BAANU A/P MOHAN v AIA BERHAD

Case Significance

Illustrates how section 28 of the Contracts Act 1950 strikes down a contractual term that restrains a third party's freedom to work, and the issue-limited use of a preliminary determination under Order 33 rule 2.

This High Court decision from the Commercial Division at Kuala Lumpur concerns a preliminary point of law determined before trial under Order 33 rule 2 of the Rules of Court 2012: the validity of a clause in an insurance agency contract that tied the agent's engagement to the employment choices of the agent's spouse. The disputed clause, said to appear in the insurer's Agency Compensation Handbook and to form part of the contract between the plaintiff agent and the defendant insurer, AIA Berhad, provided that if the agent's spouse was an agent of another insurance company or takaful operator, the agent's own contract would be terminated unless the spouse first terminated the competing engagement. In substance, the clause restrained the agent's spouse, a third party to the contract, from taking employment with any other insurer or takaful operator in Malaysia, on pain of the agent's contract being automatically terminated. The central question was whether that clause was valid or whether it fell foul of section 28 of the Contracts Act 1950, which provides that every agreement by which anyone is restrained from exercising a lawful profession, trade or business of any kind is to that extent void. The court considered the insurer's reliance on the restraint-of-trade reasoning in Polygram Records Sdn Bhd v The Search, but held that the clause offended section 28 because it operated to restrain a person, the spouse, from exercising a lawful profession or business. The court accordingly declared the clause void. Importantly, the court confined its ruling to the validity of the clause alone: it made no finding on liability, on the alleged breach of fiduciary duties by the agent, or on whether the termination was otherwise justified, and it expressly preserved the insurer's right to raise all such defences at trial. The preliminary determination was directed to narrow the issues, save time and costs, and ensure an efficient trial. The judgment is a useful illustration of the reach of section 28 of the Contracts Act 1950 to a contractual term that restrains a third party's freedom to work, and of the careful, issue-limited use of a preliminary determination under Order 33.