Chapter 6

DAMAGES
INtroduction
▪ Damages is the most common remedy granted by the
court in cases of breach of contract Every breach,
whether serious or not, will give an innocent party a
right to claim for damages for all losses suffered as a
result of the breach.
▪ The law on damages. is provided in s 74 of the
Contracts Act which embodies the common law rule of
remoteness in Hadley v Baxendale 1 (1854) 9 Exch341.
▪ Section 75 provides for liquidated damages where
parties have agreed on the sum payable as compensation
upon a breach of contract. 3
▪ Before commencing with the law on damages, some clarifications
on the terminology used is helpful.
▪ In Akitek Tenggara Sdn Bhd v Mid Valley City Sdn Bhd [2007] 15
MLJ 697, FC. Augustine Paul FCJ made an observation that s 74
uses the word 'compensation' and referred to the commentary by
Pollock and Mulla (11th edn, Vol II) on s 73 of the Indian Contract
Act (equivalent to s 74) as follows:
“the general principle for the assessment of damages is
compensatory, that is, the innocent party is to be placed, as far
as money can do, in the same position as if the contract had
been performed." 4
 two main aspects relating to damages
In relation to the principles of
assessment, the most important
principles are:
(i) remoteness of damage; and
(ii) mitigation of loss *
Other principles
(iii)date of assessment;
(iv) taxation of damages; and
(v) contributory negligence.
Types of losses and damages examines:
(i) pecuniary loss-monetary loss;
(ii) non-pecuniary loss-damages that are not
economic in nature but still effect one’s
enjoyment of life, lifestyle
(i.e.: pain and suffering, emotional distress,
future income)
(iii) specific damages comprising general and
special damages, nominal damages,
exemplary damages and aggravated
damages;
(iv) liquidated damages; and
(v) deposits.
5
PRE-requisites
for a claim in
DAMAges
▪ There must be a valid contract in existence.
▫ No claim in damages if the contract is illegal and void.

▪ There must be breach of the contract

▫ Breach must be proven

▪ The breach must have caused the loss.

▫ A claim for damages will not arise if the loss suffered is independently
caused by an event which the party in breach has no control over it-
frustration (s57, remedy S66)

7
Remoteness of
damages –
Section 74 of the
contracts act
SECTION 74(1)
When a contract has been broken, the party
who suffers by the breach is entitled to receive,
from the party who has broken the contract,
compensation for any loss or damage caused to
him thereby, which naturally arose in the usual
course of things from the breach, or which the
parties knew, when they made the contract, to
be likely to result from the breach of it.

9
▪ Section 74(1) is a statutory codification of the common
law rule as stated in Hadley v Baxendale.
▪ Section 74(2) reinforces the principle of remoteness by
providing as follows:
▫ Such compensation is not to be given for any
remote and indirect loss or damage sustained by
reason of the breach.

10
Rule in Hadley v Baxendale
▪ General assessment of damages for breach of contract.
▪ The general rule is that the aggrieved party is to be put in
the same position as they would be if the contract had been
properly performed.

11
In the classic case of Hadley v Baxendale, Alderson B laid down the test of
remoteness of damage in two limbs as follows:

▪ “[W]here two parties have made a contract which one of them has broken,
the damages, which the other party ought to receive in respect of such breach
of contract, should be such as
▫ may fairly and reasonably be considered either arising naturally, i.e.
according to the usual course of things from such breach of contract
itself, or
▫ such as may reasonably be supposed to have been in the contemplation
of both parties, at the time they made the contract, as the probable result
of the breach of it.'
12
▪ In this case, the Pfs' mill suffered from a crankshaft breakage, and the Dfs were hired as
carriers to send the crankshaft to the makers in Greenwich. The Dfs were informed that
"the article to be carried was the broken shaft of a mill, and that the Pfs were the millers
of the mill." As a result of the Dfs' delayed delivery, the Pfs' mill was inoperable for much
longer than it would have been without the delay. The Pfs' claim for loss of profits was
rejected by the court on the ground that it was too remote.
▪ The test of remoteness when applied to the facts of this case was not satisfied.
▪ Under the first limb, the losses suffered by the Pfs were not the natural consequence of the
Dfs' breach; the court found that in a great majority of such cases, the mill-owner would
probably have another shaft.
▪ Under the second limb, the loss of profits was not within the contemplation of both parties
at the time they made the contract as the special circumstance of the mill not being able to
proceed in the absence of the shaft was not communicated to the Dfs.

13
▪ Victoria Laundry (Windsor) Ltd v Newman Industries Ltd. [1949] 2 KB 528.
▫ In this case, Asquith LJ was of the view that the loss for which a Pf seeks to
recover must, at the time of the contract, be reasonably foreseeable as liable to
result from the breach. In determining what was reasonably foreseeable by the
parties, regard must be had to the knowledge possessed by the parties. For this
purpose, knowledge possessed is of two kinds, that is, imputed knowledge and
actual knowledge.
▫ First Limb, imputed knowledge, this means that everyone, as a reasonable
person, is taken to know the 'ordinary course of things' and consequently what
loss is liable to result from a breach of contract in that ordinary course.
▫ Second Limb, actual knowledge, this applies where in a particular case, parties
actually possess knowledge of special circumstance outside the "ordinary course
of things" of such a kind that a breach in those special circumstances would be
liable to cause more loss. 14
▪ In relation to s 74(1) of the Contracts Act, it is to be noted that the second limb "or
which the parties knew" differs from its common law counterpart by requiring the
parties to have knowledge of the loss or damage likely to result from a breach of
contract.

▪ In Hadley v Baxendale, the second limb refers to loss which "may reasonably be
supposed to have been in the contemplation of both the parties at the time they made
the contract as the possible result of the breach of it". However, most cases have
regarded the position under s 74(1) as being the same as in Hadley v Baxendale despite
the different phraseology used. In Toeh Kee Keong v Tambun Mining Co Ltd [1968] 1
MLJ 39, FC.
▫ Ong Hock Thye FJ said that "section 74(1) of the Contracts (Malay States)
Ordinance 1950 is the statutory enunciation of the rule in Hadley v Baxendale".
Direct reference was made to the difference in the second limb of s 74(1) by the
Supreme Court in Malaysian Rubber.
15
▪ Malaysian Rubber Development Corp Bhd v Glove Seal Sdn Bhd [1994] 3 AMR 2407;
[1994] 3 MLJ 569, SC. where Mohammed Dzaiddin FCJ stated:
▫ [The] normal measure of damages for breach of contract in this country is
prescribed by s 74(1) of the Contracts Act 1950, which is the statutory
enunciation of Hadley v Baxendale ... For the sake of completeness, it should be
mentioned that our courts have treated the position under the second limb of the
section to be similar to the second limb of Hadley v Baxendale, which is, the
party may recover damages which may 'reasonably be supposed to have been in
contemplation of both the parties, at the time they made the contract’.

