LIA1008

CONTRACT LAW ASSIGNMENT

2016/2017 SEMESTER 2

NAME : Neoh Kai Sheng LIA160088

Chong Jia Wei LIA160020
Low Zhi Yuin LIA160065
GROUP : 28
LECTURER : Prof Madya Dr. TAY PEK SAN
 All agreements are contracts if they are made by free consent of the contracting parties.1
By virtue of section 14 of the Contracts Act 1960 (hereby referred as the Act), the framework to
determine whether there is free consent is provided, which is in absence of coercion, undue
influence, fraud, misrepresentation and mistakes. The existence of these elements would cause the
lack of free consent and render the contract voidable at the option of innocent party. Based on that
context, Section 14 is said to be an important provision to protect one contracting party from
unfairness and inequality asserting by the other party in a contractual dealing.
The first situation of lack of free consent is when it is caused by coercion, which is provided
for in Section 14(a) of the Act. Coercion is defined in section 15 where it is divided into two types:
first, the committing or threatening to commit any act forbidden by the Penal Code; and second,
the unlawful detaining or threatening to detain any property. At first sight, coercion under the Act
is wider than the doctrine of duress under the historical common law which only recognizes actual
or threatened violence to persons, because section 15 covers the unlawful detention of property
too. However, the English case The “Siboen” and The “Sibotre”2 has led to the development of
the concept of “economic duress”, which involves illegitimate pressure in commercial transactions
where the blameworthy party threatens to discontinue the contract unless he is paid more than what
was originally agreed. For instance, in North Ocean Shipping Co Ltd v Hyundai Construction Co
Ltd,3 the defendant had threatened to stop work on building the ship as contracted if he was not
paid more. The Court held that there was economic duress as the defendant had threatened
economic loss to the plaintiff which caused the plaintiff to make extra payment.
The first issue arises is whether the definition of coercion of the Act is sufficient to cover
economic duress. Nevertheless, the definition in section 15 is very limited by including crimes
under the Penal Code and detention of property only. Unlawful pressure in commercial transaction
without dealing with crimes and property is not addressed under this provision. The case of Perlis
Plantations Berhad v Mohammad Abdullah Ang 4 further ruled that the Act does not provide any
other type of coercion other than as defined by section 15. This implies that the doctrine of
economic duress is not embodied yet in Malaysian law. As a consequence, as long as the defaulting

1 Section 10, Contracts Act 1950.

2 [1996] 4 MLJ 331.
3 [1978] 3 All ER 1170.
4 [1988] 1 CLJ 670.
party does not violate the criminal law in Penal Code and detain any property, it will not render
the contract voidable even if there is no free consent due to illegitimate commercial pressure.
Be that as it may, the arguments based on economic duress had been brought before the
courts in several Malaysian cases. For instance, the case of Mohd Fariq Subramaniam v Naza
Motor Trading Sdn Bhd5 appears to recognise the doctrine of economic duress to the extent of
‘unless it amounts to a coercion of his will which vitiates consent’. Still, the application of
economic duress by the courts is uncertain and inconsistent in different cases. Moreover, the
approach adopted by the Malaysian courts is still based on the test of whether there has been ‘free
consent’ to an agreement, in which the concept of illegitimacy fails to carry great weight in the
Malaysian jurisdiction. This is because in English law, the test for duress stresses on the criterion
of illegitimacy as it is opined that duress does not involve absence of consent. 6
Under English law, Cartwright7 summarizes that illegitimate pressure as: first, the unlawful
threats such as threats to commit any crime or tort, or second, the way in which the pressure is
exerted is unlawful such as the application of the pressure itself constitutes a tort. 8 In short, duress
includes threats to commit a crime as well as a tort. Thereby, the second issues arises, is the
definition of coercion in section 15 wide enough to cover both crimes and torts cases?
Apparently, coercion under Malaysian law is limited to criminal acts alone, 9 as the words
“act forbidden by the Penal Code” in section 15 provide so. In Teck Guan Trading Sdn Bhd v
Hydrotek Engineering (S) Sdn Bhd & Ors,10 it was held that it must be proved what offence the
plaintiff had committed under the Penal Code before the court makes decision on whether such an
offence had been committed. In other words, the coercive act will cause no free consent if offend
the Penal Code only. This implies that offences outside the Penal Code as well as those merely
civil wrongs which also vitiate consent of the innocent party are not covered under this provision.
Nonetheless, the criminal law is not found solely in the Penal Code, it can also be found in
statutes other than Penal Code. Therefore, to exclude other criminal wrongs beyond the boundary
of Penal Code would be unfair to the innocent party as it would render opportunities to the
defaulting party to commit coercive acts without violating the Penal Code. Second, vitiating factors

