[Column] Can liability caps be 100% of the contract amount – Considering the proposed Malaysian contract law reform

2026-11-12

✅ In a nutshell

🏭 When determining the limit of liability for an equipment maintenance contract, it is necessary to consider the maintenance fee and the losses incurred when the equipment stops separately.
⚖️ Malaysia's proposed contract law reforms suggest a mechanism to question the reasonableness of exemption and limitation of liability clauses, such as when contracting on written standard terms of business of one party.
📋 For liability caps, liquidated damages for delay, and non-compete clauses, the circumstances to consider for reasonableness and the party responsible for demonstrating it differ.
📝 Recording the losses anticipated at the time of contract conclusion and the scope covered by insurance will make it easier to determine whether to maintain the same terms when adding equipment or renewing the contract.

Table of Contents

Introduction

This time, we will use Malaysia's proposed contract law reform as a clue to explain how to determine the liability limits for inter-company contracts.

I think many of you have been looking at contracts and seen clauses that state that the maximum amount of damages is 100% of the contract amount.
Using the contract amount as a basis makes it easier to calculate the upper limit.
However, these figures do not reveal what losses will actually occur, what will be borne by whom, or who will bear them.

For example, consider the case of a Japanese manufacturer in Malaysia that outsources the maintenance of its factory's production equipment to local contractors.
The following is a fictional example.
The standard contract presented by the maintenance company stipulates that the maximum amount of damages is 100% of the annual maintenance fee.

If equipment is shut down due to a work error by a maintenance company, the factory may incur costs for repairing the malfunction, as well as the cost of transferring production to other factories and additional transportation costs to make the shipment in time.
On the other hand, if maintenance companies are willing to bear the losses resulting from the shutdown of the entire factory, that risk will also affect maintenance fees and insurance arrangements.

What we want to consider in this transaction is what burden will remain on the factory side when the equipment stops, subject to a 100% annual maintenance fee cap.
The proposed revision of contract law in Malaysia provides material for considering the circumstances under which these conditions should be evaluated.

Proposal to demand reasonable limits on liability in standard contracts

This also relates to standard trading conditions between companies

Committee for the Review and Reform of Contract Law (Malaysia). The name seems a little strange in Japanese...) I submitted it to the Legal Affairs Division of the Prime Minister's Office (BHEUU) Final report for June 2026 Therefore, we proposed a new section (Part XI) to regulate the provisions of liability and liability limitations in the Contract Act (Contracts Act 1950).
According to the report, this section is modeled after the UK Unfair Contract Terms Act (1977).
The following are the draft articles of the report, and at the time of writing, the corresponding bill Submission to the Diet , its establishment and implementation have not been confirmed.

Draft Article 194 This applies when one party trades under the other party's written standard trading terms.
The suggestion is that for a party using standard terms to avoid liability for its breach of contract or to limit liability to a certain extent, the clause must satisfy the requirement of reasonableness.
The report points out that the current Consumer Protection Act (Consumer Protection Act 1999) does not apply to inter-company transactions and explains that the proposed provision is intended to apply to standard contracts between companies as well.
Scenes like the opening one, where we trade in a standard contract for maintenance contractors, provide an example of how this proposal could relate to business-to-business transactions.

The basis for the upper limit will be considered based on the circumstances at the time the contract was signed

Draft Article 199 The clause will then be determined to be fair and reasonable in light of the circumstances known to the parties at the time of entering into the contract or circumstances reasonably known to them.
When the reasonableness of the liability limit based on monetary value is questioned, the financial resources that the liable party could have used to make the payment, as well as the extent to which they could have covered it with insurance, will also be taken into consideration.
The burden of demonstrating rationality rests with the party claiming that the clause satisfies the requirement of rationality.

If I were to sign a equipment maintenance contract, I would first look at the cost of fixing the equipment and the costs incurred while the equipment is down.
For lines that can be quickly switched to spare equipment and lines that cannot be restored until replacement parts arrive from overseas, the impact of the outage will vary even for the same maintenance fee.
If the maintenance contractor has insurance, check whether the expected accidents and losses are covered, along with the insurance amount.

Then, compare the scope of damages in the contract with the limit of liability.
For example, if the costs of alternative production and additional transportation are not covered by contractual compensation, raising the upper limit will not change the burden of those costs.
Negotiating specific costs that the factory wants to recover makes it easier to consider which of the following would be a good fit for the deal: raising the cap, setting a separate framework for recovery costs, or securing alternative options.

Consider equipment exports from Japan and local maintenance separately

Exclusion of international goods supply contracts

Consider the case where the Japanese headquarters sells equipment to a Malaysian customer, and the local subsidiary undertakes maintenance under a separate contract.
Even if a business deal is handled in a single case, the same rules apply to the sales contract and maintenance contract based on the details of each transaction.

Draft Article 202 It has been proposed that international goods supply contracts where the parties have offices in different countries and meet certain requirements, such as the transport of goods across borders, be excluded from the regulations of Part XI.
The report highlights that the question of whether to maintain this exclusion in Malaysia, limit it to export contracts, or not, is a matter that needs careful consideration.
For transactions involving the export of equipment from Japan, and for maintenance services provided locally by local subsidiaries, it is necessary to individually verify the applicable requirements.

