On LIQUIDATED ASCERTAINED DAMAGES (& SECTION 75 CONTRACTS ACT 1950)
Is LAD conclusive? Does an employer have to proof he /she suffered actual losses? Can a party challenge it?
By KELVIN NG CY (fMIArb) (fSIArb) (MCIArb)
Almost every construction contract comes with a LAD clause: i.e. where a party fails to complete the works by an agreed date, the other party is entitled to impose a sum payable by the defaulting party. It is calculated in the following formula: [RM …. / day ] x [no. of days until the completion is achieved]
Is this amount or rate conclusive? Can the employer rely on the rate in the contract or must he still proof his actual loss?
The law in Selva Kumar
Prior to Cubic Electronics Sdn Bhd (in Liquidation) v Mars Telecommunications Sdn Bhd  2 CLJ 723, the law was this: an innocent party in a contract that has been breached, cannot recover simpliciter the sum fixed in a damages clause whether as penalty or liquidated damages. He must prove the actual damage he has suffered unless his case falls under the limited situation where it is difficult to assess actual damage or loss.
This was the principle laid down in Selva Kumar Murugiah v Thiagarajah Retnasamy  1 MLJ 817.
The facts of Cubic Electronics
Cubic Electronics (“Cubic”) owned a plant and machineries which were put up for sale by way of an open tender. Mars Telco (“Mars”) made an offer to purchase the property and machineries at RM80million and RM 10 million respectively. The terms of the tender state that all offers must be accompanied by an earnest deposit of 2% and 10% of the offer price for the property and machineries respectively. It also contained a term that the sale and purchase agreement must be executed within 30 days failing which the earnest deposits will be forfeited as agreed liquidated damages and not by way of penalty.
Mars did not execute the SPA within time and sought for extension. Cubic allowed for extension of time on condition that Mars pay a further earnest deposit of RM500,000.00. Cubic cautioned Mars that in the event Mars failed to comply with the deadline, the earnest deposit would be forfeited as agreed liquidated damages.
There were another 2 more extensions granted by Cubic on condition of further earnest deposits to be paid. By then Mars had paid RM 3 million as earnest deposit and RM 40,000.00 as interest.
When Mars failed to pay the balance purchase sum by the extended date, Cubic terminated the sale and forfeited the whole RM 3.04 million.
Decision of the Federal Court in Cubic Electronics
Cubic Electronics departed from that the law in Selva Kumar. The Federal Court held that there is no necessity for proof of actual loss or damage in every case where the innocent party seeks to enforce a damages clause.
The Federal Court also reversed the burden of proof. In summary:
- The initial onus lies on the party seeking to enforce a clause under section 75 of the Act to adduce evidence that firstly, there was a breach of contract and that secondly, the contract contains a clause 54 specifying a sum to be paid upon breach.
- Once these two elements have been established, the innocent party is entitled to receive a sum not exceeding the amount stipulated in the contract irrespective of whether actual damage or loss is proven, subject to (c) below
- If the defaulting party disputes the reasonableness of the compensation, the burden of proof falls on him or her to show that the damages clause is unreasonable or to demonstrate from available evidence and under such circumstances what comprises reasonable compensation caused by the breach of contract;
- Failing to discharge that burden, or in the absence of cogent evidence suggesting exorbitance or unconscionability of the agreed damages clause, the compensation stipulated in the contract ought to be upheld.
The decision of Cubic Electronics was published on 21.11.2018.
The Court of Appeal in So Lian Yee
On 4.1.2019, the Court of Appeal heard So Lian Yee (trading in the name and style of Goldwell Trading) v China Railway Engineering Corp (M) Sdn Bhd & Anor  3 MLJ 115 CA
The respondents were JV partners in a railway rehabilitation project in Sabah. They appointed the appellant as the subcontract for the earthworks and drainage works. The appellant claimed from balance of unpaid work including retention sum. The 1st respondent counterclaimed for defective works and LAD arising from delay. On the issue of LAD, the high court ordered the appellant to pay LAD to the 1st respondent. However, the Court of Appeal reversed this decision.
The reason for doing so was because the Court of Appeal held the 1st respondent had failed to prove the LAD under section 75 of the Contracts Act 1950. The Court of Appeal followed the principles in Selva Kumar. The Court did not refer to the Federal Court’s decision in Cubic Electronics.
Where do we go from here?
Despite So Lian Yee being decided after Cubic Electronics, it is the author’s view that the decision in Cubic Electronic is binding. The latter is decided by the apex court of the land. Judicial precedent means that latter cases must follow Cubic Electronics unless and until it is over turned in a subsequent Federal Court decision.