5 [1998] 6 MLJ 193.

6
Contracts Induced By Threats: An Overview [2001] 3 MLJ cxxix
7 Cartwright, Unequal Bargaining (1991) at 165.
8 Williams v Bayley (1886) LR 1 HL 200.
9 Supra note 5.
10 [1996] 4 MLJ 331.
are not only limited to crimes but also torts. Tortious wrongs or threats such as assault will also
induce the other party to enter into an agreement, should therefore fall within the scope of coercion.
It would be unfair if the contract is held not voidable as the guilty party had committed or
threatened to commit civil wrongs. Though section 15 covers certain tort cases such as trespass to
goods by including unlawful detention of property, still, it should be amended to cover all civil
wrongs in order to address the current unjust situation faced due to the loopholes of the law.
In conclusion, the limited definition of coercion renders the scope of application in
Malaysian law narrower than in English law. Having regard to this, it is proposed to review the
definition of coercion so as to make it clear as well as incorporate the doctrine of economic duress,
to overcome the current unfair situation and fill in the lacuna of the contract law in Malaysia.
Section 16(1) of the Act emphasised on the position of dominate the will of the other to
obtain an unfair advantage. Section 16(2) merely illustrates two possible situations where such
dominance is presumed. In Section 16(3), the domination of one party to the other into an unfair
contract has the onus to prove the contrary. In Tengku Abdullah ibni Sultan Abu Bakar v Mohd
Latiff bin Shah Mohd11, it was approved that section 16 is as accordance to the doctrine of undue
influence in English Law. Therefore, decisions from English Courts can be used to interpret this
section. However, there are differences between the section and English common law position.
The general notion is that the section 16(1) is not restricted to section 16(2) as to allow
liberal and broader interpretation of the provision12. Notwithstanding the relations stated in section
16(2), there is no defined scope or limits of such relationship. In Malaysian French Bank Bhd v
Abdullah bin Mohd Yusof 13, the liberal approach was taken by Zakaria Yatim J to interpret section
16(1), which decided that the provision refers to any contract induced by undue influence,
including third parties who are not privy to the contract. His lordship further observed and
concluded that his decision was consistent with section 16 of the Act, and that his decision should
be ‘an addition to what is provided in s16’. There are conflicting views upon the interpretation of
such relationships. One may argue that the meaning of section 16(1) is restricted to situations
where both are contracting parties. The provisions itself allow room for development in accordance

11 [1996] 2 MLJ 265.