Relationship with the choice of governing law

In contracts with Japanese companies, I believe the governing law may be Japanese law or Malaysian law.
Draft Article 203 The law states that if Malaysian law applies only by choice to a contract to which foreign law would have applied if there had been no choice of the parties, the disciplines of Sections 193 to 197 do not apply.
On the other hand, even if there are provisions that make foreign law the governing law solely or primarily for the purpose of exempting a country from the application of Part XI, Part XI is still considered to apply.
It is important to understand that this discipline cannot be avoided if the governing law is based on Japanese law.

Date of change to existing contract

For existing maintenance contracts, it is also important to pay attention to when to change the contract.
Draft Article 206 This structure generally excludes contracts that were not in effect before the law came into effect, but applies to the scope that has changed since the law came into effect.
The report explains that it has in mind a basic contract (master services agreements) that will last for a long time and change frequently.
In the future, if legislation is enacted, it is expected that final transitional measures will be confirmed when adding equipment to existing long-term contracts or revising liability clauses.

What to base your planned damages and non-compete for delay on

Planned damages are considered in terms of both the daily amount and the total amount limit

If the factory mentioned above prioritizes early restoration, one possible approach would be to include a clause requiring maintenance companies to pay a fixed amount per day if they fail to meet their contractual restoration deadlines.
In this way, when the parties agree in advance on an amount or calculation method in case of breach of contract, this is called liquidated damages (damages).

Draft Article 75 This system allows for reasonable compensation up to the amount specified in the contract, and requires the claimant to prove that the requested compensation amount is not excessive compared to the maximum amount of legitimate loss.
The report's reasoning does not require proving actual damages in the same way as ordinary damages, but it does explain that evidence is necessary to determine the reasonableness of the compensation amount.
The reasonableness of the liability limit is indicated by the party relying on that limit, while the reasonableness of the expected damages is indicated by the claimant, and the opposite is true for the party being asked to explain.

Furthermore, Malaysian courts have issued numerous rulings regarding the current Article 75.
Report citing precedents such as the 2019 federal court case in Cubic Electronics, explains that the proposed provisions will clarify the original legislative intent of Section 75, independent of the development of such precedents.
This paper does not go into how these precedents interpret the current Article 75 or where the proposed article differs from it.
When designing the clauses for expected damages in actual contracts, it is necessary to also verify their interpretation in accordance with current case law.

When the factory sets the daily rate, the costs of alternative production and additional transportation if recovery is extended will be used as a basis for calculation.
In the contract, we would also like to clarify whether the cumulative daily amount is included in the total amount cap based on the annual maintenance fee, or whether it is a separate framework.
Even if an agreement can be reached on a daily rate, if the relationship with the total amount limit is ambiguous, there is a possibility that the two sides will have differing understandings if the suspension continues for an extended period.

Avoidance of competition means considering the scope of restrictions from the business that is being protected

There is something in common with reviewing non-compete agreements: when considering contract terms from the interests that must be protected.
According to the report, the current Section 28 uniformly invalidates agreements that restrict business, with the narrow exceptions relating to the sale of goodwill and partnerships.
Draft Article 28 proposes a framework to revise this, ensuring that the time, region, and scope of the work are reasonable and that the necessary restrictions are in place to protect the legitimate interests of the parties involved.
The draft text cites examples such as the sale of goodwill, the dissolution of partnerships, commercial agreements, and employment contracts while employed, and states that confidentiality agreements will not be considered restrictions on business operations to a reasonable extent.
The draft articles explicitly state that non-compete measures should be in place while employees are employed, and the extent to which restrictions after retirement are permitted cannot be determined solely from the wording of the proposal.

For example, a company acquiring a equipment maintenance business might want to limit the seller's competition for a certain period of time.
If what you want to protect is the customer relationships of the business you are acquiring, you can consider the scope of the restrictions based on the services and operating areas that the business has actually provided.
If the seller restricts the company to handling equipment unrelated to the acquisition in another region, the reasons for requiring such equipment will be considered on a case-by-case basis.

Summary

When negotiating the liability limit for equipment maintenance contracts, we believe it is useful to estimate the costs if equipment stops and to determine the extent to which the maintenance company will bear the costs and the extent to which the factory will remain, before deciding on the percentage of the contract amount.
If planned damages are to be awarded, the relationship between the basis for the daily amount and the total amount limit can also be resolved within the same negotiation process.

Even if we agree on 100% of the annual maintenance fee, what I would like to revisit later is the suspension period, availability of alternative production, and insurance coverage that we anticipated when we chose that percentage.
When adding production lines the following year, having such records will help you determine whether adjusting the cap to match the increase in maintenance fees will be sufficient, or whether you should reconsider the cost burden at the time of shutdown.
Following Malaysia's proposed contract law reform, it is worth reflecting on the contract strings we are currently using and the maximum amount was determined based on the type of transaction.

This article is a general summary based on the draft articles published in the final report in June 2026. This does not cover the interpretation of court cases under current law. The draft text may be changed during future legislative processes.