16
Other Malaysian cases - ON GENERAL
ASSESSMENT OF DAMAGES FOR BREACH OF
CONTRACT
▪ Bank Bumiputera Bhd Kuala Terengganu v Mae
Perkayuan Sdn Bhd & Ors (1993) 2 MLJ 76 *
▪ Nikmat Masyhur v Kerajaan Negeri Johor Darul Takzim
(2014) 1 MLJ Con 213

17
- These cases essentially set forth the same proposition ie
that the damage or loss suffered must be within the
contemplation of both parties whether actual or
constructive.

-That the loss suffered was a natural and probable result of

the Df’s breach and that it included loss of profit.

18
▪ It should be noted that the Supreme Court in Eikobina (M) Sdn Bhd v Mensa
Mercantile (Far East) Pte Ltd [1994] 1 MLJ 553; [1994] 1 AMR 529, SC. had applied a
stricter test of actual knowledge in referring to the second limb of Hadley v Baxendale
as follows:
▫ If the first rule of Hadley v Baxendale does not apply, we now examine the
circumstances if they could qualify for the second rule; the actual knowledge of
special circumstances, viz whether details of such potential loss were made known
to the contract breaker before or at the time of contract so that the contract breaker
can be said to have taken the risk of such loss into the bargain of the contract.
Ibid, at 564 .

19
First Limb of section 74(1) Contracts act
▪ The first limb of s 74(1) provides for compensation of losses "which naturally
arose in the usual course of things from the breach". (loss of profits being the
usual claim under this limb)
▪ Illustration (a)
▪ The first limb of s 74(1) was applied in Bee Chuan Rubber Factory Sdn Bhd v Loo
Sam Moi [197] 2 MLJ 14, FC. In this case, the plaintiffs/appellants entered into a
contract to sell a piece of land and to build a house thereon for the
defendant/respondent. In breach of contract, the appellants delayed completion of
the contract. The learned trial judge awarded damages to the respondent at the rate
of $100 for every month from the time delivery was due on September 21, 1970
until April 3, 1975 when delivery of the house was finally given.

20
Continue…
▪ The Federal Court affirmed the trial judge's decision and held that damages are
recoverable for a breach of contract for delay in the completion of an ordinary dwelling
house required for personal occupation. Such damages which include the reasonable cost
of living accommodation or living elsewhere and storing furniture came within the first
limb of the rule in Hadley v Baxendale.

21
▪ Limb 1 of Section 74 of the Contracts Act will apply when the parties did not, at the
time of the contract, apply their minds to the issue of damages upon breach and/or there
was no “special circumstances” known to both parties.’
▫ Cory Thomas v Thames Ironworks Company (LR3 QB 181)
▫ Victoria Laundary (Windsor) Ltd v Newman Industries Ltd (1949) 2 KB 528

▪ The general rule , for the plaintiff to recover profits from contracts that they have
entered with third parties, the defendant must know at the time of the contract, the
prospect and the terms of the contract.
▫ Bank Bumiputra Malaysia Bhd Kuala Trengganu v Mae Perkayuan Sdn Bhd
(1993) 1 AMR 1079
▫ Kepong Wood Products Co Sdn Bhd v Daishowa (M) Wood Products Sdn Bhd
(1980) 2 MLJ 68*
22
Second limb of section 74(1) of the
Contracts act
▪ The second limb of section 74(1) is for losses which "the parties knew, when they made
the contract, to be likely to result from the breach of it".
▪ These are special losses which have been known or contemplated by the parties.
▪ Illustration (i) is similar to the facts in Victoria Laundry, A having informed B that his
mill is stopped for want of the machine.
▪ Similarly, in Illustrations (j) and (1), the other party had been told or informed of the
purpose of the contract and thus, knew of the loss likely to arise from the breach of
contract.
▪ The application of the second limb of s 74(1) can be seen in Tham Cheow Toh v
Associated Metal Smelters Ltd [1971] 1 MLJ 271, HC; [1972] 1 MLJ 171, FC.

23
▪ Deepak Jaikishan Rewachand & Anor v Intrared Sdn Bhd (2012) MLJU 1273

▫ The High Court held that the contract breaker must have actual knowledge of
special circumstances outside the ordinary course of things.
▫ The breach would make him liable for addition loss than that he would be liable
for in “ordinary things”.

▪ Ekiobina (M) Sdn Bhd v Mensa Merchantile (Far East) Pte Ltd (1994) 1 AMR 529
▪ Teoh Kee Keong v Tambun Minig Co Ltd (1968) 1 MLJ 39

24
Both LIMBS uNDER SECTION 74(1)
▪ Both limbs of s 74(1) was considered by the Supreme Court in Bank Bumiputra Malaysia Bhd
Kuala Terengganu v Mae Perkayuan Sdn Bhd & Ors [1993] 2 MLJ 76, SC in a breach by a bank
for wrongful termination of an overdraft facility.
▫ In this case, the first respondent (the first defendant) proposed to develop a few pieces of
land in Dungun, Terengganu as well as agricultural lands in Alor Gajah, Melaka into housing
estates. The appellant (the plaintiff) had agreed to grant an overdraft facility of RM4.5
million to the respondent for both projects. The appellant knew that the loan for the Alor
Gajah project would be recovered from the Dungun project's profit revenue. In breach of
contract, the appellant withdrew the overdraft facility before the term of the overdraft facility
had expired.
▫ The appellant appealed and the Supreme Court allowed the appellant's claim to recover the
loan granted to the respondent. In relation to damages, the Supreme Court allowed the
respondent's claim for loss of profit in relation to the Dungun project on the ground that the
appellant had known that if the loan was frozen, the said project would be affected.
25
Continue…
▪ In relation to damages, the Supreme Court allowed the respondent's claim for loss of profit in
relation to the Dungun project on the ground that the appellant had known that if the loan was
frozen, the said project would be affected.
▪ In relation to the Dungun project, Abdul Hamid Omar LP stated:
We are, therefore, of the view that the loss of profits on housing project which the first
respondent would suffer was the natural and probable result of the breach of agreement by the
bank, and when the bank agreed to provide the bridging finance to the first respondent, the bank
well knew of the loss that the first respondent would incur should the bank break the contract.
For the Dungun project, the Court applied both limbs. The Court considered that the bank had
full knowledge and had studied every aspect of the project before granting the facility (this
would refer to the second limb)

26
▪ However, the Court did not allow the claim for loss of profit for the Alor Gajah project
which was dependent upon the application of profits expected from the Dungun project
and thus, it was too remote.

▪ For the Alor Gajah project, the claim was dismissed as it clearly did not fall within the
second limb.

