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ILLEGALITY OF CONTRACT UNDER THE CONTRACTS ACTS 1950 IN ISLAMIC

HOME FINANCING IN MALAYSIA: ISSUES AND POSSIBLE REFORM

Conference Paper · October 2016

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 ILLEGALITY OF CONTRACT UNDER THE CONTRACTS ACTS 1950 IN ISLAMIC
HOME FINANCING IN MALAYSIA: ISSUES AND POSSIBLE REFORM
Syuhaeda Aeni Mat Ali1, Rusni Hassan2 and Ahmad Azam Othman3

Abstract

Islamic home financing being an alternative to conventional home financing has overwhelmingly
flourished in Malaysia due to popular demand from the public. Section 28(1) of Islamic Financial
Services Act 2013 requires an Islamic financial institution to ensure its aims and operation, business,
affairs and activities are in compliance with Shariah.This includes Shariah compliance for all of its
home financing products and services. Despite the existence of various mechanism to ensure its home
financing products and services are Shariah compliant (particularly at the product development and
application stage), Shariah compliance becomes an issue at the product enforcement and dispute
resolution stage. This paper examines the effects of non-compliance of Shariah principles in Islamic
home financing contracts from the perspective of the Contracts Act 1950. The methodology used in this
paper is case based analysis in order to determine the adequacy of the Contracts Act 1950 in dealing
with the effects of Shariah non-compliance in Islamic home financing.The analysis of case law reveal
that the courts declared Islamic home financing contract which is Shariah non-compliance to be void
under s 66 of Contracts Act 1950. Nonetheless, it is observed that the courts fail to explain the grounds
for such decision. Non-disclosure of the grounds for void contract results in uncertainty and
inconsistency of the application of the law. To ensure uniformity of the application of the law, this paper
argues there is a need to reform s 24 of the Contracts Act 1950 to include a specific ground which
Shariah non-compliance renders the contract of Islamic financing void for illegality. With the insertion
of the word Shariah non-compliance in s 24 of the Contracts Act 1950, this will at least provide a firm
ground that can be used by the Malaysian courts in declaring Islamic home financing contract void for
Shariah non-compliance.

Keywords: Islamic Home Financing, Shariah non-compliance, Contracts Act 1950, illegality,void

INTRODUCTION

Islamic home financing which has grown tremendously in Malaysia indicated its viability as an
alternative to conventional home financial system. This phenomenal expansion of Islamic home
financing witnesses various kinds of Islamic home financing products offered by the Islamic financial
institutions such as Murabahah, Ijarah Thumma Al-Bay’, Bay Bithaman Ajil, Musharakah Mutanaqisah
and Commodity Murabahah/ Tawarruq to facilitate the needs of the people seeking home ownership.
In parallel thereto, Section 28(1) of Islamic Financial Services Act 2013 was enacted to ensure that the
aims and operation, business, affairs and activities of Islamic financial institution are in compliance
with Shariah.This includes Shariah compliance for all its home financing products and services.
Despite the existence of various mechanisms to ensure its home financing products and services are
Shariah compliant particularly at the product development and application stage, Shariah compliance
becomes an issue at the product enforcement and dispute resolution stage. It is pertinent to highlight
that in addition to being Shari‘ah compliant, Islamic home financing has to be conducted in
accordance with governing laws applicable (conventional laws) which are not intended to
facilitate the application of Islamic law.4It should also capable to be enforced in the court of law. The

1
Senior Lecturer at Universiti Teknologi Mara, Shah Alam, Selangor /PhD candidate at Ahmad Ibrahim Kulliyyah
of Laws, International Islamic University Malaysia
2
Associate Professor and Deputy Dean IIUM Institute of Islamic Banking and Finance, International Islamic
University Malaysia
3
Associate Professor at Ahmad Ibrahim Kulliyyah of Laws, International Islamic University Malaysia
4
See List I (Federal List) of Ninth Schedule of Federal Constitution.

1
Court of Appeal held in Bank Kerjasama Rakyat Malaysia Berhad v.Emcee Corporation Sdn Bhd,5that
the law applicable to Islamic banking disputes is the same as that applicable to the conventional banking.
Despite the fact that the case involved an Islamic facility, the court held that the procedures and
principles applicable to conventional banking are also applicable in the case. This paper examines the
effects of non-compliance of Shariah principles in Islamic home financing contracts from the
perspective of the Contracts Act 1950.

