UNFAIR CONTRACTUAL TERMS IN

BANKING DOCUMENTS: A CRITICAL EVALUATION OF THE

POSITION IN MALAYSIA

BY

CHERYL ANNE MARIE NICHOLSON

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA

2006

UNFAIR CONTRACTUAL TERMS IN BANKING DOCUMENTS:

A CRITICAL EVALUATION OF THE POSITION IN MALAYSIA

BY

CHERYL ANNE MARIE NICHOLSON

A dissertation submitted in partial fulfilment of

the requirement for the degree of Master of Comparative Laws

Ahmad Ibrahim Kulliyyah of Laws International Islamic University Malaysia

JULY 2006

ABSTRACT This study traces the development of inequality of bargaining power or unconscionability both in the United Kingdom as well as in Australia, Malaysia and Singapore. In particular, this study looks deeply into the positions of consumers and customer of banks in their dealings with these banks. Despite the unfairness of these dealings, legislations have not proved to be of assistance. This study will analyze the present sources of law and their adequacy in dealing with these unfair dealings and suggest ways in which the courts can play a major role in ensuring that justice is done for the individual consumers and customers.

APPROVAL PAGE I certify that I have supervised and read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate in scope and quality as a dissertation for the Degree of Master of Comparative Laws.

------------------------------------------------- Abdul Mohaimin Bin Noordin Ayus

Supervisor

I certify that I have read this study and that in my opinion it conforms to acceptable standards of scholarly presentation and is fully adequate in scope and quality as a dissertation for the Degree of Master of Comparative Laws.

------------------------------------------------- Syed Ahmad Alsagoff Examiner

This dissertation was submitted to the Department of Private Law and is accepted as partial fulfilment of the requirements for the Degree of Master of Comparative Laws.

------------------------------------------------- Juriah Bt Abdul Jalil

Head, Department of Private Law

This dissertation was submitted to the Ahmad Ibrahim Kulliyyah of Laws and is accepted as partial fulfilment of the requirements for the Degree of Master of Comparative Laws.

------------------------------------------------- Zaleha Kamarudin

Dean, Ahmad Ibrahim Kulliyah of Laws

INTERNATIONAL ISLAMIC UNIVERSITY MALAYSIA DECLARATION OF COPYRIGHT AND AFFRIMATION

OF FAIR USE OF UNPUBLISHED RESEARCH

Copyright © 2006 by Cheryl Anne Marie Nicholson. All rights reserved.

UNFAIR CONTRACTUAL TERMS IN BANKING DOCUMENTS: A CRITICAL EVALUATION OF THE POSITION IN MALAYSIA

No part of this unpublished research may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise without prior written permission of the copyright holder except as provided below. Any material contained in or derived from this unpublished research may only be used by others in their writing with due acknowledgement.

1. Any material contained in or derived from this unpublished research may only be used by others in their writing with due acknowledgement.

2. IIUM or its library will have the right to make and transmit copies (print or electronic) for institutional and academic purposes.

3. The IIUM library will have the right to make, store in a retrieval system and

supply copies of this unpublished research if requested by other universities and research libraries.

Affirmed by Cheryl Anne Marie Nicholson ……………………………………………. ……………………… Signature Date

DEDICATION

THE ROAD NOT TAKEN

Two roads diverged in a yellow wood, And sorry I could not travel both

And be one traveler, long as I stood And looked down one as far as I could To where it bent in the undergrowth; Then took the other, as just as fair,

And having perhaps the better claim, Because it was grassy and wanted wear;

Though as for that the passing there Had worn them really about the same,

And both that morning equally lay In leaves no step had trodden black. Oh, I kept the first for another day!

Yet knowing how way leads on to way, I doubted if I should ever come back.

I shall be telling this with a sigh Somewhere ages and ages hence;

Two roads diverged in a wood, and I – I took the one less traveled by,

And that has made all the difference.

- Frost –

This work is dedicated to my late mother, Maria, whose constant encouragement had led me to always take the road less traveled.

