Reflecting on a Talk About Liquidated Damages post Cubic Electronics v. Mars Telecommunications

Attended a talk by the Society of Construction Law, in AIAC, on the subject matter of Liquidated Damages post Cubic Electronics Sdn Bhd (in liquidation) v. Mars Telecommunications Sdn Bhd. The speakers were mostly lawyers with only one representing the contractor, MBAM. Wonder why the Architects, QS and Engineers were excluded and not represented to give their views?

The recent Federal Court position on Liquidated Damages “LD” clause, under Section 75 of the Contract Act 1950 “CA1950”, has been shifted from the position held in the Selvakumar Murugiah v. Thiagarajah Retnasam, where the Employer would still have to prove loss to a more inclusive positions where the parties’ freedom of contract were mutually inclusive especially where parties have comparable bargaining power and are properly advised.

The court has taken an approach similar to the UK Supreme Court position in Cavendish where proper credence to the parties’ own ability to assess their own commercial position and in doing so, allowing the damages clause to be used as a “permissible risk allocation tool” of the following features: - 

1.   Allow the innocent party to demonstrate firstly, there was a breach of contract and secondly, the contract contains a damages clause.

2.   By reversing the burden of proof to the defaulting party to show that the damages clause is unreasonable;

3.   Factors such as “legitimate interest” and “proportionality” when determining damages sum to be “reasonable”.

Obviously these new sets of “tests” were taken as a purely legal point of view, such as the test of “legitimate interest”, “proportionality” and “reasonableness”. The construction industries, however, posed a different sets of complexities such as: -

1.   Where the contractors were often at the receiving ends not having a greater opportunity to negotiate, especially on the quantum for LD during the tender stage, risking over-pricing and so forth.

2.   Where the contractors now have to proof that the damages, imposed by the employer, are unreasonable as for most of the time, the quantum for damages were fixed by the employer based on undisclosed methodology.

3.   Where arbitrators and adjudicators, whom were basically, technical professionals, now having to consider these new sets of “tests” of “legitimate interest”, “proportionality” and “reasonableness” in granting their decisions.

4.   Where the QS and the Architects were to revamp the entire tendering processes, now having to deliberate the methods of quantifying LD.

5.   Where the employer would now having to pass the cost, arising from the risk assessment of LD to the end user, the buyer.

As at the end of the session, there is no obvious answer as to what constitute these new sets of “tests” of “legitimate interest”, “proportionality” and “reasonableness” for immediate use by the professionals in the construction industries.
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A passing remarks was made to PAM 2018 form with regard to Clause 22 but failed to deliberate further on Clause 22.2. A point to note, that Clause 22.2 was drafted to keep in mind that the LD stated in the Appendix is a genuine pre-estimate of loss and or damage which the employer will suffer in the event that the contractor is in breach… the parties agree that by entering into the contract, the contractor shall pay to the employer the said amount, if the same breaches due without the need for the employer to prove his loss and or damage unless the contrary is proven by the contractor.