Contracts Act 1950 Reform: A Strong Report and a Much-Needed Step towards Modernisation

“A modern economy depends upon a modern law of contract. The world of 1950 did not contemplate artificial intelligence, smart contracts, algorithmic decision-making, cloud computing, digital marketplaces, platform economies, or the global interconnectedness of modern commerce. The law must evolve if it is to remain relevant and effective.” — Dato’Seri Vazeer Alam bin Mydin Meera, Federal Court Judge and Chair of the Committee, The Edge Malaysia, 11 June 2026.

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1. Background

The Committee for the Review and Reform of Contract Law (CRRCL) was established on 14 January 2025 and is chaired by Dato’ Seri Vazeer Alam bin Mydin Meera, Judge of the Federal Court. The initiative is led by the Legal Affairs Division of the Prime Minister’s Department (BHEUU) in collaboration with Monash UniversityMalaysia and Universiti Kebangsaan Malaysia. The CRRCL’s eight working groups examined all 191 provisions of the Contracts Act 1950.

On 30 June 2026, the Minister in the Prime Minister’s Department (Law and Institutional Reform), Dato’ Sri Azalina Othman Said, briefed the Dewan Rakyat on the CRRCL’s Final Report. The reforms aim to enhance legal certainty, reduce transaction and dispute costs, strengthen investor confidence and align Malaysia’s commercial framework with ASEAN and international standards.

The CRRCL concluded that the core structure of the Contracts Act 1950 remains sound, and the Act will therefore not be repealed. Instead, the proposed reforms comprise three measures:

(a) targeted amendments to the Act, including modernising its language, removing statutory illustrations and introducing a new Part XI on exemption and limitation clauses;

(b) a new Contracts (Rights of Third Parties) Bill; and

(c) a new Agency Bill to repeal and replace Part X of the Act and the Powers ofAttorney Act 1949, addressing electronic transactions and artificial intelligence (AI) systems and establishing a unified powers-of-attorney regime.

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2. Key Proposals

2.1 Modernising the Act

The CRRCL proposes to replace archaic expressions in the Contracts Act 1950 and remove statutory illustrations inherited from the Indian Contract Act 1872, incorporating any substantive legal principles into the Act’s operative provisions.

The amendments would standardise terminology. For example, “terminate” would consistently describe the discharge of a contract for breach, distinguishing it from avoidance on grounds affecting the validity of consent. Section 1 would also clarify that the Act is not a complete codification of contract law and that common law principles continue to apply where it is silent, reflecting the position recognised by the courts.

These changes should improve clarity and reduce disputes arising from statutory uncertainty. As they primarily concern the Act’s structure and expression, they are not expected, by themselves, to require changes to existing contracts.

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2.2 Making and Varying Contracts

Contractformation and validity

The reforms would clarify the rules on how a contract is formed. Where the party making an offer specifies how it must be accepted (for example, in writing orby signing and returning a form), an acceptance made in any other way would not bind that party unless it expressly agrees to it. This gives businesses greater certainty as to when a binding contract comes into existence. In addition,where only part of an agreement is unlawful and that part can be clearly separated, only the unlawful part would be void and the rest of the agreement would remain enforceable.

Contracts entered into by minors would become voidable (that is, capable of being set aside by the minor) rather than void, while contracts for necessaries,contracts for the minor’s benefit (such as education, employment, training or internships) and contracts permitted by written law would be enforceable.

‍Protectingparties from improperly obtained consent

The reforms would replace “coercion” with “duress”, expressly including economic duress. A new statutory doctrine of unconscionable dealing would also be introduced. In deciding whether a dealing is unconscionable, courts could consider factors such as the parties’ relative bargaining strength, whether conditions were imposed that were not reasonably necessary to protect legitimate interests, and whether undue pressure or unfair tactics were used. Relief would be confined to serious misconduct, unfair advantage-taking or exploitation of a party’s special disadvantage, and would not be available merely because a bargain is harsh.