ACKNOWLEDGEMENTS

I wish to express my sincere appreciation to Dr. Abdul Mohaimin Bin Noordin Ayus for his patience and guidance whilst acting as my supervisor. My grateful thanks also to Dr. Norhashimah Bt Yasin, Dr. Mohd Daud Bin Bakar and Dr. Razali Nawawi for imparting their knowledge, encouraging me and for the many articles and books written by them which proved to be sources of my research. I must add that Dr. Razali’s kindness and understanding was awesome and he is truly an inspiration to me. Last but not least, a special thanks to my family and friends, Wong and Sri for all their understanding, support and sacrifice whilst I was researching and writing this study.

LIST OF STATUTES Carriage of Goods by Sea Act 1971 13 Contracts Act 1950 S 10 36 s 14 36,39 s 16 39 s 16 (2) 41 s 16 (3) 44 s 24 (e) 43,57 Contracts Review Act 1980 (NSW) s 4 (2) 34 s 5 34 s 6 34 s 7 34,65 s 9 34,65 Evidence Act 1950 s 101 57 Housing Development (Control & Licensing) (Amendment) Act 2002 13,78 Islamic Banking Act 1983 69 Law of Property Act 1925 s 174 22 Sale and Supply of Goods Act 1994 18 Sales of Reversions Act 1867 21 Stamp Duty Act 1949 54 Trade Practices Act 1986 s 51AA 35

s 51AB 35,65 s 51AC 35 Unfair Contract Terms Act 1977 18,63,64 Unfair Terms in Consumer Contracts Regulations 1944 18,65

LIST OF CASES ABN-AMRO Bank Bhd v Ismail Bin Mydinsah (trading as Ismy Classic) [2004] 7 MLJ 30 58 Addiscombe Garden Estates Ltd v Crabble [1958] 1 QB 513 74 Affin Bank Bhd v Zulkifli Abdullah [2006] 1 cLJ 438 72 Alec Lobb (Garages) Ltd v Total Oil (Great Britain) Ltd [1985] 1 WLR 173 30 Allcard v Skinner [1887] 36 Ch D 145 40 American Express International Banking Corporation v Tan Loon Swan [1992] 1 MLJ 727 54 American International Assurance Co Ltd v Koh Yen Bee [2002] 4 MLJ 301 45 Arrale v Constain Civil Engineering Ltd [1976] 1 Lloyds Rep 98 24 Avon Finance Company Ltd v Bridger & Anor [1985] 2 All ER 281 48 Awang bin Omar v Haji Omar & Anor [1949] MLJ Supp 28 37 Banque Keyser Ullman SA v Skandia (UK) Insurance Ltd [1989] 3 WLR 25 78 Barclays Bank v Schwartz, The Times, August 2 1995 8 Begbie v State Bank of New South Wales [1994] ATPR 41-288 33 Blay v Pollard and Morris [1930] 1 KB 628 7 Bloomley v Ryan (1956) 99 CLR 362 32, 49

Boustany v Pigott [1993] EGCS 85 28, 31 Chait Singh v Budin Bin Abdullah [1922] 1 FMSLR 348 41 Chesterfield (Earl of) v Jannsen [1951] 2 Ves. Sen. 125 21 Commercial Bank of Australia Ltd v Amadio (1983) 151 CLR 447 32,50 Credit Lyonnais Bank Nederland NV v Burch [1997] 1 All ER 144 27 Creswell v Potter [1978] 1 WLR 910 26 Curtis v Chemical Cleaning & dyeing Co [1951] 1 All ER 631 37 D & C Builders Ltd v Rees [1966] 2 QB 617 25 Datin Zainun Binti Ismail v Tuan Minah Binti Syed Abdul Rahman & Anor [1980] 1 MLJ 100 38 Dobbs v National Bank of Australasia Ltd [1939] HCA 49 78 Earl of Aylesford v Morris (1873) L.R. 8 Ch. App. 488 22,25,42 Evans v Llewellin [1787] 1 Cox 333 26, 32 Fong Whye Koon v Chan Ah Thong [1996] 2 SLR 706 49 Foreman v Great Western Railway Co (1878) 38 LT 851 7 Fry v Lane (1888) 40 Ch. D. 312 26,27,28,49 Fui Lian Credit & Leasing Sdn Bhd v Kim Leong Timber Sdn Bhd [1991] 1 CLJ 522 42, 46 Gallie v Lee [1969] 2 Ch. 17 10 George Harvey v Ventilatoren-fabrik Oelde GmbH