ILLEGALITY OF CONTRACT UNDER THE CONTRACTS ACT 1950

The Contracts Act 1950 is a statute of general application that governs the contractual relations in
Malaysia and provide general guidelines to contracts. Since Islamic home financing normally involves
various types of contracts to be executed between the Islamic financial Institution and its customers,
these contracts are therefore governed by the Contracts Act 1950. In Arab-Malaysian Finance Bhd v
Taman Ihsan Jaya Sdn Bhd & Ors,6 the High Court declared contract of Bay’ Bithaman Ajil void for
Shariah non-compliance, thus, the Plaintiffs were entitled under s 66 of the Contract Act 1950 to a
return of the original facility amount they had extended.7This case proved that the provisions of the
Contracts Act 1950 are applicable to Islamic home financing in Malaysia.In addition, it is well settled
law that Islamic banking and finance in Malaysia is subjected to Federal legislation enacted by
Parliament pursuant to List 1 of Ninth Schedule of the Federal Constitution.8

Section 2(g) of the Contracts Act 1950 provides that “An agreement not enforceable by law is said to
be void". Thus, an agreement will not be enforceable by law if it is illegal or unlawful. A contract will
be considered as unlawful/illegal and void if it consists of any one of the following criteria as stated by
s 24 of the Contracts Act 1950. Section 24 of the Contracts Act 1950 deals with the illegality of
consideration or objects of the contract, which would render the contract to be void. The provision reads
as follows: -

“The consideration or object of an agreement is lawful, unless—

(a) it is forbidden by a law;
(b) it is of such a nature that, if permitted, it would defeat any law;
(c) it is fraudulent;
(d) it involves or implies injury to the person or property of another; or
(e) the court regards it as immoral, or opposed to public policy.

In each of the above sub sections, the consideration or object of an agreement is said to be unlawful.
Every agreement of which the object or consideration is unlawful is void. A contract tainted with
illegality cannot be made enforceable. In fact, it is void ab initio and both parties must not benefit from
the said void agreement.

Subsection (a) deals with what is forbidden or prohibited by law while para (b) deals with what could
defeat the object of any law. This is further illustrated in Hee Cheng V Krishnan,9 where there was a
contract for the purchase of house built on a land which is temporary occupation license (TOL) was
issued. This is contrary to rule 41 of Land Rules 1930 which states that “no license for temporary
occupation of land shall be transferrable”. The court held that the contract entered into was an attempt
5
[2003] 1 CLJ 625
6
2008]5 MLJ 631
7
Nonetheless,the decision of the High Court has been overruled by a later Court of Appeal’s decision in Bank
Islam Malaysia Berhad v Lim Kok Hoe and Anor[ 2009] 6 MLJ 839) where the contract of BBA was declared to
be valid.
8
See List 1 of 9th schedule of the Federal Constitution with special reference to item 7 and 8. See also Section 3
and 5 of Civil Law Act 1956 which states that banking matters and related transactions are within jurisdiction of
civil laws. Thus, Islamic Banking and Finance is under the jurisdiction of civil laws as within the ambit of
mercantile laws. See also Rusni Hassan,Islamic Banking and Takaful, Pearson Custom Publishing, p93
9
[1955] MlJ 103

2
to sell and to purchase the defendant’s rights under the TOL license which is contrary to Rule 41 of the
Land Rules 1930. As such the contract was unlawful and void. Similarly, in Tan Bing Hock v. Abu
Samah10 the defendant held a logging license in Pahang under the Forest Rules 1935 which prohibited
transfer without prior approval in writing of the District Forest Officer. The defendant agreed to assign
his rights under the license to extract timber to the plaintiff. The High Court found that the contract on
which the action was instituted was illegal as what the parties attempted to do amount to defeating the
provision of the Forest Rules 1935.The court held that the contract was void and unlawful.

On the other hand, subsection (e) deals with public policy. However, the Contracts Act 1950 is silent
as to what constitutes public policy. In Egerton v Brownlow (Earl),11 Lord Truro defined public policy
as 'that principle of the law which holds that no subject can lawfully do that which has a tendency to be
injurious to the public, or against the public good, which may be termed, as it sometimes has been, the
policy of the law, or public policy in relation to the administration of the law'. 12 Thus, the matter which
has a tendency to be injurious to the public is considered as against public policy. Furthermore, an
agreement to be at variance with public interest is indubitably in contravention of public policy.13

In addition, it was argued that public policy is not a monolithic concept but rather consists of three
distinct yet intertwined notions of public namely public interest, public morality, and public security.14
The public interest category views the private arrangement of citizens as equal to public arrangements
and tries to strike a balance between the two.15

