LIQUIDATED AND ASCERTAINED DAMAGES (LAD)
AND REQUIREMENTS OF MITIGATION
YONG MEI LEE
UNIVERSITI TEKNOLOGI MALAYSIA
PSZ 19: 16 (Pind. 1/97)
UNIVERSITI TEKNOLOGI MALAYSIA
BORANG PENGESAHAN STATUS TESIS ♦
JUDUL: LIQUIDATED AND ASCERTAINED DAMAGES (LAD) AND
REQUIREMENTS OF MITIGATION
SESI PENGAJIAN : 2005 / 2006
Saya
YONG MEI LEE ___________________________
(HURUF BESAR)
mengaku membenarkan tesis (PSM / Sarjana / Doktor Falsafah)* ini disimpan di
Perpustakaan Universiti Teknologi Malaysia dengan syarat-syarat kegunaan seperti
berikut:
1. Tesis adalah hakmilik Universiti Teknologi Malaysia.
2. Perpustakaan Universiti Teknologi Malaysia dibenarkan membuat salinan untuk
tujuan pengajian sahaja.
3. Perpustakaan dibenarkan membuat salinan tesis ini sebagai bahan pertukaran
antara institusi pengajian tinggi.
4. ** Sila tandakan (9)
9
SULIT
(Mengandungi maklumat yang berdarjah
keselamatan atau kepentingan Malaysia seperti yang
termaktub di dalam AKTA RAHSIA RASMI 1972)
TERHAD
(Mengandungi maklumat TERHAD yand telah
Ditentukan oleh oprganisasi/ badan di mana
Penyelidikan dijalankana)
TIDAK TERHAD
Disahkan oleh
__________________________________________
(TANDATANGAN PENULIS)
Alamat Tetap:
22, Jalan Saga SD8/2E,
Bandar Sri Damansara,
52200 Kuala Lumpur.
Tarikh: ____________________
CATATAN:
__________________________________________________
(TANDATANGAN PENYELIA)
Assoc. Prof. Dr. Rosli Abdul Rashid
Nama Penyelia
Tarikh: ______________________
* Potong yang tidak berkenaan.
** Jika tesis ini SULIT atau TERHAD, sila lampirkan surat daripada pihak
berkuasa/organisasi berkenaan dengan menyatakan sekali sebab dan
tempoh tesis ini perlu dikelaskan sebagai SULIT atau TERHAD.
Š Tesis dimaksudkan sebagai tesis bagi Ijazah Doktor Falsafah dan
Sarjana secara penyelidikan, atau disertasi bagi pengajian secara kerja
kursus dan penyelidikan, atau Laporan Projek Sarjana Muda (PSM).
“We hereby declare that we have read this thesis and in our opinion this thesis is
sufficient in terms of scope and quality for the award of the degree of
Master of Science in Construction Contract Management.”
Signature
: .................................................................
Name of Supervisor I : .................................................................
Date
: .................................................................
Signature
: .................................................................
Name of Supervisor II : .................................................................
Date
: .................................................................
LIQUIDATED AND ASCERTAINED DAMAGES (LAD)
AND REQUIREMENTS OF MITIGATION
YONG MEI LEE
A thesis submitted in fulfilment of the
requirements for the award of the degree of
Master of Science in Construction Contract Management
Faculty of Built Environment
Universiti Teknologi Malaysia
MARCH, 2006
ii
DECLARATION
I declare that this thesis entitled “Liquidated and Ascertained Damages (LAD) And
Requirements of Mitigation” is the result of my own research except as cited in the
references. The thesis has not been accepted for any degree and is not concurrently
submitted in candidature of any other degree.
Signature
: .................................................................
Name
: .................................................................
Date
: .................................................................
iii
Specially dedicated to my family for your love and support
“With love and appreciation”
iv
ACKNOWLEDGEMENT
I would like to express my thankfulness to those who have helped me in
completing this thesis. First and foremost, I would like to express my sincere
appreciation to my supervisor, Associate Professor Dr. Rosli Abdul Rashid, for his
encouragement, support, guidance and dedication in assisting me to succeed in
writing out this thesis.
Special thanks to En. Jamaludin Yaakob for his concerns, comments and
professional advices. Besides that, I would also like to acknowledge Associate
Professional Dr. Maizon Hashim, En. Norazam Othman for their support and
motivation.
My appreciation also goes to all my classmates, Nor Jalilah Idris, Ling Tek
Lee, Dennis Oon Soon Lee; my friends Sze Nee, Voon Chiet and Wan Siang for their
great support, opinion and willingness to share their knowledge towards the
completion of my research.
Finally, I would like to extend my truthful appreciation to all my family
members, especially my father, the late Yong Weng Lok and my beloved mother,
Mdm. Kok Nyok Moi for her love and support.
Yong Mei Lee
March, 2006
v
ABSTRACT
When a project is late in completion due to contractor’s fault, the employer is
entitled to a contractual remedy by enforcing the Liquidated and Ascertained
Damages (LAD) provisions.
However, contractors often seek to challenge the
enforceability of LAD by alleging that the employers suffer no loss and that they are
under a duty to mitigate their losses. Therefore, the objectives of the research are to
determine the requirements of mitigation and the extent of the employer’s duty to
mitigate his losses when enforcing his right under the LAD clause. The objectives of
this research are achieved by analysing relevant laws governing LAD and mitigation.
The governing laws include relevant statutes, judicial decisions, and the Contracts
Act 1950. The research found that although the requirements is silent in standard
forms of contract, an employer is bound to comply with the requirements of
mitigation in enforcing LAD by taking all reasonable steps to mitigate his losses.
Furthermore, employer’s duty to mitigate his losses is governed by the principles of
mitigation. He is only bound to take all reasonable steps in order to comply with the
requirements and does not has to embark on hazardous or uncertain courses of action
that will cause him incur substantial expense or inconvenience, damage his
reputation, or breach any contracts, in order to mitigate. The reasonable actions to
mitigate will be determined on a case-to-case basis.
In short, this research is
expected to grab the attention of employers in enforcing LAD, so that they can
safeguard their claims.
vi
ABSTRAK
Apabila sesuatu projek mengalami kelewatan disebabkan kegagalan
kontraktor, majikan akan menuntut gantirugi tertentu dengan mengenakan klausa
Ganti Rugi Tertentu (Liquidated and Ascertained Damages, LAD).
Walau
bagaimanapun, kontraktor sentiasa mencabar pengenaan klausa tersebut dengan
menyatakan bahawa pihak klien tidak mengalami kerugian dan mereka adalah
dikehendaki mengurangkan kerugian yang dialami. Oleh yang demikian, kajian ini
dijalankan untuk mengenalpasti keperluan pengurangan kerugian dan sejauh
manakah klien perlu bertindak untuk mengurangkan kerugian yang dialami semasa
mengenakan haknya dibawah klausa LAD.
Objektif kajian ini dicapai dengan
menganalisa undang-undang yang mengawal LAD dan pengurangan.
Undang-
undang kawalan yang berkaitan termasuklah statut, keputusan mahkamah dan Akta
Kontrak 1950.
Kajian ini mendapati walaupun kehendak tersebut adalah tidak
dinyatakan, klien adalah terikat untuk mematuhi kehendak pengurangan semasa
mengenakan LAD dengan mengambil langkah-langkah yang munasabah bagi
mengurangkan kerugiannya.
Tambahan pula, hak klien untuk mengurangkan
kerugiannya adalah dikawal oleh dasar pengurangan. Klien hanya terikat untuk
mengambil langkah-langkah munasabah bagi mematuhi kehendak tersebut dan tidak
perlu bertindak sehingga menyebabkannya mengalami kerugian lanjutan atau
ketidaksenangan, menjejaskan reputasinya, atau memungkiri mana-mana kontrak
dalam
usaha
mengurangkan
kerugian.
Kemunasabahan
tindakan
mengurangkan kerugian ditentukan berdasarkan kes-kes yang tersendiri.
untuk
Secara
ringkasnya, kajian ini dijangka akan menarik perhatian klien semasa mengenakan
LAD, supaya mereka dapat mempertahankan tuntutan mereka.
vii
TABLE OF CONTENTS
CHAPTER
TITLE
PAGE
TITLE
i
DECLARATION
ii
DEDICATION
iii
ACKNOWLEDGEMENT
iv
ABSTRACT
v
ABSTRAK
vi
TABLE OF CONTENTS
vii
LIST OF CASES
xii
LIST OF FIGURES
xvi
LIST OF ABBREVIATIONS
xvii
LIST OF APPENDICES
xviii
CHAPTER 1 INTRODUCTION
1.1
Background Of Study
1
1.2
Problem Statement
6
1.3
Objectives Of The Study
8
1.4
Scope And Limitations Of The Study
8
1.5
Significance Of The Study
9
1.6
Research Methodology
9
1.6.1 Stage 1: Identifying Research Issue
10
1.6.2
Stage 2: Literature Review
10
1.6.3
Stage 3: Data And Information Collection
10
1.6.4
Stage 4: Research Analysis
11
viii
1.6.5
Stage 5: Conclusion And Recommendations 11
1.7
Research Flow Chart
12
1.8
Conclusion
13
1.8.1
Chapter 1: Introduction
13
1.8.2
Chapter 2: Liquidated And Ascertained
Damages (LAD)
13
1.8.3
Chapter 3: Mitigation
14
1.8.4
Chapter 4: Requirements of Mitigation and
The Extent of Mitigation in Enforcing
LAD Provisions
1.8.5
14
Chapter 5: Conclusion And
Recommendations
14
CHAPTER 2 LIQUIDATED AND ASCERTAINED DAMAGES (LAD)
2.1
Introduction
15
2.2
Breach Of Contract
17
2.2.1
19
2.3
2.4
2.5
Remedies For Breach Of Contract
Damages
20
2.3.1
General Principles of Damages
21
2.3.2
Types Of Damages
22
2.3.3 Statutory Provisions
24
2.3.4 Recovery Of Damages
26
2.3.4.1 Remoteness Of Damage
27
2.3.4.2 Measure Of Damage
29
2.3.5 Proof Of Damages
30
Liquidated And Ascertained Damages (LAD)
32
2.4.1
Express Contractual Provisions
32
2.4.2
Definition Of LAD
34
2.4.3
Merit Of The LAD Provision
35
2.4.4
Advantages Of LAD Provision
37
Component Costs Of LAD
38
2.5.1
39
Loss Of Income
ix
2.6
2.5.2
Financing Loss
40
2.5.3
Business Disruption Loss
40
2.5.4 Management Costs
41
2.5.5 Professional Fees
41
LAD And Penalties
41
2.6.1 Distinction Between LAD And Penalties
42
2.6.2
Pleading Cases In Distinguishing LAD
And Penalties
2.7
44
Liquidated And Ascertained Damages:
The Malaysian Position
46
2.7.1 Applicable Statutory Provision
46
2.7.2 Interpretation Of Section 75 Of
Contracts Act 1950
2.7.3
Recovery Of Liquidated And
Ascertained Damages (LAD)
2.8
47
Conclusion
51
53
CHAPTER 3 MITIGATION
3.1
Introduction
54
3.2
Definition Of Mitigation
55
3.3
General Rules And Principles Of Mitigation
55
3.4
Mitigation In Malaysian Position
57
3.5
The Duty To Mitigate
59
3.6
Limitation Of Mitigation Upon Recovery
Of Damages
63
3.7
Mitigation In Building Contracts
64
3.8
Significance Aspects In Relation To Mitigation
65
3.9
Conclusion
67
x
CHAPTER 4 REQUIREMENTS OF MITIGATION AND THE EXTENT
OF MITIGATION IN ENFORCING LAD PROVISIONS
4.1
Introduction
4.2
Requirements Of Mitigation in Enforcing LAD
Provisions
70
4.2.1 Malaysian Law
70
4.2.2
English Law
71
4.2.3
English Commercial Law
74
4.2.4
Requirements Of Mitigation In Building
Contracts
4.3
75
To What Extent That Employer Has To Mitigate
His Losses In Enforcing LAD Provisions
78
4.3.1 The Extent In Loss Mitigation
78
4.3.2
4.3.3
4.4
69
Reasonableness In Taking The Duty
To Mitigate
79
Bottom Line Of Mitigation
80
Conclusion
81
CHAPTER 5 CONCLUSION AND RECOMMENDATIONS
5.1
Introduction
83
5.2
Research’s Findings
83
5.2.1
Objective 1: To Determine The
Requirements Of Mitigation In Enforcing
The LAD Provisions in Construction
Contracts
5.2.2
84
Objective 2: To Determine The Extent That
Employer Has To Mitigate His Losses In
Enforcing LAD Provisions
85
5.3
Research’s Constraints
86
5.4
Suggestions For Further Research
86
5.5
Conclusion
87
xi
REFERENCES
89
APPENDICES
A
General Procedure in Recovery of Liquidated Damages
96
B
Clause 40 of the JKR Forms 203A (Rev 10/83)
99
C
Clause 22.0 of the PAM 1998 Forms
100
D
Clause 26 of the CIDB Form (2000 Edition)
102
E
Section 74-76 of Contracts Act 1950
104
F
Section 3, 5 of Civil Law Act 1956
110
G
Case 1: Joo Leong Timber Merchant v Dr Jasawant
Singh a/l Jagat Singh [2003] 5 MLJ 116
114
H
Case 2: Payzu Ltd. v Saunders [1919] 2 K.B. 581
123
I
Case 3: Selva Kumar a/l Murugiah v
Thiaragajah a/l Retnasamy [1955] 1 MLJ 817
127
xii
LIST OF CASES
CASE
PAGE
AMEV-UDC Finance Ltd. v Austin [1986] 162 CLR 170, 193
………15
Balfour Beatty Construction (Scotland) Ltd v Scottish Power plc
[1994] 71 BLR 20
………………………………………………28
Ban Hong Joo Mine Ltd. v Chen & Yap Ltd [1969] 2 MLJ 83
………19
Bhai Panna Singh v Bhai Arjun Singh [AIR 1929 PC 179] ......47, 48, 49, 53
Boyo v Lambeth London Borough Council [1994] ICR 727
Brace v Clader [1895] 2 Q.B. 253
………77
………………………………………60
British Westinghouse Electric Co. v Underground Electric
Railway Co. of London [1912] AC 673
Chiam Keng v Wan Min [1924] 5 FMSLR 4
………...…….19, 56, 78
………………………..4
Choo Yin Loo v Visuvalingam Pillay [1930] 7 FMSLR 135
Chou Choon Neoh v Spottiswoode [1869] 1 Ky. 216
Chulas v Kolson [1867] Leic.462
……4, 19
………………73
………………………………………73
Chung Syn Kheng Electrical Co Bhd. v Regional Construction
Sdn Bhd. [1987] 2 MLJ 763 ……………………………………4, 49
Dennis v Sennyah [1963] MLJ 95
..……………………………………..23
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd.
[1915] AC 79
..……………………………………....4, 16, 42
Fateh Chand v Balkrishan Dass AIR 1963 supreme court 1405
Frank & Collingwood Ltd v. Gates [1983] 1 Con LR 21
.……….5
…..…………..22
Gebruder Metel Mann GmbH & Co. KG v NBR (London) Ltd.
[1984] 1 Lloyd’s Rep 614
..……………………………………..62
xiii
Government of Malaysia v Thelma Fernandez [1967] 1 MLJ 194
............5
Government of Pakistan v Seng Peng Sawmills Sdn Bhd.
[1979] 1 MLJ 219
……………………………………………..66
Hadley v Baxendale [1854] 9 Ex 341 ………4, 24, 26, 27, 28, 30, 50, 51, 52
Hong Leong Co Ltd v Pearlson Enterprise Ltd (No 2 )
[1968] 1 MLJ 262
………..…………………………....23, 57, 58
Hopkins v Norcross plc [1993] 1 All ER 565)
..……………………77
Hua Khiow Steamship Co. Ltd. v Chop Guan Hin
[1930] 1 MC 175, 1 JLR 33 .………………………..…………….4
Hutchinson v Harris [1978] 10 BLR 19
……………………………..65
Joo Leong Timber Merchant v Dr. Jaswant Singh A/L Jagat Singh
[2003] 5 MLJ 116
.……………………...5, 76, 77, 82, 84, 87, 88
Kabatasan Timber Extraction Co. v Chong Fah Shing
[1969] 2 MLJ 6
..………………………………………….5, 59
Kemble v Farren [1829] 6 Bing 141
...…………………………....44
Khoo Hooi Leong v Khoo Chong Yeok [1930] A. C. 346
...……………73
Khoo Tiang Bee v Tan Beng Guat [1877] 1 Ky. 423
……………...73
Kilbourne v Tan Tiang Guee [1972] 2 MLJ 94
...……………………23
Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733 …77
Kon Thean Soong v Tan Eng Nam [1982] 1 MLJ 323
..…………….75
Kueh Sing Khay v Lim Boon Chuan [1950] SCR 23
...……………67
Larut Matang Supermarket Sdn. Bhd. v Liew Fook Yung
[1995] 1 MLJ 379
..…………………………………………….17
Law v Redditch Local Board [1892] 1 QB 127
...……………………43
Linggi Plantation Ltd v Jagatheesan [1972] 1 MLJ 89 ...4, 17, 47, 48, 49, 53
Malayan Credit Ltd. v Mohammed Kassim [1965] 2 MLJ 134
...……..5
Maredelanto Compania Naviera SA v Bergbau-Handel GmbH;
'The Mihalis Angelos' [1970] 3 WLR 601
……………………...77
Morello Sdn Bhd v Jaques (International) Sdn Bhd.
[1995] 1 MLJ 577 (also reported at [1995] 2 CLJ 23,
[1995] 1 AR 873 and [1995] 1 MAC 153)
……………………..67
Pacific Electrical Co Ltd v Seng Hup Electrical Co (S) Pte Ltd.
[1978] 1 MLJ 162
……………………………………………..66
Paradine v Jane [1647] Aleyn 26
………………………………………1
xiv
Pasuma Pharmacal Corp v McAlister & Co Ltd.
[1965] 1 MLJ 221
………………………………………65, 79, 81
Payzu Ltd. v Saunders [1919] 2 K.B. 581 ……...60, 61, 62, 66, 79, 81, 84, 87
Penang Port Commission v Kanawagi s/o Seperumaniam
[1996] 3 MLJ 427
………………………………………………76
Pilkington v Wood [1953] 2 Ch 770; [1953] 3 WLR 522 …..66, 68, 80, 82, 85
Public Works Commissioner v Hills [1906] AC 368
Robinson v Harman [1848] 1 Ex 850
...…………….45
…………………………...19, 28
Rockingham Country v Luten Bridge Co. [1929] US Ct of App
……….65
SEA Housing Corporation Sdn. Bhd. v Lee Poh Choo
[1982] 1 MLJ 324
……………………………………....30
Selva Kumar a/l Murugiah v Thiaragajah a/l Retnasamy
[1955] 1 MLJ 817
……………………3, 24, 50, 52, 53, 87
Selvanayagam v University of the West Indies
[1983] 1 WLR 585
…………………………………..64, 81
Smith Construction Co. Ltd. v Phit Kirivata [1955] MLJ 8 ………………19
Song Toh Chu v Chan Kiat Neo [1973] 2 MLJ 206 ………………………17
SS Maniam v The State of Perak [1975] MLJ 75
………………..4, 47, 48
Stanor Electric Ltd v R Mansell Ltd. [1988] CILL 399
………………44
Syarikat Batu Sinar Sdn. Bhd. & Ors v UMBC Finance Bhd.
& Ors. [1990] 3 MLJ 468
………………………………………73
Syed Jaafar bin Syed Ibrahim v Maju Mehar Singh Travel &
Tours Sdn. Bhd. [1999] 4 MLJ 413 ………………………………31
Tan Hock Chan v Kho Teck Seng [1980] 1 MLJ 308
………………19
Tansa Enterprise Sdn Bhd v Temenang Engineering Sdn Bhd.
[1994] 2 MLJ 353
………………………………………………58
Techno Land Improvements Ltd v British Leyland (UK) Ltd
[1979] EGD 519
………………………………………76, 77, 84
Tham Cheow Toh v Associated Metal Smelters Ltd [1972] 1 MLJ 171 ..28, 28
Toeh Kee Keong v Tambun mining Co. Ltd [1968] 1 MLJ 39
………28
T & S Contractors Ltd v Architectural Design Associated QBD
(Official Referee's Business) 16 October 1992
………………77
Victoria (Laundry Windsor) Ltd v Newman Industries Ltd
[1949] 2 KB 528
………………………………………………26
xv
Wearne Brothers (M) Ltd v Jackson [1966] 2 MLJ 155 ...4, 24, 25, 48, 49, 53
Wee Wood Industries Sdn. Bhd. v Guannex Leasing Sdn. Bhd
[1990] 2 CLR 1060
……………………………………………….4
West v Versil Ltd & Ors Court of Appeal (Civil Division)
………………77
Westwood v Secretary of State for Employment [1985] AC 20
………77
William Tompkinson & Sons Ltd. v Parochial Church Council of
St. Michael [1990] 6 Const. LJ 319 ………………………………64
Woon Hoe Kan & Sons Sdn. Bhd. v Bandar Raya Development Bhd.
[1972] 1 MLJ 75
………………………………………………17
WT Malouf Pty Ltd v Brinds Ltd [1981] 52 FLR 442
………………..4
Yerkey v Jones [1940] 63 CLR 649 ………………………………………19
xvi
LIST OF FIGURES
FUGURE NO.
TITLE
PAGE
1.7
Research Flow Chart
12
xvii
LIST OF ABBREVIATIONS
AC
-
Appeal Cases
AIR
-
All India Reports
Bing
-
Bingham Reports
BLR
-
British Law Reports
Con LR
-
Construction Law Reports
Ex
-
Exchequer Reports
FMSLR
-
Federated Malay States Law Reports
ICE
-
Institute of Civil Engineering
JLR
-
Johore Law Reports
KB (or QB)
-
King’s (or Queen’s) Bench
LAD
-
Liquidated and Ascertained Damages
Lloyd’s Rep
-
Lloyd’s List Law Reports
MC
-
Malayan Cases
MLJ
-
Malayan Law Journal
PAM
-
Pertubuhan Arkitek Malaysia
PC
-
Privy Council
PCC
-
Privy Council Cases
PWD
-
Public Work Department
SCR
-
Supreme Court Reports
SIA
-
Singapore Institute of Architects
SO
-
Superintending Officer
UTM
-
Universiti Teknologi Malaysia
WLR
-
Weekly Law Reports
xviii
LIST OF APPENDICES
APPENDIX
TITLE
PAGE
A
General Procedure in Recovery of Liquidated Damages
96
B
Clause 40 of the JKR Forms 203A (Rev 10/83)
99
C
Clause 22.0 of the PAM 1998 Forms
100
D
Clause 26 of the CIDB Form (2000 Edition)
102
E
Section 74-76 of Contracts Act 1950
104
F
Section 3, 5 of Civil Law Act 1956
110
G
Case 1: Joo Leong Timber Merchant v Dr Jasawant
Singh a/l Jagat Singh [2003] 5 MLJ 116
114
H
Case 2: Payzu Ltd. v Saunders [1919] 2 K.B. 581
123
I
Case 3: Selva Kumar a/l Murugiah v
Thiaragajah a/l Retnasamy [1955] 1 MLJ 817
127
CHAPTER 1
INTRODUCTION
CHAPTER 1
INTRODUCTION
1.1
Background of Study
A contract is an agreement enforceable by law. 1 When two or more persons
enter into a contract, their intention is normally to carry out the terms of contract as
promised. 2 As a general principle, once a party enters into a contract, he must perform his obligations strictly according to the terms of contract. 3 He is liable to answer for any of the obligations, which he has failed to discharge and it is no defence
to an action for incomplete performance that the party has done everything that can
be reasonably undertaken if the end result falls short of that required of the contract. 4
There are only two parties to a building contract: the employer and the contractor but due to the customary divisions of duties within the building process, several other persons are named. 5 Some of these are professional advisers to the em1
Section 2(h) of Contracts Act 1950.
Alsagoff, Syed Ahamad. (2003). Principles of the Law of Contract in Malaysia. Malyaisa: Malaysia
Law Journal Sdn. Bhd., pp.1
3
Chow, Kok Fong. (1988). An Outline of the Law and Practice of Construction Contract Claims. Singapore: Longman Singapore Publishers Pte. Ltd., pp.27
4
Paradine v Jane [1647] Aleyn 26
5
Turner, D.F. (1971). Building Contracts: A Practical Guide. London: George Godwin Ltd., pp.9
2
2
ployer, who are also given defined responsibilities and powers under the contract,
some of which may be quasi-judicial. 6 A breach of contract is essentially a non performance of a contractual obligation under conditions for which no legal excuse for
the non performance exists. 7 The ordinary remedy for breach of contract is an action
for damages; the innocent party is entitled to claim for a financial amount, which
would compensate him for the loss incurred as a result of the breach committed by
the other party. In the example of late completion, the usual redress afforded the
employer would be to award him liquidated damages calculated according to a rate
stipulated in the contract. 8 In exceptional cases, where a breach takes on a very serious nature so that it adversely affects some fundamental aspect of the contract, the
innocent party may under common law, bring the contract to the end. 9
Liquidated damages may as a provision in a contract, and therefore agreed
between the parties to the contract at the time if entering into it, which aims to determine in advance the extent of the liability for some future, specified breach. 10
Construction contracts frequently contain a “liquidated damages” clause in favour of
the owner. This typical liquidated damages clause provides that if the contractor
fails to complete the work by the agreed completion date, he will be required to pay
the owner a stipulated amount for each day thereafter until completion. 11
For example, clause 40 12 of PWD Forms 203A (Rev 10/83), and clause 22 of
PAM 98 13 provides a provision of Damages for Non-completion. Briefly, the provi-
6
Ibid.
Chow, Kok Fong. (1988). An Outline of the Law and Practice of Construction Contract Claims. Singapore: Longman Singapore Publishers Pte. Ltd., pp.28
8
Ibid, pp.29
9
Ibid.
10
Turner, D.F. (1971). Building Contracts: A Practical Guide. London: George Godwin Ltd., pp.17
11
Kenny, P. (2001, March). Liquidated Damages: how much of a threat can they be? Heavy construction News. Toronto: Mar 2001 vol.45. Iss.3. Pg.32. URL:http://proquest.umi.com/pqdweb?did37477610&sid-8&Fmt-3&clientld.21690&RQT-309&VName-PQD
12
If the Contractor fails to complete the Works by the “Date for Completion” stated in the Appendix
or within any extended time under Clause 43 hereof and the S.O. certificates in writing that in his
opinion the same ought reasonably so to have been completed the Contractor shall pay or allow the
Government a sum calculated at the rates stated in the Appendix as Liquidated and Ascertained Damages for the period during which the said Works shall so remain and have remained incomplete and
the S.O. may deduct such damages from any monies due to the Contractor.
7
3
sion indicates that in the event of late completion, the contractor shall pay to the employer the LAD a specified amount per day of delay until the completion date. The
employer may deduct such sum from any monies payable to the Contractor under
this Contract. In addition, the LAD is considered as the actual loss that will be suffered in breach f contract and the contractor agrees to pay the said sum without the
need of proving damages by the employer.
Statutory provision for liquidated damages in Malaysia is found in Section 75
of the Contracts Act 1950. 14
“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 contact reasonable
compensation not exceeding the amount so named or, as the case may be, the
penalty stipulated for”.
The Federal Court in Selvakumar a/l Murugiah v Thiagarajah a/l Retnasamy 15 held that the employer is required to prove his actual loss suffered in accordance with the general principles of proof of damages. The Federal Court, in interpreting Section 75 held that the plaintiff who is claiming for actual damages in an
action for breach of contract must still prove the actual damages or reasonable com13
22.1 If the Contractor fails to complete the Works by the Date for Completion of within any extended time fixed under Clause 23.0 or sub-clause 32.1 (iii) and the Architect certifies in writing that
in his opinion the same ought reasonably so to have been completed, then the Contractor shall pay to
the Employer a sum calculated at the rate stated in the Appendix as Liquidated and Ascertained Damages (LAD) for the Date for Completion or any extended date where applicable to the date of Practical
Completion. The Employer may deduct such sum as a debt from any monies due or to become due to
the Contractor under this Contract.
22.2
The Liquidated and Ascertained Damages stated in the Appendix is to be deemed to be as the
actual loss which the Employer will suffer in the event that the contractor as in breach of the Clause
thereof. The Contractor by entering into this Contract agrees to pay to the Employer the said
amount(s) if the same become due without the need of the Employer to prove his actual damage or
loss.
14
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (The PAM 1998
FORM). 2nd ed. Kuala Lumpur; Malayan Law Journal Sdn. Bhd., pp.195
15
[1995] 2 MLJ 817
4
pensation in accordance with the settled principles in the English landmark case of
Hadley v Baxendale. 16 Any failure to prove such damages will result in the refusal
of the court to award such damages. The Contracts Act s75 provides an instance in
which Malaysian law departs significantly from the line of English common law. 17
Under common law, a liquidated damages clause must comply with the ‘penalty’ principle establish by Lord Dunedin in the landmark case of Dunlop Pneumatic
Tyre Co Ltd v New Garage & Motor Co Ltd. 18 that:
“The essence of liquidated damages is a genuine covenanted pre-estimate of
loss.”
What is meant by the term ‘genuine pre-estimate’ was further explained in
WT Malouf Pty Ltd v Brinds Ltd 19 as:
“A genuine pre-estimate means a pre-estimate which is objectively of that
character: that is to say, a figure which may properly be called so in the light
of the contract and the inherent circumstances. It will not be enough merely
that the parties honestly believed it to be so.”
The court in Malaysia have concluded that the distinction between liquidated
damages and penalties does not apply, the situation being governed by section 75 of
the Contracts Act which has been held to have erased this distinction. 20
16
[1854] 9 Ex 341
Robinson, N.M., et.al. (1996). Construction Law in Singapore and Malaysia 2nd ed. Singapore: the
Butterworth Group of Companies., pp.244
18
[1915] AC 79
19
[1981] 52 FLR 442
20
See e.g. Choo Yin Loo v SK Visuvalingam Pillay [1930] 7 FMSLR 135, The Hua Khiow Steamship
Co. Ltd. v Chop Guan Hin [1930] 1 MC 175, 1 JLR 33; SS Maniam v The State of Perak [1957] MLJ
75; Wearne Bros (M) Ltd. v Jackson [1966] 2 MLJ 155; Linggi Plantation Ltd v Jagatheesan [1972]
1 MLJ 89, [1971] 2 PCC 749, reversing [1969] 2 MLJ 253, which in turn reversed [1967] 1 MLJ 177;
and Wee Wood Industries Sdn. Bhd. v Guannex Leasing Sdn. Bhd. [1990] 2 CLR 1060. See also the
Bruneian Case of Chung Syn Kheng Electrical Co Bhd. v Regional Construction Sdn Bhd. [1987] 2
MLJ 763 which, however, is not, with respect, wholly unambiguous. Cf Chiam Keng v Wan Min
17
5
In addition, there is a general duty requiring that reasonable steps to be taken
to mitigate losses flowing a breach particularly in the case of anticipatory breach. 21
The party who has failed to mitigate the losses cannot later recover any such loss
flowing from his neglect. 22 This is a long established principle applied in Kabatasan
Timber Extraction Co. v Chong Fah Shing. 23 The Federal Court held that, it was the
duty of the respondent to take reasonable steps to mitigate the damages caused by the
appellant when he failed to deliver logs to the mill but left them some 500 feet away.
This principle also applied in Joo Leong Timber Merchant v Dr. Jaswant Singh a/l
Jagat Singh. 24 The respondent counterclaimed for loss of rental income against appellant’s claim for the balance sum due for the completed building works was dismissed by the High Court due to respondent’s failure to show that he had taken all
reasonable steps to mitigate his damage.
Construction contracting is extremely time sensitive and timely completion of
a project is frequently seen as major criteria of a project success. 25 Owners lose opportunity and profits waiting for completion of late projects. 26 Hence, a liquidated
damages provision provides a straight forward method of calculating damages recoverable by an owner in the event of late completion. However, the recent position
seems to put more burdens to employer in his effort to impose LAD. The recent
case, Joo Leong Timber Merchant v Dr. Jaswant Singh A/L Jagat Singh 27 , employer
is now liable to take mitigation in enforcing LAD although it is silent in the provision
of LAD in the forms of contract. Failure in taking mitigation will cause the employer fail in recovering the LAD.
[1924] 5 FMSLR 4 at 14. But cf Malayan Credit Ltd. v Mohammed Kassim [1965] 2 MLJ 134 and
Government of Malaysia v Thelma Fernandez [1967] 1 MLJ 194. Reference may be also be made to
the Indian Supreme Court decision of Fateh Chand v Balkrishan Dass AIR 1963 supreme court 1405.
21
Vohrah, B. and Wu, Min Aun. (2003). The Commercial Law of Malaysia. Malaysia: Pearson Malaysia Sdn. Bhd., pp.179
22
Ibid.
23
[1969] 2 MLJ 6
24
[2003] 5 MLJ 116
25
Allen, P.E.(Jan, 1995). The Estimation of Construction Contract Liquidated Damages.
URL:http://www.library.findlaw.com.civil.remedies/damages/liquidated.damages./html
26
Ibid.
27
Supra.
6
As a result, the court is now applying the principle of mitigation in awarding
LAD and the employer should be prudent while imposing LAD, whereby they will
have to make sure that they fulfil the requirements of mitigation by taking reasonable
steps to mitigate his losses and damages upon the breach of contract by the contractor.
1.2
Problem Statement
Each of the standard form of contract provides for payment of an agreed sum
by the contractor when completion of work is not within the stipulated time. The
payment is known as liquidated and ascertained damages. The amount is usually recorded in the appendix to the form of a contract. 28 Liquidated damages are a sum,
which represents a genuine pre-estimate of the loss caused by the breach, that is, of
what is needed to put the plaintiff into as good a position as if the contract had been
performed. 29
The liquidated damages provisions in the usual standard forms of contract for
construction work is to stipulate a rate for each day of delay in completing the works,
clearly links the severity of delay to the quantum of damages payable. 30 Most standard forms of construction contract are drafted to permit the parties to fix the damages payable for late completion in advance. When these damages are a genuine preestimate of the loss likely to be suffered or a lesser sum, they can rightly be termed
as liquidated damages. 31
28
Ashworth, A. (2001). Contractual Procedures in the Construction Industry. 4th ed. England: Pearson Education Limited., pp.32
29
Burrows, A. S. (1987). Remedies for Torts and Breach of Contract. London: Butterworth & Co.