[1988] 6-CLD-06-29 8 George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 19 Greg v Tasmanian Trustee Ltd [1997] ALR 328 33 Gore v Gibson (1845) 153 ER 260 9 Harrison v National Bank of Australiasia Ltd (1928) 23 Tas. L.R. 1 31 Hart v O’ Connor [1985] AC 1000 29,49 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465 76 Hitchman v Avery (1892) 8 TLR 698 7 Hong Kong and Shanghai Banking Corporation v Syarikat United Leong Enterprise Sdn Bhd & Anor. [1993] 2 MLJ 449 40 Ho Lai Ying & Anor v Cempaka Finance Bhd [2004] 1 CLJ 232 58 Hu Siew Hie & Anor v PP [2004] 6 MLJ 415 53 Imbangan Utama Sdn Bhd v Lotan Engineering Sdn Bhd [2002] 2 MLJ 313 38 Ismail bin Savoosah & Ors v Hajee Ismail (1889) 4 Ky 453 37 L Schuler AG v Wickman Machine Tool Sales Ltd [1975] AC 235 20 L’Estrange v F Groucob Ltd [1934] 2 KB 394 7, 37 Levison v Patent Steam Carpet Cleaning Co Ltd [1978] QB 69 24 Lim Geok Hian v Lim Guan Chin [1994] 1 SLR 203 47

Lim Tai Ming & Sons Credit Sdn Bhd v Lim Tuck Thien [2001] 1 MLJ 57 53 Lloyds Bank Ltd v Bundy [1975] QB 326 24,47 Loi Hieng Chiong v Kon Tek Shin [1983] 1 MLJ 31 42 Louth v Diprose (1992) 67 ALJR 95 33 Malayan Banking Bhd v Kim Produce Pte Ltd [1991] 2 MLJ 448 48 Malayan Banking Bhd v P K Rajamani [1994] 1 MLJ 405 73 Maria Chia Sook Lan v Bank of China [1976] 1 MLJ 49 37 Mountford v Scott [1974] 1 All ER 248 76 Multi-Service Bookbinding Ltd v Marden [1979] 1 Ch 84 76,78 National Westminister Bank plc v Morgan [1985] AC 686 29 Pao On v Lau Yiu Long [1980] AC 614 30 Parker v South Eastern Railway (1877) 2 C.P.D. 416 6 Parras Holdings Pty Ltd v Commonwealth Bank of Australia [1998] 682 FCA 33 Pek Nam Kee v Peh Lam Kong [1996] 1 SLR 75 48 Pengurusan Danaharta Nasional Bhd v Miri Salamjaya Sdn Bhd & Ors [2004] 4 MLJ 341 46 Photo Production Ltd v Securicor Transport Ltd [1980] AC 827 18, 29 Polygram Records Sdn Bhd v The Search [1994] 3 MLJ 127 42

