allow certain forms of oral or extrinsic evidence to be introduced, even
when a contract is in written form.

Exceptions under Section 92 of the Evidence Act 1950:

1. Invalidity of the Document (Fraud, Illegality, etc.):

o Oral evidence may be introduced to prove any fact that could invalidate the
document or entitle a person to a decree or order relating to it. This includes:
▪ Fraud: Evidence of fraudulent activity related to the formation of the
contract.
▪ Intimidation: If the contract was made under coercion.
▪ Illegality: If the contract or its terms are illegal.
▪ Lack of due execution: If the document was not properly executed or
signed.
▪ Lack of capacity: If one of the parties lacked the legal capacity to enter into
the contract (e.g., due to age or mental state).
▪ Wrong dating: If the document is incorrectly dated, affecting its validity.
▪ Failure of consideration: If the consideration for the contract is not provided
or is insufficient.
▪ Mistake in fact or law: If the contract was made based on a mistake of fact
or law.
2. Separate Oral Agreement on Silent Matters:
o If a written contract is silent on a specific issue, oral evidence may be introduced to
prove the existence of a separate oral agreement regarding that issue, provided
that the oral agreement is not inconsistent with the written terms.
o The degree of formality of the document is considered in deciding whether this
exception applies. This is related to the doctrine of collateral contracts, where oral
agreements can exist alongside the written contract.
3. Oral Agreement as a Condition Precedent:
o Oral evidence can be used to prove that there was a condition precedent that must
be fulfilled before any obligation under the written contract becomes effective.
o For example, a contract may be contingent on an event or condition that was agreed
orally, and this condition may be proven by oral evidence.
4. Subsequent Oral Agreement to Rescind or Modify:
o Evidence may be introduced to prove that the parties made a distinct subsequent
oral agreement to rescind or modify the original contract. However, this exception
does not apply in cases where the contract, grant, or disposition of property must
be in writing by law (e.g., certain land transactions or contracts subject to
registration).
o If the contract has been registered as required by law, oral agreements to modify or
rescind the contract would generally not be allowed.
5. Usage or Customs in the Industry:
o Evidence of usage or customs in the industry may be introduced to show that
certain incidents or practices are usually attached to contracts of that particular
 type, provided that such usage or customs do not conflict with or are not repugnant
to the written terms of the contract.
o For example, standard industry practices could be used to explain or add to the
written terms of a contract where the written agreement is silent on those practices.
6. Clarification of Language in the Document:
o Oral evidence may be introduced to explain the meaning of the language in a
document, particularly if the terms are ambiguous or unclear. This is done to show
how the language in the document relates to existing facts, potentially clarifying any
misunderstanding or confusion.

The two important Federal Court decisions in Tindok Besar Estate Sdn Bhd v Tinjar Co and Tan
Chong & Sons Motor Co Sdn Bhd v Alan McKnight illustrate differing interpretations of Section 92
of the Evidence Act 1950 regarding the admissibility of parol evidence. Both cases highlight
situations where oral evidence was admitted to modify or add to the terms of a written agreement,
but the courts applied different reasoning based on the context and exceptions in Section 92.

Tindok Besar Estate Sdn Bhd v Tinjar Co

In this case:

• The appellant was a contractor for timber extraction but later decided not to proceed with
the work. A new agreement was made where the respondent would take over the work.
• The dispute arose regarding the new terms of the agreement.
• The trial judge admitted parol evidence to prove several implied undertakings, reasoning
that not all terms had been incorporated into the written agreement.

The decision in this case supported the admission of parol evidence because the court believed that
the written contract did not fully reflect the parties' actual agreement. In this context, parol
evidence was used to add implied terms not included in the writing.

Tan Chong & Sons Motor Co Sdn Bhd v Alan McKnight

This case involved:

• A dispute about the sale of a car. The respondent, based on representations made by the
appellant's salesman, bought the car despite the written contract containing a clause stating
no warranty was provided.
• The respondent later found that the car did not meet Australian Design Regulations, and he
sought damages for breach of warranty.
• The central issue was whether the parol evidence of the salesman's oral representations
was admissible in light of Section 92 of the Evidence Act.

In this case:

• The Federal Court held that provisions (b) and (c) of Section 92 applied, which allow the
admission of parol evidence in certain circumstances.
o Provision (b) allows evidence of oral agreements concerning matters not covered in
the written document, as long as these agreements do not conflict with the written
terms.
 o Provision (c) allows the admission of oral evidence if it constitutes a separate
agreement(additional promise) , such as a warranty or promise distinct from the
written terms.
• Salleh Abas FJ emphasized that the purpose of admitting the oral evidence was not to
contradict or vary the written contract but to prove the existence of an additional warranty
or separate contractual promise. This would not violate Section 92, as the written contract
did not encompass all terms, particularly the warranty.

Salleh Abas FJ's Interpretation:

• He argued that the prohibition against the admissibility of oral evidence under Section 92
applies only when all terms of the contract are written down.
• If some terms are agreed upon orally and others in writing, oral evidence could be
introduced to prove those oral terms.
• In other words, Section 92's limitation applies when all terms are written, but not when
some terms are oral.

D. COLLATERAL CONTRACTS

• A collateral contract is a separate, secondary agreement made alongside the main contract.
It happens when one party gives a promise or assurance during negotiations, which
convinces the other party to sign the main contract.
• A collateral contract allows oral promises or statements made during pre-contractual
negotiations to be considered, even if they are not part of the written agreement.
• An oral promise forming part of the collateral contract may override terms in the main
written contract if the assurance was essential to one party’s decision to contract.
• Sometimes, promises or statements made before signing a written contract are not included
in the written terms. The parol evidence rule says you can’t bring in outside evidence (like
oral promises) to change a written contract.
But with a collateral contract, the law allows you to rely on that promise if:

1. The promise was important to your decision to sign the contract.

2. It can exist separately without directly contradicting the main contract.

Example of Collateral Contract

Imagine this situation:

• Party A (a car dealer) tells Party B (a buyer) that the car they’re selling meets certain safety
standards.
• Party B only agrees to buy the car because of this promise.
• Later, the written contract doesn’t mention the safety standards.

If the car doesn’t meet those standards, Party B can argue that the dealer’s promise was a collateral
contract, even though it wasn’t in the written agreement.

• The collateral contract makes the oral promise legally binding, especially if it was the reason
why one party entered into the written contract.
• In Hartela Contractors Ltd v Hartecon JV Sdn Bhd [1999], the court decided that an oral
promise (made at the time of negotiation) could form a collateral contract even if it
 contradicted the written agreement. This shows how the law protects promises that
influence a contract.

1. What is a Collateral Contract?

o It’s a separate oral agreement that exists alongside the main written contract.
o It arises when one party gives a promise during negotiations, and this promise
convinces the other party to enter the main contract.
2. Does It Override the Written Agreement?
o Yes, the collateral contract can override the main contract if there’s inconsistency,
but the promise is treated as a separate agreement, not part of the main one.

1. Tan Swee Hoe Co Ltd v Ali Hussain Brother [1980]

• Facts:
o The landlord (appellants) made an oral promise to allow the tenant (respondents) to
stay for as long as they wanted if they paid $14,000 as tea money.
o Two written tenancy agreements were signed, but these agreements didn’t mention
the oral promise.
o Later, the landlord asked the tenant to leave, leading to a dispute.
• Issue:
o Can the tenant rely on the oral promise that wasn’t included in the written tenancy
agreement?
• Federal Court Decision:
o The oral promise was a collateral contract.
o This collateral contract existed side by side with the written tenancy agreement and
overrode any inconsistency in the written terms.
o Reasoning: The oral promise induced the tenant to enter into the tenancy
agreement, which established the collateral contract.

2. Kluang Wood Products Sdn Bhd v Hong Leong Finance Berhad [1999]

• Facts:
o A representation(statetemnet) was made during negotiations, which induced one
party to sign the main contract.
o The representation wasn’t included in the written contract.
• Federal Court Decision:
o The Federal Court confirmed that a collateral contract existed.
o For a collateral contract to be valid, the following must be proven:
1. A representation was made, and the defendant intended for the other party
to rely on it.
2. The representation induced the signing of the main contract.
3. The representation amounted to a warranty that was collateral to the main
contract.
Key Principles from These Cases

1. Separate Contract:
The collateral contract is not part of the main contract but exists as a side agreement.
2. Inducement is Key:
If a promise or assurance convinces someone to sign the main contract, it can form a
collateral contract.
3. Proof Requirements:
To establish a collateral contract, you must prove:
o There was a clear promise/representation.
o The promise was relied upon to enter the main contract.
o The promise acted as a warranty.

❖ OVERRIDES INCONSISTENT WRITTEN TERM

A collateral contract is independent of the main written contract, even though it exists
alongside it.
If a term in the collateral contract contradicts a term in the main contract, the collateral
contract overrides the inconsistent written term

Case: Kandasami v Mohamed Mustafa

• Facts:
o The parties signed a written document, but one party represented to the other that
the document would have no legal effect between them.
o This oral assurance acted as a collateral agreement.
• Issue:
o Can the oral agreement (collateral contract) override the written document?
• Privy Council Decision:
o The court upheld the collateral contract.
o It held that if both parties agree that the written document would not have legal
effect between them, the collateral contract takes precedence over the written
terms.
o The collateral contract essentially nullified the legal effect of the written agreement.

❖ CANNOT DESTROY MAIN CONTRACT

• While a collateral contract exists alongside the main written agreement and may
override any inconsistent written terms, it cannot eliminate or invalidate the written
contract entirely.
• A collateral contract can only exist if there is a written contract in the first place.
Case: Industrial & Agricultural Distribution Sdn Bhd v Golden Sands Construction Sdn Bhd

• Facts:
o The defendant (buyer) purchased two excavators from the plaintiff (seller).
o After two months, the defendant wanted to return the excavators, claiming there
was an oral collateral warranty by the plaintiff stating that if the excavators were
unsuitable, they could be returned without financial liability.
o The plaintiff filed a claim for damages, including the depreciation of the excavators.
o The plaintiff believed that the written contract didn’t allow for the return of the
excavators after purchase unless there was a valid reason.

• Issue:
o Was the defendant’s oral assurance a valid collateral contract?
o Could the collateral contract negate the written contract?
• Court Decision:
o No collateral contract existed in this case.
o The court held that the oral assurance given by the defendant could not constitute a
collateral contract because it would destroy the main contract.
o The court concluded that the collateral contract cannot invalidate the written
contract in its entirety.

(2) IMPLIED TERMS

Definition: Implied terms are provisions that a court assumes were intended to be part of a
contract, even though they are not explicitly stated. These terms arise from the actions, conduct,
or circumstances surrounding the contract and are legally binding, just like express terms.

• A contract can be implied through the actions, conduct, or circumstances between the
parties, rather than through clear verbal or written agreements.
• Express terms are clearly outlined by the parties, either orally or in writing.
• Implied terms fill in the gaps when no express terms are provided. However, once
express terms are agreed upon, any implied terms that conflict with them are voided.

Examples of Implied Terms:

• Zebra Crossings: Pedestrians are given the right of way at zebra crossings even if no sign is
posted. This is an implied term in traffic rules and regulations.
• Employee Health & Safety: Employers are impliedly obligated to ensure a safe working
environment for employees, even if not explicitly stated in a contract.
• Business Loyalty: In a business relationship, there may be implied terms requiring loyalty,
confidentiality, and good faith, even if not specifically written in the contract.

Implied Terms in Contracts:

 • Contracts may not only include express terms that the parties explicitly agree to, but they
can also contain implied terms. These are rights and liabilities assumed by the courts to
reflect the presumed intentions of the parties involved, even if not written out in the
contract.
• The Contracts Act in Malaysia doesn't specifically address implied terms. Therefore,
Malaysian courts have adopted common law principles when it comes to implied terms in
contracts.
• Courts are generally cautious when deciding to imply terms. A term will not be implied just
because it seems to make the contract more just or reasonable. There must be clear
justification for implying such terms, and it cannot be based solely on the idea that it would
improve fairness.

Lord Atkin's Warning in Bell v Lever Brothers Ltd (1932):

• One of the most significant cautions against implying terms in contracts is from Lord Atkin’s
statement in the case Bell v Lever Brothers Ltd [1932] AC 161, HL:
o Lord Atkin’s Warning: "Nothing is more dangerous than to allow oneself liberty to
construct for the parties contracts which they have not in terms made by importing
implications which would appear to make the contract more businesslike or more
just."
o Meaning: This warning stresses that courts should not add terms to a contract that
were not explicitly agreed upon by the parties, even if such additions could make the
contract seem more practical or fair.

Case: Bell v Lever Brothers Ltd [1932] AC 161, HL

Facts:

• Mr. Bell was the managing director of a company owned by Lever Brothers Ltd. for five
years. During his tenure, Mr. Bell engaged in personal trading for his own profit, violating his
employment contract.
• Lever Brothers Ltd. was unaware of Mr. Bell’s trading activities.
• The company later offered Mr. Bell a redundancy payment of £30,000 as compensation for
terminating his contract, but when they discovered his personal trading activities, they
sought to recover the compensation paid, arguing that the payment had been made under a
mutual mistake (both parties had assumed the payment was required, but the company
might have been entitled to dismiss him without compensation due to his breach).

Held:

• House of Lords (HL) held that the mistake was not fundamental enough to void the contract.
• The court considered that mutual mistake was not a strong enough reason to set aside the
agreement, especially because the point about the mistake had only been introduced as an
alternative argument (not supported by sufficient evidence) during the trial.
• Outcome: The case does not support the idea of implying terms into contracts based on an
assumption of fairness or business practicality.
There are three ways a court can add implied terms:

1. By Custom or Usage:
o If something is usually done in a particular business or industry, the court might add
it to the contract. For example, if everyone in a particular trade usually provides a
warranty, the court may add that warranty even if it's not written in the contract.
2. By Law (Common Law or Statute):
o Sometimes, the law itself adds terms to contracts. For example, the law might say
that goods sold must be of good quality, even if this isn't written in the contract.
3. By the Court Based on the Facts of the Case:
o The court can add a term if it's clear that the parties would have agreed to it if they
had thought about it when making the contract. For instance, if two people agree to
something, and later, it turns out they forgot a key detail, the court might add that
term to make the contract fair.