Consideration:deeds and contract variations

First, section 26 would expressly recognise that an agreement made by deed is enforceable without consideration, resolving long-standing uncertainty and aligning Malaysian law with jurisdictions such as the United Kingdom, Australiaand Singapore.

Secondly, a new section 26A would provide that performing, or promising to perform, an existing contractual obligation is capable of being consideration for avariation. In practice, a party could validly agree to pay more, or acceptless, in return for the other party performing what it was already bound to do.This would reverse the position reaffirmed by the Federal Court in Kuala Dimensi Sdn Bhd v Port Kelang Authority [2025] 5 MLJ 238 at [92], underwhich such a variation requires fresh consideration.

These changes would provide greater certainty when renegotiating price, scope of work and delivery timelines. Parties must still document variations properly and avoid duress or unconscionable dealing during negotiations.

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2.3 Restrictive Covenants and Contractual Time Bars

Restrictive covenants: moving towards a reasonableness test

‍Section 28 of the Contracts Act 1950 renders void any agreement restraining a person from exercising a lawful profession, trade or business, subject only to narrow exceptions relating to the sale of goodwill and partnerships. Restraints outside these exceptions are void, even where they are reasonable.

The CRRCL proposes to replace this prohibition with a reasonableness test. A restraint would be enforceable if it is reasonable in duration, geographical area and scope of activities, and necessary to protect legitimate interests.The proposal also recognises categories such as the sale of goodwill, partnership dissolution, commercial agreements and non-competes during employment, and confirms that reasonable confidentiality clauses are notrestraints of trade.

This could enable employers, business purchasers and business partners to protect goodwill, client relationships and confidential know-how through appropriatelydrafted restrictive covenants. Businesses should review existing restrictions, as broad or excessive restraints would not automatically become enforceable.

Contractual time bars: greater certainty for commercial claims

Section 29 currently voids agreements that limit the time within which a party may enforce its contractual rights. The CRRCL proposes to remove this, so that an agreement would be void only to the extent that it absolutely prevents a party from enforcing its rights through the usual legal proceedings. In practice,reasonable contractual claims periods would generally be permissible.

The CRRCL declined to follow the more restrictive Indian approach, which it considered commercially impractical and potentially detrimental to Malaysia’s attractiveness as a jurisdiction for dispute resolution.

The changes could provide greater certainty for notification and claims periods in supply, construction and services agreements. Businesses should ensure theseprovisions are clearly drafted and consistent with the final legislation.

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2.4 Controls on Exemption and Limitation Clauses

The CRRCL recommends stronger controls on exemption and limitation clauses througha new Part XI, modelled on the Unfair Contract Terms Act 1977 (UK).

First, parties could not exclude or restrict liability for death or personal injury caused by negligence, or liability for supplying goods without title. Secondly, exclusions or restrictions of other liabilities would be enforceable only if reasonable. These include liability for negligence causing other loss, misrepresentation, and breaches of statutory implied terms concerning the description, quality and fitness for purpose of goods.

Part XI is significant because it is not limited to consumer transactions. The Consumer Protection Act 1999 regulates unfair terms in consumer contracts but does not extend to business-to-business dealings. Under Part XI, where one business deals on the other’s written standard terms of business, the exclusion and limitation clauses in those terms would be enforceable only if reasonable.The party relying on the clause would bear the burden of proving that it isreasonable.

The proposed controls on negligence liability and standard terms of business would not extend to certain contracts, including insurance contracts and contracts relating to land, intellectual property, the formation or constitution of companies and securities, although the CRRCL noted that these exclusions require further consideration in the Malaysian context. Suppliers, service providers and technology vendors should review their exclusion clauses and liability caps for reasonableness. Business customers would gain a statutory basis to challenge unreasonable terms, particularly in standard-form contracts presented on a take-it-or-leave-it basis.