Poosathurai v Kannapa Chettiar & Ors [1919] 47 1A 1 40 Printing and Numerical Registering Co v Simpson [1987] LR 19 Eq 462 13 R & B Customs Brokers v UDT [1988] 1 All ER 847 63 Raghunath Prasad v Sarju Prasad AIR [1924] PC 60 39 Rajabali Jumabhoy v Ammerali R Jumabhoy [1997] 3 SLR 802 50 Redmond v Allied Irish Bank p.l.c. [1987] 2 F.T.L.R. 264 78 Roe v R A Naylor Ltd [1917] 1 KB 712 9 Saad Marwi v Chan Hwan Hua & Anor [2001] 3 CLJ 98 43 Saunders v Anglia Building Society [1971] AC 1004 10 Schroder Music Publishing Co Ltd v Macaulay [1974] 3 All ER 616 19, 25 Seranggon Garden Estate Ltd v Maria Chye [1959] MLJ 113 37 South Australian Railways Commissioner v Egan (1973) 130 CLR 506 34 Standard Chartered Bank Malaysia Bhd v Foreswood Industries Sdn Bhd & Anor [2004] 6 CLJ 320 45 Subramaniam v Retnam [1966] 1 MLJ 172 37 Suisse Atlantique Societe d’Armement Maritime SA v NV Rotterdamsche Kolen Centrale [1967] 1 AC 361 17 Tan Lai Wah v National Bank of Chicago [1984] 1 MLJ 150 38 Tate v Williamson (1866) 2 Ch App 55 26 Teck Guan Trading Sdn Bhd v Hydroteck Engineering (S) Sdn Bhd & Ors [1996] 4 MLJ 331 38 The Chikuma [1981] 1 WLR 314 29

The Luna [1920] P 22 8 Tufton v Sperni [1952] 2 TLR 516 26 United Malayan Banking Corp Bhd v Chen Yin Khee & Ors [2005] 2 MLJ 118 58 United Malayan Banking Corp Bhd v Masagoes [1994] 1 SLR 766 48 Watkin v Watson-Smith The Times, 3 July 1986 28 West v AGC (Advances) Ltd [1986] 5 NSWLR 610 34 Westhill Pty Ltd v Heath (1959) 52 SASR 46 44 William and Glyn’s Bank v Barnes [1981] Comm. L.R. 205 78

TABLE OF CONTENTS

Abstract in Arabic ..………………………………………………………………. i Abstract in English ………………………………………………………………. ii Approval Page …………………………………………………………………… iii Copyright …………….………………………………………………………...... iv Dedication …………………………………………………. …………………… v Acknowledgments ………………………………………….…………………… vi List of Statutes ……..…………………………………………………………… vii List of Cases ……….………………………………………. ………………..…. viii CHAPTER ONE: INTRODUCTION ..………………………………………… 1 CHAPTER TWO: WRITTEN CONTRACTS .………………………………… 3

Signature …...………………………………………………………….... 4 Non Est Factum ……………………………………. …………………… 9

CHAPTER THREE: INEQUALITY OF BARGAINING POWER………........... 12

Freedom of Contract ……………………………………………………. 12 Standard Form Contracts ………………………………………………. 15 Unconscionability/Inequality of Bargaining Power……………………… 21 The Position in Australia ……………………………………………….. 31 The Position in Malaysia ………………………………………………... 36 The Position in Singapore ………………………………………………. 47 Conclusion ……………………………………………………………… 50

CHAPTER FOUR: MALAYSIAN BANKING DOCUMENTS……………….. 52

Signing the Document …………………………………………… 53 Stamping the Document …………………………………………… 54 Legal Representation ………………………………………...…. 54 Language of the Document …………………………………………… 55 Facilities Agreement …………………………………………… 55

CHAPTER FIVE: STATUTORY PROTECTION ……………………………. 61

Unconscionability as a Vitiating Factor………………………………….. 61 Procedural and Substantive Unfairness…………………………………... 62 Unconscionability – New Law ……………………………………. 63

CHAPTER SIX: BANKING CONTRACTS IN ISLAM………………………... 67

Bay al-Inah ……………………………………………. 70 Profit Margin ……………………………………………. 71 Al-Bay Bithamin al-Ajil Facility: The case of Affin Bank Bhd v Zulkifli Abdullah ……………………. 72

CONCLUSION ……………………….…………………… 75 BIBLIOGRAPHY ……………………………………………. 80 APPENDICES ……………………………………………. 82

CHAPTER ONE

INTRODUCTION

The signature of the parties on the contract document speaks volumes as to its validity

and binding nature of the contract on the parties. This research will examine the effect of

such a signature on the signatories, i.e. how far a person is bound by the terms of the

contract that he/she has put his/her signature on. We will see that initially, the courts took

the view that a signatory was bound by the contract as long as he had put his signature on

it.