27
▪ The decision in Mae Perkayuan was followed in Bumiputra-Commerce Bank Bhd, Kuala
Trengganu v Chendering Development Sdn Bhd [2004] 1 MLJ 657, CA. which also failed to
distinguish the application of the two limbs of s 74(1).
▫ While it is possible that in exceptional cases both limbs can apply, it is important 24 In
relation to exemplary damages, the Court dismissed it after referring to Rookes v Barnard
[1964] 1 All ER 367; [1964] AC 1129, HL (For a discussion on exemplary damages, see p
492). The Court also dismissed the claim for damages to third parties as there was no
evidence that the third parties had accepted the said damages from the respondent. The Court
also allowed the appellant's claim to recover the loan granted to the respondent. for the
development of the law that a clear analysis and application of the facts is made as to which
limb applies accordingly.

28
Mitigation of
damages in
contract
EXPLANATION OF SECTION 74

In estimating the loss or damage arising

from a breach of contract, the means
which existed of remedying the
inconvenience caused by the non
performance of the contract must be
taken into account.

30
▪ Plaintiff has the duty of taking all reasonable steps to mitigate the loss
consequent on the breach and debars him from claiming any part which due
to his neglect to take such steps.
▫ Kabatasan Timber Extraction v Chong Fah Shing (1969) 2 MLJ 6 *

31
Three rules to mitigation
▪ The innocent party must take minimize the loss and secondly refrain from taking unreasonable
steps that could increase the loss.
▫ Khoo Then Sui v Chan Chiau Hee (1976) 1 MLJ 25

▪ If the innocent party in fact manages to avoid or mitigate the loss or damage, he cannot recover
for such avoided or mitigated loss or damage.
▫ Gebruder Metal MannGmbH & co KG v NBR (London) Ltd (1984) 1 Lyod’s Rep 164

▪ However, if such party by taking a reasonable steps to avoid or mitigate the loss or damage
incurs further loss or expense, the innocent party can then recover such amount in full from the
defaulting party.
▫ Wilson v United Counties (1920) 1 WLR 426

32
What is mitigation of damages?
▪ Anson’s Principles of the English Law of Contract , mitigation of damages was explained as
follows:
….one who has suffered loss from a breach of contract must take any reasonable steps that
are available to him to mitigate the extent of the damage caused by the breach…He cannot
claim to be compensated by the party in default for loss which due not to the breach but due to
his own failure…
 Darbyshire v Warren (1963) 1 WLR 1067
 Malaysian Rubber Development Corp Bhd V Glove Seal Sdn Bhd (1994) 3 MLJ 569
 The Supreme Court held that the Plaintiff was under the duty to take reasonable steps to
mitigate it loss immediately upon breach.
 The question of what is reasonable is a question of fact and not law.
 The Plaintiff had continued with the manufactured although the market on glove was
declining.
. 33
Principles
▪ The duty on mitigate only comes when there is a breach of a contract. The
standard of a conduct of the Plaintiff in taking steps to mitigate his losses
is one of whether the plaintiff had acted reasonably, and it is a question of
facts.
▫ Banco De Portugal v Waterlow and Sons, Limited (1932) AC 452
▫ Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd (2004) 3
SLR 288

34
Burden of proof
▪ Although the duty to mitigate is that of the Plaintiff, the
burden of proof is on the Defendant to show that the Plaintiff
has failed to take reasonable steps to mitigate the loss; that
the Plaintiff had the means available and did not take
reasonable steps to avail himself. (Pollock & Mulla, p 1264)

35
Time for
assessment of
damages
▪ The time for assessment of damages is at the time of the breach and for foreign currency
debts, at the date of judgment.
▪ Miliangos V George Frank (Textiles) Ltd (1976) AC 443
▪ Tan Ah Chim & Sons Sdn Bhd v Ooi Bee Tat & Anor (1993) 3 MLJ 633
▪ In determining the damages, the Court can take into account facts and events occurring after
the breach.
▫ Tan Sri Khoo Teck Puat & Anor v Plenitude Holdings Sdn Bhd (1995) 1 AMR 41;
(1994) 3 MLJ 777
⬝ The general principle that damages are normally measured in reference to the
circumstances at the date of the breach of contract does not mean that events
that have occurred after the date of the breach may never be considered.

37
TAXATION OF
DAMAGES
▪ The issue of taxation on damages arises as the aim of damages is to compensate the
plaintiff for the actual loss suffered as a result of a breach.
▪ Thus, if the award of damages is for income or loss of profits, an amount equivalent to the
sum of money that the plaintiff would have to pay by way of tax for the said sum, will
have to be deducted.
▪ This principle was propounded in the House of Lords decision in British Transport
Commission v Gourley [1956] AC 185, HL. which involved a claim for damages in tort
but the principle is equally applicable to a contractual claim. In this case, it was held that
the application of the principle is subject to the fulfilment of two conditions; first, the
income or profits on which the claim is based is subject to taxation; and second, the sum
awarded as damages to the plaintiff will not be liable to taxation. This condition is
necessary as otherwise the plaintiff will in effect be paying tax twice over instead of
receiving just compensation for the loss he has suffered.

39
▪ The principle in Gourley's case was applied by the Federal Court in Daishowa (M) Wood Products Sdn Bhd
v Kepong Wood Products Co Sdn Bhd [1979] 1 MLJ 195, HC [1980] 2 MLJ 68, FC. In this case, the
appellants installed two chipping plants in the respondents' factory for the production of wood chips.
▫ The appellants agreed for a period of five years to purchase all the wood chips produced by the
respondents on certain terms and conditions. When the appellants subsequently terminated the
contract, the respondents' business was affected. The respondents sued the appellants for damages for
loss of profits. At the trial at first instance, the respondents were awarded damages amounting to
$938,745.14. The appellants contended that the trial judge's award of damages to the respondents
was incorrect as it was made without taking into account the tax element. The respondents replied
that Gourley's case was inapplicable on the ground that the second condition was not fulfilled.
▫ On the facts of this case, the Court held that the damages awarded to the respondents was more in the
nature of capital payment rather than trading receipts. Thus, the damages would not be taxable under
the Income Tax Act 1967 (Revised 1971) (Act 53) and the second condition in Gourley's case was
satisfied. The trial judge was, therefore, wrong in awarding damages without deducting taxes. The
Federal Court reduced the award for damages by $250,000.

40
Continue…
▪ On the facts of this case, the Court held that the damages awarded to the
respondents was more in the nature of capital payment rather than trading
receipts. Thus, the damages would not be taxable under the Income Tax Act 1967
(Revised 1971) (Act 53) and the second condition in Gourley's case was
satisfied. The trial judge was, therefore, wrong in awarding damages without
deducting taxes. The Federal Court reduced the award for damages by $250,000.

41
Contributory
negligence
▪ The position in Malaysia would be similar to the English position as ss 12(1) and (6) of the Civil
Law Act 1956 (Revised 1972) Act 67 are modelled on ss 1(1) and (4) of the Law Reform
(Contributory Negligence) Act 1945.
▪ An illustration is the case of Sabah Finance Bhd v UMW (East Malaysia) Sdn Bhd [1991] 12 CLJ
1013. In this case, the plaintiffs/lessors applied for summary judgment against the defendants who
had guaranteed the obligations of the lessee concerning the hire of some machinery.
▫ The High Court dismissed the plaintiffs' application as the plaintiffs "adopted a lackadaisical
or couldn't-care-less attitude" and neglected to act in the interest of the guarantor. In this
case, the plaintiffs did not take any action although they were informed by the defendant of
the lessee's attempt to take the machineries out of Sabah without the plaintiffs' consent.
▫ The High Court held that Illustration (c) to s92 of the Contracts Act read together with s
12(1) of the Civil Law Act 1956 applied to this case.

43
Types of
damages
Pecuniary loss and non pecuniary loss
▪ Loss arising from a breach of contract can be broadly divided into pecuniary and non-
pecuniary losses.
▫ Pecuniary losses are financial and material losses sustained due to a breach such
as loss of earnings, loss of profits, costs of repairs and/or replacements.
▫ Non-pecuniary losses are not economic or financial in nature such as physical
pain, injury to feelings and mental distress. This part will deal with pecuniary
loss and it will explore the function of damages to protect the expectation
interests and the reliance interests of the parties.

45
Continue…
▪ In Robinson v Harman, (1848) 1 Exch 850. Parke B made a classic statement to the effect that:
▫ The rule of the common law is, that where a party sustains loss by reason of a breach of contract, he is,
so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract
had been performed. Ibid, at 855.

▪ The rationale for protecting the plaintiff's expectation interest stems from basic contract principles that a
binding promise creates in the promisee an expectation of performance. Towards this, a breach of a binding
promise entails a remedy that would fulfil, if not, protect that expectation.

▪ Besides the expectation interest, the law also protects the reliance interest of an injured party. In this respect,
the law aims to put a plaintiff in the position he would have been in had he not entered into the contract with
the defaulting party.
▫ First, when a plaintiff has not suffered any loss of profits but has incurred expenditure in reliance of the
contract.
▫ Second, although the plaintiff may suffer loss of profit, he has difficulty in ascertaining and proving the
amount of profit that he would have obtained if the contract had been performed.
46
▪ A case to illustrate an award of damages to protect the plaintiff's reliance interest is McRae v
Commonwealth Disposals Commission (1951) 84 CLR 377 (High Court of Australia).
▫ In this case, the plaintiff and the defendant entered into a contract with the aim of recovering
a shipwrecked oil tanker. Towards this, the plaintiff organised an expedition to salvage the
said tanker, upon being told that the tanker was lying at a specified place. Despite an
extensive search, the tanker was not found and the plaintiff claimed against the defendant for
loss of profit.
▫ The plaintiff's claim for loss of profit was refused on the ground that the speculative
enterprise made it impossible to quantify the plaintiff's expectation interests with any degree
of certainty. In this case, there was no certainty over the size or value of the tanker and even
if there was such a tanker, it remained uncertain whether or not the tanker's oil cargo
remained intact.

47
non pecuniary loss
▪ The courts are generally not keen to award damages for non-pecuniary losses such as
pain and suffering, physical discomfort, injury to feelings or mental distress, and loss of
reputation.
▪ Two policy grounds are often cited:
(i) the "floodgates argument" which raises the difficulty of verifying genuine claims
and (Hayes v James & Charles Dodd (1990) 2 All ER 815
(ii) the difficulty of assessing and quantifying the damages to be awarded. (Farley v
Skinner (2001) 4 All Er 801
▪ There have been concerns for some measure of consistency in the awards for non-
pecuniary losses.

48
▪ Lord Steyn in Fancy v Skinner [2001] 4 All ER 801, HL. addressed this concern when he opined:
▪ [A]wards in this case [of non pecuniary damages] should be restrained and modest. It is
important that logical and beneficial developments in this corner of the law should not
contribute to the creation of a society bent on litigation. Ibid at 302.

▪ However, non-pecuniary losses may be recoverable if they are within the contemplation of the
parties to the contract as not unlikely to result from the breach. Thus, if as a result of a breach of
contract, the injured party suffers pain, loss of amenities and expectation of life, these losses are
recoverable. One example is Summers v Salford Corp [1943] AC 283. where the plaintiff-tenant
was cleaning the window when it broke, causing injuries to her hand. She sued the landlord for
breach of the covenant of fitness for habitation and was successful in her claim.

49
▪ This part will deal with two heads of non-pecuniary
losses, namely:
a) physical inconvenience and discomfort; and
b) injury to feelings and mental distress.