Case: Todd v Nicol [1957] SASR 72

Key Points:

• The case of Todd v Nicol involved an agreement between Nicol and the Todd family
(Margaret and Grace) to move from Scotland to Australia. Nicol promised to alter her will to
ensure that her house would go to the Todds upon her death in exchange for their
companionship after the death of her husband.
• The Todds accepted the offer and moved to Australia, but the relationship eventually
deteriorated. Nicol asked the Todds to move out, and an issue arose as to whether their
agreement was legally binding, particularly concerning the existence of an implied term
about their behavior.

Court's Ruling:

• Justice Mayo held that the agreement was not a legally binding contract because it lacked
sufficient consideration (something of value exchanged between the parties). However, he
also addressed the question of whether a term could be implied into the agreement.
• Implied Terms: Mayo ruled that a term could indeed be implied into the agreement
requiring the Todds to behave in a reasonable and decent manner. This was necessary to
fulfill the reasonable expectations of both parties based on the nature of their agreement. In
this case, behavioral expectations were essential for the contract to function effectively.

Court's Emphasis:

• The court emphasized that it is not the role of the court to create or modify contractual
terms for the parties based on events or circumstances that occurred after the contract was
made. Justice Mayo’s statement in Todd v Nicol is similar to Lord Atkin’s warning in Bell v
Lever Brothers Ltd, where the court cautioned against introducing terms based on fairness
or perceived business sense.

IMPLIED TERMS : i) by custom or usage ii) by law (CL or Statute) iii) by the courts
i) Terms Implied by Custom or Trade Usage

In some industries, there are certain customs or practices that are generally followed. If these
customs or trade usages are well-known and accepted, they can be implied into a contract, even if
they aren't written down in the agreement itself. However, for a custom or trade usage to be
implied, it must meet certain conditions.

Requirements for Implied Terms by Custom or Trade Usage:

1. Notorious (Well-Known): The custom or usage must be widely recognized and known in the
industry or field.
2. Certain (Clear and Unambiguous): The custom must be clear and definite. It shouldn't be
vague or uncertain.
3. Reasonable: The custom or usage must be fair and reasonable to be added to the contract.
4. Not Inconsistent with Express Terms: The custom or usage shouldn't contradict any terms
that are explicitly written in the contract.

Do the Parties Need to Know About the Custom or Usage?

Yes, generally, for a custom or trade usage to be implied, both parties must be aware of it or it must
be so well-known in the industry that it can be assumed they knew about it. The custom must be
something that the parties could reasonably be expected to understand and accept when entering
into the contract.

Example: Hutton v Warren [1836]

• Facts: A farmer (claimant) had a tenancy on a field owned by the defendant. The farmer
planted corn and barley, prepared the field, and worked to ensure the crops grew. Before
the crops were ready for harvest, the defendant terminated the tenancy. The farmer then
sent a bill to the defendant, asking for compensation for the work done and the seeds used.
This type of compensation was customary in farming tenancies.
• Defendant’s Argument: The defendant refused to pay, saying there was nothing in the
tenancy agreement that stated the farmer should be compensated for his work and the
seeds used.
• Court's Decision: The court implied a term into the tenancy agreement, stating that
compensation for the work and seed costs would be paid. This was based on the customary
practice in farming tenancies to include such compensation, even though the contract didn’t
explicitly mention it.

a) NOT INCONSITENT WITH EXPRESS TERMS

When people agree on a contract, they may have some customs or practices that are common in
their industry or market. These customs can sometimes be added to the contract even if they're not
written down. However, these customs cannot go against the explicit (clearly written) terms that
the parties already agreed to.

Example: Les (London) Affreteurs Reunis SA v Leopold Walford Ltd

• Lord Atkinson's Statement:

 o This means that a custom cannot override what has been clearly agreed upon in
writing in a contract. If the written contract explicitly excludes the custom, the
custom will not be implied into the contract.

Proviso (e) of Section 92 of the Evidence Act 1950

This section allows the introduction of extrinsic evidence (like customs or trade usages) as an
exception to the parol evidence rule. However, it limits this by stating that the custom or usage
cannot be inconsistent with or repugnant to the express terms of the contract.

• Section 92(e) of the Evidence Act 1950 states: means that customs or trade usages can be
introduced to a contract if they don't contradict what's explicitly stated in the contract.

Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leong [1998] 3 MLJ 151, FC

• Peh Swee Chin FCJ explained:

Peh Swee Chin FCJ (a judge in Malaysia) is explaining that:

• Implied terms can come from customs or practices that are common in a particular market
or trade.These customs are reasonable (i.e., they make sense and are fair).
• Importantly, these customs don’t come from the court's judgment or decision, but because
these customs already exist in that trade or market.
• Example: In certain industries, it’s common practice to pay for delivery costs, even if the
contract doesn’t specifically mention it. The court doesn’t create this custom, it’s already in
place in the market.
• This case also noted that Section 92(e) of the Evidence Act 1950 supports the idea that
customs can be implied into contracts, but they must not contradict the express terms.

2.Reasonableness of the Custom or Trade Usage:

Before a practice or custom can be implied into a contract, it must be reasonable. This means that
the practice must make sense and be fair, and it can't be something that's unusual or unreasonable.

Case Example: Preston Corporation Sdn Bhd v Edward Leong & Ors [1982] MLJ 22, FC

• Facts:
o The appellants (a publishing company) and the respondents (a printing company)
had a dispute about the ownership of film positives (used for printing books).
o The printing company claimed that there was a trade usage that entitled them to
ownership of the film positives unless the publishing company paid for them.
• Court's Decision:
o The Federal Court ruled that the trade usage wasn't proved. They explained that for
a practice to be considered a trade usage, it must meet certain criteria: it must be
notorious (widely known), certain (clear and definite), and reasonable.
o The Court emphasized that no practice could be accepted as a trade usage unless it
is reasonable.
o Key Point: If a custom or practice is unreasonable (even if it is certain and
notorious), it cannot be considered a trade usage.
Reasonableness is a key requirement: A custom or trade usage must be fair and sensible to be
enforced by the courts.

3. Knowledge of Custom or Trade Usage:

This principle explores whether a party needs to be aware of a custom or trade usage before it can
be implied into their contract. Generally, if a custom or practice is reasonable, certain, and
notorious (widely known in the industry), it can apply to a contract even if one of the parties is not
aware of it.

Case Example: Cunliffe-Owen v Teather & Greenwood [1967] 3 All ER 561:

• Court's Explanation:
o The court said that usage can be implied if it is certain, notorious, and reasonable.
o A party is bound by customs or usages if they are certain, notorious, and
reasonable—even if the party doesn't know about the custom.
o However, if the practice is unreasonable (even though it’s well-known), it cannot be
enforced unless the party knows about it and agrees to it.