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2.5 Two Proposed New Bills: Third-Party Rights and Agency

Contracts (Rights of Third Parties) Bill

Underthe doctrine of privity, a person who is not party to a contract generally cannot enforce its terms, even if the contract benefits them. The Contracts Act 1950 does not currently address third-party rights.

The proposed Bill would allow third parties to enforce terms intended to benefit them. Once a third party has assented to or relied on a term, it generally could not be varied or terminated without their consent, unless the contract provides otherwise. Third parties enforcing a term would also be bound by any arbitration agreement in the contract.

The Bill could simplify group and project arrangements by reducing the need forseparate agreements. Businesses should review whether to permit or expressly exclude third-party enforcement.

Agency Bill

The proposed Agency Bill would repeal and replace Part X of the Contracts Act 1950 and the Powers of Attorney Act 1949. It would confirm that a contract is not invalid merely because it was formed through electronic agents, including AI systems, and establish a unified powers-of-attorney regime across Peninsular Malaysia, Sabah and Sarawak. It would also simplify the rules on seals: an agent would no longer need to be appointed under seal to execute a sealed document, and could execute such a document under hand.

The Bill would provide greater certainty for automated and AI-enabled transactions. Businesses should strengthen system controls and ensure agreements with technology providers appropriately allocate responsibility and risk.

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2.6 Remedies, Frustration and Security

Damagesfor breach of contract

Section 74 would clarify that recoverable loss includes loss arising naturally in the usual course of things and loss the parties knew or could reasonably have contemplated when contracting, aligning the provision with the common law rule on remoteness of damage in Hadley v Baxendale (1854) 9 Exch 341. The duty to mitigate loss would also be expressly incorporated into the Act.

Agreed damages and forfeiture of deposits

The proposed revision of section 75 would replace the distinction between penalties and liquidated damages with a single standard of reasonable compensation. A party claiming agreed damages would need to show that the sum is not exorbitant or disproportionate to the greatest legitimate loss, with any award capped at the contractual amount.

The claimant would need to provide some evidence to assist the court in assessing reasonableness, but would not need to prove actual loss in the same manner as aclaim for general damages.

Forfeiture of deposits would also be expressly permitted if reasonable. These changes could improve predictability in construction, property development and supply contracts. Businesses should document the commercial rationale and anticipated loss underlying agreed damages and ensure deposit and forfeiture provisions are justifiable.

Supervening impossibility and illegality

The CRRCL proposes to clarify section 57 so that, where a contract becomes void because of supervening impossibility or illegality, sections 15 and 16 of the Civil Law Act 1956 would govern the adjustment of payments and benefits between the parties. This makes the existing position explicit rather than introducing new rights.

The CRRCL considered, but did not adopt, proposals for statutory hardship and force majeure doctrines. Relief from unforeseen events would therefore continue to depend principally on existing legal principles and contractual terms. Businesses should review force majeure clauses to ensure they address relevant events, notice requirements and prolonged disruption.

Pledgesand subsequent advances

Aproposed amendment to section 127 would remove the presumption that a pledge extends to subsequent advances, requiring any extension to be expressly agreed. Financial institutions and other secured creditors should ensure their security documents clearly address subsequent advances.

3. Conclusion:Preparing for the Reform

The CRRCL’s Final Report is the first comprehensive review of the Contracts Act 1950 since its enactment. The reforms seek to modernise the Act, codify principles developed by the courts and address long-standing gaps while retaining its core structure.

For businesses, the proposals could improve certainty in contractual variations, restrictive covenants, agreed damages and digital transactions. However, new controls on exemption and limitation clauses and third-party contractual rights may require changes to how contracts allocate risk and define enforceable rights.

Although the proposals remain subject to the legislative process, businesses should begin reviewing their standard terms, template agreements and contracting practices, particularly liability provisions, agreed damages, restrictive covenants, force majeure clauses and third-party rights.

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Zaid Ibrahim & Co will organise client briefings and prepare practical playbooks to help clients navigate thereforms once the legislative amendments have been finalised and published.