Liquidated Damages

LIQUIDATED
DAMAGES
DR.NORAZLINA ABDUL AZIZ
LIQUIDATED DAMAGES
Fixed, contractually agreed sum of money which is payable by the defaulting
party upon breach of contract
Liquidated damages are an amount of money that the contracting parties agree
as the amount of damages if ANY party breaches the contract.
Usually they apply to some specific type of breach of the contract, not any
breach of any promise anywhere in the contract.
In construction contracts, most often see liquidated damages apply when the
contractor breaches the contract by not finishing the work on time, i.e. delay
• E.G: suppose Ben agrees to lease a
store-front to Richard, from which
Richard intends to sell jewelry. if Ben
breaches the contract by refusing to
lease the store-front at the appointed
time, it will be difficult to determine
what profits Richard will have lost
because the success of newly created
small businesses is highly uncertain.
This, therefore, would be an
appropriate circumstances for Richard
to insist upon a liquidated damages
clause in case Ben fails to perform.
• Issue: Whether court will enforce payment of
thesum agreed?
• Common law: Depend on whether the
sum agreed is considered as liquidated
damages ora penalty.
GENERAL
• Malaysia: Thisdifferences is irrelevant.
RULE: • Why?See sec.75 ContractsAct 1950
• A LD Clause Will Not Be Enforced If Its Purpose Is To
Punish The Wrongdoer/Party In Breach Rather Than To
Compensate The Injured Party (I.E. Penalty).
• In Order For A Liquidated Damages Clause To Be

Upheld, Two Conditions Must Be Met:
COMMON i)First, the amount of the damages identified must be

approximate to the damages likely to fall upon the party
LAW seeking the benefit of the term.
i)Second, the damages must be sufficiently uncertain at

the time the contract is made that such a clause will likely
save both parties the future difficulty of estimating
damages.
DUNLOP PNEUMATIC TYRECO. LTD. V
NEWGARAGE& MOTOR CO. LTD.
(1915) -
For an LD clause to be enforceable
(rather than being a penalty):
The court will see if the intention of the
LD is to threaten the guilty party into
performance (rather than to
compensate the innocent party), it is
likely to be seen as a penalty.
• a clause will be presumed to be a penalty if
the sum is not proportionate to the
seriousness of the breach.
• the sum payable upon breach must be a
genuine pre-estimated loss that the
innocent party would suffer in respect of
that breach. (must be determined at the time
of contract formation). Thus, even if the sum
is not proportionate to the seriousness of
the breach, if it was genuinely estimated, it
could be LD.
Common
Law • Described As Sum In Terrorem (In
Fright Or Terror) which are aimed
rejects at ensuring that the other party
does not break his contractual
Penalty obligations.
• Common Law: Unenforceable

Effects Of LD Clause To Contracts:
• It fixes in advance the damages payable in the event of default.

• It will also limit a defaulting party’s liability.
• It can provide a means of pressure on the defaulter so as to coerce
him into performing the contract.
S 75 :
when a contract has been broken, if a
sum is named in the contract as the
amount to be paid in case of such
breach, or if the contract contains
MALAYSIA
any other stipulation by way of
penalty, the party complaining of the
& S 75 breach is entitled, whether or not

actual damage or loss is proved to
have been caused thereby, to receive
from the party who has broken the
contract reasonable compensation
not exceeding the amount so named
or, as the case may be, the penalty
stipulated for.
1) no distinction between LD and penalty.
SSMANIAM v THE STATE OF PERAK[1957]
MLJ 75;
WEARNE BROTHERS (M) LTD v JACKSON
2 ISSUES: [1966] 2 MLJ 155
(the result of either case is that the court must
determine reasonable compensation, thus
may not recover the exact amount as agreed)
2) the need for the P to prove his
actual loss.
Landmark case:
SELVA KUMARA/L MURUGIAHv
THIAGARAJAHA/L RETNASAMY[1995]
-
ISSUE 1:
All Liquidated Damages Clauses
Are Deemed To Be Penalty Under
S.75 CA
•SS Maniamv. State of Perak[1957] MLJ75
•LinggiPlantationLtd v.Jagatheesan (1971) 2
PCC749 PC
• The phrase “whether or not actual loss or
damage is proved to have been caused”
• However, Federal court in SELVA
KUMAR(1995):
ISSUE 2:
- Both the parties herein were medical
LITERAL practitioners. In 1988 the respondent sold
READING: his medical practice to the appellant for a
consideration of RM120,000, payable in
an option. several instalments and for this purpose the
Thus P may parties had entered into an agreement in
opt not to writing. The agreement inter alia contained a
forfeiture clause for breach, to the effect that
prove actual
“in the event the purchaser shall default in his
loss. obligations herein all monies paid to date of
such breach shall be forfeited absolutely to
the vendor as agreed liquidated damages and
thereupon this agreement shall be deemed
null and void”.
• The appellant had paid a total of
RM96,000 towards the purchase price,
including RM12,000 earnest money
upon the signing of the agreement,
but had failed to pay the last 6
instalments totalling RM24,000.
Henceforth, the respondent, by a letter
dated 22nd December 1989
terminated the contract and forfeited
the whole of the sum thus paid as
“agreed damages”.
• Issue: whether the R has the right to
forfeit the sum paid?
Held:
• i) the phrase is limited to those cases
where the court would find it difficult to
assess damages for the actual damage or
loss.
• E.G. Where there is no known measure of
damages employable, and yet the evidence
clearly shows some real loss inherently and
such loss is not too remote.
• ii)to all other cases, a plaintiff will have to