50
Physical inconvenience and discomfort
▪ Awards for damages for physical inconvenience and discomfort have been
granted. In Hobbs and Wife v The London and South Western Railway
Company (1874-75) LR 10 QB 111. the Court awarded damages for the
physical inconvenience suffered by the plaintiff and his family who were
set down by the defendant railway company at the wrong station late at
night. They had to walk five miles home in the drizzling rain, in the
absence of available transport or accommodation.
▪ However, Mellor J emphasised that the award for "inconvenience" is
confined to "real physical inconvenience":
For the mere inconvenience, such as annoyance and loss of vexation ...
you cannot recover damages
▪ This approach was also adopted in Watts & Anor v Morrow [1991]1 WLR 1421 at 1445, CA.
▪ In this case Bingham J held that "any distress, frustration, anxiety, displeasure, tension or
aggravation" caused by a breach (even where distress was within the reasonable contemplation of
the parties) is irrecoverable.
▪ In this case, the plaintiffs had purchased a house after relying come inspection carried out by the
defendant. The defendant's survey stated that the overall house was sound, stable and in good
condition with minor defects. After the plaintiffs obtained possession of the possession it was
discovered that the defects were serious and required repairs including new ceilings, windows
and floorboards. these defects were not stated in the defendant's report. The plaintiffs claimed
from defendant the cost for repair and also damages for mental distress discomfort suffered.
▫ The Court held that damages for breach of a normal contract of were only recoverable for
distress caused by the physical consequences of the breach. It is not available for mental
distress not caused by physical discomfort or inconvenience resulting from the breach.
▫ Thus, the for damages for distress and inconvenience was set aside and the Court instead
awarded damages of £750 for physical discomfort.
▪ In contrast, the House of Lords in Farley v Skinner7070 [2001] 4 All ER 801,HL allowed the
plaintiff claim for depreciation on a house purchased as well as for non-pecuniary loss. In this
case, the plaintiff employed the defendant, a land survey inspect a property in the countryside,
some 15 miles from an international airport that he intended to purchase for his retirement. The
plaintiff expressly sought the defendant's advice as to whether the house w*i be seriously affected
by aircraft noise. The defendant breached contract when he reported that it was unlikely that the
property would be greatly affected by such noise. The plaintiff bought the property and spent a
significant sum of money refurbishing it. Upon moving the plaintiff was disturbed by aircraft
noise and brought proceedings against the defendant.
▫ The defendant argued that before damages for non-pecuniary loss be awarded, the object of
the entire contract must be of the type to pleasure, relaxation and peace of mind. The House
of Lords disagreed and Lord Steyn stated:
▫ There is no reason in principle or policy why the scope of recovery in the exceptional
category should depend on the object of the contract as ascertained from all its
constituent parts. It is sufficient if a major or important object of the contract is to give
pleasure, relaxation or peace of mind. Ibid, at 812
Injury to feelings and mental distress
▪ The House of Lords decision of Addis v Gramophone Co Ltd [1909] AC 488, HL is often
taken as authority for the general principle that damages will not be awarded for injured
feelings. In this case, the plaintiff was employed by the defendants as manager of their
business with a salary and commission on the trade done. He could be dismissed by six
months' notice. In October 1905, the defendants gave him six months' notice of dismissal,
but at the same time they appointed his successor and took steps to prevent the plaintiff
from acting as manager. The House of Lords was of the view that despite the wrongful
dismissal and the "harsh and humiliating“ manner in which the plaintiff was treated, there
could be no award of damages for his injured feelings or for the loss that he may sustain
from the fact that the dismissal of itself makes it more difficult for him to obtain fresh
employment.
▪ In Malaysia, Addis's case has been applied in CCA Holdings Ltd v Palm Resort Bhd
[1998] 4 AMR 3354; [1998] 4 MLJ 143. In this case, the plaintiffs were managers of the
defendants' club under a technical assistance and managerial agreement. The defendants
terminated the agreement on the ground that the club had not generated profits as required
in the agreement. The plaintiffs alleged that as a consequence of the termination, they
suffered loss of reputation and goodwill which will impact them as managers of
prestigious clubs internationally.
▪ The plaintiffs applied for an interim injunction to restrain the defendants'
club from removing them as managers of the club and a mandatory
injunction to reinstate them as managers. In deciding whether damages
would be an adequate remedy, the High Court considered the question
whether damages for loss of credibility and reputation can be awarded in
this case.
▪ The Court adopted Addis's decision that damages are irrecoverable for
loss of credibility and reputation under the common law and also held
that the facts of this case did not fall within the exceptional situations
where damages for loss of reputation may be granted.
▪ After a long period of time subsequent to Addis, the
courts showed greater willingness to allow exceptional
situations where damages for injured feelings and mental
distress can be given. These are situations where first,
the contract is to provide for enjoyment and secondly,
where the contract is entered into with the aim of
preventing further distress.
▫ In relation to the latter, in Heywood v Wellers
[1976] QB 446, CA. the plaintiff retained the
defendant-solicitor to initiate legal proceedings
against a man who had been molesting her but the
proceedings were bungled by the defendant which
caused the plaintiff further prolonged distress.
▪ The Court of Appeal awarded damages for anxiety and mental distress as the
contract was primarily entered into with the aim of protecting the plaintiff from
further distress or annoyance.
▪ In relation to the first situation where damages are awarded for disappointed
expectations in a contract to provide enjoyment, these are cases of holiday
contracts as in Jarvis v Swans Tours Ltd [1973] QB 233, CA In this case, the
plaintiff had booked a 15-day winter sports holiday in Switzerland organised
by the defendants. He did so on the faith of the defendants' travel agent's
brochure which described the holiday as a "house-party" and promised a string
of activities ranging from excellent skiing, a yodeller evening as well as
afternoon tea and cakes. To his disappointment, what the plaintiff obtained was
a first week with 13 people and a desolate second week besides inferior quality
entertainment.
▫ The Court of Appeal awarded the plaintiff damages for the sum paid for the
holiday and also an additional amount for his disappointed expectations. Lord
Denning reasoned that the plaintiff in his contract with the defendants did not
merely contract for the travel facilities, board and lodging but also to enjoy
himself.
▪ Locally, the exception in Jarvis's case has been applied in Abdul
Karim v T & R United (S'pore) Pte Ltd [1987] Butterworth's Law
Digest para 949, where the defendants did not meet up to their
contractual obligations in respect of a tour package offered to the
plaintiff. The plaintiff was granted damages for mental distress,
disappointment and discomfort.
▪ In James Yu v Raffles Hotel Ltd [1988] Butterworth's Law Digest
para 1182 the Court awarded the plaintiff damages for mental
distress and disappointment for the defendants' failure to prepare
sufficient food for the plaintiff's wedding reception. As a result of
the defendants' breach, the plaintiff suffered much embarrassment
before his guests at the reception.
▪ Compensation for discomfort and inconvenience was also awarded
in Subramaniam a/l Paramasivam & 2 Ors v Malaysian Airline
System Bhd [2002] 1 AMR 254; [2002] 1 ML] 45.
▫ In this case, the first, second and third plaintiffs flew from
Madras to Kuala Lumpur with the defendant airline. Upon arrival
in Kuala Lumpur, the defendant's officers insisted that the
plaintiffs' luggage be reweighed. Their baggage was found to be
in excess of the permitted weight and they were requested to pay
an additional fee for the excess baggage. The first plaintiff was a
lawyer and politician who headed a wing in the Malaysian Indian
Congress party. During this two-hour incident, the first plaintiff
had many supporters waiting for him at the airport.
▪ The Court distinguished the instant case from Jarvis's case where the loss suffered
arose directly from the failure of the defendants to provide the "invigorating and
amusing" holiday they had promised the plaintiff. In the present case, the defendant's
breach was not its failure to convey the plaintiffs and their baggage from Madras to
Kuala Lumpur, but their act of reweighing and unlawfully imposing excess baggage
charges upon the plaintiffs' luggage. In the process, the defendant caused the plaintiffs
to suffer non-pecuniary losses which clearly did not arise from the natural course of
things nor was within the contemplation of the parties. However, the Court considered
that the plaintiffs did suffer some loss (thus, nominal damages was not the question).
Thus, the Court granted damages of RM300 for the discomfort and inconvenience,
albeit for a short duration of only two hours.
▪ Before completing this part on non-pecuniary loss, it should be highlighted that the House of Lords
decision of Addis was reviewed in Malik v Bank of Credit and Commerce International SA (in
liquidation) [1997] 3 All ER , HL. Addis is authority for the principle that damages cannot be
awarded for any loss that an employee may sustain from the fact that the wrongful dismissal of itself
makes it more difficult for him to obtain fresh employment!“
▪ In Malik's case, the House of Lords explained and distinguished Addis's case. Addis concerns a
claim for non-pecuniary loss for injured feelings while Malik deals with the recovery of pecuniary
loss for damage to reputation. In Malik, long serving employees of the defendant bank were
rendered redundant following the bank's liquidation. The plaintiffs claimed damages, alleging that
their inability to obtain alternative employment was due to the stigma attached to being former
employees of the defendants. For the purposes of legal proceedings, it was assumed that the bank
had carried on its operations in a corrupt and dishonest manner; that this was widely known, that the
plaintiffs were innocent of any involvement; and that the plaintiffs suffered financially as a result.
▪ In its decision, the House of Lords held that the plaintiffs' contracts of
employment contained an implied term imposing an obligation of mutual trust
and confidence between the parties. Therefore, the defendants were under an
obligation to act honestly in its business dealings. The House of Lords further
held that if the plaintiffs had suffered injury to reputation as a result of the
defendants' breach of the implied term of the contract, damages for financial
loss in respect of loss to reputation caused by breach of contract was
recoverable. In this respect, the House distinguished Addis's decision and that
it does not preclude a claim for pecuniary loss for loss of reputation arising
from a breach of contract.
SPECIFIC DAMAGES
▪ Besides the broad classification of damages for pecuniary and non-
pecuniary losses, there are also awards of specific damages which are
dealt with below as follows:
(i) general damages and special damages;
(ii) nominal damages;
(iii) exemplary damages; and
(iv) aggravated damages.