12 ShaikMohd Noor Alam bin SM Hussain. (1993). PRE-CONTRACTUAL FAIRNESS: SECTIONS 15 AND 16
OF THE MALAYSIAN CONTRACTS ACT 1950. Malayan Law Journal Articles, 2, 4.
13 [1991] 2 MLJ 475.
with the society, and is liberal and general in nature. There are no restrictions being placed on the
limit or scope of the relationship between the parties and the discretion is on the courts to decide.
In CIBC Mortgages plc v Pitt 14 , actual undue influence does not require that such
transaction was of manifestly disadvantage to the claimant. Therefore, it is sufficient to only
establish that there is the element of abuse of confidence. However, in the Malaysia context,
section 16(1) made it essential to show that the defendant abused his position to obtain an unfair
advantage. The inconsistency between the section of the Act and English common law was actually
addressed in Tengku Abdullah15 which English common law decisions are endorsed. Following
the development of the Malaysia common law, there is a probability that in the future the element
of manifest or unfair disadvantage may be required in actual undue influence.
In National Westminster Bank plc v Morgan16, the burden of proof for presumption of
undue influence was on the claimant to prove the element of manifest disadvantage. It was
subsequently replaced by a more viable test in Royal Bank of Scotland v Etridge (No. 2) 17, in which
‘the transaction is such that it calls for explanation.’ The claimant must show that trust and
confidence was placed on defendant. Besides that, the presumption of actual influence can be
determined based on the nature of the relationship per se. However, two elements must be fulfilled
in section 16(3), namely the position to dominate the will and that the transaction appears to be
unconscionable. Section 16(3) interpreted literally is inconsistent with the Lord Nicholl’s view in
Etridge18.
Section 16 required that the element of position to dominate the will in presumption of
undue influence. However, English cases held to the contrary. In Etridge19, the element of trust
and confidence was required instead of the domination of one party. The provision of section 16
is at doubt as it is not required by the common law and mere proof of trust and confidence is not
enough to raise a presumption. Furthermore, according to section 16(2)(a), a person is deemed to
be in a position to dominate when he holds a ‘real or apparent authority’. It is contended that a
20
submissive or inferior party may still influence or induce another party into a contract.

14 [1993] 4 All ER 433.

15 Supra at 12.
16 1985] 2 WLR 588.
17 [2001] 4 All ER 449.
18 Ibid.
19 Ibid.
20 Assoc. Prof. Dr. Abdul Mohaimin Noordin Ayus. (2004). PROOF OF UNDUE INFLUENCE: AN OVERVIEW

OF TRENDS AND IS-SUES IN ITS DEVELOPMENT. Malayan Law Journal Articles, 4, 8.

 Many aspects of the provision of section 16 are uncertain, and the jurisprudential basis are
difficult to be determined. The categories of undue influence are not being classified and the
allocation of burden of proof is not being addressed. It is incapable of providing guidelines on
issues of formation of commercial contracts in the modern society like in the case of Etridge.21

The Malaysian courts have a tendency to refer to the doctrine of unconscionability in a

general way without actually establishing and analyzing the elements and principles for its
application. The lack of statutory attention and provision towards the doctrine has failed to address
the situations and issues regarding contractual unfairness in Malaysia. 22Unconscionability was
not legally defined, but generally it was explained that in the absence of fraud or duress, one party
was taken advantage by another party to enter into an unfair contract.23 The doctrine of unequal
bargaining power was explained by Lord Denning in Lloyds Bank v Bundy, 24 contractual
unfairness can be established when contracting parties are of unequal position, and the bargaining
power of both parties are in stark contrast, coupled with undue influence or pressures by the
superior.

The term doctrine of unconscionability and doctrine of unequal bargaining power was used
interchangeably in the case of Saad Marwi and Koh Yen Bee25, however it was suggested that
unequal bargaining power should be a part of the element in the doctrine of unconscionability.
Mere inequality cannot give rise to unconscionability, whereas there must be some form of abuse
of power which led to unequal bargaining power in which one party has no choice but to abide to
the absurd terms proposed.26

The doctrine of unconscionability has been argued to be a separate doctrine from the doctrine
of undue influence, and should have developed independently. However, section 16(3) of the Act
suggests that unconscionability is just a mere proof to establish undue influence. In Saad Marwi v
Chan Hwan Hwa & Anor27, the doctrine of unconscionability was endorsed and Gopal Sri Ram

21 Ibid at p.9
22 Siti Aliza Alias, & Zuhairah Ariff Abdul Ghadas. (2012). Inequality of Bargaining Power and the Doctrine of
Unconscionability: Towards Substantive Fairness in Commercial Contracts. Australian Journal Of Basic And
Applied Sciences, 6(11), 340.
23 Ibid at p.334.
24 [1975] QB 326.
25 [2001] 3 CLJ 98, [2002] 4 MLJ 301.
26 Zahira bte Mohd Ishan. (2007). DOCTRINE OF UNCONSCIONABILITY: ITS DEVELOPMENT AND POSSI-

BILITIES. Malayan Law Journal Articles, 3, 11.