prove damages or the reasonable
compensation for the actual damage or loss
in the usual ways.
• If the loss/damage is not too remote and
could be assessed by settled rules, any
failure to bring in further evidence or to
prove damages for such actual loss or
damage, will result in the refusal of the
court to award such damages, despite
the words “whether or not actual
damage was proved to have been
caused thereby” in s. 75 of the
Contracts Act.
• In SELVA KUMAR, the evidence clearly
shows some actual loss, damages for
which could be assessed by settled rules,
as there was evidence that at the
material time the appellant was already
using the respondent’s medical
equipment.
• But, since evidence has not been brought
to prove damages for the said actual
loss( as to enable the court to award at
least some damages as compensation
for loss of use of the said medical
equipment), no compensation could be
awarded in this respect. NO RIGHT TO
FORFEIT!
• JOHOR COASTAL DEVELOPMENT v CONSTRAJAYA
SDN BHD [2009]
- Federal court – reinforced SELVA KUMAR.
- Disallowed any claims on LD as the A had
failed to prove its losses.
• FACTS: 2 SPA entered into by the A and R
whereby the respondent agreed to purchase
lots 7 and 14 of the Johor Bahru Waterfront
City for RM4,590,000 and RM10,830,000
respectively. The purchase price was to be paid
by six instalments. After 3 instalments, the R
defaulted in payment and failed to pay the
balance of the purchase price. The A
terminated the agreements and forfeited all
the sums paid pursuant to the clause as stated
in the contracts.
AFTER JOHOR COASTAL
• CHAI KIAW v PLUS FOREVER SDN BHD (2010)– P was not
entitled to any compensation under s 75 as she did not prove
losses as a result of breach of contract.
• ATLANTIC PLANTATION SDN BHD V MATURE LAND SDN

BHD(2010)
The amount of LD was too excessive and awarded a
reasonable amount based on the losses suffered by the P.
High Ct: P must prove its loss.
CUBIC ELECTRONICS SDN BHD (IN LIQUIDATION) V
MARS TELECOMMUNICATIONS SDN BHD. [2018]
MLJU 1935
FederalCourtdecision:
I. Ifthereisabreachofcontract,anymoneypaidinadvanceofperformanceandaspart-
payment of the contract price is generally recoverable by the payer. But a deposit paid
which is not merely part-payment but also as a guarantee of performance is generally
not recoverable.
WHAT IS THE MEANING OF
DEPOSIT?
• Whetherapaymentis part-paymentofthepriceoradeposit is a
questionofinterpretationthat turnsonthefactsofacase,and
theusualprinciples ofinterpretation apply.
• Onceit hasbeenascertainedthat apaymentpossessesthe dual
characteristics of earnest money and part-payment, it is a
deposit.Adeposit is subject to section 75 of theAct.
• Indeterminingwhatamountsto“reasonablecompensation”under section
75 of the Act, the concepts of “legitimate interest” and “proportionality”
asenunciatedincavendish(supra)arerelevant.
• A sum payable on breach of contract will be held to be unreasonable
compensation if it is extravagant and unconscionable in amount in
comparisonwiththehighestconceivablelosswhichcouldpossibly flow
fromthe breach.
• In the absence of proper justification, there should not be a
significant difference between the levelof damages spelt outinthe
contractandtheleveloflossordamage whichislikelytobe sufferedby
theinnocent party.
Section75oftheActallowsreasonablecompensationtobeawardedbythe court
irrespectiveofwhetheractuallossordamageis proven.
The initial onus lies on the party seeking to enforce a damages 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 specifying a sum to be
paidupon breach.
CASES THAT FOLLOW AFTER SELVA KUMAR: It is settled law that if a
sum is named in a contract as the amount to be paid in case of
breach, it is to be treated as a penalty under section 75.
• Berjaya Times Square Sdn Bhd V. Twingems Sdn Bhd & Ors [2010] 1
LNS 1302
• Malayan Cement Industries Sdn Bhd V Golden Island Shipping (L) Bhd
[2018] 1 CLJ 228 (CA].
• Saycon Construction Sdn Bhd V Rosado Tradeline Sdn Bhd[2018] 4 MLJ
652.
• Tekun Nasional v Plentitude Drive (M) Sdn Bhd and 2 Others

Appeals[2018] 8 MLJ 693.
THE END

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LIQUIDATED

• In Order For A Liquidated Damages Clause To Be

COMMON i)First, the amount of the damages identified must be

LAW seeking the benefit of the term.

i)Second, the damages must be sufficiently uncertain at

• Common Law: Unenforceable

• It fixes in advance the damages payable in the event of default.

& S 75 breach is entitled, whether or not

• ii)to all other cases, a plaintiff will have to

• ATLANTIC PLANTATION SDN BHD V MATURE LAND SDN

• Tekun Nasional v Plentitude Drive (M) Sdn Bhd and 2 Others

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