INGENIEUR
actual loss is not mandatory in order for the
court to award damages.
● ●
In the event the innocent party is able to
show a breach of contract and that the
contract contains a liquidated damages
clause, then the innocent party would be
entitled to reasonable compensation not
exceeding the sum stated in the clause.
● ●
The burden then shifts to the defaulting
party to show that the sum stated in the
liquidated damages clause is unreasonable.
A sum would be considered as unreasonable
compensation if it is extravagant and
unconscionable in amount in comparison
with the highest conceivable loss which
could possibly flow from the breach.
● ●
Even though proof of an actual loss
is not determinative of ‘reasonable
compensation’, evidence of an actual
loss would be useful as a starting point in
determining whether the compensation is
a reasonable one. There should not be a
significant difference between the damages
stipulated in the contract and the level of
loss/damage which is likely to be suffered
by the innocent party.
The Federal Court also clarified that if there
is a dispute as to what constitutes reasonable
compensation, the burden of proof lies with the
defaulting party to show that the damages clause
including the sum stated therein is unreasonable.
With this new Federal Court decision, it would
appear that an innocent party will have a higher
chance of receiving the stipulated sum in the
liquidated damages clause as compensation for
the breach of contract.
UNITED KINGDOM (UK)
While the Federal Court in Cubic Electronics
did refer to the UK Supreme Court’s position
in Cavendish Square Holding BV v Makdessi
[2015] UKSC 67 in determining what amounts to
‘reasonable compensation’, has the Malaysian
Federal Court truly adopted the position in
Cavendish? Before we conclude on that, we might
find it helpful to discuss briefly the position of
the law in the UK on the enforceability of penalty
clauses (liquidated damages clauses).
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VOL
2019
VOL 78
55 APRIL-JUNE
JUNE 2013
Prior to the UK Supreme Court’s transformative
decision in Cavendish, it has traditionally been
accepted that the test for determining whether
a particular liquidated damages clause is in fact
an unenforceable penalty clause would depend
on whether the stipulated sum was a genuine
pre-estimate of the loss that could be caused
by the breach of the relevant primary obligation
(Dunlop Pneumatic Tyre Co Ltd v New Garage &
Motor Co [1914-15] All ER Rep 739). The Dunlop
approach was predicated on the assumption
that the sole purpose of a liquidated damages
clause is to compensate the innocent party for
losses arising from a breach of contract. Thus, the
liquidated damages provision in a contract would
be unenforceable if the amount stipulated was
“extravagant, exorbitant or unconscionable”.
Though there were some developments on
this area by the English courts thereafter, the UK
Supreme Court finally shed a new light on the law
on penalty clauses in the case of Cavendish. The
UK Supreme Court reformulated the approach
towards penalty clauses as follows:
● ●
The penalty rule applies only to secondary
obligations, i.e. obligations triggered by
a breach of contract. The rule does not
apply to primary obligations (i.e. obligations
imposed on each party to procure whatever
he has promised to do).
● ●
If the penalty rule applies, the court will
then consider whether the consequence
of a breach is out of all proportion or
“unconscionable” or “extravagant” having
regard to the legitimate interests of the
innocent party.
The Cavendish approach is certainly wider
than the Dunlop approach in that it allows for
consideration of contractual purposes beyond
the desire to recover compensation for a breach,
including but not limited to considerations of
commercial interests. This shift in position also
indicates the reluctance of the courts to interfere
with the parties’ freedom of contract, as well as to
give legal certainty to the operation of a damages
clause.
Coming back to the Malaysian position, whilst
the Federal Court did decide that the concept
of ‘legitimate interest’ and ‘proportionality’ as
enunciated in Cavendish would be relevant
in determining what amounts to ‘reasonable