(Publishers) Ltd., pp.283
30
Chow, Kok Fong. (1988). An Outline of the Law and Practice of Construction Contract Claims.
Singapore: Longman Singapore Publishers Pte. Ltd., pp.159
31
Eggleston, B. (1997). Liquidated Damages and Extension of Time in Construction Contracts. 2nd ed.
London: Blackwell Science Ltd., pp.4
7
Most construction contracts provide a contractual mechanism, which allows
the employer to deduct liquidated damages from amounts due to the contractor. 32
For examples, in PAM 98 33 (clause 22), PWD 203A 34 (Clause 40), and CIDB 35
(Clause 26) provide a provision of Damages and Non-completion to enable the employer to recover their damages in the event of late completion by contractor. However, contractors often seek to challenge the enforceability of Liquidated Damages
clause 36 , which they consider that it has been wrongly deducted and alleged that employer actually suffered no loss in the event of delay and fails to mitigate his losses
in the event of breach. 37
Such challenges may cause an uncertainty to the employer, as it is not expressed in the provisions. Further, the employers may not be aware that they are obligated to take mitigation in enforcing LAD. Thus, this matter may give raise to
some queries, such as, whether the employer is bound to mitigate his loss in the event
of enforcing the LAD. Since all standard forms of contract are silent about the duty
to mitigate loss, then what are the rules that may override the provisions of LAD in
the contract? In addition, if the employer is really bound to comply with the mitigation rules, then what are the circumstances does the employer could take mitigation
and to what extent they should act to mitigate his losses?
Regarding the quantum of damages, whether the employer is entitled only for
the loss that he managed to mitigate, or he is totally not entitled to recover his loss if
he failed in taking the duty of mitigation. Furthermore, it may be doubted that what
are the circumstances that the employer is considered has conducted the said duty
and how does the tribunal make the decision on this matter.
32
Steve, Chan. (2004). Lecture 4: Duty to Mitigate, Constructive Acceleration, Challenges to Liquidated Damages. Bullet-Proof EOTs-with Particular reference to PWD/JKR standard Forms of Contract. 27 July, 2004. Kuala Lumpur: James R Knowles (M) Snd. Bhd., pp.17
33
Agreement and Conditions of Building Contract
34
Standard Form of Contract to be used where Bills of Quantities Form Part of The Contract
35
Standard Form of Contract for Building works (2000 Edition)
36
Steve, Chan. (2004). Lecture 4: Duty to Mitigate, Constructive Acceleration, Challenges to Liquidated Damages. Bullet-Proof EOTs-with Particular reference to PWD/JKR standard Forms of Contract. 27 July, 2004. Kuala Lumpur: James R Knowles (M) Snd. Bhd., pp.18
37
Ibid.
8
In short, whether the duty to mitigate should have a controlling influence on
the conduct of the innocent / injured party, or whether it is merely a method of assessing the recoverable loss and how does the mitigation may effect the enforcement
of LAD by the employer? As a result, it is important to investigate the actual position of employer in enforcing the LAD.
1.3
Objectives of the Study
The objectives of the study are:
1.
To determine the requirements of mitigation in enforcing the LAD
provisions in Construction Contracts.
2.
To determine the extent that employer has to mitigate his losses in enforcing LAD provisions.
1.4
Scope and Limitations of the Study
This research will be focused on following matter:-
1.
The provision of Liquidated and Ascertained Damages in the standard
forms of contract used in Malaysia, namely, JKR 203A, PAM98, and
CIDB 2000.
2.
Court cases related to the issue particularly Malaysian cases. Reference is also made to cases in other countries such as United Kingdom,
Brunei, Singapore, Australia, and Hong Kong.
9
1.5
Significance of the Study
The provision of LAD is provided in most standard form of building contracts in favour of the employer to recover their damages or losses due to delay in
completion. However, the contractor often seek to challenge the enforcement of
LAD is challenged by the contractor on certain grounds as before discussed. Such
challenge put the employer in an uncertain position while enforcing LAD although
the compensation for non-completion has pre-agreed by the contracting parties and
stipulated in the contract.
Therefore, this study is expected to unfold the queries that arise in the event
of enforcing LAD in relation to mitigation. Thus, an employer will be aware of their
obligations, rights, and duties in the event of recovering his damages or losses. In
short, the finding of the study could be used as guidance to the employer and putting
them in a better position in enforcing LAD. Finally, it is believed that the result will
also be capable to resolve disputes in relation to LAD in the construction industry.
1.6
Research Methodology
Briefly, the research process will be divided into five (5) stages:
a.
Identifying the research issue,
b.
Literature review,
c.
Data and information collection,
d.
Research analysis,
e.
Conclusion and recommendations
10
1.6.1
Stage 1: Identifying Research Issue
Identifying the research issue is the initial stage of the whole research. To
identify the issue, firstly, it involves reading on variety sources of published materials, such as journals, articles, seminar papers, previous research papers or other related research papers, newspapers, magazines, and electronic resources as well
through the World Wide Web and online e-databases from University of Technology
Malaysia, UTM library’s website. 38
1.6.2
Stage 2: Literature Review
Literature review is the second stage of the research. Literature review will
be involved the collection of documents which from secondary data for the research,
such as books, journals, newspapers. 39 Indeed, published resources like books, journals, varies standard form of contract, and related statutory are the most helpful in
this literature review stage. Besides this, reported court cases from different sources
like Malayan Law Journal, Australia Law Report, and Building Law Reports will be
referred.
1.6.3
Stage 3: Data and Information Collection
Third stage of this research is data and information collection stage. This is
an important stage towards achieving the objectives. This stage will be begun just
38
39
http://www.psz.utm.my
Blaxter, L., et al. (1996). How to research. Buckingham; Open University Press., pp.109
11
after the previous two stages are completed. The further action is to collect the relevant information based on the secondary data from the published resources and carry
out case studies. Lexis-Nexis database is the main source in getting the related cases.
The system provides cases based on different sources of law reports available, such
as Appeal Cases Report, All England Report, Building Law Report, King’s Bench
Report, Singapore Law Report and other common jurisdictions.
1.6.4
Stage 4: Research Analysis
In this stage, it is able to determine whether the stated objectives has been
achieved or vice versa. Different types of analysis will be carried out according to
the requirements of the objectives. It is important in conducting case study in the
way to identify the trends and developments in the issue that is to be studied.
1.6.5
Stage 5: Conclusion and Recommendations
Conclusion and recommendations is the final stage of the research. In this
stage, the findings would able to show the result of the research. A conclusion need
to be drawn in-line with the objectives of the research. At the same time, some appropriate recommendations related to the problems may be made for a better solution
in relation to the said problem, or for further research purposes.
12
13
1.8
Conclusion
Briefly, this research is related to the issues on principles of mitigation, and
Liquidated and Ascertained Damages (LAD) in building contracts. The report will
be divided into five (5) chapters.
1.8.1
Chapter 1: Introduction
The first chapter is an introduction to the whole research and consisting of a
few sub topics. The first sub topic is background of the study; followed by problem
statement, that influence such research to be carried out. Subsequence is the objectives of the research that stated the aims of the study; the significance of the research
as to overcome certain problems in the industry; scope and limitations to the research
and finally is the research methodology that to be used during the process of research.
1.8.2
Chapter 2: Liquidated and Ascertained Damages (LAD)
Briefly, this chapter will be covered by a few important subtopics, such as
introduction, definition of the term, LAD and LD, principle of LAD, LAD in the Malaysian position and finally the issues or cases in relation to the enforceability of
LAD in the event of breach of contract.
14
1.8.3
Chapter 3: Mitigation
This chapter will discuss the definition, theories, rules, and principles of mitigation. Besides that, the function of the principle applied in damages as remedy in
the event of breach of contract will also be discussed. Related cases will be incorporated in the explanation for getting a better understanding of the terms and its application.
1.8.4
Chapter 4: Requirements of Mitigation and The Extent of Mitigation in
Enforcing LAD Provisions
This chapter is the essential part of the whole report. The significant task is
to obtain the research’s findings, namely the requirements of mitigation, and to what
extent the employer has to mitigate his losses in enforcing LAD provisions.
1.8.5
Chapter 5: Conclusion and Recommendations
This chapter is the final part of the whole report and is considered the conclusion chapter. Briefly, this chapter includes the summary on the research findings,
conclusion and recommendations and suggestions for further research.
CHAPTER 2
LIQUIDATED AND
ASCERTAINED DAMAGES (LAD)
CHAPTER 2
LIQUIDATED AND ASCERTAINED DAMAGES (LAD)
2.1
Introduction
The parties to a contract may themselves specify in that contract an amount
which is payable to the plaintiff in the event of breach, such clauses are known as
liquidated or agreed damages clauses 1 Liquidated damages, synonymous with the
term Liquidated and Ascertained Damages and the abbreviation ‘LAD’ remain a
remedy most commonly encountered consequence of non-completion. 2
When the contractor is unable to complete the works by the original date for
completion set in the contract or by any new date fixed by the contract administrator
and the cause or causes of delay does not entitle the contractor to any valid extension
of time under the contract, he is guilty of breaching the contract. 3 A liquidated
damages clause ‘makes for greater certainty by allowing the parties to determine
more precisely their rights and liabilities consequent upon breach or termination’. 4
1
Paterson, J. et.al. (2005). Principles of Contract Law, 2nd ed. Sydney: Lawbook Co., pp.450
Harbans Singh. (2004). Engineering and Construction Contracts Management: Commencement and
Administration. . Selangor: Malayan Law Journal Sdn. Bhd., pp.501
3
Ibid.
4
AMEV-UDC Finance Ltd. v Austin [1986] 162 CLR 170, 193
2
16
In many projects, where time is the essence of construction, the owner and
the contractor agree under the contract that if the contractor fails to complete the
project by the stipulated date, it is finally liable to the owner for a pre-agreed sum for
each day beyond the specified completion date that it takes the contractor to finish
the work. 5 When liquidated damages are agreed in this way, the employer’s only
remedy for late completion is a sum not exceeding the specified liquidated damages
amount and the employer does not have the option to claim unliquidated damages. 6
In English Law, the courts will have to decide if they are liquidated damages
or a form of penalty. 7
The rules against penalties renders void a clause which
requires payment of a sum which is extravagant or unconscionable having regard to
the greatest loss which could be suffered by the plaintiff following the breach of
contract to which the sum relates. 8 If the amount is found to be a penalty then the
employer can only recover damages to the extent that they are proved. In addition,
the burden of proving that a stipulated sum is a penalty and not liquidated damages in
such situations rests with the contractor. 9 Whether a stipulated sum is liquidated
damages or a penalty depends upon the intention of the parties, but the Court have
laid down certain guiding rules. 10
However, the distinction between damages and a penalty does not apply in
Malaysia by virtue of Section 75 of the Contracts Act, 1950 as both are dealt in the
same manner. 11
5
Section 75 of the Contracts Act provides an instance in which
Fisk, E.R. (2004). Construction Project Administration. 7th Ed. New Jersey; Prentice Hall., pp.580
Martin, R. In What Circumstances Does An Employer Have The Right To Levy Liquidated
Damages? James R Knowles (M) Sdn. Bhd. URL:
www.jrk.com.sg/ARTICLES/employerliqdamages.htm
7
Vohrah, B. and Wu, Min Aun. (2003). The Commercial Law of Malaysia. Malaysia: Pearson
Malaysia Sdn. Bhd., pp.178
8
Paterson, J. et.al. (2005). Principles of Contract Law, 2nd ed. Sydney: Lawbook Co., pp.450
9
Martin, R. In What Circumstances Does An Employer Have The Right To Levy Liquidated
Damages? James R Knowles (M) Sdn. Bhd. URL:
www.jrk.com.sg/ARTICLES/employerliqdamages.htm
10
see Lord Dunedin in Dunlop Tyre Co. Ltd. v New Garage & Motor Co. Ltd. [1915] AC 78
11
Martin, R. In What Circumstances Does An Employer Have The Right To Levy Liquidated
Damages? James R Knowles (M) Sdn. Bhd. URL:
www.jrk.com.sg/ARTICLES/employerliqdamages.htm
6
17
Malaysia law departs significantly from the line of English common law. 12
Compensation is apparently recoverable up to the limit of the stipulated figure if that
was a genuine pre-estimate and is considered by the court to be reasonable. 13 There
is no support for the view that a plaintiff may recover a genuine pre-estimate without
proof of any actual loss. 14 Thus, it is important for the employer to ensure that the
amount stipulated as liquidated damages is a reasonable calculation of the likely loss
to the employer and not an exaggerated sum since the purpose is only to provide the
employer with reasonable compensation. 15
In short, this chapter addresses the consequences of non-completion
focussing on the issue of ‘LAD’, as a remedy to be compensated by the nonbreaching party flow from a breach of contract.
2.2
Breach of Contract
A breach of contract occurs where a party does not perform her or his
obligations in accordance with the terms of the contract. 16 Eggleston, B. (1997) in
his book Liquidated Damages and Extensions of Time in Construction Contract 17
mentioned that every breach of contract carries with the potential for dispute and
breach of contract in the construction industry are common either by the employer or
12
Robinson, N. M., et al. (1996). Construction Law in Singapore and Malaysia. 2nd ed. Singapore:
The Butterworth Group of Companies., pp.244. See also in Linggi Plantations Ltd v Jagatheesan
[1972] 1 MLJ 89.
13
see Larut Matang Supermarket Sdn. Bhd. v Liew Fook Yung [1995] 1 MLJ 379, Song Toh Chu v
Chan Kiat Neo [1973] 2 MLJ 206, Woon Hoe Kan & Sons Sdn. Bhd. v Bandar Raya Development
Bhd. [1972] 1 MLJ 75.
14
Dato’ Visu sinnadurai. (1987). The Law of Contract in Malaysia and Singapore: Cases and
Commentary. 2nd ed. Singapore: Butterworth & Co. (Asia) Pte Ltd., pp. 704.
15
Martin, R. In What Circumstances Does An Employer Have The Right To Levy Liquidated
Damages? James R Knowles (M) Sdn. Bhd. URL:
www.jrk.com.sg/ARTICLES/employerliqdamages.htm
16
Paterson, J. et.al. (2005). Principles of Contract Law, 2nd ed. Sydney: Lawbook Co., pp.333
17
Eggleston, B. (1997). Liquidated Damages and Extensions of Time in Construction Contract. 2nd ed.
London: Blackwell Science Ltd.
18
by the contractor because of lack or neglect in the performance of his obligations
under the contract. 18
When the employer is in breach by way of interference or prevention arising
from late supply of information, failure to give full possession of the site and the like,
the result for the contractor is delay, disruption, and involvement in loss and expense
or extra cost. 19 On the other hand, the contractor’s breaches of contract are most
commonly due to failure to proceed with due diligence, failure to meet specified
standard and failure to complete the project on time. 20
The employer’s position is significantly different from the contractor’s.
Whereas the contractor has a financial remedy for numerous and various breaches,
the employer has his for only one breach of common occurrence – failure by the
contractor to complete on time. 21 The financial effects of the employer’s breach on
the contractor can rarely by estimated in advance because of the involvement of subcontractors, but the financial effects of the contractor’s late completion can usually
be estimated with some certainty. 22
Consequently, in order to resolve these disputes, most standard forms of
construction contract are drafted to permit the parties to fix the damages payable for
late completion in advance and containing clauses that detailing with the procedures
to be applied in the event of breach. 23
18
Eggleston, B. (1997). Liquidated Damages and Extensions of Time in Construction Contract. 2nd ed.
London: Blackwell Science Ltd., pp.3
19
Ibid.
20
Ibid.
21
Ibid, pp.4
22
Ibid.
23
Ibid.
19
2.2.1
Remedies for Breach of Contract
A breach of contract occurs when one party fails to perform an obligation
under the terms of the contract. 24 An award of damages is the primary remedy for
any breach of contract. 25 Contract law uses various remedies to repair the damage
caused by a breach of contract. 26 The purpose of contract damages is to compensate
the plaintiff for loss caused by a breach of contract. 27 An award of damages is to
place the victim of the breach, so far as an award of damages can, in the position he
would have been in if the contract had been performed. 28 When there is a breach of
contract, the party who is not in default may claim one or more of the remedies,
namely rescission of contract, damages, specific performance, and injunction. 29
Rescission is a form of relief which, in appropriate circumstances, is available
to victims of the following vitiating factors: mistake, misrepresentation, duress,
undue influence, unconscionable dealing, breach of fiduciary duty, and under the rule
in Yerkey v Jones [1940] 63 CLR 649. 30 The purpose and effect f rescission, as
traditionally understood, is to set aside the contract and restore the parties to their
original pre-contractual positions. 31 Section 40 of the Contracts Act stated that when
a party to a contract has refused to perform / disable himself from performing his
promise, then the promise may put on end. 32
24
Ashworth, A. (2001). Contractual Procedures in the Construction Industry. 4th ed. England:
Pearson Education Limited., pp.31
25
Ibid
26
Damages and otherRemedies for Breach of Contract.
