Claiming LAD under Construction Contract – Do You Need to Prove Damages?

ARC News   •   April 02, 2020

Liquidated and Ascertained Damages (“LAD”) is commonly found in construction contract as a pre-determined and agreed amount between the contracting parties in the event of the delay in the completion of works. The nature of a LAD clause is that once the contractor fails to complete the scope of work within the agreed timeline, the counter party is able to claim for LAD without the need to prove actual loss suffered. This is in line with the spirit of Section 75 of Contracts Act 1950 (“CA 1950”) which states that:

“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.”

Historically, the Federal Court in the case of  Selva Kumar Murugiah v Thiagarajah Retnasamy [1995] 1 MLJ 817 (“Selva Kumar’s case”) held that an innocent party who claims for damages in the event of breach of contract must prove actual damage suffered by him or reasonable compensation which he should receive. The court would refuse to award damages if the innocent party failed to prove the damages. Nevertheless, if the damage is not measurable and the evidence clearly shows some real loss suffered by the innocent party, substantial damages which are reasonable and fair shall be awarded by the court to the innocent party.

 

New Position in Assessing Damages

The position in Selva Kumar’s case had been override by the recent judgment in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd [2019] 6 MLJ 15 (“Cubic Electronics’ case”). The Federal Court ruled that it is not necessary to prove actual loss or damage in every case where an innocent party sought to enforce a LAD clause in a contract. Section 75 of CA 1950 allowed reasonable compensation to be awarded by the court irrespective of whether actual loss or damage was proven. Thus, once an innocent party seeking to enforce a LAD clause had established that there was a breach of contract and that the contract specified a sum to be paid upon such breach, the innocent party is entitled to receive a sum not exceeding the amount specified irrespective of whether actual damage or loss was proven subject always to the defaulting party proving that the damages clause, including the sum stated therein, if any, was unreasonable.

The Federal Court further held that in determining reasonable compensation, it is necessary for the court to adopt a common-sense approach by taking into account the legitimate interest which an innocent party might have and the proportionality of a LAD clause. In other words, reasonable compensation could be deduced by comparing the amount that was payable on breach with the loss that might be sustained if indeed the breach had occurred. The standard to assess reasonableness is that there must not be a significant difference between the level of damages agreed in the contract and the level of loss or damage which is likely to be suffered by the innocent party.

 

Application of Section 75 of CA 1950 to Statutory Contracts?

In the recent decision of Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui [2019] MLJU 693 (“Macvilla’s case”), a purchaser of a condominium brought a claim against the developer before the Tribunal of Homebuyers Claims (“Tribunal”) for ascertained damages amounting to RM38,732.06 due to the delay in delivery of vacant possession of the property and common facilities. The sale and purchase of the property was concluded under the schedules of the Housing Development (Control and Licensing) Regulations 1989.

Though the purchaser failed to file any documents to support his claim for the damages before the Tribunal, the Tribunal nonetheless gave an award in favour of the purchaser for LAD amounting to RM32,011.79. The developer’s application for judicial review at the Kuala Lumpur High Court was dismissed resulting in the current appeal before the Court of Appeal.

In interpreting Sections 74 and 75 of CA 1950, the Court of Appeal held that Section 74 applies to the cases where the compensation sum is not stipulated in the contract while Section 75 applies to cases where the compensation sum is clearly stipulated in the contract. The Court of Appeal set out the methodology for assessment of compensation as below:

(a)           When there is an objection by the defaulting party that the sum stipulated towards damages for breach of contract is a penalty, the innocent party has the duty to prove the actual damage or loss.

(b)           If the actual damage or loss is proved by the innocent party, the innocent party is entitled to recover the damage not more than the stipulated sum and the compensation awarded must be a reasonable compensation.

(c)            If the innocent party is not able to prove the actual damage or loss, the court may exercise discretion to award a reasonable compensation which must not exceed the stipulated sum.

(d)           In exercising the discretion, the court may award reasonable compensation based on market practices. For instance:

(i)            LAD of 10% of the value of the property or according to the market practice may be regarded as reasonable;

(ii)           in case of industry related to construction and/or Housing Developers, etc. governed by Standard Form Contract pursuant to a statutory provision or by reputable institutions of the industry, such as PAM or CIDB, the courts should give due consideration to the agreed terms and the LAD stipulated should be recognized, unless there are compelling reasons not to do so.

(e)           As a matter of policy, the courts should not put the innocent party to strict proof at the expense of the public purse to benefit the defaulting party. This is an important consideration as in cases of major construction contract, it will take much of courts’ time and expense for the innocent party to prove his damage.  As such, it is best for the court to deal with the issue of compensation summarily to satisfy the stipulated sum is reasonable, according to the market practice.

The Court of Appeal further held that amongst others the Selva Kumar’s case and Cubic Electronics’ case have no relevance to the facts before the court as it deal with mixed jurisprudence related to ‘Prepaid Payments’ and ‘Post Payment as to Damages’, without making a distinction to its applicability according to the statutory mandate. In view of the above, the matter before the Court of Appeal was dismissed.

 

Conclusion

Due to the different views applied by the Court of Appeal in Macvilla’s case, more confusions arose as to the need to prove actual damage in future LAD cases and the methodologies to be adopted by court in assessing reasonable compensation.  As the Macvilla’s case was decided at Court of Appeal, it remains to be seen as to whether a further apex court decision will be rendered to provide greater clarity on this subject.

Despite the above, whether or not confusions arise as to the interpretation of Section 75 of CA 1950, the decision in Cubic Electronics’ case and Macvilla’s case nonetheless bear a significant impact on the party who brought the matter before the court (i.e: developer or purchaser). It will be a completely different ball game depending on which party a lawyer is representing.

 

This Article is co-written by Yeo Shu Pin (Partner) and Serene, Tee Jia Qing (Legal Executive) of Messrs. Afif Rahman & Chong

Disclaimer: Every attempt to ensure the accuracy and reliability of the information provided in this publication has been made. This publication does not constitute legal advice and is not intended to be used as a substitute for specific legal advice or opinions. Please contact the authors for a specific technical or legal advice on the information provided and related topics.

2020-04-02T06:34:15+00:00