Case Example: De Cruz v Seafield Amalgamated Rubber Co Ltd [1963] MLJ 154:

• Facts:
o The plaintiff worked for a rubber estate and was paid by the estate. When the estate
was sold, his contract was terminated, and later he was employed by the defendant.
o The issue was whether the plaintiff was entitled to three months' notice before
termination, even though the contract didn't specify the notice period.
• Court's Decision:
o Gill J ruled that the plaintiff was entitled to three months' notice. This was because
in the absence of a specified notice period in the contract, the custom or usage in
the industry would apply.
o The Court emphasized that the custom must be known to the parties when they
made the contract. The custom must also be certain, reasonable, and well-known.

Key Point:
In this case, the court implied a term regarding the notice period based on custom in the rubber
estate industry. However, the custom must be something that both parties would reasonably know
about when entering the contract.

In the case Pembangunan Maha Murni Sdn Bhd v Jururus Ladang Sdn Bhd [1986] 2 MLJ 30, SC, the
Supreme Court discussed how customs or trade usages can be proven in court and when the court
will accept them without needing detailed proof.

The court explained that there are four ways to prove a custom or trade usage:

1. Direct Evidence from Witnesses:

o This means that someone who knows about the custom can testify about it in court.
However, the evidence must be clear and specific—it can’t just be a vague opinion.
2. Evidence of Past Instances:
o If the custom has been used repeatedly in the past, a series of examples or actions
can be shown in court. This shows that the custom is commonly followed.
3. Proof from Similar Trades:
 o If a similar custom is followed in the same industry or a related industry, this can be
used to prove the custom in question.
4. Ancient Customs (or Reputation):
o For very old customs, the court can take into account reputation or declarations
made by people who are now deceased but had knowledge of the custom at the
time.

In simple terms, the court doesn’t always need direct evidence or witnesses to prove a custom. If the
custom is well-established or has been followed for a long time, the court can accept it without
much proof. However, if the custom is newer or unclear, it must be proven in one of the four ways
mentioned above.

ii) TERMS IMPLIED BY LAW

Terms can be implied by law through both common law and statutes. This means that even if the
parties do not explicitly state certain terms in their contract, the law may still assume those terms to
exist because they are considered necessary or customary for certain types of contracts.

Terms Implied by Common Law

Some contracts, such as employment contracts, often have terms that are implied by law. These
terms are commonly found in specific types of contracts where there are established obligations
between the parties, even if they are not written down.

Example:

• Lister v Romford Ice & Cold Storage Co Ltd [1957] AC 555

The court implied that an employee has an obligation to serve diligently, loyally, and with
reasonable competence. Similarly, it is also implied that an employer must provide a safe
place of work.
• Malik v Bank of Credit & Commerce International SA [1998] AC 20
The court held that both the employer and the employee have a duty not to destroy the
relationship of trust and confidence between them.

Terms Implied by Law in Tenancy Agreements

Liverpool City Council v Irwin [1977] AC 239

The defendant, a tenant, requested the court to imply that the landlord had a duty to repair the
common parts of the building. The tenancy agreement didn’t mention any such obligation. The court
implied a term that the landlord has a duty to take reasonable care to maintain common areas such
as lifts, stairs, etc. However, the landlord had not breached this duty.

Terms Must Be Reasonable

The law will only imply a term if it is reasonable. If a term would make sense in the context of the
contract and would align with what the parties would have agreed to if they had thought about it, it
might be implied by law.
Example:

• Wilson v Best Travel [1993] 1 All ER 353

The claimant was injured by a glass door while on holiday. The court did not imply a term
that all accommodation should meet British safety standards, as this would not be
reasonable for international travel contracts.

Terms Must Be Certain

Terms must be sufficiently certain for them to be implied by law. If the terms are vague or unclear,
they will not be implied.

Example:

• Shell UK v Lostock Garage Ltd [1976] 1 WLR 1187

Lostock Garage asked the court to imply a term that Shell would not discriminate against
them by supplying petrol at lower prices to nearby garages. The court refused to imply the
term because it was not certain enough and was not essential to the contract.

Terms Implied by Statutes

Some laws imply terms into contracts automatically. For instance, in the Sale of Goods Act 1957
(Revised 1989), certain terms are automatically implied in contracts involving the sale of goods:

• Section 14 of the Sale of Goods Act:

Implies that the seller must have the right to sell the goods, and the goods should be free
from any undisclosed charges or encumbrances.
• Section 15: Implies that the goods must match their description.
• Section 16(1): Implies that the goods should be fit for the intended purpose or of
satisfactory quality.

iii) TERMS IMPLIED BY THE COURTS

Terms Implied by the Courts

• Terms in fact may be implied by the courts to reflect the unexpressed intentions of the
parties, especially when they have omitted a term they would have included if they had
considered it.
• To determine whether a term should be implied, the courts will assess the terms of the
contract and the surrounding circumstances. There are three tests for implying terms in fact:
o Business Efficacy Test
o Officious Bystander Test
o Combined Test

a. Business Efficacy Test

• The classic case for the business efficacy test is The Moorcock (1889) 14 PD 64.
 o Facts: The defendant, a wharfinger, allowed the plaintiff, a shipowner, to discharge a
vessel at his jetty. The vessel was damaged when the tide ebbed and the vessel
settled on a ridge of hard ground below the mud.
o Court’s Decision: The Court of Appeal implied a term that the defendant should take
reasonable care to ascertain the safety of the vessel's berth. Bowen LJ stated that
business transactions require implied terms to make the transaction work efficiently
and fairly for both parties.
o Test: This test is satisfied if a term is necessary to give business efficacy to the
contract, ensuring that the transaction produces the intended result.

b. Officious Bystander Test

• This test implies a term into a contract if it is so obvious that it goes without saying. In other
words, if an officious bystander had suggested the term during the formation of the
contract, both parties would have agreed without hesitation.
o Case Example: Shirlaw v Southern Foundries (1926) Ltd [1939] 2 KB 206.
o Facts: Shirlaw was appointed as managing director for a term of 10 years. The
company later amended its articles of association to allow for the removal of
directors. Shirlaw argued that an implied term prevented such a removal.
o Court’s Decision: The court implied a term that the company would not alter its
articles in a way that would remove Shirlaw from his position.
o Test: The court applied the officious bystander test by asking if an officious
bystander would have suggested such a term during the drafting of the contract,
and the answer would have been an emphatic "Of course!"

c. Combined Test

• As the law on implied terms developed, courts combined both the business efficacy and
officious bystander tests to form a more comprehensive approach.
o Case Example: Reigate v Union Manufacturing Co (Ramsbottom) Ltd [1918] 1 KB
592.
o Court’s Decision: Scrutton LJ stated that a term can only be implied if it is necessary
to give efficacy to the contract and is so obvious that both parties would have
agreed to it without explicitly stating it.

Key Principles for Implied Terms:

• Reasonableness and Equity: The implied term must be reasonable and equitable.
• Necessity for Business Efficacy: It must be necessary to give business efficacy to the
contract, i.e., the contract must not be effective without it.
• Obviousness: The term must be so obvious that both parties would have included it if they
had considered it.
• Clarity: The term must be capable of clear expression.
• Consistency: The term must not contradict any express term of the contract.

