Malaysian Federal Court finds there is no necessity for proof of actual loss or damage under section 75 Contracts Act 1950
28 March 2019
Cubic Electronics Sdn Bhd (In Liquidation) v Mars Telecommunications Sdn Bhd [2018] 1 LNS 2017
The Malaysian Federal Court, in the landmark case of Cubic Electronics Sdn Bhd (In Liquidation) v Mars Telecommunications Sdn Bhd, has held that there is no necessity for an innocent party seeking to enforce a damages clause to show proof of actual loss or damage in every case.
This decision departed from the previous decisions of the Federal Court in the case of Selva Kumar a/l Murugiah v Thiagaraj a/l Retnasamy [1995] 2 CLJ 374 and Johor Coastal Development Sdn Bhd v Constrajaya Sdn Bhd [2009] 4 CLJ 569.
In a nutshell, the Federal Court has held, inter alia, as follows:
- Where a payment possesses the dual characteristics of earnest money and part payment, the payment is a deposit and is subject to section 75 of the Malaysian Contracts Act 1950 (“Act”).
- There is no necessity for proof of actual loss or damage in every case where an innocent party seeks to enforce a damages clause under section 75 of the Act.
Background
The defendant was the owner of a piece of land in Malacca together with the plant and machinery situated on the land (“Property”). Following the winding up of the defendant, the Property was put up for sale by way of an open tender exercise. The plaintiff made an offer to purchase the Property for MYR90 million with an earnest deposit of MYR1 million. The liquidators accepted the plaintiff’s offer and did not proceed with the tender exercise. The acceptance of the plaintiff’s offer was subject to the term that the sale and purchase agreement must be executed within 30 days, failing which the MYR1 million paid by the plaintiff would be forfeited as agreed liquidated damages and not by way of penalty.
The plaintiff subsequently requested for three extensions of time and paid additional earnest deposit. When the plaintiff requested for a fourth extension of time, the defendant refused and informed the plaintiff that the four sums paid as earnest deposit were forfeited and the Property was sold to a third party by way of open tender. The plaintiff then brought a claim against the defendant, disputing the forfeiture of the entire earnest deposit. The Court of Appeal found that the defendant could not forfeit the entire earnest deposit. Upon appeal to the Federal Court, the Court of Appeal’s decision was set aside. As such, the entire earnest deposit was forfeitable and the defendant was able to retain the sums paid by the plaintiff.
Deposits are not recoverable
The Federal Court held that any money paid in advance of performance and as part-payment of the contract price is generally recoverable by the payer if there is a breach of contract. However, a deposit paid as a guarantee of performance is generally not recoverable. Whether a payment is a part-payment of the price or a deposit is a question of interpretation that turns on the facts of a case and the usual principles of interpretation apply. Once it has been ascertained that a payment possesses the dual characteristics of earnest money and part-payment, it will be treated as a deposit and will be subject to section 75 of the Act.
No necessity for proof of actual loss or damage
The Federal Court stated that there is no necessity for proof of actual loss and damage where an innocent party seeks to enforce a damages clause under section 75 of the Act. The court revisited and departed from its previous decisions on the subject in Selva Kumar a/l Murugiah v Thiagaraj a/l Retnasamy [1995] 2 CLJ 374 and Johor Coastal Development Sdn Bhd v Constrajaya Sdn Bhd [2009] 4 CLJ 569, and held that proof of actual loss is not the sole conclusive determinant of reasonable compensation. Furthermore, the concepts of “legitimate interest” and “proportionality” are relevant in deciding what amounts to a “reasonable compensation” as stipulated in section 75 of the Act. It is also to be noted that section 75 of the Act provides that reasonable compensation must not exceed the amount so named in the contract.
The initial burden of proof lies on the party seeking to enforce a damages clause under section 75 of the Act to adduce evidence that there was a breach of contract and that the contract contains a clause specifying a sum to be paid upon breach. However, if there is a dispute as to the what constitutes a reasonable compensation, the burden of proof falls on the defaulting party to show that the damages clause is unreasonable or to demonstrate what comprises a reasonable compensation.
Reference materials
The judgments rendered by the Federal Court and the Court of Appeal in this matter are available from the website of the Office of the Chief Registrar of the Federal Court of Malaysia, www.kehakiman.gov.my/en, or by clicking on the links below: