By Lam Wai Loon and Serene Hiew Mun Yi
Harold & Lam Partnership
T
he Malaysian Federal Court has recently,
in the case of Cubic Electronics Sdn Bhd
(in liquidation) v Mars Telecommunications
Sdn Bhd [2019] 2 CLJ 723 decided on the often
debated point of law relating to the application
and effect of liquidated damages clauses.
While this recent Federal Court decision does
not overrule the previous judgment of the Federal
Court in Selva Kumar a/l Murugiah v Thiagarajh
a/l Retnasamy [1995] 1 MLJ 817, the Federal
Court has certainly clarified the decision in Selva
Kumar in regard to the interpretation of Section 75
of the Contracts Act 1950.
BEFORE CUBIC ELECTRONICS
Prior to the Federal Court’s decision in Cubic
Electronics, the courts have consistently followed
the interpretation of Section 75 of the Contracts
Act 1950 as laid down in Selva Kumar, which held
(among others):
● ●
Although Section 75 of the Contracts Act
1950 provides that an innocent party
may receive reasonable compensation
‘whether or not actual damages or losses
are proved to have been caused thereby’,
the Federal Court held that those words
ought to be given a restricted construction.
As such, an innocent party who is claiming
for actual damages in an action for breach
of contract must prove actual damages/
losses or reasonable compensation in
accordance with the principles in Hadley v
Baxendale [1943-60] All ER Rep 461.
● ●
An exception to the above would be where
the court finds it difficult to assess the
actual damages/losses as there is no
known measure of damages employable.
Nevertheless, the evidence ought to still
show some real loss which is not too
remote.
Due to the restricted interpretation in Selva
Kumar, even if an innocent party succeeds in
proving a breach of contract, the failure to prove
actual damages/losses will result in the refusal
of the court to award such damages. Even if the
contract contains a liquidated damages clause
which stipulates a sum to be paid in the event of
a breach, the innocent party will still have to prove
actual damage/loss.
The above position was also confirmed in the
Federal Court case of Johor Coastal Development
Sdn Bhd v Constrajaya Sdn Bhd [2009] 4 MLJ
445.
DECISION IN CUBIC ELECTRONICS
After more than 20 years since Selva Kumar, the
Federal Court has decided to adopt a more liberal
interpretation of Section 75 of the Contracts Act
1950, in line with the position taken in other
common law jurisdictions.
In Cubic Electronics, the issue before the
Federal Court was regarding forfeiture of a deposit
(as agreed liquidated damages). Nevertheless,
the Federal Court went on to clarify the law on
liquidated damages clauses under Section 75 of
the Contracts Act 1950:
● ●
As Section 75 of the Contracts Act 1950
allows the innocent party to reasonable
compensation ‘whether or not an actual
damage or loss is proved’; proof of an
21
Recent Federal Court
Decision on Liquidated
Damages Clauses