27 [2001] 3 CLJ 98.
JCA suggested that the doctrine should develop as a separate doctrine from the doctrine of undue
influence. However, the view was not accepted in another Court of Appeal decision in American
International Assurance Co Ltd v Koh Yen Bee 28, the doctrine of unconscionability was doubted
as section 14 does not recognize such doctrine. Be that as it may, the court in that case distinguished
the facts with Saad Marwi29, but did not out rightly rejected the doctrine of unconscionability.
Hence, the two distinct Court of Appeal decision should be further clarified in the apex court.

The deficiency in the Act which fails to address situations of undue influence and
unconscionability was suggested to be reformulated and merged into a new broad doctrine.
However, the doctrine of unconscionability should be refined as to establish clear principles, in
particular to discover the similarities and differences between these two principles so that they can
be developed congruently and compatible with each other.30

Besides, to avoid the occurrence of unwanted inequalities, the Malaysian Courts have taken
tremendous initiative by addressing good faith in contractual dealings in addition to the doctrine
of conscionability. As pertaining to Perbandaran Kemajuan Ekonomi Negeri Johor v Lim Shee
Pin & Anor,31 good faith was recommended by the Court to grant relief. However, the Malaysian
Courts has yet to recognize fully on the implied duty on contracting parties to perform good faith.
Therefore, to achieve this, some basic fundamentals must first be ascertained as good faith in
contractual dealings will bring Malaysia law of contract closer to the civil law jurisdictions. 32

In conclusion, based on the discussion above, it can be concluded that Section 14 is

inadequate to undertake situations of unfairness in the forming of commercial contracts in this
modernizing world. The insufficiency in the provisions should be addressed through legislative
interventions taking into account recent developments and situations. Efforts from the judicature
shall not be neglected to fill up the lacunae in the law, as to effectively ensure contractual fairness.

28 [2002] 4 MLJ 301.

29 Supra at 28.
30 Siti Aliza Alias, & Zuhairah Ariff Abdul Ghadas. (2012). Inequality of Bargaining Power and the Doctrine of

Unconscionability: Towards Substantive Fairness in Commercial Contracts. Australian Journal Of Basic And
Applied Sciences, 6(11), 339.
31 [ 1986] 1 MLJ 184.
32 Mayer Brown, Good faith – is there a new implied duty in English contract law?

https://www.mayerbrown.com/files/Publication/92d74f21-c4e3-4d1d-86ac-
77fa21b6c95c/Presentation/PublicationAttachment/65ac405d-db68-4d53-bdfa-
8434e78cf627/Good_Faith_jul2013_corp-alert.pdf
Bibliography
Statute
1. Laws of Malaysia, Reprint. Act 136. Contracts Act 1950.
Journal Articles
1. Adnan Trakic. (2015). Statutory protection of Malaysian consumers against unfair contrac t
terms: Has enough been done?.Common Law World Review, 44(3).
2. Assoc. Prof. Dr. Abdul Mohaimin Noordin Ayus. (2004). PROOF OF UNDUE
INFLUENCE: AN OVERVIEW OF TRENDS AND ISSUES IN ITS DEVELOPMENT.
Malayan Law Journal Articles, Volume 4.
3. Cartwright, Unequal Bargaining (1991) at 165.
4. Cheong May Foong. (2005). A Malaysian Doctrine of Inequality of Bargaining Power and
Unconscionability After Saad Marwi?. Malayan Law Journal Articles, Volume 4.
5. Nurretina Ahmad Shariff. (2001). CONTRACTS INDUCED BY THREATS: AN
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6. Shaik Mohd Noor Alam bin SM Hussain. (1993). PRE-CONTRACTUAL FAIRNESS:
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Contracts. Australian Journal Of Basic And Applied Sciences, 6(11), 339.
8. Zahira bte Mohd Ishan. (2007). DOCTRINE OF UNCONSCIONABILITY: ITS
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Website
1. Mayer Brown, Good faith – is there a new implied duty in English contract law?
https://www.mayerbrown.com/files/Publication/92d74f21-c4e3-4d1d-86ac-
77fa21b6c95c/Presentation/PublicationAttachment/65ac405d-db68-4d53-bdfa-
8434e78cf627/Good_Faith_jul2013_corp-alert.pdf