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General damages and special damages
▪ The distinction between general damages and special damages is relevant in the context of proof
and pleadings.
▪ General damages need not be pleaded as the law presumes that such damage results from the
infringement of a legal right or duty.
▪ Special damages on the other hand, require the precise amount of pecuniary loss to be specifically
pleaded and evidence relevant to it must be adduced. This follows from the function of pleadings
to prevent surprises at the trial.
▪ Thus, pleadings on special damages provide the defendant with notice of items in a claim for
which a definite amount can be adduced by evidence.
▪ The use of general and special damages in the context of pleadings is more relevant in tort cases.
▪ The terms "general damages" and "special damages" have also been used in the context of
liability, that is, to describe the first and second limbs of the principle of remoteness in Hadley v
Baxendale and in s 74(1) of the Contracts Act.

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NOMINAL DAMAGES
▪ Nominal damages are granted to the plaintiff when there is a breach of contract by the defendant
but the plaintiff suffers no actual loss or fails to sufficiently prove such loss.
▪ Nominal damages, thus, protect a plaintiff's legal right and recognises that it has been infringed.
▪ In The Owners of The Steamship "Mediana" v The Owners, Master And Crew of The Lightship
"Comet “84 [1900] AC 113, Lord Halsbury LC stated:
▫ Essentially, nominal damages affirm that there has been an "infraction of a legal right ...
though it gives you no right to any real damages at all, yet [it] gives you a right to the verdict
or judgment because your right has been infringed. [19001] AC 113 at 116.

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▪ Nominal damages usually consist of a small sum.
▫ In Hilbourne v Tan Tiang Quee [1972] 2 MLJ 94, CA the defendant-solicitor breached his duty
to the plaintiff- claimant when he failed to inform the latter of the completion date for the
purchase of a piece of land.
⬝ The plaintiff sued the defendant for the loss of opportunity to purchase the land. On the
facts, the Court of Appeal recognised that there was a breach of contract. However, as the
plaintiff did not suffer any pecuniary loss, the Court only awarded nominal damages of
$10.

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▪ Nominal damages are also granted when the plaintiff suffers loss but is unable to prove his loss.
In such cases, although a plaintiff has shown the fact of damage, without the evidence or
sufficient evidence adduced as to its amount, it is virtually impossible to assess damages.
▫ Thus, in Industrial & Agricultural Distribution Sdn Bhd v Golden Sands Construction Sdn
Bhd [1993] 2 AMR 2275; [1993] 3 MLJ 433 in relation to the plaintiffs' claim that the
excavators had depreciated in value owing to the defendants' use of them over a two-
month p€riod, as the plaintiffs failed to prove the depreciation, the High Court awarded
only nominal damages of RM100.

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EXEMPLARY DAMAGES
▪ Although an award of damages for breach of contract is primarily aimed at compensating the loss
or injury suffered by the plaintiff, it may be used to punish a defendant in exceptional situations,
for instance, for a breach of promise to marry.
▫ In Dennis v Sennyah [1963] 1 MLJ 95 the plaintiff and the defendant became engaged, but
the defendant subsequently broke off the engagement and refused to marry the plaintiff.
The plaintiff claimed that she had endured humiliation, mental anguish and wasted
expenses as a result and claimed general damages for the breach of promise and special
damages for the expenses incurred.
⬝ In this case, the High Court awarded the plaintiff $1,500 as general damages and
$620.10 as special damages. In relation to damages for breach of the promise to
marry,

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▪ In Rookes v Barnard, [1964] AC 1129, HL the House of Lords established three categories when
exemplary damages may be awarded:
(a) there has been oppressive, arbitrary or unconstitutional conduct by the servants of the
government;
(b) the defendant's conduct has been calculated by him to make a profit for himself which may
well exceed the compensation payable to the plaintiff; and
(c) a statute has expressly authorised it.

▪ Cassell & Co Ltd v Broome[1972] AC 1027

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▪ The decision in Rookes v Barnard was applied in Dato' Ahdullah Hishan bin Haji Mohd Hashim v Sharma Kumari
Shukia (No 3) [1999] 6 MLJ 589, HC.
▫ In this case, the plaintiff claimed that he had loaned the defendant money to enable her to purchase certain
shares. The defendant breached the agreement and the plaintiff sought exemplary damages and aggravated
damages, arguing that the defendant had misled the plaintiff into believing that the defendant would convert
to Islam marry him.
▫ The High Court held that the cause of action in this case was not a breach of promise to marry but was a
claim for the return of a loan. Nevertheless, the Court took into consideration the fact that the promise to
marry had encouraged the loan. The Court referred to Rookes v Barnard and held that this case fell within the
second category, that is, it amounted to behaviour calculated to bring about a profit. In this case, the Court
considered that the "profit" extended to the defendant's desire and aspiration to be called "Datin" or "Mrs
Abdullah” as well as the defendant's travel expenses to overseas destinations and expensive gifts. The Court
awarded the plaintiff RM500,000 in exemplary damages and another RM500,000 for aggravated damages.

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Aggravated damages
▪ In Dato'Abdullah Hishan's case above, aggravated damages were claimed together with
exemplary damages. However, aggravated damages are still compensatory in nature and must
be distinguished from the punitive purpose of exemplary damages. In Rookes v Barnard, Lord
Devlin distinguished them as follows:
▪ In a case in which exemplary damages are appropriate, a jury should be directed that if, but only
if, the sum which they have in mind to award as compensation (which may of course be a sum
aggravated by the way in which the defendant has behaved to the plaintiff) is inadequate to
punish him for his outrageous conduct, to mark their disapproval of such conduct and to deter
him from repeating it, then they can award some larger sum.' [1964]AC 1129 at1228,HL

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Liquidated damages
▪ "Liquidated damages" refer to a fixed, contractually agreed sum of money which is payable by
the defaulting party upon a breach of contract. The issue arises whether the courts will enforce
payment of the sum agreed.
▪ Common law position on liquidated damages:
▫ Under the common law, this will depend on whether the sum agreed is considered as
liquidated damages or a penalty. The common law draws a distinction between them.
▫ Liquidated damages are a genuine pre-estimate of the actual loss that will be suffered by a
party in the event that a contract is breached. When a breach occurs, the innocent party will
be allowed to claim the said sum.
▫ Penalties, on the other hand, are sums which are grossly disproportionate to the actual loss
that will be suffered by the innocent party in the event of a breach

