MAY 2019

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LIQUIDATED DAMAGES CLAUSES IN CONTRACTS:
AN INVITING SHIFT IN LAW THROUGH THE FEDERAL
COURT’S DECISION IN CUBIC ELECTRONICS SDN BHD (IN
LIQUIDATION) V MARS TELECOMMUNICATIONS SDN BHD

The Federal Court decision in the case of Selva Kumar Murugiah v

Thiagarajah Retnasamy[1] (“Selva Kumar”) on the scope of
Section 75 of the Contracts Act 1950 (“S.75 CA”)[2] had created
much unrest in various industries, especially the construction
industry in Malaysia. The effect of the decision was this. Even if
breach of a contract was established, there was still a
requirement on the claiming party to strictly prove the
damages it has suffered, despite the fact that the contract
contained an agreed liquidated damages clause.
“The doctrine of contract
sanctity has come back
As a result, industry players often questioned the effectiveness of alive and the days of the
even having a liquidated damages clause (“LC clause”) in a
contract, considering the fact that the Courts were reluctant in Courts delving into agreed
accepting and interpreting such such clauses as per the contractual LD clauses
intentions of parties to the contract. Often enough, contractors
were able to scot-free without having to pay a cent for a delayed that are crystal clear have
project as the claiming party is not usually able to prove the come to an end.”
actual damages it has suffered. This appeared to be an
infringement of the contracting parties’ autonomy and it defeated
the purpose of having such clauses placed in a contract as the
primary aim of the same was to provide for commercial certainty
for the parties, with regard to the risks they undertake in a
contract.

Thankfully, the recent Federal Court decision in Cubic Electronics

Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd[3]
 MAY 2019
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has revisited this area of law and held that the position on LD Reference:
clauses recognized in Selva Kumar would no longer be [1] [1995] 1 MLJ 817
applicable. The Cubic case has essentially surmised the legal [2] Section 75 Contracts Act 1950 reads: When
a contract has been broken, if a sum is named in
position with regards to LD clauses. In essence, the claiming the contract as the amount to be paid in case of
party seeking to enforce an LD clause must first be able to such breach, or if the contract contains any
demonstrate that there was in fact a breach of contract and that other stipulation by way of penalty, the party
the contract contains a clause specifying a sum to be paid upon complaining of the breach is entitled, whether or
such breach. not actual damage or loss is proved to have been
caused thereby, to receive from the party who
has broken the contract reasonable
Upon satisfactorily meeting the two requirements above, the compensation not exceeding the amount so
claiming party would be entitled to receive reasonable named or, as the case may be, the penalty
compensation ie, a sum of monies not exceeding the amount stipulated for.
[3] [2018] MLJU 1935
stipulated in the contract, irrespective of whether the claiming
party is able to prove the actual damages it has suffered. If there is About the author
however a dispute as to what constitutes reasonable compensation,
then it would be incumbent upon the defaulting party to
demonstrate that the sums stated in the LD clause is unreasonable.

A sum payable on breach of contract will be held to be

unreasonable only if it is extravagant and unconscionable
amount in comparison with the highest conceivable loss which
could possible flow from the breach.
Ankit (ankit.sanghvi@hhq.com.my) has
represented multi-national and government
In essence, the Federal Court through its decision in Cubic has
linked companies both in an advisory capacity as
reversed the obligation of parties to a contract. Previously, the well as lead counsel at all levels of the Malaysian
claiming party was required to prove its actual damages courts.
suffered in order to obtain LD. The LD sum that would be
awarded by the Courts would be limited to the extent of which
the court has been satisfied as proven. Now, the burden is on
the defaulting party to show that the LD clause is unreasonable.

This is indeed a welcomed departure from the previous legal

position on LD clauses as decided in Selva Kumar. The doctrine
of contract sanctity has come back alive and the days of the
Courts delving into agreed contractual LD clauses that are
crystal clear have come to an end. The Cubic case makes it
unequivocally clear that placing the burden on the claiming
party would undermine the very purpose of having such as LD
clause in the first place.

It will now be interesting to see how future CIPAA cases decide

on LD related claims. As it stands, adjudicators have always
insisted that developers would need to prove actual loss in
order to be entitled to LD (applying the Federal Court’s decision
in Selva Kumar). It now remains to be seen how this major
restatement of the law will be applied by our Malaysian Courts
in the days ahead and what efforts will be taken by our
legislators to reconcile this new ruling with the wordings of S75
CA.