- the application of the business efficacy test and the officious bystander test in Malaysian law when
implying terms into contracts. Here's a breakdown of the key points:

1. Datin Peggy Taylor v Udachin Development Sdn Bhd [1984] 1 CLI 36, affirmed [1984] 2 CLJ
17:
 oFacts: The plaintiff sued for fees based on the abandonment of a project,
referencing the Pertubuhan Akitek Malaysia (PAM) guidelines for architects.
o Court Decision: The court implied the PAM guidelines into the engagement terms
based on the established practice within the architectural profession, even though
the original agreement did not explicitly cover project abandonment.
o Legal Principle: The court invoked the business efficacy test, as the PAM guidelines
were considered essential for making the contract work effectively in the context of
the profession.
2. Sababumi (Sandakan) Sdn Bhd v Datuk Yap Pak Leon [1998] 3 MLJ 151, FC:
o Facts: The case involved an agreement for a club to grant exclusive rights to a
company for operating betting and lotteries. The issue arose over the scope of the
1995 licence, which was later contested as it wasn’t clearly stated in the original
agreement.
o Court Decision: The Federal Court referred to both the business efficacy and
officious bystander tests in deciding whether the 1995 licence was implied as part of
the original contract. The court emphasized that for a term to be implied, it must be
something so obvious that both parties would have agreed upon it if asked, as well
as necessary to give business efficacy to the contract.
o Legal Principle: Both tests were applied: the officious bystander test (whether the
term was so obvious that it would be tacitly agreed upon by both parties), and the
business efficacy test (whether the term was necessary to make the contract work
commercially).

Implied Terms: In both cases, the courts demonstrated that terms could be implied into contracts to
reflect what the parties would have agreed to if the situation had been foreseen. The tests used to
determine the presence of these implied terms focus on practicality, commercial necessity, and
industry customs or standards.

In conclusion, the tests allow courts to fill in gaps where the written contract does not explicitly
provide for all eventualities, ensuring that contracts function effectively in practice.

- The issue of implying terms into contracts based on necessity or reasonableness has been an
important aspect of contract law, as demonstrated in the cases you've mentioned.

1. Liverpool City Council v Irwin [1977] AC 239:

• What happened?
The case was about whether a landlord (the local council) had to maintain shared parts of a
building, like hallways, for tenants. The tenant argued that this was an implied term (a term
not written in the contract but assumed to exist).
• What the courts said?
o The Court of Appeal said it might be reasonable to assume the landlord should
maintain the building's shared areas. But when the case reached the House of Lords,
the judges said something important:
o The House of Lords explained that a term should only be implied if it is necessary for
the contract to work. It shouldn’t be implied just because it seems reasonable or
fair.
o For example, the relationship between a landlord and tenant inherently involves
maintaining the property, so this obligation is necessary to make the contract work.
 • Legal Point:
The House of Lords said a term should only be added if it's necessary for the contract’s
function. Reasonable terms alone are not enough to imply terms.

2. Trollope & Colls Ltd v Worth Metropolitan Regional Hospital Board

• What happened?
This case dealt with whether a court could add terms to a contract that weren’t clearly
stated by the parties.
• What the court said?
o Lord Pearson stated that the court's job is not to create or improve contracts for the
parties. If the contract is clear, the court should simply enforce it.
o Even if the court thinks another term would be more reasonable or helpful, it cannot
change the contract unless the term is absolutely necessary for the contract to work.
• Legal Point:
The court emphasized that it is not the court's role to change or improve a contract. If the
expressed terms of the contract are clear, they should be followed. The court doesn’t create
new terms based on what it thinks is best.

Key Takeaways:

1. Necessity vs. Reasonableness:

o In the Irwin case, the court said that a term can only be implied if it’s necessary for
the contract to function. Just because something seems reasonable does not mean
it will be implied.
o So, the court focuses on what is essential for the contract to work rather than just
what is fair or reasonable.
2. Role of the Court:
o In Trollope & Colls, the court made it clear that its role is to apply the contract as
written. Courts are not allowed to add or change terms, even if the court thinks it
would improve the contract.

EXCLUSION CLAUSE

What is an Exclusion Clause?

• Exclusion Clause: A clause in a contract that seeks to limit or exclude liability (responsibility)
for not fulfilling the contract or for failing to meet certain obligations.

In simple terms, it’s a clause that tries to protect a party from being held responsible for not
doing something they promised in the contract.

What Does an Exclusion Clause Do?

• Excludes Liability: The clause can completely remove a party's responsibility for certain
actions.
• Limits Liability: Instead of removing liability entirely, the clause may reduce the extent of
responsibility, like limiting the amount of money that can be claimed for a breach.
Types of Exclusion Clauses:

1. Excluding Legal Duties: The clause excludes certain legal obligations that would otherwise
apply under the contract. This could be, for example, excluding responsibility for certain
kinds of damages.
2. Limiting Liability: This type of clause does not completely exclude responsibility, but it may
limit the amount that can be claimed for a breach of duty, or only for specific types of loss.
3. Procedural Clauses: These clauses affect the process rather than the liability itself, like
altering the burden of proof or setting a time limit for when a claim must be made.

Other Important Points:

• Exemption/Exception Clauses: Exclusion clauses can also be called exemption or exception

clauses.
• Limitation Clause: A special kind of exclusion clause that only limits liability rather than
excluding it completely.
• Standard Form Contracts: Exclusion clauses are often found in standard form contracts,
which are contracts that businesses create in advance and then use with all their customers.
These contracts are usually "take it or leave it" for the customer, meaning the customer has
little room to negotiate the terms.

These contracts tend to have unfair terms, especially exclusion clauses, because one party
(usually the business) has more power to set the terms.

Example 1: Consumer Contract (Service Agreement)

Imagine you sign up for a gym membership. In the contract, there’s an exclusion clause that says:

• “The gym is not responsible for any injury caused while using the equipment, except where
such injury results from the gym's gross negligence.”

Explanation:

• This clause excludes the gym's liability for injuries unless it’s proven that they were negligent
in a serious way.
• If you hurt yourself while using the treadmill, the gym would not be responsible unless you
could prove they were grossly negligent (for example, failing to maintain the equipment
properly).

Example 2: Hotel Stay (Accommodation Contract)

You book a hotel room, and in the hotel’s terms and conditions, you see the following clause:

• “The hotel is not responsible for the loss or damage of personal items left in the room.”

Explanation:

• If you leave your wallet or laptop in the hotel room and it goes missing, the hotel would not
be liable to compensate you for the loss because of the exclusion clause.
• It’s essentially saying that the hotel won’t take responsibility for your personal belongings,
even though they may have a duty to care for the room.
Example 3: Car Rental Agreement (Limitation Clause)

You rent a car, and the rental agreement includes the following clause:

• “The rental company’s liability for any damage to the car is limited to the total rental
amount paid for the car.”

Explanation:

• If the car is damaged while you’re renting it, the rental company won’t charge you for the
full cost of repairs. Instead, the most they’ll charge is the amount you paid for renting the
car.
• This is a limitation clause because it limits the rental company’s liability, rather than
excluding it completely.

Example 4: Software License Agreement

You purchase software, and the software license includes a clause like:

• “The software company is not liable for any indirect, incidental, or consequential damages
arising from the use of this software, including loss of profits or data.”