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Malaysian Position on Liquidated Damages
▪ In Malaysia, the position on liquidated damages is governed by s 75 of the Contracts Act 1950
which provides as follows:
▪ 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 any other stipulation by way of penalty, the party
complaining of the 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.
▪ By virtue of the provision in s 75, the Malaysian position differs from the common law. In contrast
with the common law position, the Contracts Act does not distinguish between liquidated damages
and penalties.
▪ In SS Maniam v The State of Perak102 [1957] MLJ75. Thompson J stated:
▪ In this country, there is no difference between penalty and liquidated damages. Section 75 of the
Contract Ordinance which is the same as section 74 of the Indian Contract Act

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▪ The position was confirmed by the Privy Council in Linggi Plantations
Ltd v Jagatheesan [1972] 1 MLJ 89, PC (Appeal from Malaysia) where
Lord Hailsham explained s 74 of the Indian Contract Act (which is in pari
materia with s 75 of the Contracts Act) as follows:
▪ [S]ection 74 was intended to cut through the rather technical rules of
English law relating to the liquidated damages and penalties and to apply
in substance the equitable rule to all cases whether the sum provided in
the contract was in substance a penalty or a genuine pre-estimate of the
damage likely to be suffered. Ibid. at 92.
▪ Another important matter concerning s 75 is whether there is a requirement
to prove actual loss in claiming compensation under a liquidated damages
clause. From a literal reading of s 75, it would seem that the plaintiff need
not prove his loss since the section provides that
▪ "the party complaining of the 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 agreed sum. Despite these
express words, the early cases have held that a plaintiff must still prove the loss
suffered relying on Lord Atkins's statement in Bhai Panna Singh & Ors v Bhai Arjun
Singh & Ors. There have, however, been other views on this matter.
▪ This issue is now settled by the Federal Court's decision in Selva Kumar a/l Murugiah
v Thiagarajah all Retnasamy [1995] 1 MLJ 817, FC. In this case, the respondent sold
his medical practice to the respondent for RM120,000. The appellant had paid a total
sum of RM96,000 and refused to pay the balance instalments. The respondent sought
to forfeit the RM96,000 paid and relied on a clause in the agreement that if the
appellant defaulted, all sums paid to date of breach would be forfeited as liquidated
damages. The High Court gave a declaration to the said effect as provided in the
agreement and the appellant appealed to the Federal Court. In this case, the Federal
Court considered the phrase in s 75 "whether or not actual damage or loss is proved to
have been caused thereby" (the said phrase) and established several important
principles.
▪ The Court noted that the said phrase is intended to cover two kinds of contracts, the first
kind where the court would find it very difficult to assess such reasonable compensation,
and the second kind where the court could assess such reasonable compensation with
settled rules. In this respect, the Court held that although the said phrase is unlimited, it
should not be given a literal construction but should instead be given a restricted and
limited construction. According to the Court, giving the said phrase a literal construction
will produce a most unreasonable result in that it will change the existing law that the
party seeking damages must prove the actual damage caused.
▪ The Court also held that said phrase only applies to those cases where the court would
find it difficult to assess damages for the actual damage or loss suffered. These are cases
where there is no known measure of damages employable, and yet the evidence clearly
shows some real loss inherently and the loss is not too remote. In these circumstances,
the court ought not to award nominal damages, but should award instead substantial
damages not exceeding the sum stipulated in the contract which is reasonable and fair
according to the court's good sense and fair play.
▪ In respect to those cases where damage for actual loss is not too remote and could be
assessed by settled rules, the Court held that the plaintiff must prove the actual loss
suffered. Any failure to tender further evidence or to prove damage for such actual
loss will result in the refusal of the court to award damages notwithstanding the said
phrase in s 75.
▪ It is important to note that the Federal Court drew a distinction between those cases
in which damages can be assessed according to settled rules and those cases in which
there is no measure of damages employable. In those cases where damage can be
assessed according to settled rules, the failure to bring evidence to prove the losses
resulted in the rejection of the claim for damages.
▪ Where there is no known measure to assess loss, an innocent party is excused from
having to prove actual loss. An instance of such cases is Sakinas Sdn Bhd v Siew
Yik Hau & Anor [2002] 2 AMR 1953; [2002] 5 MLJ 497. which concerned a claim
for liquidated damages for delay in completion of property covered by the Housing
Developers (Control and Licensing) Regulations 1989.
▪ The High Court held that a delay in completion of a construction project (such as the
instant case) belongs to the first class of cases, that is, cases where the evidence shows
some real loss which is not too remote but it is difficult for the court to assess the actual
loss because there is no known measure of damages employable. The losses suffered by a
purchaser for delay in completion include the deprivation of early enjoyment of the
premises, having to pay the loan instalments, incurring alternative rental costs as well as
being deprived of the potential rental if the purchaser had chosen to rent it out.
▪ Further, it is difficult to prove the rental he would have obtained where the entire
development project has been delayed as there is no case on which to base a fair
comparison. Thus, in such cases, actual proof of loss is not necessary, and all that is
required is for the court to determine whether the sum agreed upon constitutes reasonable
compensation. In this case, the 1989 Regulations had already prescribed a fair method of
calculating liquidated damages for late delivery. The standard formula of 10% of the
purchase price as liquidated damages is an acceptable benchmark in the business
community and is not excessive. Thus, the liquidated damages prescribed in the agreement
constituted reasonable compensation and the respondents were entitled to it.
▪ The Federal Court's decision in Selva Kumar has been followed in many cases
on s 75 of the Contracts Act. However, there are some High Court decisions that
have preferred a literal interpretation of s 75.
▪ In the recent decision of Cubic Electronics Sdn Bhd (in liquidation) v Mars
Telecommunications Sdn Bhd [2019] CLJ 723 (“Cubic Electronics”), the apex
court of Malaysia revisited the principles on forfeiture of deposits and the
treatment of liquidated damages clauses in contracts.
▪ In Lebbey Sdn Bhd v Tan Keng Hong & Anor [2000] 1 AMR 15 the High
Court held that s 75 should be interpreted literally and that the courts must give
effect to the principle of freedom of contract and bind the parties to what they
have agreed as long as the agreed damages is reasonable. Further, to limit s 75 to
cases where damages are difficult to assess is illogical. The Court used as an
example, Illustration (a) in s 75 which clearly shows that liquidated damages are
permissible even when actual damages can be proved. In any event, the Court
held that even if it was wrong on the above, the facts of the instant case are
distinguishable from the case of Selva Kumar.
deposit
▪ The function of a deposit was explained by Cotton LJ in Howe v Smith (1884)27 Ch D 89 as
serving two purposes.
▫ First, the deposit is treated as a guarantee for performance. Thus, in a sale and purchase
agreement, a deposit made by the purchaser shows that he is serious about the transaction.
The deposit provides some form of assurance to the vendor that the purchaser will perform
his part of the contract. If the purchaser breaches the contract, the vendor is entitled to
forfeit the deposit.
▫ Second, if the purchaser performs his part of the contract, the deposit goes towards part
payment of the purchase price.

