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

Postscript-3: UPDATES, it was interesting to note that in this case[1], the FC held among others, the LD clause in the standard HDA SPA Schedule H, although mirrored s.75, Contract Act 1950, need not necessarily follow the findings of Cubic Electronics v Mars Telecommunication[2], which referred to forfeiture of deposit; instead warrant proof of actual loss. This findings implied that the Cubic decision cannot be applied across the board, including those of the construction dispute. As it stands, this law is remained unsettled.

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[1] Chong Nge Wei & Ors v Kemajuan Masteron Sdn Bhd [2022] 1 LNS 581
[2] [2019] CLJ 723 

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Postscript-2 [Cubic’s Reversal of Burden of Proof is to be Applied Prospectively]: The Malaysian Federal Court has taken great length again, to contemplate the issue of damages versus penalty clause[1]; revisiting Cubic (supra)[2]; in determining that cases decided by the court of first instance, prior to Cubic (supra), will be taken as ‘prospective approach’[3]; and not ‘retrospective in nature’; to apply retrospectively[4], is to allow parties to prepare and argue their case based on the ‘burden of proof’ in the trial stage[5].

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[1] Plenitude Drive (M) Sdn Bhd v Tekun Nasional [2021] Civ App. 02(f)-92-10/2018(W)
[2] Para 38, Plenitude (Supra): Tekun must adduce evidence to prove that the damages claimed by Plenitude is unreasonable.
[3] Ibid: Selva Kumar (supra) and Johor Coastal (supra) should not be applied […]; Para 33, Plenitude (Supra): Ling Peek Hoe v Ding Siew Ching [2017] 7CLJ641
[4] Sinnaiyah & Sons Sdn Bhd v Damai Setia Sdn Bhd [2015] 5MLJ1
[5] Para 32, Plenitude (Supra)

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Postscript: Many things had happened to the application of law pertaining to Liquidated Damages (‘LD’). I take the opportunity to share what has happened since in our local scene:
 
Provision for late completion damages is common in the construction industry.[1] To avoid dispute on quantum and to allow an accurate estimates on cost, liquidated damages LD was adopted where the quantum is a genuine pre-estimate subject otherwise for court to ascertain.[2] It removes the need to proof ‘actual loss’ only if deemed ‘disproportionate’ it will be taken as penalty clause.[3] This evolves from the fact that penalty clauses are unenforceable.[4] On account that the ‘pre-estimated’ loss bear no relation to the loss that might have occurred. [5] Difference between LD and penalty clause may be straightforward in theory but difficult in application.[6] LD also puts a limit (cap) on damages that may be considered unfair under UCTA[7], under the UK’s provision as mentioned in obiter, OfirScheps.
 
While the Cavendish Square decision was upheld in Malaysia via Cubic Electronics, Singapore’s departed from the Cavendish Square approach, in Leiman v Noble Resources[8] and another[9], the Appeal Court reaffirmed the principle set out in Dunlop Pneumatic Tyre v New Garage & Motor[10] that LD is not a penalty considering the contractual terms, if the amount of LD did not exceed greatest conceivable loss that arisen from the breach, in contrast to the Cavendish Square approach where the amount of LD exceeded the greatest conceivable loss that arisen from the breach, is still not a penalty clause. This is to protect the “legitimate interest” of the innocent party. The Singapore court viewed such term to be too vague for commercial interests. In a ‘nutshell’, a LD clauses can be considered a “genuine pre-estimate” of loss and not a penalty, if only the employer, during tender, could furnish actual calculations as to how the expected loss is computed, instead of leaving it out to the contractor to figure it, themselves, as implied in Malaysian’s Cubic Electronics approach.
 
Another, is the question of whether LD clause which is void limits the contractor for general damages? The English court attempts to uphold pre-determined damages agreement between the parties but such LD clauses may tend to be voided under various circumstances such as ‘time at-large’. The question is, will ‘general damages’ also be capped at LD levels? In one-case[11], it was held that if the LD is void, it shall still act as the cap for general damages. In contrast, a Singapore case[12] a contractual LD cap will not constrain the recovery of general damages. The law on such is yet to be settled.
 
Yet another case[13], the UK Supreme Court contemplated the issues, one, whether liquidated damages were payable under this clause in respect of work which had not been completed before the contract was terminated? Two, whether “negligence” in the exception means the tort of negligence or whether it includes breach of the contractual duty of skill and care? And three, whether liquidated damages are subject to a cap in the contract on the amount of recoverable damages? The court held that, for issue one, accrual of liquidated damages comes to an end on termination of the contract; issue two, English law “negligence” covers both the separate tort of failing to use due care and a breach of the contractual provision to exercise care [extra contractual obligation]. Parties must seek damages for breach of contract under the general law; and three, LD clause does not need to provide for it.

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[1] Multiplex Constructions v Abragus(1993-94)33NSWLR504
[2] Cellulose Acetate Silk v Windes Foundry[1933] AC20
[3] Cavendish Square v Talal ElMakdessi and Parking Eye v Beavis[2015] UKSC67
[4] Dunlop Pneumatic Tyre v New Garage Motor[1915] AC79
[5] Johnson v Johnson[1989] 1WLR1026
[6] Alfred McAlpine v Tilebox[2005] EHWC541
[7] Unfair Contract Terms Act1977
[8] (2020)SGCA 52
[9] Denka Advantech v Seraya Energy (2020)SGCA119
[10] [1915]AC79
[11] Eco World – Ballymore Embassy Gardens v Dobler [2021]EWHC2207TCC
[12] Crescendas Bionics v Jurong Primewide (2021)SGHC189
[13] Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230

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Attended a talk by the Society of Construction Law, in AIAC, on the subject matter of Liquidated Damages post Cubic Electronics v Mars Telecommunications[1]. Speakers were mostly lawyers with one representing the contractor, MBAM. Wonder why Architects, QS and Engineers were excluded from giving their views?
 
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 Retnasamy[2], 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.
 
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.

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[1] [2019] CLJ 723
[2] [1995] 1 MLJ 817