URL:http://www.law.washington.edu/courses/ramasastry/A50k/handouts/remedies.html
27
Paterson, J. et.al. (2005). Principles of Contract Law, 2nd ed. Sydney: Lawbook Co., pp.234
28
Robinson v Harman [1848] 1 Exch 850. See to similar effect Viscount Haldane LC in British
Westinghouse Electric and Manufacturing Co Ltd v underground Electric Railways Co of London Ltd
[1912] AC 673 at 689: ‘The first is that, as far as possible, he who has proved a breach of a bargain to
supply what he had contracted to get is to be placed, as far as money can do it, in as good a situation
as if the contract had been performed. The fundamental basis is thus compensation for pecuniary loss
naturally flowing from the breach.’
29
Vohrah, B. and Wu, Min Aun. (2003). The Commercial Law of Malaysia. 2nd ed. Selangor: Pearson
Malaysia Sdn. Bhd., pp.176
30
Paterson, J. et.al. (2005). Principles of Contract Law, 2nd ed. Sydney: Lawbook Co., pp.605
31
Ibid.
32
In Choo Yin Loo v Visuvalingam Pillay [1930] 7 FMSLR 135, the court affirmed the view that
section 40 enacted English law on the subject. See also in Ban Hong Joo Mine Ltd. v Chen & Yap
Ltd [1969] 2 MLJ 83, Tan Hock Chan v Kho Teck Seng [1980] 1 MLJ 308, and Smith Construction
Co. Ltd. v Phit Kirivata [1955] MLJ 8
20
Specific performance is an order of the court compelling the defendant to
perform his or her part of the contract.33 The courts will enforce a party to do what it
has contracted to do, in preference to awarding damages to the aggrieved party. 34
Specific performance will only be granted where damages are an inadequate
remedy. 35 However, specific performance will not be granted where the contracts
requiring constant supervision, or the contracts involves personal services or lack of
mutuality at the time of the judgment. 36
Oxford dictionary of law stated that injunction is a remedy in the form of a
court order addressed to a particular person that either prohibits him from doing or
continuing to do a certain act or orders him to carry out a certain act. In other words,
an injunction may be granted to restrain a breach of negative stipulation (a promise
not to do something) in the contract. 37 In addition, the Specific Relief Act, defines
injunction as a remedy is classed in the Part III as ‘Preventive Relief’ and there are
various types of injunction, namely, Prohibitory Injunction, Interlocutory Injunction,
Quia Timet Injunction, Mareva Injunction, Anton Piller order and Erinford
Injunction. 38
2.3
Damages
Whenever a party (the defendant) breaches a contract, the other party (the
plaintiff) will be entitled to an award of damages as monetary compensation for the
breach. 39 Damages are normally awarded based on a basis of placing the innocent
33
Duxbury, R. (1991). Contract in A Nutshell. London: Sweet & Maxwell., pp.101
Ashworth, A. (2001). Contractual Procedures in the Construction Industry. 4th ed. England:
Pearson Education Limited., pp.33
35
Duxbury, R. (1991). Contract in A Nutshell. London: Sweet & Maxwell., pp.101
36
Ibid.
37
Ibid, pp.102
38
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.217-222
39
Paterson, J. et.al. (2005). Principles of Contract Law, 2nd ed. Sydney: Lawbook Co., pp.411
34
21
party in the same financial position as if the contract had been properly performed. 40
In addition, whether rightly or wrongly, under the English law, damages for breach
of contract are designed to compensate the innocent party for the breach, to make
good the actual loss, within certain parameters rather than to punish the guilty party.
2.3.1
General Principles of Damages
Damages are granted to the innocent party for the damage, loss or injury he
has suffered for a breach of contract. 41 In addition, there are two further points need
to be considered in relation to the general approach to damages. These are:
a.
If the parties have expressly agreed and stipulated in their contract or
agreement a particular remedy for the breach complained or, due
effect will be given to this means of redress provided, it is not
repugnant to the law; and
b.
Once the innocent party has selected a particular remedy to pursue
and has manifested his choice to the defaulting party; who in reliance
upon the manifestation has taken any action, the choice is binding and
will bar recourse to any other alternative.
Syed Ahmad Alsagoff (2003) states that the law grants the damages to a party
as monetary compensation for the damage, loss or injury suffered through a breach
of contract. He added that, the court will not award compensation to the plaintiff for
all the losses suffered because of breach, provided he has fulfil certain qualifications
required. The requirements are related to remoteness of damages and the plaintiff
40
Duxbury, R. (1991). Contract in A Nutshell. London: Sweet & Maxwell., pp.102
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.200
41
22
must shows that it was the defendant’s breach that caused him to suffer the said loss.
The both requirements will be discussed in further detail in subtopic 2.3.4.
2.3.2
Types of Damages
Damages can be classified into a few types 42 as following:
a)
General Damages
These are damages, which the law presumes to have resulted from the act of
the defaulting party (defendant) and which need not be specially pleaded.
They are recoverable as compensation for such loss as the parties may
reasonably foresee as a natural consequence of the breach or act complained
of. Examples include damages for pain, inconvenience, disappointment, etc:
Frank & Collingwood Ltd v. Gates. 43
b)
Special Damages
Special damages are damages of a kind which the law will not presume in the
innocent party’s (plaintiff’s) favour, but which must be specially pleaded and
proved at the trial or arbitration hearing, e.g. loss of profit, interest on money,
etc.
42
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.209
43
[1983] 1 Con LR 21
23
c)
Nominal Damages
Nominal damages are damages awarded where, although there is a technical
breach resulting in the contravention of a right but it results in no real loss to
the innocent party.
Examples include trespass 44 , failure of claimant to
mitigate loss 45 , or where the plaintiff is better off as a result of the breach.
d)
Substantial Damages
Substantial damages represent compensation that is given for loss actually
sustained by the aggrieved party.
These are in essence, pecuniary
compensation intended to put the aggrieved party (plaintiff) in the position he
would have enjoyed had the contract been performed. These represent the
classic example of damages based on the ‘compensatory’ principle.
e)
Exemplary Damages
Exemplary damages are vindictive or punitive and are awarded so as to
punish a defaulting party (defendant). Exemplary damages consist of a sum
awarded which is far greater than the pecuniary loss suffered by the innocent
party. These damages are awarded only in exceptional circumstances, eg.
defamation, breach of promise to marry etc: Dennis v Sennyah. 46
f)
Unliquidated Damages
Unliquidated damages are unascertained damages that need to be proved.
These damages are dependent on the circumstances of the case.
44
Kilbourne v Tan Tiang Guee [1972] 2 MLJ 94
Hong Leong Co. Ltd. v Pearlson Enterprises Ltd (No.2) [1968] 1 MLJ 262
46
[1963] MLJ 95
45
24
g)
Liquidated Damages
These are damages agreed between the parties at the time of contracting and
stated in the contract as the damages payable in the event of a specified
breach, usually that is of late completion. The sum must be a genuine preestimate of loss likely to be caused by the breach or lesser sum. Liquidated
damages cannot be recovered simpliciter: Wearne Brothers (M) Ltd. v
Jackson. 47 These damages are covered comprehensively by the provisions of
section 75 of the Contracts Act 1950.
2.3.3
Statutory Provisions
In Malaysia, the consequences of breach of contract are amply covered under
Part VII of the Contracts Act 1950 principally in the following sections. 48
a)
Section 74 – Compensation For Loss Or Damage Caused By Breach Of
Contract.
(1) When a contract has been broken, the party who suffers by the breach is
entitled to receive, from the party who has broken the contract,
compensation for any loss or damages caused to him thereby, which
naturally arose in the usual course of things from the breach, or which
the parties knew, when they made the contract, to be likely to result from
the breach of it. 49
47
[1966] 2 MLJ 155. See also Selva Kumar a/l Murugiah v Thiaragajah a/l Retnasamy [1955] 1 MLJ
817.
48
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.202
49
see Hadley v Baxendale [1854] 9 Ex 341
25
(2) Such compensation is not to be given for any remote and indirect loss or
damages sustained by reason of the breach. 50
(3) When an obligation resembling those created by contract has been
incurred and has not been discharged, any person injured by the failure
to discharge it is entitled to receive the same compensation from the
party in default as if the person had contracted to discharge it and had
broken his contract.
Explanation – In estimating the loss or damage arising from a breach of
contract, the means which existed of remedying the inconvenience caused by
the non-performance of the contract must be taken into account.
b)
Section 75 – Compensation For Breach Of Contract Where Penalty Is
Stipulated For.
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 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. 51
Explanation – A stipulation for increased interest from the date of default
may be a stipulation by way of penalty….
50
51
see Tham Cheow Toh v Associated Metal Smelters Ltd [1972] 1 MLJ 171
see Wearne Brothers (M) Ltd v Jackson [1966] 2 MLJ 155
26
c)
Section 76 – Party Rightfully Rescinding Contract Entitled To
Compensation.
A person who rightfully rescinds a contract is entitled to compensation for
any damages which he has sustained through the non-fulfilment of the
contract.
2.3.4
Recovery of Damages
The limits to a plaintiff’s claim for damages under the English law are
governed by the rules relating to the remoteness of damage in contracts. 52 The
classic statement on this aspect of the law can be found in the judgement of Alderson
B in Hadley v Baxendale. 53 The rule enunciated by Alderson B was subsequently
explained in Victoria (Laundry Windsor) Ltd v Newman Industries Ltd. 54
In Malaysia, section 74 of the Contracts Act sets out the consequences of a
breach of contract and the rule embodied in section 74 has its origin in the rule as
expounded in Hadley v Baxendale. 55
Section 74 of the Contracts Act limits a
plaintiff’s claim for damages caused by a breach of contract.
There are two limbs under section 74 (1) under which compensation become
to the injured party. 56
52
Dato’ Visu sinnadurai (1987). The Law of contract in Malaysia and Singapore: Cases and
Commentary. 2nd ed., pp.669
53
[1854] 9 Ex 341; 156 ER 145
54
[1949] 2 KB 528
55
Dato’ Visu sinnadurai (1987). The Law of contract in Malaysia and Singapore: Cases and
Commentary. 2nd ed., pp.670
56
Syed Ahmad Alsagoff. (2003). The Principles of the Law of Contract in Malaysia. 2nd ed., pp.370
27
1.
When the damage or loss caused to the injured party arose naturally in
the usual course of things fro the breach.
2.
When the parties to the contract were fully aware at the time when
they made the contract that damage or loss or likely to result from the
breach.
In either situation, the compensation claimable must not be too remote or
indirect. 57
2.3.4.1 Remoteness of Damage
A party culpable of breaching a contract is not generally liable for all
damages, which ensues from his breach of contract. 58 Some damage is said to be too
remote and therefore irrecoverable.
In contract, the general rule governing the
remoteness of damage was laid down in the case of Hadley v Baxendale 59 in the
following words:
When two parties have made a contract which one of them has broken, the
damages which the other party ought to receive in respect of such breach of
contract should be such as may fairly and reasonably be considered either
arising naturally, i.e according to the usual course of thing from such breach
of contract itself, or such as may reasonably be supposed to have been in the
contemplation of both parties, at the time they made the contract, as the
probable result of the breach of it.
57
Ibid, pp.370
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.204
59
1854] 9 Ex 341; 156 ER 145
58
28
In summary, the rule in Hadley v Baxendale comprises of two limbs, i.e: in
the first limb, damages arising naturally or directly; in the second limb, damages as
may reasonably be supposed to have been in the contemplation of both parties at the
time they made the contract, as the probable result of the breach of it.
The Contracts Act 1950 had codified the common law rule in Hadley v
Baxendale in the form of section 74(1). This fact has been expressly acknowledged
by local courts in a string of cases, notable of; Tham Cheow Toh v Associated Metal
Smelters Ltd 60 , and Toeh Kee Keong v Tambun mining Co. Ltd. 61 In Tham Cheow
Toh v Associated Metal Smelters Ltd, the appellant had agreed to sell a metal furnace
to the respondent and giving a responsibility that the melting furnace would have a
temperature of not lower than 2,600 degree F. This specification was not fulfilled
and consequently, the respondent brought an action alleging breach of condition and
claimed damages, including loss of profits.
The Federal Court pointed out that the appellant would not liable for the
payment of damages for loss of profits unless there was evidence showing that the
special object of the furnace had been drawn to their attention and they are contracted
on the basis liable to the payment of loss of profits. On the facts, the appellant was
knew about the requirement of producing the specified temperature and the urgency
of delivery. Therefore, they were liable to pay for the certain loss of profits suffered
by the respondent.
Again, the rules were applied in a prominent Scottish’s case, Balfour Beatty
Construction (Scotland) Ltd v Scottish Power plc. 62 . In this case, the plaintiffs were
constructing a concrete aqueduct over a main road, installed a concrete batching
plant and arranged for electricity to be supplied by the defendants. The plaintiffs
needed to pour all the concrete in a single continuous operation and so, when the
60
[1972] 1 MLJ 171
[1968] 1 MLJ 39
62
[1994] 71 BLR 20
61
29
electricity supply failed during the pour, the plaintiffs had to demolish all the works,
which had been done. The case was held that although the defendant were clearly in
breach of contract, they were not liable for these consequences, since they had not
been told that a continuous pour was essential.
In short, the loss recoverable is subjected to the provision that such
compensation is not to be given for any remote and indirect loss or damage sustained
as a result from the breach.
2.3.4.2 Measure of Damage
The measure of damages in contract is the principle involved in the
assessment of the actual monetary compensation that needs to be paid to the innocent
party for the damage sustained as a result of the breach of contract.63 Under the
common law, damages may be claimed under two established principles, namely:
1.
Principle in Robinson v Harman 64
The quantum of damage is assessed in the dictum that provided the
damages suffered is not too remote, the innocent party is entitled to be
placed, so far as money can do it, to the position he would have been,
had the contract been performed (or that the particular damage had not
occurred), ie there must be restitution in integrum. 65
63
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.206
64
[1848] 1 Ex 850
65
Harbans Singh. (2004). Engineering and Construction Contracts Management: Law and Principles.
Selangor: Malayan Law Journal Sdn. Bhd., pp.206
30
2.
Principle under the Rule in Hadley v Baxendale 66
The quantum of damage is assessed on the premise that provided the
damage suffered is not too remote, the innocent party is entitled to
receive damages which are fairly and reasonable considered to be
either arising naturally, i.e according to the usual course of things
from such breach of contract itself or such as may reasonably be
supposed to have been in the contemplation of both parties at the time
they made the contract, as the probable result of the breach of it.
From the two principles adverted earlier, the second principle as codified in
section 74 of the Contracts Act 1950 is commonly employed locally.
2.3.5
Proof of Damages
A plaintiff claiming damages for breach of contract must produce evidence in
court of the loss that he has suffered because of the breach. 67 In the absence of
documentary evidence, the court can make a reasonable evaluation of the loss
incurred. However, the plaintiff must lead at least sufficient or satisfactory evidence
to enable the court to make a fair and reasonable assumption of loss. 68
A local case in relation to construction contracts, SEA Housing Corporation
Sdn. Bhd. v Lee Poh Choo 69 , the developer delayed in completing the house and the
owner claimed for her loss of use and enjoyment of the house at a monthly rate at
RM 2,500.
Her evidence was that she called the developer’s office and was
informed that the rental would be at that monthly rate, without witness or document
66
[1854] 9 Ex 341
Syed Ahmad Alsagoff. (2003). The Principles of the Law of Contract in Malaysia. 2nd ed., pp.387
68
Ibid
69
[1982] 1 MLJ 324
67
31
to sustain her claim. The Judge, Mohamed Dzaiddin held that the house owner could
not recover his loss as she failed to prove her loss of her house and occupation of the
said building by was of rental. Therefore, party who claim for damages they will
have the duty to prove their damages.
In recovery of special damages, plaintiff must have to plead and prove to his
claim. In another local case, Syed Jaafar bin Syed Ibrahim v Maju Mehar Singh
Travel & Tours Sdn. Bhd. 70 , whereby a performance of Haj by 151 persons was
cancelled due to the defendant not obtain the visas and the plaintiff claimed for his
expenses to putting the passenger for certain duration in Kuala Lumpur.
The
plaintiff had spent for RM 27,810 for the cost of bringing the passengers from Kota
Bahru to Kuala Lumpur and expenses for putting the passengers in Kuala Lumpur
from 11 May 1992 to 5 June 1992. The defendant denied the plaintiff’s claim.
The court refused the plaintiffs claim for RM 27,810 because there was no
evidence produced by plaintiff to sustain his claim. According to the Judge, the
plaintiff should produced either the receipts from hotels and restaurants or by at least
called the hotel and restaurant proprietors to show the nexus of his loss that he had
collected the sum from the 151 passengers. As a result, this case held that the
plaintiff must both specifically plead and prove his damages.
In short, it can be concluded that the innocent party who claiming for
damages should bear in mind that he/ she has the burden of proof for their actual
damages/ losses by showing the evidence of suffering and must be pleaded.
70
[1999] 4 MLJ 413
32
2.4
Liquidated and Ascertained Damages (LAD)
Delay can cause incalculable damages to an owner. On a construction project
and such damages, however, may be very difficult to quantify with reasonable
accuracy.