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▪ In Sun Properties Sdn Bhd & Ors v Happy Shopping Plaza Sdn Bhd [1987] 2 MLJ 711, SC the
Supreme Court referred to Howe v Smith and explained the role of deposits as follows:
▫ The expression "as a deposit and part payment of the purchase money" always relates to the
two alternatives that in the event of the purchaser making default the money is to be forfeited
and that in the event of the purchase being completed the sum is to be taken as part payment.
▫ A deposit is not merely a part payment but is also an "earnest" money to bind the bargain
entered into and creates by fear of its forfeiture a motive in the payer to perform the rest of
the contract

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▪ An important case on forfeiture of deposit is the Federal Court decision in Morello Sdn Bhd v
Jaques (International) Sdn Bhd [1995] 1 AMR 873; [1995] 1 MLJ 577, FC.
▫ This case is significant because it allowed the seller to "forfeit" an unpaid deposit. In this
case, the appellant agreed to purchase from the respondent a machine which was to be
installed at the appellant's premises.
▫ The sale and purchase agreement provided that 10% of the purchase price would be paid as a
"deposit" on the signing of the agreement. However, there was no express provision for the
forfeiture of this initial payment in the event of the appellant's breach. The appellant failed to
pay the sum stated as deposit on the date the agreement was signed but the respondent still
proceeded to install the machine. Finally, no payment was made by theappellant. The
respondent terminated the contract and commenced proceedings against the appellants.

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▪ The Federal Court held that the initial payment which was expressly stated to be a deposit was a true
deposit. The respondent was entitled to obtain the unpaid deposit although there was no express
provision in the contract on forfeiture of deposit. The Court considered the terms of the agreement as
a whole, the surrounding circumstances as well as the label attached by the parties to the initial
payment as a "deposit" and held that in this case, the initial payment made was a deposit as
distinguished from the other four instalment payments. Further, the sum paid was within the range of
10% of the purchase price which was considered reasonable for an amount stipulated as a deposit.
▪ The decision in Morello as to whether a deposit is a true deposit was followed by Constrajaya Sdn
Bhd v Johor Coastal Development Sdn Bhd [2002] 6 MLJ 115. Applying the principles in Morello to
the terms of the agreement in the instant case, the High Court held that the absence of the word
"deposit" coupled with the repeated usage of the word "instalments" clearly established that the initial
payment in this case was not a deposit which can be forfeited. The initial payment is in the nature of
instalment payment as part payment towards the purchase price.

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Recovery of deposits
▪ There is no statutory definition for a true deposit under the Act and therefore it was necessary for
the Court to consider the principles of law applicable to forfeiture of deposits bearing in mind
section 75 of the Act.
▪ A deposit which is not merely part payment but also a guarantee of performance is generally not
recoverable.
▪ Whereas any money paid in advance of performance and as part-payment of the contract price is
generally recoverable.
▪ Whether a payment is part payment of the price or a deposit is a question of interpretation that
turns on the facts of the case and the usual principles of interpretation apply.
▪ Once it has been ascertained that the payment made is a deposit, the said sum is subject to section
75 of the Act.
▪ What this means is that, the next step is to determine whether the deposit sum is reasonable.

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▪ In determining whether or not the deposit is reasonable under section 75 of the Act, the concepts of
“legitimate interest” and “proportionality” as enunciated in the joined cases of Cavendish Square
Holding BV v Makdessi and ParkingEye v Beavis [2015] UKSC 67 (“Cavendish”) are relevant.
▪ Once the innocent party has demonstrated that it has a legitimate interest to safeguard and that the
said interest is proportionate to the interest identified, the onus then shifts to the defaulting party to
show that the forfeited deposit is excessive.
▪ In short, the burden to demonstrate whether the forfeited deposit is reasonable or otherwise lies
with the defaulting party.

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▪ Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd [2019] CLJ 723
(“Cubic Electronics”), the apex court of Malaysia revisited the principles on forfeiture of deposits
and the treatment of liquidated damages clauses in contracts.
▫ Cubic Electronics Sdn Bhd (“Cubic”) was the owner of a piece of land in Melaka together
with the plant and machinery on the land (“properties”). When Cubic was wound up, the
properties were put up for sale by way of an open tender exercise. Prior to the open tender
exercise, Mars Telecommunications Sdn Bhd (“Mars”) offered to purchase the properties for
RM90,000,000.00. Mars also offered an initial earnest deposit of RM1,000.000.00 which it
paid to Cubic. The liquidators accepted Mars’s offer and did not proceed with the open
tender exercise. The acceptance of Mars’s offer was subject to a term that the sale and
purchase agreement (“SPA”) must be executed within 30 days from 7 October 2011, failing
which the earnest deposit would be forfeited as liquidated damages and not by way of a
penalty.

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▪ The Federal Court then distilled the principles that it had laid down into the following propositions:
▫ If there is a breach of contract, any money paid in advance of performance and as part payment is generally
recoverable by the payer. A deposit paid which is not merely part payment but also a guarantee of
performance is generally not recoverable.

▫ Whether a payment is part payment of the price or a deposit is a question of interpretation that turns on the
facts of a case.

▫ A deposit is subject to section 75 of the Act.

▫ In determining what amounts to “reasonable compensation” under section 75 of the Act, the concepts of
“legitimate interest” and “proportionality” as enunciated in Cavendish are relevant.

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Continue…
▪ A sum payable in breach of contract will be held to be unreasonable compensation if it is extravagant and
unconscionable in comparison with the highest conceivable loss which could possibly flow from the breach.

▪ Section 75 of the Act allows reasonable compensation to be awarded irrespective of whether actual loss or damage is
proven.

▪ The initial onus lies on the party seeking to enforce a damages clause under section 75 to adduce evidence that
firstly, there was a breach of contract and that secondly, the contract contains a clause specifying a sum to be paid
upon breach. Once these 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.

▪ If there is a dispute as to what constitutes reasonable compensation, the burden of proof falls on the defaulting party
to show that the damages clause, including the sum stated therein, is unreasonable.

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▪ Cubic Electronics is a significant decision as it restates the law regarding deposits and damages
clauses in Malaysia. The decision makes it clear that both areas are subject to section 75 of the Act
and lays down the burden of proof under section 75 in a manner that is fair and logical.

▪ The case lays to rest the perception that arose from Selva Kumar that there is, in general, a legal
requirement for an innocent party to prove actual loss in order to determine what amounts to
reasonable compensation.

▪ Cubic Electronics also aligns the legal position in Malaysia to the current position in England and
India.

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Any questions?

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