Explanation:

• If the software causes your computer to crash and you lose important files or profit from a
business activity, the company would not be liable for those losses because of the exclusion
of indirect and consequential damages.
• This means that even if the software fails, they won’t be held responsible for losses beyond
just the cost of the software.

Example 5: Airline Ticket Terms (Exemption Clause)

When you buy an airline ticket, the terms and conditions may include the following clause:

• “The airline will not be held responsible for delays due to weather conditions or other
unforeseen events.”

Explanation:

• This exclusion clause protects the airline from liability if your flight is delayed or canceled
due to weather, which is out of their control.
• So, if your flight is delayed because of a snowstorm, you cannot claim compensation from
the airline under this clause.

Summary of the Different Types:

1. Exclusion Clause (Hotel): Limits the hotel’s responsibility for personal belongings.
2. Limitation Clause (Car Rental): Limits the liability to the total cost of the rental.
 3. Exemption Clause (Software): Excludes liability for certain types of damages (e.g., loss of
data).
4. General Exclusion Clause (Gym): Excludes liability for injuries unless gross negligence is
proven.

Incorporation of Exclusion Clauses:

An exclusion clause is a part of a contract that says one party is not responsible for certain things
(like accidents, damages, etc.). But for this clause to be valid and enforceable, the court needs to
make sure it is properly included in the contract.

This means that before a person can be affected by an exclusion clause (like being told they can’t sue
if something goes wrong), they must have known about the clause before the contract was
finalized. If they didn't know about it, then the clause can't be used against them.

Example from a Case (White v Blackmore):

In the White v Blackmore case, a man was hurt at a motor race, and the ticket he bought had a
clause that said the organizers weren’t responsible for injuries. The court had to decide if this clause
was part of the contract.

• The Court's Decision: The court said that for the clause to count, White (the man who was
injured) must have been aware of it when he bought the ticket. If the clause was hidden or
not clearly shown, it wouldn’t be valid.

In simpler terms: The exclusion clause can only be used if the person was properly informed about
it before they agreed to the contract.

How an Exclusion Clause Can Be Incorporated into a Contract:

An exclusion clause (which limits or removes liability) can be included in a contract in three main
ways:

1. By giving notice (such as posting a sign or a notice at a place of business).

2. Through a course of dealing (when two parties have consistently included the same clause
in their previous dealings).
3. By signature in a written document (when one party signs a document that contains the
exclusion clause).

Now, let’s focus on the first method: By giving notice.

A. By Notice:

• For an exclusion clause to be effective (meaning it can actually limit liability), the party who
will be bound by the clause must know about it before or at the same time the contract is
made.
• For example, you might see signs in places like car parks, or on tickets, that tell you about
the exclusion clause (such as “We’re not responsible for damages to your car”).

But there’s an important rule: Notice must be given at the right time.
Case Example: Thornton v Shoe Lane Parking Co Ltd:

This case helps explain when notice must be given to make the exclusion clause effective.

• Facts: The plaintiff (a customer) parked his car in a car park that had a machine. Before
driving in, he saw a red light and a notice saying there were charges and that the cars are
parked at their own risk.
• When the customer drove in, the light turned green, and the machine issued a ticket. On
the ticket, it said the conditions (including the exclusion of liability) could be found on the
premises. However, the customer didn’t walk around the car park to see the conditions.
• Court Decision: The court said the exclusion clause couldn’t apply because the customer did
not see it before or at the time of entering into the contract. The contract was formed when
the customer put his money into the machine, before he received the ticket with the
exclusion clause.

So, the ticket with the exclusion clause was given after the contract was already made. Therefore,
the exclusion clause didn’t apply because the customer was not properly informed about it at the
time of entering into the contract.

Incorporating Exclusion Clauses: Offer and Acceptance Analysis

The key idea here is that the offer and acceptance analysis applies to when an exclusion clause
becomes part of a contract.

1. Olley v Marlborough Court Ltd [1949]:

• Facts: A couple booked a hotel room. There was a notice in the room stating the hotel would
not be responsible for any stolen items. The wife's coat was stolen. The hotel tried to argue
that the notice in the room was part of the contract.
• Court Decision: The court ruled that the contract had already been formed before the
couple entered the room. Since the exclusion clause was only presented after the contract
was formed (inside the room), it wasn't part of the contract.

Key takeaway: An exclusion clause must be brought to the attention of the party before or at the
time the contract is formed.

2. Notices in Documents

• In Thornton v Shoe Lane Parking Co Ltd, the exclusion clause was in the ticket, which was
treated like a receipt. The court ruled that a receipt cannot be considered a proper notice of
terms and conditions because it's just a confirmation of payment.

Key takeaway: The exclusion clause needs to be in a document expected to contain

contractual terms (like a contract) and not just a receipt.

3. Chapelton v Barry Urban District Council [1940]

• Facts: A person rented deckchairs from a council. The ticket given after payment had an
exclusion clause saying the council wasn't liable for accidents. When the chair broke and
caused injury, the person sued.
 • Court Decision: The court held that the exclusion clause could not apply because the ticket
was just a receipt. The contract was made when the person paid, not when the ticket was
given.

Key takeaway: A ticket (just a receipt) doesn't count as a proper contract document
containing exclusion clauses.

4. Sufficiently Brought to the Notice of the Other Party:

To be valid, an exclusion clause must be reasonably noticed by the other party. It's not enough to
just have the clause written down; the other party must be aware of it.

5. Parker v South Eastern Railway Co (1877):

• Facts: A person left a parcel at a train station and received a ticket. The ticket had conditions
on the back, including a limit on liability for items above £10. The parcel was lost, and the
person sued.
• Court Decision: The court said it wasn't enough for the person to just know there was
writing on the ticket. They had to be reasonably aware of what the ticket said, especially the
exclusion clause.

Key takeaway: The person must be given reasonable notice that the ticket has terms on it.
Just knowing there's writing isn't enough.

6. Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd [1989]

• Facts: A company rented photographic transparencies and received a notice saying they
would be charged a large fee if the items were not returned on time.
• Court Decision: The court ruled that when a clause is unusual or onerous (like a big penalty
fee), it must be clearly and fairly brought to the other party's attention.

Key takeaway: The "red hand rule" applies to unusual or unfair clauses, meaning the more
unreasonable the clause, the more notice must be given.

In the Malaysian case Sanggaralingams/o Arumugam v Wong Kook Wah & Anor [1987] 2 CLJ 255,
the High Court addressed the issue of exclusion clauses in contracts, specifically whether a party
could rely on an exclusion clause when the other party had no notice of it.

Case Overview:

• Facts: The appellant (plaintiff) sent his car to a workshop (the second respondent) for
repairs. At the workshop, there was a notice posted on a signboard that said:
“All vehicles stored or driven by our employees are at owner’s risk. We accept no
responsibility for loss or damage.”
While the car was being test-driven by the first respondent (an apprentice working for the
second respondent), the car collided with another vehicle, resulting in the appellant
suffering personal injuries.
 • Legal Issue: The key question in this case was whether the exclusion clause on the signboard
could be enforced. The exclusion clause essentially tried to limit the workshop’s liability for
any damage or injury that occurred while the car was in its care.