Thus in order to help avoid the uncertainty and expense of long
evidentiary battles to establish (or refuse) the owner’s actual damages, parties to a
construction contract may agree in advance to liquidate those damages. 71
Liquidated and ascertained damages are a common way of dealing with the
consequences of delay in construction and engineering projects. 72 LAD is stated in
the contract at a rate per day. If the contractor fails to complete the works before the
date for completion, then the amount of liquidated damages can be readily
ascertained by multiplying the number of days delayed by the daily rate of liquidated
damages. 73
2.4.1
Express Contractual Provisions
Most standard form of construction contracts provide for the insertion of
liquidated damages clause. 74 LAD clause can be found in several standard forms of
contract in local construction industry; namely Clause 40 75 of JKR Forms 203 and
203A (Rev 10/83), Clause 22 76 of PAM 1998 Forms (With and Without Quantities)
71
Stockenberg, R.A. Building Design & Construction: Liquidated Damages – A two-edged sword.
May, 2002; 43, 5; ABI/INFORM Global. pp29. URL: http://www.bdemag.com
72
Blake, P. Liquidated Damages – Case Law Review / Sectional Completion. URL:
http://www.prettys.co.uk/business_law/construction/lads.shtml.
73
Lynch, B.G., (June, 2003). Building Journal Hong Kong China: Focus on legal: The Employer’s
Risk? URL: http://www.building.com.hk/forum/09_03employer.pdf
74
Blake, P. Liquidated Damages – Case Law Review / Sectional Completion. URL:
http://www.prettys.co.uk/business_law/construction/lads.shtml.
75
Entitled ‘Damages for Non-completion’. JKR Standard Form of Contract
76
PAM Agreement and Conditions of Building Contract., pp.17
33
Editions, Clause 26 77 of the CIDB Form (2000 Edition), Clause 31.4 78 IEM.ME
1/94 Form, Clause 42 79 of the PWD Form DB/T- (2000 Edition), Clause 27 80 of
JKR 203N Form (Rev 10/83), Clause 7.0 81 of PAM 1998 Sub-Contract Form,
Clause 50 82 and Clause 25 83 of the Putrajaya Conditions of Contract for Main
Contract and Nominated Sub-Contract respectively.
Generally, these clauses are drafted to provide a mechanism, whereby the
parties can agree in advance the damages payable by the contractor and recoverable
by the employer if he fails to complete the works by the date for completion stated in
the appendix / within any extended period certified by the Architect or
Superintending Officer under the extension of time clauses.
Although differing widely in wording and scope, these express provisions
essentially stipulated the common matters for non-completion, whereas the
employer’s right to deduct the said damages, the situation under which such right can
be exercised contractually, the procedures involved and the conditions precedent, and
other administrative matters. For example, clause 22.1 of PAM 98 and clause 40 of
JKR 203A include provisions for the Architect / S.O. issuing a certificate when the
contractor fails to complete on time.
In terms of scope, the most concise are the provisions in the JKR 203 and
203A Forms, whilst the CIDB Form is the most detailed and elaborate. The rest
of the forms, e.g. Putrajaya and PAM 1998 fall somewhat in between. 84
77
Entitled ‘Non-Completion and Damages For Delay in Completion’. CIDB Standard Form of
Contract For Building Works.
78
Entitled ‘Delay in Completion’. IEM Standard Form of Contract.
79
Entitled ‘Damages for Non-Completion’. PWD Form DB/T
80
Entitled ‘Damages for Non-Completion’. JKR 203N Form
81
Entitled ‘Damages for Non-Completion’. Sub-Contract Form
82
Entitled ‘Damages for Non-Completion’ Putrajaya Conditions of Contract (Main Contract)
83
Entitled ‘Damages for Non-Completion’ Putrajaya Conditions of Contract (Nominated SubContract)
84
Harbans Singh. (2004). Engineering and Construction Contracts Management: Commencement and
Administration. . Selangor: Malayan Law Journal Sdn. Bhd., pp.507
34
2.4.2 Definition of LAD
Liquidated and Ascertained Damages (LAD) is defined in various ways.
First and foremost, Professor Vincent Powell-smith defines the term LAD as a sum
of money stated in a contract as the damages payable in the event of a specific
breach, usually that of late completion. The sum must be a genuine pre-estimate of
the loss of the likely to be caused by the breach or a lesser sum. There is no need to
prove actual damage after the event and it does not matter that the actual loss or
greater or less than the stated sum or even if in the event there is no loss…. 85
Eggleston in ‘Liquidated Damages and Extension of Time in Construction
contracts’ 86 states: … most standard forms of construction contract are drafted to
permit the parties to fix in advance the damages payable for late completion. When
these damages are a genuine pre-estimate of the loss likely to be suffered or a lesser
sum, they can be termed liquidated damages.
However, Robinson and Lavers 87 on the other hand, explains the term in this
manner:, …the term “liquidated’ means only that the sum is agreed to in advance of
the event by the two parties, as opposed to ‘unliquidated’ meaning damages left to be
assessed after the event… .
Furthermore, LAD is the ascertained amount, expresses in Ringgit and Sens,
which an injured party has sustained, or is taken to have sustained. 88
It is an
ascertained or calculated monetary loss claimed in an action and also a sum provided
by a contract (with agreement) as payable in the event of breach. Where contracting
85
Powell-Smith, V. et.al. An Engineering Contract Dictionary. Legal Studies and Services Ltd.,
pp.336
86
Eggleston, B. (1997). Liquidated Damages and Extensions of Time in Construction contract. 2nd ed.
London: Blackwell Science Ltd., pp.4
87
Robinson, et.al. Construction Law in Singapore and Malaysia. 2nd Ed. Butterworths Asia., pp.242
88
Abdul Aziz Hussin Amn. Liquidated Ascertained Damages (LAD). URL:
http://www.hbp.usm.my/aziz/LIQUIDATED%20ASCERTAINED%20DAMAGES.htm
35
parties make a genuine pre-assessment of the loss that would flow from any
particular breach, and stipulate accordingly in their contract that this sum shall be
payable in the event of a breach.89
In short, LAD is a pre-determined amount of money that the parties to a
contract agree will be awarded to one or both parties if there is a breach of contract. 90
2.4.3 Merit of the LAD Provision
Construction contracts often contain a liquidated damage provision that
provides for payment a stipulated amount in the event that work is not completed
within a specified period. 91 The general theme of such a provision is that if the
contractor does not complete construction within a certain number of days after
construction begins, the contractor will be liable to the owner for a certain amount of
money for each day beyond the contractual completion date. 92 The amount to be
paid generally represents the employer’s estimated loss in the event completion is
delayed. 93
Most commonly within the construction industry, liquidated damages are
levied where a contractor fails to meet the contractual completion date without a
89
Abdul Aziz Hussin Amn. Liquidated Ascertained Damages (LAD). URL:
http://www.hbp.usm.my/aziz/LIQUIDATED%20ASCERTAINED%20DAMAGES.htm
90
Johnson, M.J. and Boates, C.T. Business Credit; Legal Jargon: Liquidated Damages. Business
Credit; Mar 2002; 104,3; ABI/INFORM Global., pp.68
91
Costs, W. (2005). Liquidated Damages Provisions: Are they Always Enforceable? Texas
Construction. Baton Rouge: Mar 2005. vol.13, Iss. 3; pp43. URL:
http://proquest.umi.com/pqdwed?did=807437291&sid=6&Fmt=3&clientld=21690&RQT=309&VNa
me=PQD.
92
Karas, Hal and Brower, D. (June2, 2003). The Daily Reporter: Liquidated Damages: Clause must
be reasonable. The Daily Reporter, Issued Monday, June 2, 2003.URL: http://bmf-law.com
93
Blake, P. Liquidated Damages – Case Law Review / Sectional Completion. URL:
http://www.prettys.co.uk/business_law/construction/lads.html
36
valid reason to claim a sufficient extension of time. 94 It is not uncommon for parties
to agree to a liquidated damages clause in a construction contract. 95
Briefly, the nature and intention of liquidated damages clauses are: 96
1.
To fix an amount agreed between the parties to be paid in the event of
non-performance of a contractual obligation.
2.
To provide certainty to the employer as to the amount, which he will
be entitled to recover in the event of non-performance without having
the difficulty of proving loss.
3.
During tender stage, it also provides contractors with certainty as to
the extent of the risk they are taking and allows them to estimate and
price the risk within their tender.
It is apparent that, the typical liquidated damages clause provides that if the
contractor fails to complete the work by the agreed completion date, he will be
required to pay the owner a stipulated amount for each day thereafter until
completion. 97 Furthermore, the employer will be entitled to recover his damages
without proving his loss as both the employer and contractor have agreed on the
amount stated in the contract.
94
Zakir Mulla. (25 February 2005). Liquidated damages: North Sea Ventilation Ltd v Consafe
Engineering. URL: htp://www.rics.org
95
Karas, Hal and Brower, D. (June2, 2003). The Daily Reporter: Liquidated Damages: Clause must
be reasonable. The Daily Reporter, Issued Monday, June 2, 2003.URL: http://bmf-law.com
96
Steve, Chan. (2004). Lecture 4: Duty to Mitigate, Constructive Acceleration, Challenges to
Liquidated Damages. Bullet-Proof EOTs-With particular reference to PWD/JKR Standard Forms of
Contract. 27 July, 2004. Grand Plaza Parkroyal Kuala Lumpur. James R Knowles (M) Sdn. Bhd.,
pp.17
97
Kerry, P. (2001). Liquidated damages: how much of a threat can they be?. Heavy Construction
News. Toronto: Mar 2001. Vol.45 Iss.6; pp32. URL:
http://proquest.umi.com/pqdweb?did=374776101&sid=8&Fmt=3&clientd=21690%RQT=309&VNa
me=PQD.
37
2.4.4 Advantages of LAD Provision
It is a common assumption that construction contracts frequently contain a
“liquidated damages” clause is in favour of the owner. 98
However, liquidated
damages clauses in contracts provide benefits for both the Employer and Contractor.
For the contractor, he is aware of his maximum risk and can include for this in his
tender. For the Employer, the right to liquidated damages means that he has no need
to provide evidence demonstrating that the Contractor’s delay caused loss, or to
prove the amount of that loss. 99
It is often beneficial to have a contract provision which allows the owner to
assess liquidated damages in the event of a delay in construction beyond the date for
substantial completion specified in the contract100 . Yet, with a liquidated damages
clause in the contract, the Employer can determine the total amount of liquidated
damages pursuant to the contract and deduct this amount from payment due to the
contractor. 101
Liquidated damages are extremely useful, because they provide a financial
incentive for the contractor to adhere to the programme and provide the Employer
with an automatic remedy without the difficulty of proving actual loss and this may
result in a considerable saving of costs since it is quite often proving that the loss is
complex and difficult. 102 In addition, a liquidated damages provision can be a useful
98
Kerry, P. (2001). Liquidated damages: how much of a threat can they be?. Heavy Construction
News. Toronto: Mar 2001. Vol.45 Iss.6; pp32. URL:
http://proquest.umi.com/pqdweb?did=374776101&sid=8&Fmt=3&clientd=21690%RQT=309&VNa
me=PQD.
99
Lynch, B.G., (June, 2003). Building Journal Hong Kong China: Focus on legal: The Employer’s
Risk? URL: http://www.building.com.hk/forum/09_03employer.pdf
100
Cheney, D. (Oct 15, 2005). Putting The Owner in The Best Position For a Successful Construction
Contract. URL: http://www.brickerstaff.com/articles/cheney2001.htm
101
Lynch, B.G., (June, 2003). Building Journal Hong Kong China: Focus on legal: The Employer’s
Risk? URL: http://www.building.com.hk/forum/09_03employer.pdf
102
Zakir Mulla. (25 February 2005). Liquidated damages: North Sea Ventilation Ltd v Consafe
Engineering. URL: htp:://www.rics.org
38
tool, as it saves a great of time and money by eliminating the need to prove the actual
amount of loss if a dispute or lawsuit arises. 103
2.5
Component Costs of LAD
Parties include the LAD clause in construction contracts as means of “fixing”
the amount of compensatory damages that would be awarded in the event of a breach
by either party to the contract. 104 Reasonable compensation for actual damages is the
legitimate objective of such provisions. In addition, the size of a project and the
types of losses anticipated help to determine the amount of the liquidated damages to
be included in a contract. 105
The amount of LAD is determined by projects’ basis. The party will examine
the scope of each individual contract, determines where that contract fits in the
procurement and scheduling of the entire project and estimates specifically how
much support services such as resident engineers, office engineers, field inspectors,
and secretaries would be needed if the project were to go beyond its contract
completion dates. 106 Besides that, the cost will be considered are associated with
permits, fees, licenses, and most importantly evaluates the impact completion
milestone or final project completion dates. 107 In fact, there are different approaches
used by the professional consultants in calculating the amount of LAD. This is
because they are considering different component costs incorporated for LAD. 108
103
Johnson, M.J. and Boates, C.T. Business Credit; Legal Jargon: Liquidated Damages. Business
Credit; Mar 2002; 104,3; ABI/INFORM Global., pp.68
104
Partks, G.T. (March, 2002). A Primer on Construction Damages: A Damage Is a Damage? Not
Really!. URL: http://www.bricker.com/legalservices/industry/construction/heavyhighway/article3.asp
105
Ibid.
106
Allen, P.E. (Jan, 1995). The Estimation of Construction Contract Liquidated Damages. URL:
library.findlaw.com/1995/Jan/1/129415.html.
107
Ibid.
108
See, Seow Lee. (1995/96). Prinsip Pemakaian Dantirugi Tertentu dan Ditetapkan dari Perspectif
Perundangan. Universiti Teknologi Malaysia : Degree Thesis., pp.55
39
However, a research found that typical costs that an owner may seek include
rental costs, use and value loss, financing costs, overhead costs, supervisory costs,
and business profit loss. 109 This finding is quite similar to a local research in relation
to the component costs incorporate in determine the amount of LAD.
The
component costs consist of loss of income, financing loss, business disruption loss,
management costs, and professional fees. The details of costs associated in each type
of the said costs are summarised as the following.
2.5.1
Loss of Income
Generally, the owner will claim for his losses in relation to loss in rental,
delayed on sales, rent of alternative premises, loss of trading profit and financial
liability to purchasers.
The owner will incur losses in term of rental for the premises in commercial
projects; late in getting profit from the sales of premises for housing projects or late
in selling the shop lots for commercial projects, such as shopping mall. In addition,
owner might suffer extra cost for rental in order to get an alternative premise for their
business operation or accommodation temporarily during the delayed duration.
For factory projects, late completion probably will cause an owner fail to
deliver his products on time and breach of the contract. This is because he could not
start the production while pending the completion of the factory.
109
Irvin, E.R. (1987). Construction Claims and the Problems of Cost Management. Cost Engineering,
Morgantown: Aug 1987. Vol.29, Iss.8; pg.20. URL:
http://proquest.umi.com/pqdweb?did=924865&sid=2&Fmt=2&client=21690&PQT=309&VName=P
QD
40
2.5.2
Financing Loss
Developer, employer, or the project owner will incur additional costs or
losses such as interest on loan and additional capital to carry on a project in the event
of late completion.
a.
Interest on Loan
It is common that a banker will charge interest on the employers’ bridging
loan. The owner has to bear more interest charged on the balance of loan if the
project is in late completion. By right, the project will be completed within the
planned duration and no more interest will be charged for delayed duration.
b.
Additional Capital
The owner could make a decision, either to apply for loan from any financial
institution or using his own money to bear with extra costs involved. If he decides to
use his own money, then he might not afford to invest in other businesses for profit
making purpose. Therefore, this is considered a loss for the owner that may incur in
the event of late completion.
2.5.3
Business Disruption Loss
When businesses could not be implemented on time due to late completion
and causing an obvious loss to the owner, then such cost will be considered as a
business disruption loss. Usually, business disruption loss arises in renovation or
extension projects, recreation projects which provides the facilities of sport, and
equipment, and hotel projects.
41
2.5.4
Management Costs
Developer or the owner of the project may suffer the cost for management.
The component costs incorporated to management costs are wages to project
managers, consultants, clerk of works, and other workers engaged in handling
management works. In addition, the owner has to pay allowances for travelling and
accommodation if the project is far away from the headquarters.
2.5.5
Professional Fees
Professional consultants are employed to supervise or manage a project.
Once a project is in late completion, the employer has to pay more for the services
provided by the professional consultants. As a result, this may cause the employer to
incur extra expenses.
2.6
LAD and Penalties
As mentioned earlier, briefly, LAD is a payment of agreed damages by the
contractor when completion of works is not within the stipulated time and their
amount should be recorded in the Appendix to the form of contract.