The principle of public policy is further elaborated in Brett Andrew MacNamara v Kam Lee Kuan16
Balia Yusof J, as he then was, referred to the following passage in Pollock and Mulla on Indian Contract
and 33 Specific Relief Act, 10th Edition, on the meaning of ‘public policy’.
“Public Policy — The principle of public policy is this:ex dolo molo non oritur action. Lord
Brougham defines public policy as the principle which declares that no man can lawfully do
that which has a tendency to be injurious to the public welfare.” It should also be said that
public policy is not static. “The question of whether a particular agreement is contrary to
public policy is a question of law … It has been indicated that new heads of public policy will
not be invented by the courts for the following reasons … However, the application of any
particular ground of public policy may vary from time to time and the courts will not shrink
from properly applying the principle of an existing ground to any new case that may arise
… The rule remains, but its application varies with the principles which for the time being
guide public opinion” (Halsbury’s Law of England 5th Edition Volume 22 at paragraph
430)”.

ILLEGALITY OF ISLAMIC HOME FINANCING CONTRACTS

Islamic home financing should fulfil all the elements of a valid and enforceable contract as prescribed
under both Shariah principles and the Contracts Act 1950. The existence of any element of riba
(interest) or gharar (uncertainty) would certainly render Islamic financing contract be void for Shariah
non-compliance. The issue of riba or interest was illustrated in CIMB Bank Berhad v Maybank Trustees
Bhd and others,17 whereby the Federal Court had to determine whether a pre-judgment interest claim

10
(1968) 2 MLJ 221,
11
[1843-60] All ER 970.
12
Ibid at p 995.
13
Chong Kow v Kesavan Govindasamy [2009] 8 MLJ 41
14
Farshad Ghodoosi,The Concept of Public Policy in Law: Revisiting the Role of the Public Policy Doctrine in
the Enforcement of Private LegalArrangements, 94 Neb. L. Rev. 685 (2015) pg 689, Available at:
http://digitalcommons.unl.edu/nlr/vol94/iss3/5
15
ibid
16
[2008]2 MLJ 450
17
[2014] 3 MLJ 169.

3
by the bondholders should be allowed. It was argued that to allow the pre-judgment penalty would
amount to riba which is prohibited by Shariah. The High Court had dismissed the application due to a
clause in the Trust Deed where the parties had agreed that no interest would be charged. However, the
decision of the High Court was reversed on appeal. The Court of Appeal allowed a 3% pre-judgment
penalty which was later set aside by the Federal Court. Thus, the respondent did not have to pay any
pre-judgment interest because of two reasons: firstly, according to the Trust Deed the parties had agreed
not to impose any interest between them and thus based on this contract no pre-judgment interest could
be charged. Secondly, no evidence was adduced as to the applicable rate imposed by the SAC. It is
evident that the issue of riba or interest was resolved by the Federal Court by taking into account the
absence of permissibility of Shariah Advisory Council’s ruling on this matter and contract between
parties which did not permit for pre judgment interest to be imposed. However, the Federal Court
avoided from addressing the fact that pre judgment interest was riba and of Shariah non-compliance.18

It is pertinent to highlight that between the years of 1987-2002, the Malaysian courts were reluctant to
look into Shariah compliance matters in Islamic financing contracts, particularly contract involving
Bay’ Bithaman Ajil. Judgments were made solely on the basis of technicality and validity of the contract
per se. In Bank Islam Malaysia Berhad v Adnan Omar,19the High Court held that the defendant was
obliged to pay the whole amount of the selling price as the parties are bound with the terms and
conditions of the contract. However, the court did not look into the issue whether Bay’ Bithaman Ajil
facility involves an element which contradict with the Shariah. It is obvious that the judge in this case
was more concerned on the application of ‘binding contract’ approach by emphasizing the civil
technical aspects and disregarded Shariah non-compliance issue. Furthermore, in Bank Islam Malaysia
Bhd v Shamsuddin Bin Haji Ahmad20 the defendant raised the issue of 'interest' in the charge under
Bay’Bithaman Ajil facility which is contrary to Shariah principles and was against the Islamic Banking
Act 1983. The High Court held that since this argument was not raised by the defendant in his affidavit
but only in his defence, thus, the court held that it did not have to consider this point. The judge merely
relied on Plaintiff’s explanation on the issue of 'interest', which his lordship believed it to be the correct
position. Issues pertaining Shariah compliance were never raised by the court.21