Court's Decision:

• The High Court ruled that the exclusion clause was not enforceable because there was no
evidence to show that the appellant was made aware of the clause before the incident. The
court highlighted that it was important for the respondents (the workshop owners) to prove
that the appellant knew about the exclusion clause and that his attention was specifically
drawn to it. Since the appellant was not informed or aware of the exclusion clause, it could
not be enforced against him.

Key Takeaways:

1. Notice Requirement: For an exclusion clause to be valid, the party relying on it must prove
that the other party was given notice of the clause, and that attention was drawn to it. It is
not enough for the clause to be displayed; the other party must be reasonably aware of it.
2. Incorporation of the Clause: In this case, even though the notice was displayed on a
signboard, the appellant’s lack of knowledge of the clause meant it could not be
incorporated into the contract.
3. Reasonable Notice: The court emphasized that the exclusion clause was not brought to the
appellant's attention in a clear and reasonable manner. Simply placing the notice on a
signboard without ensuring the customer saw or understood it was not sufficient.

In essence, the case reinforced the principle of reasonable notice for exclusion clauses. To be
enforceable, exclusion clauses must be sufficiently communicated and highlighted to the other party
at or before the time the contract is entered into.

B. Incorporation of Exclusion Clauses by Course of Dealing

An exclusion clause may be incorporated into a contract through a course of dealing, where the
parties have a consistent and established pattern of conduct that includes the use of such clauses.
However, the courts require sufficient communication and consistency to ensure that the exclusion
clause is validly included in the contract.

Here are the key cases that illustrate how course of dealing works:

1. J Spurling Ltd v Bradshaw [1956] 1 WLR 461 (CA)

• Facts: The defendant (Bradshaw) sent wooden casks of orange juice to the plaintiff
(Spurling) for storage. The plaintiff sent a receipt ("landing account") to the defendant,
which included an exclusion clause on the back of the document, stating that goods would
be stored at the owner's risk. The plaintiff also sent an invoice with the same terms.
• Issue: The defendant’s goods were damaged, and the defendant sought to claim for their
loss. The plaintiff sought to rely on the exclusion clause printed on the documents.
 • Court’s Decision: The Court of Appeal held that the exclusion clause was effectively
incorporated into the contract, based on the course of dealing between the parties.
Denning LJ emphasized that the defendant had previously received many landing accounts
with similar conditions, had not objected to them, and had continued to do business with
the plaintiffs. This established that the terms were part of the ongoing contract.

Denning LJ's Statement:

"The defendant admitted that he had received many landing accounts before. True, he had
not troubled to read them. On receiving this account, he took no objection to it, left the
goods there, and went on paying the warehouse rent for months afterwards. It seems to me
that by the course of business and conduct of the parties, these conditions were part of the
contract."

2. Hollier v Rambler Motors (AMC) Ltd [1972] 1 All ER 399 (CA)

• Facts: The plaintiff had bought spare parts from the defendants over a period of five years,
but only occasionally sent the car for repairs to the defendant’s garage. Each time the car
was repaired, the defendant would require the plaintiff to sign a form (an invoice) that
included an exclusion clause stating that the defendant would not be responsible for fire
damage to the car.
• Issue: The plaintiff's car was damaged by fire on the defendant’s premises due to the
defendant's negligence. The defendant sought to rely on the exclusion clause in the invoice.
• Court’s Decision: The Court of Appeal ruled that the exclusion clause could not be
incorporated into the contract, as there were only a few instances (three or four) over five
years where the car was repaired by the defendant. This was insufficient to establish a
consistent course of dealing that would make the exclusion clause part of the contract.

3. McCutcheon v David MacBrayne Ltd [1964] 1 WLR 165 (HL)

• Facts: The plaintiff (McCutcheon) regularly dealt with the defendant (David MacBrayne Ltd)
and had a history of being asked to sign a risk note when traveling by ferry. However, there
was inconsistency in the dealings: sometimes the risk note with the exclusion clause was
signed, and sometimes it was not.
• Issue: The plaintiff's goods were lost due to the defendant’s negligence. The defendant
sought to rely on an exclusion clause in a risk note that had not been consistently used in
previous dealings.
• Court’s Decision: The House of Lords held that the exclusion clause could not be
incorporated into the contract. The inconsistency in asking the plaintiff to sign the risk note
meant that there was no consistent course of dealing between the parties. As a result, the
exclusion clause could not be enforceable.

Key Points

1. Sufficient Course of Dealing: For an exclusion clause to be incorporated through a course of

dealing, there must be consistent and repeated transactions between the parties that
include the clause. The parties must have had prior dealings where the exclusion clause was
regularly communicated and accepted.
2. Inconsistency and Insufficient Dealings: If there is inconsistency in how the exclusion clause
is introduced, or if the course of dealing is insufficient (e.g., only a few transactions), the
 clause may not be incorporated into the contract. This was emphasized in Hollier v Rambler
Motors and McCutcheon v David MacBrayne Ltd.
3. Effective Incorporation: In J Spurling Ltd v Bradshaw, the clause was held to be
incorporated into the contract because of the consistent dealings between the parties and
the repeated use of the clause in the documents exchanged.

Incorporation of Exclusion Clauses by Signature in Written Documents

An exclusion clause may be incorporated into a contract if the party signs a written document that
contains the clause. In this case, the notice or previous course of dealing is not relevant, as the
signature indicates consent to the terms in the document, including any exclusion clause, regardless
of whether the person read or understood them.

1. L'Estrange v F Graucob Ltd [1934] 2 KB 394 (CA)

• Facts: The plaintiff (L'Estrange) purchased a cigarette vending machine from the defendant
(F Graucob Ltd). The agreement contained an exclusion clause that excluded all implied
warranties and conditions. Although the plaintiff signed the agreement, she did not read it
and was unaware of the exclusion clause. After the machine broke down, she claimed that
the machine was unfit for the purpose for which it was sold.
• Issue: Whether the exclusion clause could be enforced despite the plaintiff not having read
the document and not being aware of its contents.
• Court’s Decision: The Court held that the plaintiff was bound by her signature on the
contract, even though she had not read the document or knew about the exclusion clause.
The key point was that by signing the document, the plaintiff had accepted the terms,
including the exclusion clause. The Court stated that a person who signs a contract is bound
by its terms regardless of whether they read the document or understood it.

2. Subramanian v Retnam [1966]

• Facts: The plaintiff sued the defendant for a loan of $1,000. The defendant had signed a
written acknowledgment of the loan in English but claimed he thought he was only signing
as surety. He did not understand English.
• Issue: Whether the defendant was bound by the terms of the written acknowledgment,
given that he did not understand English and thought he was only signing as a surety.
• Court’s Decision: The High Court held that the defendant was bound by the signed written
acknowledgment, even though he was ignorant of the English language. The Court
emphasized that unless there was fraud or misrepresentation, a person is bound by the
contract they sign. The defendant's lack of understanding of English did not excuse him from
the contractual obligations.