The
characteristic of liquidated damages is that loss need not to be proved. 110 The sum
stated should be a genuine estimate of the damage that the building owner may
110
Eggleston, B. (1997). Liquidated Damages and Extensions of Time in Construction contract. 2nd
ed. London: Blackwell Science Ltd., pp.53
42
suffer. If the sum stated is excessive and bears no relation to the actual damages,
then it may be regarded as a penalty. 111
However, a penalty is “a sum which a party similarly agrees to pay or forfeit
in the event of breach, but which is fixed not as a pre-estimate of the probable actual
damages but as punishment, the threat of which is designed to prevent the breach”.112
In other words, if the stipulated amount is too high, the clause will be declared
invalid as a “penalty”. 113 In addition, a liquidated damages clause could not be
enforceable when it constitutes a “penalty”. 114 In such circumstances, the employer
is left to claim unliquidated damages in respect of whatever loss or damage that can
be proved. 115
2.6.1 Distinction between LAD and Penalties
One of the arguments, which are sometimes used as defences to a liquidated
damages clause is penalty and it is sometimes difficult to ascertain whether the
damages are penalties or liquidated damages.
However, the case of Dunlop
Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd 116 established that the stated
damages must be a genuine pre-estimate of the anticipated loss if the clause is not to
be struck down as a penalty.117 In this case, Dunlop contracted to sell tyres and other
accessories to New Garage on terms designed to ensure that the tyres, etc. were not
111
Ashworth, A. (2001). Contractual Procedures in the Construction Industry. 4th ed. England:
Pearson Education Limited., pp.33
112
Liquidated Damages for construction Delays: Definitions and Legal interpretation in Connection
with delays. URL: http://www.CTS2000.bizland.com/liquidated.htm
113
Wallenfang, R.L. (2001). Coordinator – Construction Law Group – Liquidated Damages for Delay
in Construction Contracts. URL: http://www.concretemasonry.org/design/Liquidated_damages.htm
114
Blake, P. Liquidated Damages – Case Law Review / Sectional Completion. URL:
http://www.prettys.co.uk/business_law/construction/lads.shtml.
115
Murdoch, J. and Hughes, W. (1996). Construction Contracts: Law and Management. 2nd Ed. UK;
E & FN Spon., pp.327
116
[1915] AC 79
117
Zakir Mulla. (25 February 2005). Liquidated damages: North Sea Ventilation Ltd v Consafe
Engineering. URL: htp:://www.rics.org
43
sold below the manufacturer’s list price. New Garage agreed to pay Dunlop ‘the sum
of £5 for each and every tyre…sold or offered in breach of this agreement, as and by
way of liquidated damages and not as a penalty’. New Garage sold tyres in breach of
the agreement. The court held that, in the circumstances of the case, the sum of £5
was liquidated damages and not penalty. As a result, Lord Dunedin had noted
guidelines, which have been long accepted as the best available to deal with this
issue: 118
1.
The terms used in the contract are not conclusive, though they may be
persuasive,
2.
Unlike a penalty, liquidated damages represent a genuine attempt at a
pre-estimate of likely damage.
3.
In deciding into which category a particular contract term falls,
account must be taken of circumstances at the time of making the
contract, not at the time of breach.
4.
The following ‘tests’ may be helpful, or even conclusive:
(a) If the sum stipulated is ‘extravagant and unconscionable’
compared with the greatest amount of loss which could be caused,
it is a penalty.
(b) If the breach consists simply of non-payment of money, and the
sum stipulated is a greater sum, it is penalty.
(c) If a single sum is payable for a range of breaches of varying
severity, there is a presumption (but no more) that it is a penalty.
(d) The fact that an accurate pre-estimation of the likely damage is
almost impossible to achieve does not prevent a stipulation from
being classed as liquidated damages. In fact, it is in precisely
these cases – public buildings, housing association projects and
other non-profit – making ventures – when a liquidated damages
clause is most useful.
Mr Justice Lopes in Law v Redditch Local Board 119 explained the distinction
in this way: 120
118
Murdoch, J. and Hughes, W. (1996). Construction Contracts: Law and Management. 2nd Ed. UK;
E & FN Spon., pp.328
119
[1892] 1 QB 127
44
‘The distinction between penalties and liquidated damages depends on the
intention of the parties to be gathered from the whole of the contract. If the
intention is to secure performance of the contract by the imposition of a fine
or penalty, then the sum specified is a penalty; but if, on the other hand, the
intention is to assess the damages for breach of the contract, it is liquidated
damages.’
2.6.2 Pleading Cases in Distinguishing LAD and Penalties
In order to give a clearer view in relation to distinguish between damages and
penalties, the following cases are highlighted.
First and foremost is Kemble v
Farren. 121 A contract for the defendant to appear as principal comedian at Covent
Garden Theatre at the rate of £3.6s.8d per night for four seasons, contained a
provision that if either party failed to fulfil the contract or any part thereof, such
party should pay the other party by way of liquidated damages the sum of £1000.
The defendant refused to act during the second season and was sued. It was held
that, the sum of £1000 was a penalty because, had the plaintiff failed to make a
single payment of £3.6s.8d, he would have been liable to pay £1000 and had the
defendant contravened any regulations of the theatre, however minute, he would
have been similarly liable.
In addition, in Stanor Electric Ltd v R Mansell Ltd 122 , the main contractor,
Mansell, sought to deduct liquidated damages for late completion by their electrical
sub-contractor, Stanor, of work on two houses where liquidated damages were stages
at £5000 per week. Judge Fox-Andrews held that as a matter of construction of the
120
Eggleston, B. (1997). Liquidated Damages and Extensions of Time in Construction contract. 2nd
ed. London: Blackwell Science Ltd., pp.57
121
[1829] 6 Bing 141
122
[1988] CILL 399
45
particular clause in the contract where work was to be done on two houses, therefore
the clause in the evidently a penalty.
Furthermore, in of Public Works Commissioner v Hills 123 , a contractor for
construction of a railway provided that the contractor should forfeit the retention
moneys under the contract ‘as and for liquidated damages’ for late completion. It
was held that, since the amount of retention money would depend upon the progress
of works, it was an indefinite sum and could not be a genuine pre-estimate of loss,
therefore, to be considered as a penalty.
Briefly, a ‘liquidated damages clause’ is likely to be unenforceable as a
penalty if: 124
a)
The pre-estimate sum is considered to be an unreasonable estimate of
the probable loss; or
b)
It has been used by one party to impose pressure or oppression on the
other (which could be said to be another way of expressing the
unreasonable nature of the predetermined sum).
However, in Malaysia, the position on the deduction of liquidated damages is
somewhat different from other common law jurisdictions. 125 In Malaysia, ‘there is
no difference between penalty and liquidated damages’. 126 The further explanation
in relation to this issue will be discussed in subchapter 2.7 as following.
123
[1906] AC 368
Freeman, K. (May, 2005). UK contract Articles in Association with Kendall Freeman: Upholding
liquidated damages and avoiding penalties. URL:
http://www.legal500.com/devs/uk/co/ukco_022.html
125
Steve, Chan. (2004). Lecture 4: Duty to Mitigate, Constructive Acceleration, Challenges to
Liquidated Damages. Bullet-Proof EOTs-with Particular reference to PWD/JKR standard Forms of
Contract. 27 July, 2004. Kuala Lumpur: James R Knowles (M) Snd. Bhd., pp.18
126
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (The PAM 1998
FORM). 2nd ed. Kuala Lumpur; Malayan Law Journal Sdn. Bhd., pp.193
124
46
2.7
Liquidated and Ascertained Damages: The Malaysian Position
The following discussion will revolved around the common law position
in relation to the recovery of liquidated damages by the employer consequent
upon the contractor's non-completion by a defined or stipulated date.
The
Malaysian courts have considered various facets of the subject of liquidated
damages and have made relevant pronouncements; which process has built up a
body of judicial precedents which must be followed in the local context. 127
Therefore, local practitioners must therefore be conversant not only with the
common law principles but also the position taken by the Malaysian courts; hence
the relevance of this discussion. 128
2.7.1
Applicable Statutory Provision
In Malaysia, the relevant statutory provision that deals directly with the
issue of liquidated damages and penalties is Section 75 of the Contracts Act 1950
(Rev 1974) entitled ‘Compensation for breach of contract where penalty stipulated
for’. 129
Section 75 reads:
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 damages or loss is proved to have been caused thereby,
to receive from the party who has broke the contract reasonable compensation
127
Harbans Singh. (2004). Engineering and Construction Contracts Management: Commencement
and Administration. Selangor: Malayan Law Journal Sdn. Bhd., pp.572
128
Ibid, pp.572
129
Ibid, pp.572
47
not exceeding the amount so named or, as the case may be, the penalty
stipulated for.
Section 75 is in pari material with Section 74 of the of the Indian Contracts
Act 1872 where it was first enacted and then followed in the local application. 130
Mr. Sundra Rajoo in his book on ‘The Malaysia Standard Form of Building
Contract (The Pam 1998 Form)’ stated that; Section 75 of the Contracts Act 1950
deals with the effect of a sum named in a contract which is payable in cases of
breach of contract. Further, in Malaysia ‘there is no difference between penalty
and liquidated damages’; see SS Maniam v The State of Perak 131 and Linggi
Plantation Ltd v Jagatheesan. 132
2.7.2
Interpretation of Section 75 of Contracts Act 1950
Section 75 apparently permits the recovery of liquidated damages ‘whether or
not damage or loss is proved have been caused by the breach of late completion. 133
However, Professor Dato’ Sinnadurai in his book on Law of Contract in Malaysia
and Singapore: Cases and Commentary (2nd ed, 1987) says:
The case seems to suggest that the plaintiff cannot recover simpliciter the
sum fixed in the contract, whether as a penalty or liquidated damages. The
plaintiff is required to prove the actual damages he has suffered, see Bhai
130
Harbans Singh. (2004). Engineering and Construction Contracts Management: Commencement and
Administration. Selangor: Malayan Law Journal Sdn. Bhd., pp.572
131
[1975] MLJ 75
132
[1972] 1 MLJ 89
133
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (The PAM 1998
FORM). 2nd ed. Kuala Lumpur; Malayan Law Journal Sdn. Bhd., pp.194
48
Panna Singh v Bhai Arjun Singh 134 ; Lord Hailsham in Linggi Plantations Ltd
v Jagatheesan 135 and Wearne Brothers v Jackson 136 .
He added that in every case,
The court has to be satisfied that every sum of money payable by way of
liquidated damages is reasonable… Upon the court being satisfied that the
said sum is a genuine pre-estimate and it represents a reasonable sum for the
loss suffered, it may order the said sum to be paid as damages.
In practice terms, therefore, an architect must take an actual calculation of the
likely loss to the employer and any temptation to increase the figure should be
avoided as otherwise it may well be found not to be a ‘reasonable compensation’. 137
In an Indian Case of Bhai Panna Singh v Bhai Arjun Singh 138 the Privy
Council, in interpreting Section 74 of the Indian Contracts Act 1872 held that, the
effect of s74 of the Contracts Act 1872 is to disentitle the plaintiffs to recover
simpliciter the sum of Rs10,000, whether as penalty or liquidated damages. The
plaintiffs must prove the damages that they have suffered.
In S.S. Maniam v The State of Perak 139 , Thomson confirmed: In the first
place, in this country there is no difference between penalty and liquidated
damages ... . As said by Pollock and Mulla on the Indian Contracts Act (7th
Edition), 'This section 64 boldly cuts the most troublesome knot in the common law
doctrine of damages. In brief, in our law in every case, if a sum is named in a
134
[AIR 1929 PC 179]
[1972] 1 MLJ 89
136
[1966] 2 MLJ 155
137
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (The PAM 1998
FORM). 2nd ed. Kuala Lumpur; Malayan Law Journal Sdn. Bhd., pp.194
138
AIR 1929 PC 179
139
[1975] MLJ 75
135
49
contract as the amount to be paid in case of breach it is to be treated as a penalty,
see Bhai Panna Singh v Bhai Arjun Singh AIR 1929 PC 179.
In Wearne Brothers (M) Ltd v Jackson 140 , the Malaysian High Court held
that whether the clause in the agreement was a penalty clause or not was
irrelevant in view of Section 75 of the Contracts (Malay States) Ordinance 1950,
which provides that in every case the court must determine what is the reasonable
compensation. The effect of the section is that the plaintiff is disentitled from
recovering simpliciter the sum fixed in the contract whether as penalty or
liquidated damages and must prove the damage suffered by him unless the sum
named is a genuine pre-estimate.
Lord Hailsham put a seal of approval on the said interpretation in the case
of Linggi Plantations Ltd v Jagatheesan 141 where he held that Section 75 of the
Contracts Act 'was intended to cut through the rather technical rules of English law
relating to liquidated damages and penalties'.
In Brunei, the Court put a further gloss on the interpretation afforded thus
far by holding in Chung Syn Kheng Electrical Co Bhd. v Regional Construction
Sdn Bhd 142 that:
... the amount provided for liquidated damages will only be enforced in
favour of the plaintiff if it can be shown that the amount was a genuine
pre-estimate of the damages likely to flow from the specified breach. The
amount of loss or damage which has actually occurred must be a major
factor in deciding whether the amount provided for was an honest preestimate of the likely loss or damage.
If the actual loss or damage
suffered is very much less than the sum agreed, the court will refuse to
140
[1966] 2 MLJ 155
[1972] 1 MLJ 89
142
[1987] 2 MLJ 763
141
50
enforce the agreement to pay a specified sum by way of liquidated
damages.
The Federal Court having meticulously reviewed all the previous case law
and authorities on this issue in the case of Selvakumar a/1 Murugiah v
Thiagarajah a/1 Retnasamy 143 held, that:
1
In Malaysia, there is no distinction between liquidated damages and
penalties as understood under English law in view of s75 of the Contracts
Act 1950 which provides that in every case the court must determine what
is reasonable compensation, 'whether or not actual damage or loss is
proved to have been caused thereby' ('the words in question');
2
The words in question must be given a restricted construction. Hence,
despite the words in question, a plaintiff who is claiming for actual
damages in an action for breach of contract must still prove the actual
damages or reasonable compensation in accordance with the settled
principles in Hadley v Baxendale 144 . Any failure to prove such damages
will result in the refusal of the court to award such damages;
3
For cases where the court finds it difficult to assess damages for the
actual damage as there is no known measure of damages employable, and
yet the evidence clearly shows some real loss inherently which is not too
remote, the words in question will apply.
The court ought to award
substantial damages as opposed to nominal damages which are
reasonable and fair according to the court's good sense and fair play. In
any event, the damages awarded must not exceed the sum so named in
the contractual provision.
143
144
[1995] 1 MLJ 817
[1854] 9 Ex 341
51
In light of the above-mentioned judicial pronouncements, the local
position on liquidated damages can be summarized as the following:
ƒ
By virtue of Section 75 of the Contracts Act 1950 (Rev 1974), in
Malaysia there is no difference between penalty and liquidated damages;
ƒ
Therefore, all liquidated damages clauses are to be treated as if they had
been penalties under English Law;
ƒ
The employer cannot recover simpliciter the sum fixed in the contract
whether as a penalty or liquidated damages. He must prove the actual
damages or the reasonable compensation in accordance with the settled
principles of Hadley v Baxendale 145 or Section 74 of the Contracts Act
1950 (Rev 1974);
ƒ
The measure of damages stated in the contract will be enforced provided
that it is proved by the employer that he had suffered loss or damage
limited to the extent of the quantum of the 'agreed compensation', ie the
liquidated damages sum; and
ƒ
The amount of damages ordered by the court in these circumstances
cannot exceed the specified amount. Therefore, the figure inserted in the
contract is a limitation on the amount for which the contractor is liable.
2.7.3
Recovery of LAD
When the LAD is agreed, the employer’s only remedy for late
completion by the contractor is a sum not exceeding the specified amount and
he does not have an option of claiming unliquidated damages. 146 However, in
the PAM 1998 Form, if the date for completion is not inserted in the Appendix,
then no liquidated damages to be recoverable, but in such case, the employer
145
[1854] 9 Ex 341
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (The PAM 1998
FORM). 2nd ed. Kuala Lumpur; Malayan Law Journal Sdn. Bhd., pp.191
146
52
would be able to recover general damages by legal action on the basis of his
actual proven loss. 147
In light of the ruling in Selvakumar a/1 Murugiah v Thiagarajah a/1
Retnasamy 148 , the recovery of liquidated damages generally follows a process as
highlighted in Appendix A. The said process entails principally the following
steps. 149
1.
Should the contractor be liable to pay liquidated damages following noncompletion, provided the conditions precedent have been fulfilled, eg the
Certificate of Non-Completion (CNC) is issued, etc, the employer may
proceed to deduct the liquidated damages simpliciter;
2.
The contractor has an option of challenging such deduction by the
employer.
Should the contractor fail to defend or acquiesce to the
deduction, this may ultimately compromise his later challenge to the
deduction;
3.
In the event the contractor proceeds with his challenge, this matter needs
to be arbitrated or litigated;
4.
The employer must then prove on a balance of probabilities the actual
damages suffered or reasonable compensation as per the settled
principles of Hadley v Baxendale 150 or Section 74 of the Contracts Act
1950 (Rev 1974); and
5.
Should the employer prove his loss or damage to be less than the amount
stipulated in the contract, he can recover only the lesser amount.
However, should this turn out to be more than the stipulated amount, he
is entitled only to the stipulated amount which effectively acts as the
ceiling amount to recovery.