This trend can also be seen in Dato’ Nik Hj Mahmud bin Daud v Bank Islam Malaysia Bhd,22 Malayan
Banking Bhd v Marilyn Ho Siok Lin23 and Affin Bank Bhd v Zulkifli bin Abdullah24 where the court
recognised the wide acceptance of Bay’ Bithaman Ajil in the market but failed to address the validity of
the contracts based on Shariah compliance.25

18
See also Bank Islam Malaysia Bhd v Lim Kok Hoe & Anor and other Appeals [2009] 6 MLJ 839 The Court of
Appeal allowed the appeal and held that J Abdul Wahab Patail had erred in his judgment and concluded that the
Bay Bithamin Ajil was a valid agreement. They based their judgment on the following reasons i.e the Bay Bithamin
Ajil is a sale agreement and should not have been compared to a conventional loan agreement which is a money
lending transaction. The profit earned by the Bay Bithamin Ajil transaction by the Islamic bank is not the same as
the interest of a conventional loan.
19
[1994] 3 CLJ 735
20
[1999] MLJU 450
21
See also Bank Kerjasama Rakyat Malaysia Bhd v Nesaretnam Samyvello [ 2002] 8 CLJ95; [2002]] 7 MLJ 103
and Tinta Press Sdn Berhad v BIMB (1987) 1 MLJ 474; 1CLJ 474
22
[1996] 4 MLJ 295
23
[2006]7MLJ 249
24
[2006]3 MLJ 67
25
The attitude of the court in avoiding discussion on Shariah compliance issue was also evidenced in Tinta Press
Sdn Bhd & Ors V Bank Islam Malaysia Berhad [1987] CLJ (Rep) 396. (Note: the case was not Islamic home
Financing). It was contended that ijarah facility was in fact a loan agreement, bearing the interest element which
is against Shariah principle. The Supreme Court held that it was a lease agreement based on the nature and recital
of the contract. The Court recognised ijarah contract on its face value, without critical analysis of the true nature
of the contract

4
However, the attitude of the Malaysian courts has gradually shifted by adopting more proactive attitude
in dealing with Shariah non-compliance issues in Islamic financing contracts. This is illustrated in
Arab-Malaysian Finance Bhd v Taman Ihsan Jaya Sdn Bhd & Ors.26 The High Court examined the
contract of Bay’Bithaman Ajil in this case and concluded that where the bank purchased the property
directly from its customer and then sold back the same property to the customer with deferred payment
at a higher price in total, such a sale is not a bona fide sale but a financing transaction in which making
the profit derived from it would be prohibited as riba. Therefore, the High Court declared the contract
of Bay’Bithaman Ajil void for Shariah non-compliance. The Plaintiffs were entitled to sought relief
under s 66 of the Contracts Act 1950. Section 66 of the Contracts Act 1950 provides that in a void
contract, the parties must return whatever benefit or advantage they have received from each other
arising from the void contract, as if to put the parties into the original position before the contract was
entered into. The High Court ordered for a return of the original facility amount they had extended to
the customers.27

It is evident that Shariah non-compliance issues such as the existence of riba / interest, gharar and lack
of one or more of elements of a valid contract would render Islamic home financing contract be void.
Section 66 of the Contracts Act 1950 provides a relief in the event of a void contract. Thus, the parties
must return whatever benefit or advantage they have received from each other arising from the void
contract. Nonetheless, it is observed that the courts failed to explain the grounds for such decision. Non-
disclosure of the grounds for void contract results in uncertainty and inconsistency of the application of
the law. This paper opines that the failure of the court to provide grounds is due to lacuna of the
Contracts Act 1950 particularly s 24.

This proactive attitude was also recently adopted in other Islamic financing contracts. In Maybank
Islamic Bhd v. M-10 Builders Sdn Bhd & Anor,28 the High Court has declared the Murabahah Overdraft
Facility (hereinafter referred to as “MOD facility”) as null and void for non-compliance of Shariah due
to the purchase and resale of the same assets being prohibited under the Shariah principle of financing.
The learned judge affirmed that it was apparent that both contracting parties ignored the features of
murabahah and regarded the transaction as if it was a conventional loan. Therefore, by their conduct,
both parties were privy to the illegality and had camouflaged the MOD facility as murabahah and both
had benefited from this illegality.