All this changed with time when contract documents became more complicated

and complex to such an extent that it was not comprehensible sometimes by one party to

the contract. Defences were provided by the law for these situations but there was still

one circumstance where no remedy was given, i.e. when the terms of the contract were

harsh on one party. This research would review the case law on unfair terms and

inequality of the bargaining position of parties to a contract.

This research will be also looking specifically at contracts between banks and

their customers in Malaysia which are rather standard in its terms. A close examination of

some sample banking documents attached to this research as Appendixes will show that

the terms are entirely favourable to the lender bank, placing the customer in a sorry

disadvantageous position. Faced with documents whose language is often

incomprehensible, banks flexing their muscles before their client and with no other

options, but for the customer to reluctantly accept the terms placed before him.

These problems faced by the customer found their way into the courts but the

courts hid behind ancient laws which only provide remedy or relief where vitiating

factors existed and cited freedom of contract as a reason not to intervene. In this study

comparisons will no doubt be made with the situation in Australia and Singapore.

The main objective of this research is to highlight the deprived position of

customers and consumers of banking products and services and the urgent need for

remedies. It is necessary for the Malaysian courts to emulate their Australian and British

counterparts in exploring this area without ‘fear or favour’ and creating laws as the

protectors of the oppressed.

If laws are not enacted and amended or guidelines are not introduced which

propound impartial terms and conditions in contracts between the customer and the bank,

we will see a deterioration of the quality of these contracts, an influx of legal suits

plaguing the courts, increase in debts, etc.

The governing bodies of banks ought to initiate moves to standardize contract

terms, wherever possible, that are fair and equal to both parties. Without constructive

control measures, there will certainly be a loss of confidence in the banking system and

eventually a slowdown in borrowings. In fact, we need only look at the present economic

situation in our country to see that although banks are competing with each other in

lowering their interest rates in order to encourage borrowings, customers are still reluctant

to borrow for, amongst others, the fear of long term commitment and being bound by

terms that are wholly in favour of the bank.

CHAPTER TWO

WRITTEN CONTRACTS

A contract may take many forms. It may be oral, written, partially written and partially

oral, partially written and partially implied or even wholly implied. Whatever form it

takes, the parties need only to prove the document for it to be binding on the parties if

there is already in existence a contract. More often than not, it is simply a case of res ipsa

loquitar, that is, the document speaks for itself. It is difficult in such situations for the

party seeking to avoid the contract to say that he or she never signed the document when

his or her signature is glaringly endorsed on the document. On the other hand, in a

situation where the existence of the contract is doubted, then the party seeking to rely on

the document is burdened with the additional task of proving the existence of the contract.

This is evident when the parties are attempting to prove contracts that are oral or implied

or even written.

Oral and implied contracts have proven to be a challenge to parties claiming not

only its existence but the terms therein when the existence of both have been denied or

refuted. The party seeking to avoid an oral or implied contract can merely deny its

existence while the party seeking to enforce it has to prove by the conduct of the parties,

the performance of the contract or witnesses that the contract existed. On the other hand,

a party seeking to enforce terms in an oral or implied contract would surely face

difficulties unless he has witnesses, proof of previous trading on such terms, if any, and

performance of the term.

These difficulties had led many contracting parties, especially institutions, to

resort to written contracts as a safeguard to prevent the party to the contract attempting

to avoid it. These written contracts are said to have set out the terms clearly and are

supposed to have been agreed upon by both parties. We say ‘supposed to have been’,

because parties, even with a written contract, have attempted to avoid it on the grounds

that they did not understand the terms, the language of the contract or that the terms, that

were to have been agreed upon, are unfair to them.

A written agreement can be proven basically by 3 ways:

(a) the signatures to the agreement;

(b) the receipt and acceptance of the agreement;

(c) that the parties had reasonable notice of the terms of the agreement.

For the purposes of this paper, we will be looking at proof of a written agreement by the

imposition of a signature on the said agreement since banking contracts can only exist

when both parties have placed their signature on the contract.

Signature