147
Ibid, pp.192
[1995] 1 MLJ 817
149
Harbans Singh. (2004). Engineering and Construction Contracts Management: Commencement
and Administration. Selangor: Malayan Law Journal Sdn. Bhd., pp.576
150
[1854] 9 Ex 341
148
53
2.8
Conclusion
As mentioned earlier, most building contracts provide an express provision for
Liquidated as Ascertained Damages (LAD) to enable an employer to claim his
damages measured by the amount of loss for every day or week of delay by the
contractor under the contract. Indeed, the nature and purpose of such clause is to save
time and money on arbitration or litigation to resolve on disputes arising from in this
matter. The typical component costs to LAD are loss of income, financing loss,
management costs, business disruption loss and professional fees.
In Malaysia, there is no difference between LAD and penalties as understood
under English Law.
Furthermore, the recovery of LAD in the local context is
governed by the section 75 of Contract Act 1950. Whereby, the court will consider
whether damages claimed is reasonable compensation instead of amount LAD
stipulated in a contract. In addition, the employer is required to prove the actual loss
that he had suffered as the principle set down in Bhai Panna Singh v Bhai Arjun
Singh 151 ; Linggi Plantations Ltd v Jagatheesan 152 , Wearne Brothers v Jackson 153
and Selvakumar a/1 Murugiah v Thiagarajah a/1 Retnasamy
154
.
It has been
argued that such an approach has put the liquidated damages recovery
mechanism on a similar footing to the recovery of unliquidated (general)
damages at common law. 155
Furthermore, it could not deny that such decision may cause certain
criticism, whereby such defence seems to defeat the ordinary purpose of having
such clause in a contract. Therefore, the requirements of mitigation in relation
to recover LAD will be discussed in the following chapter in order to resolve on
this problem.
151
[AIR 1929 PC 179]
[1972] 1 MLJ 89
153
[1966] 2 MLJ 155
154
[1995] 1 MLJ 817
155
Harbans Singh. (2004). Engineering and Construction Contracts Management: Commencement
and Administration. Selangor: Malayan Law Journal Sdn. Bhd., pp.576
152
CHAPTER 3
MITIGATION
CHAPTER 3
MITIGATION
3.1
Introduction
The basic concept of damages in contract is to place the plaintiff in the same
position he would have been in had the contract been carried out, is subject to the test
of remoteness. 1 However, the basic concept is limited by the notion of mitigation of
loss. 2
This chapter discusses the rules of mitigation and the related matters.
Generally, it covers the precise rules and principles of mitigation, when may the duty
to mitigate exist; in what circumstances the duty apply, to what extent the mitigation
should be carried and etc., as guidance to innocent parties to recover their damages
and losses.
1
2
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp352
Ibid, pp352
55
3.2
Definition of Mitigation
Oxford Dictionary of Law 3 defines mitigation as the reduction in the loss or
injury resulting from a tort or breach of contract and the injured party is under a duty
to take all reasonable steps to mitigate his loss when claiming damages. Mitigation
(also known as the doctrine of “avoidable consequences”) holds that an injured party
cannot ignore an opportunity act as to reduce the continuing increase in damages
from that injury, and recover the same from defendant. 4
In short, mitigation
essentially means that a plaintiff will not be able to claim for losses, which he could
have avoided by taking of reasonable steps to reduce those losses once he has elected
to treat the contract at an end. 5
3.3
General Rules and Principles of Mitigation
Mitigation of damages is a common law defences, often known as the law of
avoidable consequences. 6 The recovery of damages is subjected to this limitation,
namely mitigation; the law does not allow a plaintiff to recover damages to
compensate him for loss which would not have been suffered if he had taken
reasonable steps to mitigate his losses. 7
3
Oxford Dictionary of Law (2003). Oxford University Press: Market House Books Ltd. pp318
TCPALaw.com, Headnote Issues Research. (August 2, 2003). Mitigation of Damages. URL:
http://.www.tcplaw.com/free/head2.pdf
5
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp352
5
Ibid, pp352
6
TCPALaw.com, Headnote Issues Research. (August 2, 2003). Mitigation of Damages. URL:
http://.www.tcplaw.com/free/head2.pdf
7
Andrew Phang, Boon Leong. (1998). Cheshire, Flfoot and Furmston’s, Law of Contract in
Singapore and Malaysia. 2nd Ed. Singapore: The Butterworth Group of Companies. pp1022
4
56
The classic judicial formulation of this is Viscount Haldane LG’s in British
Westinghouse Electric Co. v Underground Electric Railway Co. of London 8 (a
contract case). The Judge said that the principle ‘…impose on a plaintiff the duty of
taking all reasonable steps to mitigate the loss consequent in the breach and debars
him from claiming any part of the damage which is due to his neglect to take such
steps.’ 9
The facts of the case 10 were that the appellants, Westinghouse had contracted
to supply turbines to the respondents. The respondent laid down that the turbines had
to meet certain specifications. While the appellants built and delivered the turbines
they never met the specifications required by the contract.
Eventually, the
respondent had to replace the turbines with those produced by a different
manufacturers. The new turbines were highly efficient, so much so that they quickly
paid for themselves. Nevertheless, the respondents sued for the cost of purchasing
and installing the new turbines.
It was held that they could not do so.
The
respondents were required to mitigate their losses and they had done so, but so
efficiently as to eliminate the costs of replacing the original turbines, and therefore
nothing could be recovered as regards these losses. They were entitled, however, to
compensation for the losses sustained while the inefficient turbines were being used.
However, whether the plaintiff has failed to take a reasonable opportunity of
mitigation is a question of fact and the question revolving around is whether the
plaintiff had done everything as reasonable man might be expected to do in the
ordinary course of business. 11
8
[1912] AC 673
Burrows, A.S. (1987). Remedies for Torts and Breach of Contract. UK: Butterworth & Co. Ltd.
pp64
10
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp352
11
Ibid, pp353
9
57
3.4
Mitigation in Malaysian Position
In Malaysia, Singapore and Brunei, the explanation of Section 74 of Contract
Act 1950 appears to statutorily embody the principle of mitigation.12 The Section 74
reads as follows:
74 (1) When the contract has been broken, the party who suffers by the
breach is entitled to receive, from the party who has broken the
contract, compensation for any loss or damage caused to him thereby,
which naturally arose in the usual course of things from the breach, or
which the parties knew, when they made the contract, to be likely to
result from the breach of it.
74 (2) Such compensation is not to be given for any remote and indirect loss
or damage sustained by reason of the breach.
74 (3) When an obligation resembling those created by contract has been
incurred and has not been discharged, any person injured by the
failure to discharge it is entitled to receive the same compensation
from the party in default as if the person had contracted to discharge it
and had broken his contract.
In estimating the loss or damage arising from a breach of contract, the means
which existed of remedying the inconvenience caused by the non-performance of the
contract must be taken into account.
The plaintiff seeking for general damages should always be able to show that
he mitigated the losses he suffered from the defendant’s breach.13 This principle was
illustrated in local cases; for instance, Hong Leong Co Ltd v Pearlson Enterprise Ltd
12
Andrew Phang, Boon Leong. (1998). Cheshire, Fifoot and Furmston’s, Law of Contract in
Singapore and Malaysia. 2nd Ed. Singapore: The Butterworth Group of Companies. pp1028
13
Robinson, N.M. et. al. (1996). Construction Law n Singapore and Malaysia. 2nd Ed. Singapore; The
Butterworth Group of Companies. pp241
58
(No 2) 14 , and Tansa Enterprise Sdn Bhd v Temenang Engineering Sdn Bhd. 15 In the
case of Hong Leong v Pearlson Enterprise, it was only concerned with the
counterclaim, which was ordered to be retried by the Federal Court on August 7,
1967. On the retrial, the court merely had to decide on the quantum of damages
under the first two items of the counterclaim. The case held that, as to the first item
of the counterclaim (namely the difference between the contract price and the lowest
possible market price for 281,004 bricks of No. 3 commercial quality) the defendants
were not entitled to any damages. This is because the offer made by the plaintiffs
was reasonable and the defendants should have mitigated their loss by accepting the
plaintiffs’ offer and no loss would have been suffered by the defendants if they had
accepted it. The defendant were not entitled to any damages in respect of second
item of the counterclaim for $ 11,868 (being wages paid to 18 workers for 69 days at
$ 172 per day). This is because the loss could have been avoided as it was the
practice in the building trade for bricklayers and carriers to be sent away without pay
if there was no work for them to do due to lack of bricks. However, the defendant is
entitled only to recover nominal damages for breach of contract. The sum of $ 10
was awarded as nominal damages. In further, as the plaintiffs by their breach of
contract caused the defendants considerable inconvenience and unreasonably delayed
the construction the flats, they should pay the defendants the costs of the retrial and
the original trial of the counterclaim to be taxed on the lower scale.
In Tansa Enterprise v Temenang Engineering, the main issue in this case is
the defendant appealed against the order for summary judgement and applied to set
aside the injunction on a few grounds. The defendant also applied for stay of
execution of judgement pending the outcome of its counterclaim against the plaintiff.
One of the counterclaims was transportation costs of RM 400 incurred by having to
buy replacement bricks.
The court dismissed the appeal on the basis that the
counterclaim for cost of transportation for the replacement bricks was not reasonable.
By assuming that the plaintiff was in breach of contract, the defendant had not
mitigated its damages because the supply of the bricks as per the contract are
common bricks and there was no shortage of bricks in the market at the material
14
15
[1968] 1 MLJ 262
[1994] 2 MLJ 353
59
time. However, in fact the defendant was already buying bricks from other suppliers
(Messrs Lin Hoo Brothers) at cheaper prices.
Therefore, if the defendant had
mitigated its losses by buying bricks from other sources, the defendant suffered no
loss. In this case, the defendant did not suffer any loss due to the lower prices paid
for the bricks. The gain made by the lower prices had offset the added cost of
transportation. The Judge added that the defendant may, at best, claim for loss
suffered as a result of having to pay cash for the bricks from other sources and such
loss, but it may be quite minimal.
3.5
The Duty to Mitigate
The “duty to mitigate loss” is a rule of contract law and this rule arises in the
event of breach. 16 It is the duty of every plaintiff to make a reasonable effort to
prevent the amount of loss or harm from increasing. 17 For example 18 , if constant
rain is raising the level of lake next to your home, you have the responsibility to take
steps to prevent damage from flood which is about to occur. Therefore, you may
move your property to higher ground or putting out sand bags to prevent water from
entering your home. 19
The party seeking damage is under a duty to mitigate the loss – Explanation
to section 74 of Contract Act 1950. 20 In Kabatasan timber Extraction Co. v Chong
Fah Shing 21 , the Federal Court recognised this general duty and held that the
plaintiff’s claim should be reduced accordingly. In this case, the appellants had
16
3.11 The Duty to Mitigate Loss (Keeping Costs to a Minimum). (January, 2004). URL:
http://www/taswa.org/tm/chapter3/3_11.htm
17
What is the ‘duty to mitigated damages?’ URL: http://injurylaw.freeadvice.com/property_damage/mitigate_duty.htm
18
Ibid
19
Ibid
20
Lee, Mei Pheng. (2005). General Principles of Malaysian Law. 5th Ed. Selangor; Penerbit Fajar
Bakti Sdn. Bhd. pp166
21
[1969] 2 MLJ 6
60
contracted to supply timber to the respondent to be delivered at the site of the
sawmill to be erected by the respondent. The timber was delivered in three lots. The
second lot of 198 logs and 4 of the 22 logs in the third lot were not delivered to the
sawmill but were dumped at a distance of more than 500 feet from the sawmill. The
learned trial judge gave judgement for the appellant for RM 9,892.41 being the
balance due under the contract and awarded damages to the respondent on his
counter-claim for breach of contract for the sum of RM 13, 192.40.
In the instance case, the judge had dismissed the appeal in respect of the
claim and allowed the appeal in respect of counter-claim by reducing the amount. It
was the duty of the respondent in this case to take reasonable steps to mitigate the
damage. There was no need for the respondent to have gone to the expense of
buying logs from elsewhere when the logs were lying a few hundred feet away from
the sawmill and all that was required was the additional expenses for hauling them
up to the sawmill. The appropriate damages to be awarded to the counter-claim was
an approximate cost of hauling the logs to the sawmill, which amounted to RM
1,000.
The decision of the case follows the rule that damages are compensatory only
in that one who has suffered loss from a breach of contract must take any reasonable
steps that are available to him to mitigate the extent of the damage caused by the
breach. 22 Although the measure of damages for breach of contract to deliver goods
is ordinarily the difference between the contract price of the goods and the market
price at the time when delivery should have been given. Yet, if the plaintiff might
have mitigated his loss, for example, by any immediate purchase at a low price of
goods to replace those not delivered, or by accepting a reasonable offer from the
defendant to make good part of the loss, this is to be taken into account in assessing
his damages. 23
22
23
Guest, A.G. (1975). Anson’s Law of Contract. 24th Ed. London; Oxford University Press. pp549
see Brace v Clader [1895] 2 Q.B. 253, and Payzu Ltd. v Saunders [1919] 2 K.B. 581.
61
Mr. Burrows, A.S. 24 in his book ‘Remedies for Torts and Breach of Contract’
stated that the duty to mitigate is sometimes used as a positive reason for awarding
damages. He added; on one hand, a plaintiff should not sit back and do nothing to
minimise loss flowing from a breach but should use his resources to do what is
reasonable to put himself into a position as good as if the contract had been
performed. On the other hand, he should not unreasonably incur expense subsequent
to the wrong.
In Payzu Ltd v Saunders 25 , the plaintiff agreed to buy certain goods from the
defendant over a period of nine months with payment within one month of delivery,
and deliveries monthly. The plaintiff failed to make prompt payment for the first
instalment, and the defendant, in breach of contract, refused to deliver any more
under the contract, but offered to deliver the goods at the contract price if the
plaintiff paid cash on delivery of the order. The plaintiff refused this and claimed
damages, these being the difference between the contract price and the market price.
It was held that the plaintiff had permitted himself to sustain a large measure
of the loss, which as prudent and reasonable people, they ought to have avoided. He
had the cash available to meet the defendant's demands and could have mitigated by
purchasing off the defendant at the contract price as the defendant offered, instead of
going into the market to purchase at a higher price. Although the defendant was
liable to pay damages, these should be limited to the value of the month’s credit, as
the claimant was under a duty to mitigate his loss and accept the defendant’s offer.
As a result, he was therefore, not entitled to damages. However, the Court of Appeal
emphasised that the claimant must only take such steps as are reasonable to mitigate
his loss; he is not bound to accept every offer made by his contractual partner.
24
Burrows, A.S. (1987). Remedies for Torts and Breach of Contract. UK: Butterworth & Co. Ltd.
pp64
25
[1919] 2 KB 581
62
In short, the plaintiff must minimise the loss resulting from the breach by
taking all reasonable steps available to him. If he fails to do so, then he cannot
recover anything in respect of the extra loss. There are three rules that lay under the
duty to mitigate, whereby: 26
1.
The plaintiff cannot recover for loss which the plaintiff could have
avoided by taking reasonable steps.
2.
The plaintiff cannot recover for any loss he has actually avoided, even
though he took more steps than were necessary in compliance with the
above rule.
3.
The plaintiff may recover loss incurred in taking reasonable steps to
mitigate his loss, even though he did not succeed.
However, the particular acts required in mitigating the damages are
determined on a case-to-case basis, whereby it is set as what is ‘reasonable’ under the
particular circumstances. 27 Whether the plaintiff has failed to take a reasonable
opportunity of mitigation is a question of fact dependent upon the particular
circumstances of each case and the burden of proving such failure rests upon the
defendant as in Payzu Ltd v Saunders 28 In this context, it should be noted that
provided the plaintiff’s attempt to mitigate are reasonable at the time, it is irrelevant
if they are subsequently found to be inefficient, as stated in Gebruder Metel Mann
GmbH & Co. KG v NBR (London) Ltd. 29
26
Remedies For Breach 1 – Damages. URL:
http://www.lawteacher.net/Contract/Discharge%20and%20Remedies/Remedies%20Lecture%20.htm
27
What is the ‘duty to mitigated damages?’ URL: http://injurylaw.freeadvice.com/property_damage/mitigate_duty.htm
28
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp353
29
[1984] 1 Lloyd’s Rep 614
63
3.6
Limitation of Mitigation upon Recovery of Damages
The doctrine of mitigation of loss means that a plaintiff cannot recover
damages for any part of loss which could have been avoided by taking reasonable
steps. 30 Mr. Emanuel, S. 31 stated that, “Duty to mitigate” is only in the sense that if
plaintiff fails to do it, he will lose the right to collect damages, not in the sense that
he has breached some obligation.
In other words, the “duty to mitigate” only
requires the plaintiff to make reasonable efforts to mitigate damages. He added that,
plaintiff does not have to embark on a hazardous or uncertain course of action that
causing him incur substantial expense or inconvenience, damage his reputation, or
break any contracts, in order to mitigate.
Thus, it was held in Pilkington v Wood 32 that the plaintiff was not obliged to
embark upon a difficult and complicated litigation. In this case, a solicitor, in breach
of contract, obtained for the plaintiff a house which had a defective title. The
plaintiff tried to sue the solicitor, who argued that the plaintiff should have mitigated
by suing the vendor under the covenants for title under s76 LPA 1925. The court
remarked: "The so-called duty to mitigate does not go so far as to oblige the injured
party, even under an indemnity, to embark on a complicated and difficult piece of
litigation against a third party. It is no part of the plaintiff's duty to embark on the
proposed litigation in order to protect his solicitor from the consequences of his own
carelessness' (per Harman J)." 33
30
Murdoch, J. and Hughes, W. (1997). Construction Contracts: Law and Management. 2nd Ed. UK; E
& FN Spon. pp324
31
Emanuel, S. Emanuel Law Outlines: Contracts: Chapter 10: Remedies.