Furthermore, in Malaysian Debt Ventures Berhad v FLH ICT Services & Anor,29 the Defendants
contended that the contract of Bai Inah entered into between the parties were Shariah non-compliant
and contrary to the Shariah principle. It was further argued that the transactions were tainted with usury
/ riba which is not permitted in Islam. However, the learned High Court judge refused to delve into the
issue of Shariah non-compliance of Bai Inah in detail since the Defendants had failed to plead with
clarity how the Agreements were said to be inconsistent with the Bai Al-Inah principle of financing in
their Defence. The High Court held that in the absence of fraud, misrepresentation or undue influence,
the Defendants were bound by the terms of the contract duly executed between parties.

It is obvious that the High Court basically went back to technicality and validity of the contract per se
by looking at the express terms and conditions laid down in the contract. The issue of Shariah compliant
was avoided. This paper opines that implication of this case is very serious as it demonstrates the lack
of active role of the judiciary in determining Shariah non-compliance of the product. It is fortunate that
it was overturned during the appeal.

26
[2008]5 MLJ 631
27
Nonetheless,the decision of the High Court has been overruled by a later Court of Appeal’s decision in Bank
Islam Malaysia Berhad v Lim Kok Hoe and Anor[ 2009] 6 MLJ 839) where the contract of Bay Bithamin Ajil was
declared to be valid.
28
[2015] 4 CLJ526
29
Civil suit no: 22A-1043-08/2012 (Date of Decision : 21st March 2014)

5
The decision of this case on that matter was overruled by the Court of Appeal in FLH ICT Services &
Anor v. Malaysian Debt Ventures Bhd30. The Court of Appeal critically examined the agreements of bai
Inah in comparison with the Resolution of Shariah Advisory Council. The Court of Appeal further
concluded that there were uncertainties in the underlying feature of the said Bai Inah contract i.e. the
transactions were devoid of any asset. Hence, the aqad to sell and the aqad to purchase the asset are not
certain and against a fundamental requirement under the Bai Al-Inah contract. The Court of Appeal
further declared that Bay Inah agreements are of Shariah non-compliance and order of the High Court
be set aside.

The willingness of the courts in critically examining Shariah compliance issues despite the cases were
not Islamic home financing was commendable. This shows that the courts now have confidence in
determining Shariah compliance issues in their sphere of judgments.

However, again, it is unfortunate that in both cases, the courts did not refer to s 24 of the Contracts Act
1950 in deciding the illegality of contract on the ground of Shariah non-compliance. This paper submits
that the failure of the courts in refering to s 24 in both Maybank Islamic Bhd and FLH ICT Services
cases are due to the fact that s 24 itself does not specifically contain Shariah non-compliance as one of
the grounds for illegality.

Arguably, this paper opines that the court can resort to s 24 (b) in order to declare Islamic home
financing contract void for illegality due to the non-compliance of Shariah as required by s 28 of IFSA
2013. Nonetheless, the concern is whether the meaning of the word “law” in the said provision is wide
enough to include Shariah or Islamic Law. This is due to the fact that Shariah/Islamic law is not
included in the definition of “law” in the Federal Constitution. 31

Alternatively, the court can also adopt s 24(e) by interpreting the Islamic home financing contract that
fails to comply with Shariah as against public policy. Section 24(e) was referred to by the party in Bank
Kerjasama Rakyat (M) Bhd v Flavour Right Sdn Bhd & Ors,32 whereby the issue before the High court
was whether the Plaintiff’s claim is tainted with illegality as the Plaintiff imposed and levied interest or
riba which is against Islamic principle rendering the entire claim unenforceable under s 24 of the
Contracts Act 1950. The Defendant contended that since the consideration of the loan facilities is
unlawful, the loan facilities are contrary to public policy. The High court agreed that the loan facilities
were in nature of Islamic banking where interest is prohibited under any circumstances. The High Court
answered the issue in negative and stated that the rate of 1% charge is consistent with the rate chargeable
for ta’widh provided in the offer letters and the loan facilities agreement.

Similarly, in Bank Muamalat Malaysia Bhd v Kong Sun Enterprise Sdn Bhd and Others,33 the
transaction between the parties was Ijarah contract under the concept of Al Ijarah Thumma Al bay’.
The Defendant contended that the Al-Ijarah transaction was a false transaction and therefore was not
legal as it was against the public policy.

This paper argues that s 24(e) is relevant and can be applied in declaring the contract as illegal for
Shariah non-compliance.34 One of the elements of public policy is protecting the public interest, i.e.

