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Date: Nov 22, 2014
Time: 02:49

"Cutting Out Remedies"

The Supreme Court in New Zealand Insurance Co Ltd v Ong Choon Lin (T/A Syarikat Federal Motor Trading) [1992] 1 MLJ 185 had to consider the validity of the following 'Condition 19', which appeared in an insurance contract:

In no case whatever shall the company be liable for any loss or damage after the expiration of twelve months from the happening of the loss or damage unless the claim is the subject of pending action or arbitration.

Apparently, Indian courts view such clauses as valid as they don't limit the plaintiff's time to enforce his rights by contract, but limit only the insurer's (duration of) liability, which somehow does not amount to contracting out of limitation. The Supreme Court observed:

...It would appear from the authorities ... that the preponderant view of the Indian courts is that conditions similar to condition 19 of the fire policy do not infringe or contravene s 28 of the Indian Contract Act, the provisions of which, as mentioned, are identical to those of s 29 of our Contracts Act 1950. It would appear that the validity of a condition similar to condition 19 of the fire policy has been upheld in the Indian cases ... on the distinction ... made between rights on the one hand and remedies on the other ...

The Supreme Court then took to a different view:

This distinction between the existence of a right and its enforcement as a matter of law does not however appear to exist in our jurisprudence ... the legal distinction ... between a right and its remedy in the context of the consequences that flow therefrom does not exist in Malaysian law in the eyes of which the distinction is merely semantic. We do not think that a right can be dissociated from its remedy. We are therefore of the opinion that condition 19 of the fire policy contravenes s 29 of the Contracts Act 1950. The learned judge was therefore correct in holding that condition 19 of the fire policy is void by virtue of the imperative words of s 29 of the Contracts Act 1950 as it clearly limits the time within which the respondent can enforce his right under s 6(1)(a) of the Limitation Act 1953.

From what I understand of the two divergent views:

1. The Indian position: you cannot contractually limit the plaintiff's right to sue within the limitation period, but you can contractually limit the plaintiff's remedy against the defendant (by cutting down the time within which the defendant can be made liable).

2. The Malaysian position: you cannot limit either. Right and remedy are inseparable.

I would agree with the Malaysian court's view. Firstly, a cause of action comes attached with a right of remedy. Secondly, a cause of action, once it exists, cannot be removed except by operation of law. One of the clearest ways that this happens is through expiry by limitation. But even when that happens, the right to sue does not die; it is just the remedy (upon suing) that can no longer be sought. (And this, I think, is why limitation must be specifically pleaded, because by default one's right to sue is not affected; it is only his right to remedy that may be barred.) Parties could later agree to 'subsume' the cause of action once it has arisen - e.g. by settlement - but they cannot, by contract, preemptively remove a cause of action that has not yet arisen or the remedy that it might have led to.

After all, if you contractually stipulate a strict time-window as to when you can be made liable, then are you not barring the aggrieved person's right to do so outside that time-window? If parties agree that the aggrieved person can sue but the defaulting party cannot be made liable, this is still, in effect, an attempt to contract out of limitation.

A hypothetical scenario: a man buys a carbonated drink from a store. He does so by express contract. The drink causes him to fall ill. The contract stipulates that he must sue within twelve months. Instead, he sues in the thirteenth month. The subtle difference: the contract did not limit the time when the man could sue; it limited only when the store could be sued. Could the store's attempt to defend itself, by relying on the limiting clause, succeed under Malaysian law? Going by previous arguments, I wouldn't think so.

I note that the void nature of such limiting clauses may similarly apply in non-insurance scenarios, even though courts treat conditions and warranties in 'normal' contracts differently. Arguably it would be even easier to assert that limiting clauses are automatically void in normal contracts, but I hesitate to find so, as it's really quite difficult to predict the outcome of litigation scenarios.