The Court of Appeal in its grounds of judgment dated 26 July 2019 in Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui & Another has revived the question of whether there is a need to prove actual loss where there is a liquidated ascertained damages clause.
The earlier Federal Court decision in Cubic Electronics had concluded that for liquidated damages clause, proof of actual loss is not mandatory. The onus was on the defaulting party to show that the liquidated ascertained damages clause was unreasonable.
In Macvilla, the Court of Appeal now sets out the method of interpreting section 75 of the Contracts Act 1950 in applying the liquidated ascertained damages clause.
The dispute was between the property developer and the purchaser of a condominium. The purchase brought a claim against the developer before the Tribunal of Homebuyers Claims for damages for late delivery of the property. This arose from a sale and purchase agreement as prescribed under the schedules of the Housing Development (Control and Licensing) Regulations 1989.
The purchaser had not filed any documents to support the quantum for the damages.
The Tribunal gave an award in favour of the purchaser for the liquidated ascertained damages of just over RM32,000.00.
The developer applied to the Kuala Lumpur High Court for judicial review of the Tribunal’s decision. The High Court dismissed the judicial review application and the developer appealed to the Court of Appeal.
Court of Appeal Findings
The Court of Appeal explained that there has been some confusion on the application of sections 74 and 75 of the Contracts Act 1950. Section 74 sets out the methodology to assess compensation for breach of contract and it has nothing to do with prepaid payments (i.e. deposits) under a contract. Section 74 is said to be partly a statutory enunciation of the rule in Hadley v Baxendale.
The section 74 assessment applies in cases where a sum as to damages is not fixed. Section 75 applies to a case where a sum as to damages has been fixed but the defaulting party complains that the clause is a penalty clause.
The Court of Appeal set out this methodology when assessing compensation under a liquidated damages clause:
- If there is a stipulated sum as agreed damages, there is a presumption that it is a penalty. If the defaulting party agrees to the clause, there is no issue.
- If the defaulting party objects to the clause, the innocent party has an obligation to prove loss and damages.
- If the innocent party does not succeed wholly or partly, the courts have a statutory discretion to provide reasonable compensation as opposed to nominal damages. In addition, the sum awarded cannot exceed the stipulated sum.
- In exercising discretion, the Courts can take into account market or industry practice. For instance, a LAD sum of 10% of the value of the property may be a reasonable compensation according to market practice. Or for standard forms contract pursuant to the Housing Developers Act or reputable institutions such as PAM or CIDB, the Courts should give due weight to the agreed terms and the liquidated sum stipulated unless there are compelling reasons not to do so.
- Finally, as a matter of policy, the Courts should not put the innocent party to struct proof at the expense of the public purse to benefit the defaulting party. Like in cases of a major construction contract, it will take much of Courts’ time and expense for the innocent party to prove his damages. It is best for the Court to deal with the issue of compensation summarily to satisfy itself that the stipulated sum is reasonable according to market practice.
The Court of Appeal also commented that the trilogy of cases of Selva Kumar, Johor Coastal and Cubic Electronics had caused confusion in this area of the law. The three cases dealt with mixed jurisprudence related to prepaid payments and post payment as to damages. Therefore, the Court of Appeal held that these three cases had no relevance to the facts of this case as well as to the interpretation of section 75 of the Contracts Act 1950.
In the end, the Court of Appeal dismissed the appeal.
It remains to be seen if there will be a further Federal Court decision to clarify the seemingly different views between the Court of Appeal in Macvilla and the view in Cubic Electronics.
It is correct that the facts of Selva Kumar, Johor Coastal and Cubic Electronics all involved pre-payment or deposit payments under a contract. There was then an attempt to forfeit those deposits and section 75 had to be applied. Those cases were not directly interpreting a liquidated damages clause.
In applying the methodology of Macvilla in the future, it appears that there may be uncertainty in whether strict proof of loss is still required and how should the Courts interpret reasonable compensation. This is more so with the apparent application of assessing reasonable compensation in a summary way only.
We will have to wait for future decisions to clarify the positions of Cubic Electronics and Macvilla.