# The Contracts Act 1950 Is Not English Law — Five Places Malaysia Diverges

> How the Contracts Act 1950 departs from English contract law on consideration, restraint of trade, penalty clauses and restitution — and which imported template clauses those departures kill.

- Category: business
- Language: en
- Status: published
- Updated: 2026-07-20
- Canonical: https://negaraku.md/en/business/contracts-act-malaysia

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A Malaysian company signs a distribution agreement drafted in London. It contains a
twelve-month post-termination non-compete, carefully narrowed to a defined territory and
a defined product line, with a severability clause underneath.

In England that clause is arguable. In Malaysia it is void, and the drafting effort that
went into making it reasonable is the reason it fails — because reasonableness is not the
test.

That single divergence costs Malaysian businesses more than any other feature of the
Contracts Act 1950, and it is one of at least five places where the Act parts company
with the English law most commercial templates assume.

## Why is Malaysian contract law in a statute at all?

Contract law here is codified. The Contracts Act 1950 (Act 136) descends from the Indian
Contract Act 1872, which the Straits Settlements and Federated Malay States inherited and
Malaysia then extended nationally by the Contracts (Malay States) (Amendment and
Extension) Act 1974.

This matters procedurally. English authority is persuasive on ground the Act does not
occupy — misrepresentation remedies, implied terms, construction of ambiguous wording.
Where the Act speaks, the Act governs, and English authority becomes background reading.

The AGC updated text is stated as at 1 January 2006, and its own list of sections amended
runs out in 1974. The operative provisions below have been stable for half a century.

## When is an agreement a contract?

Section 10(1): all agreements are contracts if they are made by the free consent of
parties competent to contract, for a lawful consideration and with a lawful object, and
are not expressly declared void by the Act.

That sentence carries four separate tests, each with its own sections behind it:

| Element | Where it lives | The trap |
| --- | --- | --- |
| Free consent | ss.13–23 | Coercion, undue influence, fraud, misrepresentation and mistake make the contract voidable, not void — you must elect |
| Capacity | ss.11–12 | Age of majority and soundness of mind at the moment of contracting |
| Lawful consideration | ss.2(d), 24–26 | The Malaysian definition is wider than the English one, in two directions |
| Lawful object | ss.24–25 | s.25 voids the whole agreement where the unlawful part cannot be severed |

Section 10(2) preserves any other law requiring writing, witnesses or registration. An
oral contract is a contract; a contract for a share transfer still needs the instrument
required by s.105 of the Companies Act 2016.

## How does s.26 differ from the English rule on consideration?

Section 26 states the rule negatively: an agreement made without consideration is void,
**unless** one of three things is true.

- **(a)** It is in writing, registered under any registration law in force, and made on
  account of natural love and affection between parties in a near relation to each other.
- **(b)** It is a promise to compensate, wholly or in part, someone who has already
  voluntarily done something for the promisor, or something the promisor was legally
  compellable to do.
- **(c)** It is a promise in writing, signed by the person to be charged or their
  authorised agent, to pay a debt the creditor could have enforced but for the limitation
  law.

Limb (c) is the commercially useful one and almost nobody uses it. A time-barred debt can
be revived by a signed written promise to pay it, in whole or in part. Read alongside
s.26 of the Limitation Act 1953, which restarts the clock on a written acknowledgment or
part payment, it gives a creditor two distinct routes out of a limitation problem.

Two further departures sit in the definition itself. Section 2(d) says consideration is
given when, at the desire of the promisor, **the promisee or any other person** has done,
does, or promises to do something. So consideration may move from a third party, and it
may be past. Both propositions are the opposite of the orthodox English position.

Explanation 2 to s.26 completes the picture: an agreement is not void merely because the
consideration is inadequate, though inadequacy is evidence the court may weigh when
asking whether consent was freely given.

## What exactly does s.28 say about restraint of trade?

One sentence:

> Every agreement by which anyone is restrained from exercising a lawful profession,
> trade, or business of any kind, is to that extent void.

Then three exceptions, and nothing else:

1. **Sale of goodwill.** One who sells the goodwill of a business may agree not to carry
   on a similar business within specified local limits, so long as the buyer or a
   successor in title carries on a like business there — *provided that such limits appear
   to the court reasonable, regard being had to the nature of the business.*
2. **Partners in anticipation of dissolution.** Partners may agree, on or in anticipation
   of dissolution, that some or all will not carry on a similar business within limits of
   the kind described in Exception 1.
3. **Partners during the partnership.** Partners may agree that some or all will not carry
   on any business other than the partnership's during its continuance.

Read that list again. **Reasonableness appears once**, as a proviso to Exception 1 only.
It is not a general test running through s.28, and it is not available to rescue a
restraint that falls outside all three exceptions.

Employment is not one of the exceptions. Neither is a services agreement, a
distributorship, a franchise, or a shareholders agreement between people who are not
partners in a partnership. Most published Malaysian guidance describes non-competes as
enforceable if reasonably drafted; the section does not support that. A carefully limited
restraint and a wildly excessive one meet the same fate, because "to that extent void"
looks at the restraint, not at its width.

What survives s.28 is everything that does not restrain the exercise of a trade:
confidentiality obligations, protection of trade secrets, non-solicitation of the
employer's own customers or staff — and restraints that operate **during** the
relationship rather than after it, since a person who is employed is not thereby
restrained from exercising a trade.

## Which other clauses does the Act quietly kill?

**Section 29 — restraint of legal proceedings.** Every agreement that restricts a party
absolutely from enforcing its rights by the usual legal proceedings in the ordinary
tribunals, **or which limits the time within which he may thus enforce his rights**, is
void to that extent.

That second limb is the one people miss. A clause saying claims must be brought within
ninety days is a contractual shortening of the limitation period, and s.29 is aimed
squarely at it.

Exception 1 to s.29 saves arbitration agreements for future disputes; Exception 2 saves
written agreements to arbitrate a dispute that has already arisen. This is the statutory
foundation on which the Arbitration Act 2005 sits — arbitration is not an ouster of the
court's jurisdiction, because s.29 says it is not.

**Section 30 — uncertainty.** Agreements whose meaning is not certain, or capable of being
made certain, are void. Heads of terms with an agreement to agree on price fail here.

**Section 75 — the sum named for breach.** Where a contract names a sum payable on breach,
or contains any other stipulation by way of penalty, the innocent party is entitled,
**whether or not actual damage or loss is proved**, to reasonable compensation not
exceeding the amount named.

The English distinction between an enforceable liquidated damages clause and an
unenforceable penalty does not exist here. Instead the named figure is converted into a
ceiling, and the court awards what it considers reasonable beneath it. The Explanation
adds that a stipulation for increased interest from the date of default may itself be a
penalty. Malaysian courts have developed a substantial gloss on how reasonableness is
assessed, and that gloss is case law, not statute.

## What if there is no enforceable contract at all?

Two sections do a great deal of unglamorous work.

**Section 66:** when an agreement is discovered to be void, or a contract becomes void,
anyone who received an advantage under it must restore it or compensate for it. This is
the restitution route when a contract fails for uncertainty, illegality or the absence of
a required approval.

**Section 71:** where a person lawfully does something for another, not intending to do so
gratuitously, and the other enjoys the benefit, the latter must compensate or restore.
That is the claim for work done under a contract that was never concluded — the
letter-of-intent problem, the deal that proceeded on emails.

Section 74 governs damages where a contract *was* concluded and broken: compensation for
loss naturally arising in the usual course of things, or which the parties knew at the
time of contracting to be likely — with s.74(2) excluding remote and indirect loss, and
the Explanation importing a duty to mitigate.

## Common mistakes

**Treating s.28 as a reasonableness test.** It is not. Drafting a narrower non-compete
does not move it inside an exception, and a severability clause cannot sever an agreement
into an exception that does not apply to it.

**Assuming a template that works in Singapore works here.** Singapore retained English
common law on restraint of trade. Malaysia codified. The two jurisdictions reach opposite
answers on the same clause.

**Relying on a contractual limitation period.** Section 29 voids agreements that limit the
time for enforcing rights. A ninety-day claims-notification clause is not a safe
substitute for the statutory six years.

**Pleading a liquidated damages figure as an entitlement.** Under s.75 the figure is the
maximum. Bring evidence of loss anyway; the section says proof is not required, but
reasonableness still has to be shown to the court.

**Forgetting that limitation is territorial.** The Contracts Act 1950 applies throughout
Malaysia. The Limitation Act 1953 applies to Peninsular Malaysia only (s.1(2)) — Sabah and
Sarawak have separate ordinances, and s.4 requires limitation to be expressly pleaded or
it is not a bar at all.

**Treating an unsigned promise to pay an old debt as worthless.** Section 26(c) makes it a
contract if it is in writing and signed.

## What's next

If the contract is a shareholders agreement, the constraints are different again — the
Companies Act 2016 limits what any private arrangement can do to the company itself. If
the contract has been broken and money is owed, the escalation ladder from letter of
demand upwards is worth understanding before instructing anyone. And if the dispute
clause points at the AIAC rather than the courts, that choice determines your appeal
rights, not just your venue.

## Sources

- Contracts Act 1950 (Act 136), updated text — https://lom.agc.gov.my/ilims/upload/portal/akta/LOM/EN/Act%20136.pdf (Attorney General's Chambers of Malaysia)
- Limitation Act 1953 (Act 254), online version as at 1 September 2019 — https://lom.agc.gov.my/ilims/upload/portal/akta/outputaktap/1727530_BI/ACT%20254-Online%20version%20as%20at%201%20Sept%202019%20%282%29.pdf (Attorney General's Chambers of Malaysia)
- Arbitration Act 2005 (Act 646), reprint as at 1 November 2018 — https://lom.agc.gov.my/ilims/upload/portal/akta/outputaktap/1700445_BI/Act%20646%20%28REPRINT%202018%29.pdf (Attorney General's Chambers of Malaysia)
- Laws of Malaysia — principal acts search — https://lom.agc.gov.my/principal.php (Attorney General's Chambers of Malaysia)

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