Contracting out of statutory provision in Malaysian construction contract

Abstract

Contracts are legally binding agreement enforces by the law of contract. In general, CA 1950 governs the contractual transactions in Malaysia as it also provides general guidelines to formation of contracts. There are also specific statutes, for example Employment Act 1955, Sales of Goods Act 1957, Insurance Act 1963, Companies Act 1965 etc provided in order to cater specific transactions. Despite the statutory provision, there are party who intended to contract out of the legal effect of these provisions. These parties tend to determine the terms and conditions that are to be incorporated into their agreement and the practice to introduce such terms and conditions in the agreement that tend to avoid the application of the statutory provision is known, by the law experts, as an act of contracting out. The freedom for parties to do so is supported by the idea commonly known as Freedom of Contract. It is however, doubtful that whether the contracting out clauses are valid and applicable in the eye of law. The issue of whether the freedom of contract is so untrammelled to the extent that application of a codified statute provision can be evaded arose. In standard form of building contract, it can be said that there are clauses which the similar contracting method has been applied. In other words, it is noticed that some of the clauses tend to contract out of the statutory provision. Out of the many clauses, the liquidated damages clause and automatic determination clause will be discussed in details as regards to the issue of contracting out. According to section 75 of the CA 1950, the injured party shall be able to prove his actual loss in order to claim for the damages. Notwithstanding the provision, the LAD clause in standard forms of building contract was drafted in order to avoid the need to prove. On the other hand, section 236 of the Company Act give the right to the liquidator to carry on with the contract while the clause in the standard form of contract prohibited them to do so by determining the contract automatically. From the analysis of case law, although there are some cases where contracting out is permissible under certain circumstances, it can be said that the validity of both of these clause might be challenged as it was held, in general that contracting out clauses are invalid.