30
[2016] 1 CLJ 243. CLJ 243
31
Article 160(2)(b) of Federal Constitution defines law to includes‘written law, the common law in so far as it is
in operation in the Federation or any part thereof and any custom usage having the force of law in the Federation
or any part thereof.’
32
[2012] MLJU 1003the
33
[2012] 10 MLJ 665
34
Public policy consists of three distinct yet intertwined notions of public namely public interest, public morality,
and public security. The public interest category views the private arrangement of citizens as equal to public
arrangements and tries to strike a balance between the two. The public security category aims to protect citizens
from outside threats that might endanger their well-being and consequently eliminate the public sphere. While
public morality category, attempts to safeguard the ties and mutual identities between citizens that shape and
maintain societal life. In cases involving public morality and public security, which are rare and extreme cases,

6
the private arrangement of citizens as equal to public arrangements and tries to strike a balance between
the two. Private arrangement in this context includes contract of Islamic home financing between
Islamic financial institution and its customers. Thus, illegality of Islamic home financing on the ground
of Shariah non-compliance could be used to protect the parties in question as there exists an unlawful
and illegal consideration/object. However, to leave the matter of interpretation as what amounts to
public policy to the courts itself would lead to diversity and differences of interpretation which can
result into uncertainty of the law as well.

From the wordings of s 24 of the Contracts Act 1950, this paper concludes that none of the subsection
specifically govern Shariah non-compliance as grounds to declare Islamic home financing contract
void for illegality. This could be the contributing factor for the judges reluctance in referring to s 24
for illegality of Islamic home financing on the ground of Shariah non-compliance.

PROPOSED REFORM OF THE CONTRACTS ACT 1950

This paper submits that the Contracts Act 1950 is not adequate to govern illegality of Islamic home
financing on the ground of Shariah non-compliance. In parallel, none of the subsection in s24 of the
Contracts Act 1950 specifically govern Shariah non-compliance as ground to declare Islamic home
financing contract void for illegality. Thus, this paper suggests for a reform of the Contracts Act 1950.
There are two ways to reform the law namely judicial reform or legislative reform.It is recognised that
legislative reform is more desirable compared to judicial reform as legislative reform provides certainty
and predictibility in its application compared to judicial reform.35 Furthermore, legislative reform could
reduce the complexity of litigiation. On the contrary, judicial reform is not as efficient as legislative
reforms as the courts are required to wait for cases with the facts necessary to allow the reform to take
place.Therefore, this paper argues that legislative reform is more appropriate in reforming the Contracts
Act 1950.

This paper proposes for s 24 of the Contracts Act 1950 to be amended in order to give effect to Shariah
non-compliance issue. As such, this paper recommends for an insertion of a specific ground in s 24 of
the Contracts Act 1950 itself that governs illegality of Islamic financing contract for Shariah non-
compliance. This paper argues that the proposed amendment is pertinent to ensure uniformity of the
application the law. The insertion of the word “Shariah non-compliance” in s 24 of the Contracts Act
1950, will at least provide a firm ground that can be used by the Malaysian courts in declaring Islamic
home financing contract void for Shariah non-compliance.

The proposed legislative reform is also comprehensive to cover all types of illegality of Islamic
financing contracts for Shariah non-compliance and not limited to Islamic home financing only.This
paper recommends legislative reform of the Contracts Act 1950 as opposed to judicial reform as it
provides certainty and clarity of the law.

CONCLUSION

It is evident that Shariah non-compliance would render Islamic home financing contracts in Malaysia
void. However, non-disclosure of the grounds for void contract by the judges as demonstrated in case
law resulted in uncertainty and inconsistency of the application of the law. The Contracts Act 1950 is
not adequate to govern illegality of Islamic home financing on the ground of Shariah non-compliance.
In parallel, none of the subsection in s 24 of the Contracts Act 1950 specifically govern Shariah non-

the courts should play a more active role and apply methods other than balancing. See Farshad Ghodoosi, The
Concept of Public Policy in Law: Revisiting the Role of the Public Policy Doctrine in the Enforcement of Private
Legal Arrangements, 94 Neb. L. Rev. 685 (2015) Available at: http://digitalcommons.unl.edu/nlr/vol94/iss3/5
pg689.
35
Hugh Beale, 'Privity of Contract: Judicial and legislative reform (United Kingdom) (Special Issue: Essay for
Professor Brain Coote)' (1995) 9 (n1) Journal of Contract law 103

7
 compliance as grounds to declare Islamic home financing contract void for illegality. Thus, legislative
reform should be embraced by Malaysian legislature to govern illegality of Islamic home financing
contract for Shariah non-compliance. The proposed reform would provide certainty and clarity as to
the rights of contracting parties and benefit the public interest.

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