3. Curtis v Chemical Cleaning & Dyeing Co Ltd

• Facts: The plaintiff (Curtis) sent her wedding dress, which was decorated with beads and
sequins, to the defendant’s laundry. The shop assistant gave her a receipt to sign, explaining
that it covered the exclusion of liability for damage to beads and sequins. However, the
receipt contained a broader exclusion clause stating that the defendant would not be liable
for any damage to the dress, not just the beads and sequins. The plaintiff signed the receipt
based on the assistant's explanation.
• Issue: Whether the defendant could rely on the exclusion clause, given that the shop
assistant misrepresented its contents.
 • Court’s Decision: The Court of Appeal ruled that the defendant could not rely on the
exclusion clause, as the shop assistant had misrepresented the scope of the clause. The
plaintiff had signed the receipt under the impression that the clause only covered damage to
the beads and sequins, not to the entire dress. Since the defendant's representative had
misled the plaintiff, the exclusion clause was not enforceable.

Key Points

1. General Rule: When a person signs a document or contract that contains an exclusion
clause, they are bound by the terms of that document, even if they did not read it or
understand it. This principle was upheld in L'Estrange v F Graucob Ltd and Subramanian v
Retnam.
2. Fraud or Misrepresentation: The signature rule does not apply if there is fraud or
misrepresentation regarding the effect of the exclusion clause. In Curtis v Chemical
Cleaning & Dyeing Co Ltd, the shop assistant’s misrepresentation about the scope of the
clause meant that the plaintiff was not bound by the exclusion clause.
3. Ignorance of Terms: Ignorance of the terms in the document (e.g., not understanding the
language or not reading the document) does not generally excuse a party from being bound
by those terms, as shown in Subramanian v Retnam.
4. Misrepresentation as a Defense: If the party signing the document is misled about the
nature or scope of the exclusion clause (as in Curtis v Chemical Cleaning & Dyeing Co Ltd),
the clause may not be enforced, even if the document is signed.

(ii) INTERPRETATION OF EXCLUSION CLAUSES

After determining that an exclusion clause has been properly incorporated into a contract, the next
step is to interpret the clause to see if it applies to the specific event that has occurred. There are
four key matters that come into play when interpreting exclusion clauses:

1. Contra Proferentum Rule

2. Effect of Negligence
3. Rule of Law
4. Rule of Construction

I. The Contra Proferentum Rule is a principle that courts apply when interpreting exclusion clauses
in contracts. Under this rule, if there is any ambiguity in the wording or scope of the exclusion
clause, it will be construed strictly against the party who drafted the clause and is relying on it. This
ensures fairness to the other party, particularly if they had no input in drafting the contract.

2.Effect of Negligence:

• When an exclusion clause seeks to absolve a party from liability for loss caused by their own
negligence, clear and explicit language must be used to make this exclusion effective. The
courts view it as inherently unlikely that one party would intend to completely relieve the
other party of responsibility for the consequences of their own negligence. As such, any
attempt to exclude liability for negligence must be clearly expressed in the contract to
prevent any ambiguity or unfairness.

3. Rule of Law and the Doctrine of Fundamental Breach

The doctrine of fundamental breach originally held that if a fundamental breach occurred, a party
could not rely on an exclusion clause, regardless of how broadly it was drafted. This principle was
based on Lord Denning's view in J Spurling v Bradshaw [1965] 1 WLR 461, and Karsales (Harrow) Ltd
v Wallis [1956] 1 WLR 936, where a fundamental breach was considered so severe that it nullified
the applicability of exclusion clauses. A "fundamental breach" refers to a violation of a term so
central to the contract that it undermines the entire agreement, thus making it unfair for the
breaching party to rely on exclusion clauses.

The reasoning is that if a party commits a breach that strikes at the heart of the contract, they
should not be allowed to escape liability through an exclusion clause. This doctrine aims to protect
the weaker party by preventing the stronger party from avoiding liability for serious breaches.

However, the application of the fundamental breach doctrine has been contentious and often
confusing. It has not always been clear when a breach should be considered so fundamental that it
disqualifies reliance on an exclusion clause.

Malayan Thread Co v Oyama Shipping Line Ltd & Anor [1973] 1 MLJ 121

In Malaysia, the doctrine was considered in the case of Malayan Thread Co v Oyama Shipping Line
Ltd & Anor. In this case, the plaintiff's goods (cotton sewing threads) were stolen after being
unloaded from a ship. The shipping company relied on two clauses in the bill of lading:

• Clause 2: Exempted the shipping company from liability for losses, including theft or
pilferage, regardless of whether it was caused by the company’s employees or others.
• Clause 15: Stated that the company’s liability ended once the goods left the ship's deck or
tackle.

Raja Azian Shah J emphasized the importance of proper construction of the exclusion clauses to
determine if the act (theft) causing the loss was covered by the clauses. The court's approach was to
interpret whether the breach was fundamental, considering both the wording of the clauses and the
nature of the breach. In the end, the court upheld the exclusion clauses, ruling that they were wide
enough to absolve the defendant from liability for the theft.

Key Observations:

• The decision highlighted the constructionist approach to interpreting exclusion clauses,

focusing on whether the act causing the loss was covered by those clauses.
• There was confusion in distinguishing between a "breach of a fundamental term" and a
"fundamental breach."
• The case raised questions about whether the rule of law (the application of fundamental
breach) or the rule of construction (interpreting the clauses based on their wording) should
prevail in Malaysia.

4. Rule of Construction of Exclusion Clauses:

The Case: Photo Production Ltd v Securicor Transport Ltd (1983)

• What happened?
o Securicor was hired to provide a patrol service to Photo Production's premises.
o The contract had an exclusion clause, saying Securicor wouldn't be responsible for
actions by its employees unless the company could have prevented them through
"due diligence."
o However, one of Securicor's employees deliberately started a fire, causing a
massive loss of £615,000.
• Initial Decision (Trial Court):
o The trial judge allowed Securicor to use the exclusion clause to avoid responsibility,
despite the fire being deliberately caused.
• Court of Appeal's Ruling:
o The Court of Appeal disagreed, saying that the fundamental breach (deliberate act
of starting the fire) meant that Securicor could no longer use the exclusion clause.
• House of Lords' (Final Appeal) Decision:
o The House of Lords reversed the Court of Appeal's decision. They said that there is
no special rule called "fundamental breach" that automatically stops exclusion
clauses from applying.
o Instead, the court said the key issue was how to interpret (or construct) the clause.
The wording of the clause was clear enough to cover both negligence and
deliberate acts.
o The Lords argued that this was a commercial contract, and both parties (Photo
Production and Securicor) were businesses capable of looking after their own
interests. Therefore, Securicor could rely on the clause, despite the fire being
deliberate.

Key Points:

1. Rule of Construction: When interpreting a contract, the courts look at how the words of the
clause are written to see if they apply to the situation.
2. No Fundamental Breach Rule: The House of Lords confirmed that there is no rule saying
that a party can’t use an exclusion clause just because there’s a fundamental breach.
3. Exclusion Clause Can Cover Both: The clause clearly covered both negligence and deliberate
acts of the employees.
4. Commercial Contract: Since both parties were businesses, the courts felt they could
negotiate and decide how to handle risks, including using an exclusion clause.