URL://http:www.stcl/students/sba/EmanuelContractsOutline.doc
32
[1953] 2 Ch 770; [1953] 3 WLR 522
33
Cases on Damages. ULT: http://www.lawteacher.net/Contract/Discharge%20and
%20Remedies/Remedies%20Lecture%20htm
64
Similarly, in Selvanayagam v University of the West Indies 34 , it was held that
the plaintiff was not required to undergo an operation which carried a risk of postoperative complications in order to mitigate the loss. 35
3.7
Mitigation in Building Contracts
By referring to Construction Contracts; Law and Management, written by
Murdoch, J. and Hughes, W., mitigation is one of the important qualifications for a
party to compensate for all general damages or losses which flow from a breach of
contract. The principle of mitigation was applied in some construction cases which
can be seen as follows.
Firstly, in William Tompkinson & Sons Ltd. v Parochial Church Council of
St. Michael 36 , the employer who unreasonably refuses to let the original contractor
return to the site during a Defects Liability Period in order to carry out remedial work
will not be able to recover the extra cost incurred by having the work carried out by
another contractor. In this case, an employer refused to allow the original contractor
access to the site to remedy defects but, instead, sued the contractor for the cost of
having these rectified by another contractor. It was held that the employer’s decision
amounted to an unreasonable failure to mitigate the loss suffered. The damages were
reduced by the amount by which the employer’s costs exceeded what it would have
cost the original contractor to carry out the work.
34
[1983] 1 WLR 585
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp353
36
[1990] 6 Const. LJ 319
35
65
Similarly, in Hutchinson v Harris 37 , an employer cannot hold an architect
liable for rental income lost due to neglect supervision of a conversion project, where
the evidence shows that the employer could easily have done what was required to
render the premise lettable.
In Rockingham Country v Luten Bridge Co. 38 , it was a contract to build a
bridge. The country decides not to build the bridge because there is no road to it.
Due to this problem, the Government gave notice not to continue building bridge.
However, the contractor continued to build it by ignoring the notice. The Court said
that, there was a duty to mitigate rests on the contractor, therefore they have to stop
work and should not have continued.
3.8
Significance Aspects in Relation to Mitigation
Andrew Phang, Boon Leong in his book Cheshire, Fifoot and Furmston’s,
Law of Contract in Singapore and Malaysia states briefly a few salient points in
relation to the doctrine of mitigation in local context. It can be summarised as
following:
a)
Reasonable Duty to Mitigate Loss
A person who suffers from a breach of contract is bound to do all that a
reasonable and prudent man would do in the circumstances to mitigate his loss. This
principle was applied in Pasuma Pharmacal Corp v McAlister & Co Ltd. 39 This
37
[1978] 10 BLR 19
[1929] US Ct of App.
39
[1965] 1 MLJ 221
38
66
decision also cited and applied in the leading English precedent of Payzu Ltd
Saunders 40 , which has been discussed in previous subtopic.
b)
No advance action of mitigation
Further, principles of mitigation cannot apply ‘in advance’. On this basis, an
application for an interlocutory injunction to mitigate loss was rejected in
Government of Pakistan v Seng Peng Sawmills Sdn Bhd. 41 As observed by the
Judge, Abdul Razak in this case:
I have not been indicated on what authority injunction, and a mandatory one
at that can be made to mitigate one’s loss where the question whether there
had been loss all and by whom had yet to be decided. In saying that the
application was to mitigate his loss the applicant had arrogated to itself the
right to say that the … respondent was at fault and therefore it must now only
be the court’s duty to mitigate his loss.
c)
Insufficient of Evidence
In the event when the issue of mitigation is raised too late, whereby in a stage
the proceedings with the result that insufficient evidence is available to the court, it
would appear that a re-trial on the issue of damages can be ordered. This rules was
applied in a case decided by the Brunei court of Appeal in Pacific Electrical Co Ltd v
Seng Hup Electrical Co (S) Pte Ltd. 42
40
[1919] 2 KB 581
[1979] 1 MLJ 219
42
[1978] 1 MLJ 162
41
67
d)
No Duty to Mitigate
Furthermore, it would appear that express statutory provision to the contrary
can result in the exclusion of the principle of mitigation. This point can be seen in
the Sarawak decision of Kueh Sing Khay v Lim Boon Chuan. 43 It has also been held
in Morello Sdn Bhd v Jaques (International) Sdn Bhd 44 , that ‘the right to recover an
unpaid deposit or to forfeit a deposit which has been paid, puts the vendor in the
position of being able to obtain compensation without having to prove his damage
and so there is no duty on his part to mitigate’
3.9
Conclusion
Duty to mitigate is an important limitation on the award of general damages.
The non-breaching party is obligated to mitigate, or minimize, the amount of
damages to the extent reasonable. For example, when there is a roof leak, the owner
should move, remove, or cover valuables that might get wet and place protective
plastic sheeting or vessels where needed. This is in satisfaction of the implied
contractual duty to mitigate damages.
In addition, damages cannot be recovered for losses that could have been
reasonably avoided or substantially restore d after the breach occurred. The nonbreaching party’s failure to use reasonable diligence in mitigation the damages
means that any award of damages will be reduced by the amount that could have
been reasonably avoided.
43
44
[1950] SCR 23
[1995] 1 MLJ 577 (also reported at [1995] 2 CLJ 23, [1995] 1 AR 873 and [1995] 1 MAC 153)
68
However, the doctrine of mitigation in minimising the damages or losses is
applied on a case-to-case basis. The non-breaching party does not have to embark on
a hazardous or uncertain course of action that causing him incur substantial expenses
or inconveniences, damage his reputation, or breach any contracts, in order to
mitigate as decided in Pilkington v Wood. In the circumstances of the example
given, if the owner fails to minimize damages when possible, it would be difficult to
hold the contractor responsible for consequential damages. All of the owner’s extra
costs for necessary mitigation efforts should be charged to the contractor.
Thus, in short, when one party has breach the contract, the other party must
take all reasonable steps to mitigate the losses consequent on the breach, and if he
fails to do so, he is disqualified from recovering in respect of any part of the
damages, which is due to his negligence to take such steps.
CHAPTER 4
REQUIREMENTS OF MITIGATION AND
THE EXTENT OF MITIGATION IN
ENFORCING LAD PROVISIONS
CHAPTER 4
REQUIREMENTS OF MITIGATION AND
THE EXTENT OF MITIGATION IN ENFORCING LAD PROVISIONS
4.1
Introduction
The principles and rules of Liquidated and Ascertained damages (LAD) and
mitigation had been explained in the previous chapter. Consequently, this chapter
focus on the achievement of each objective that had set up. In other words, this
chapter is the most important part for the whole research, whereby it will determine
whether the objectives that had set in the earlier stage of the research could be
achieved.
Briefly, this chapter will be divided into two (2) parts as following:
1:
Requirements of Mitigation in Enforcing LAD provisions
2:
The extent that employer has to mitigate his losses in enforcing LAD
provisions
70
4.2
Requirements of Mitigation in Enforcing LAD Provisions
It was a query that whether the employer is bound to mitigate his losses in
enforcing LAD in the event of contractor’s late completion as such requirement is
not stipulated in the LAD provisions.
Due to this issue, the requirements of
mitigation in the event of breach, and what are the rules that may override the
provisions should be identified.
As explained in chapter 3, mitigation of damages is a common law defence,
and is often known as the law of avoidable consequences. 1 Thus, it is necessary to
look at the Malaysian legal system and the sources of Malaysian Law in order to find
out what are the rules that may override the building contracts.
4.2.1
Malaysian Law
Malaysian law can be classified into written, unwritten law and Muslim law. 2
Written law is the most important source of law and it refers to that portion of
Malaysian law which includes the Federal and State Constitutions. The Federal
Constitution is the supreme law of land. There are also Constitutions of the thirteen
States comprising the Federation, which from part of written law in Malaysia.
Legislation enacted by Parliament and the State Assemblies, (e.g. Acts of Parliament,
Ordinances, Enactments, etc.). Subsidiary legislation made by persons or bodies
under powers conferred on them by Acts of Parliament or State Assemblies (e.g.
Rules and Regulations, By-laws, guidelines, etc.). 3
1
TCPALaw.com, Headnote Issues Research. (August 2, 2003). Mitigation of Damages. URL:
http://.www.tcplaw.com/free/head2.pdf
2
Lee, Mei Peng. (2005). General Principles of Malaysian Law. 5th ed. Selangor: Penerbit Fajar Bakti
Sdn. Bhd. pp17
3
Ibid
71
Unwritten law is simply that portion of Malaysian law which is not written,
i.e. law which is not being enacted by Parliament or the State Assemblies and which
is not found in the written Federal and State Constitutions. Unwritten law is found in
cases decided by the courts, local customs, etc. The unwritten law comprises the
principles of English law applicable to local circumstances, judicial decisions of the
superior courts, i.e. the High Courts, Court of Appeal and the Federal Court and
customs of the local inhabitants which have been accepted as law by the courts.
Muslim law is also an important source of Malaysian law but it is applicable
to Muslims only and is administered by a separate system of courts. 4 In Malaysia,
Muslim or Islamic law is increasingly being applied in our local laws. 5 For instance,
currently there is a move to incorporate some Islamic principles into land laws ad
banking laws. In further, it is applies to all person who are Muslims and of particular
are the laws relating to family matters and estate matters relating to the division of
property and assets when a person dies. 6
4.2.2 English Law
English common law and the rules of equity form part of the laws of
Malaysia. 7 English law can be found in the English common law and rules of equity.
However, not all of England’s common law and rules of equity form part of
Malaysian law.
4
Wu, Min Aun. (1982). An Introduction To The Malaysian Legal System. Revised 3rd ed. Malaysia:
Heinemann (Malaysia) Sdn. Bhd. pp23
5
Lee, Mei Peng. (2005). General Principles of Malaysian Law. 5th ed. Selangor: Penerbit Fajar Bakti
Sdn. Bhd. pp18
6
Ibid.
7
Wu, Min Aun. (1982). An Introduction To The Malaysian Legal System. Revised 3rd ed. Malaysia:
Heinemann (Malaysia) Sdn. Bhd. pp24
72
Section 3(1) of the Civil Law Act 1956 (Revised 1972) provides that:
a.
in West Malaysia or any part of thereof, apply the common law of
England and the rules of equity as administered in England on the 7th
April, 1956;
b.
in Sabah, apply the common law of England and the rules of equity,
together with statutes of general application, as administered or in
force in England on the 1st day of December, 1951;
c.
in Sarawak, apply the common law of England and the rules of equity,
together with statutes of general application, as administered or in
force in England on the 12th day of December, 1949…
It is to be noted that, Section 3(1) (a) applicable to West Malaysia mentions
the application of “the common law of England and the rules of equity” whereas
Section 3(1) (b) and (c) applicable to Sabah and Sarawak allows the application of
“the common law of England and the rules of equity, together with statutes of
general application”. 8
However, the application of the law of England throughout Malaysia is
subjected to two limitations: 9
a.
Firstly, it is applied only in the absence of local statutes on the
particular subjects.
Local law takes place precedence over the
England law as the latter is meant only to fill in gaps in the local
system.
8
Wu, Min Aun. (1982). An Introduction To The Malaysian Legal System. Revised 3rd ed. Malaysia:
Heinemann (Malaysia) Sdn. Bhd. pp24-25
9
Ibid, pp26
73
b.
Secondly, only that part of the England law that is suited to local
circumstances will be applied. The provision to Section 3 (1) of the
Civil Law Act is the authority for this.
The provision stated that ‘the said common law, rules of equity and statutes
of general application shall be applied so far only as the circumstances of the States
of Malaysia and their respective in habitants permit and subject to such qualifications
as local circumstances render necessary’.
This provision is necessary as the
population in Malaysia comprise of diverse races practicing a variety of customs and
religions, most of which are totally different from those of the English. 10 The cases
which recognized this fact include Chulas v Kolson 11 , Khoo Tiang Bee v Tan Beng
Guat 12 , Khoo Hooi Leong v Khoo Chong Yeok 13 , and Chou Choon Neoh v
Spottiswoode 14 . 15 In Chou Choon Neoh v Spottiswoode, Maxwell C.J. held that the
English Superstitious Uses Act, 1947 and the Mortmain Acts of 1531 and 1735 were
not applicable in the Straits Settlements.
The extent of the application of common law of England in Malaysia was
also decided in Syarikat Batu Sinar Sdn. Bhd. & Ors v UMBC Finance Bhd. &
Ors. 16 . This case concerned ownership claim over a second-hand tractor. The
problem of double financing arose because the first purchaser’s (UMBC Finance’s)
ownership was not indorsed on the registration card o vehicle. UMBC Finance Bhd.
wanted to repossess the tractor. The plaintiffs sued them, seeking a declaration that
the defendants were not entitled to the tractor.
The High Court allowed the
plaintiffs’ application.
10
Lee, Mei Peng. (2005). General Principles of Malaysian Law. 5th ed. Selangor: Penerbit Fajar Bakti
Sdn. Bhd. pp25
11
[1867] Leic.462
12
[1877] 1 Ky. 423
13
[1930] A. C. 346
14
[1869] 1 Ky. 216
15
Lee, Mei Peng. (2005). General Principles of Malaysian Law. 5th ed. Selangor: Penerbit Fajar Bakti
Sdn. Bhd. pp25
16
[1990] 3 MLJ 468
74
The case was held that, all buyers of second-hand cars in Peninsular Malaysia
have always depended on the absence of any registered endorsement of claim to
ownership in the registration card as a ‘green light’ to deal with sellers whose names
are registered as owners on the registration cards or their mercantile agents. The
practice in Peninsular Malaysia combined with local statutory provisions in regard
to the registration of ownership claims would constitute such a distinctive local
circumstance of the inhabitants of Peninsular Malaysia that the decisions in English
cases on the point of failure to have an ownership claim registered should not be
followed.
4.2.3
English Commercial Law
Section 5(1) introduces into the former Malay States principles of English
Commercial Law as it stood on 7th April, 1956 in the absence of local legislation.
This section states that:
In all questions or issues which arise or which have to be decided in the states
of West Malaysia other than Malacca and Penang with respect to the law of
partnerships, corporations, banks and banking, principals and agents, carriers
by air, land and sea, marine insurance, average, life and fire insurance, and
with respect to mercantile law generally, the law to be administered shall be
the same as would be administered in England in the like case at the date of
the coming into force of this Act, if such question or issue had arisen or had
to be decided in England, unless in any case other provision is or shall be
made by any written law.
On the other hand, section 5(2) of Civil Law Act, which applies to the States
of Penang, Malacca, Sabah and Sarawak provides that English Commercial Law
75
shall apply to the matter which has to be decided in the named States as it would in
England. The said subsection provides that:
“…the law to be administered shall be the same as would be administered in
England in the like case at the corresponding period, if such question or issue
had arisen or had to be decided in England”.
Thus, in the four States mentioned above, there is still a continuing reception
of English commercial Law in the absence of local legislation. 17 However, since
there are so many local statutes already passed which deal with commercial subjects,
there is no total reliance on English commercial Law. 18 Such local statues include
the Companies Act 1956 (Revised 1973), Partnership Act 1961 (Revised 1974),
Banking and Financial Institutions Act 1989 Contracts Act 1950 (Revised 1974),
Insurance Act 1963 (Revised 1972), and Bills of Exchange Act 1949 (Revised 1978).
In Kon Thean Soong v Tan Eng Nam 19 , it was held that English Law of partnership
was not applicable in Malaysia since there is a local statute applicable, that is, the
Contract (Malay States) Ordinance.
4.2.4
Requirements of Mitigation in Enforcing LAD Provisions
In order to determine whether the employer is bound to take mitigation in
enforcing LAD, the sources of Malaysian law was investigated.
As before
mentioned, English common law and the rules of equity form part of the laws of
Malaysia. Its application is subjected to two limitations as it is applied only in the
absence of local statutes on the particular subjects and only for the parts is suited to
local circumstances. Since principle of mitigation is silent in Malaysian law, then it
will be referred to English Law.
17
Lee, Mei Peng. (2005). General Principles of Malaysian Law. 5th ed. Selangor: Penerbit Fajar Bakti
Sdn. Bhd. pp27-28
18
Ibid
19
[1982] 1 MLJ 323
76
In a recent High Court’s case, namely Joo Leong Timber Merchant v Dr
Jaswant Singh a/l Jagat Singh 20 , damages were assessed on the basis that an
innocent party had a duty to mitigate his damages. It was held that, a victim of a
breach of contract could not cut short his duty to mitigate his loss by the mere
commencement of an action for damages (see Techno Land Improvements Ltd v
British Leyland (UK) Ltd [1979] EGD 519).
This was an appeal by the appellant against the decision of the sessions court
(the trial court). The session court had dismissed the appellant’s claim for RM 31,
700 the balance sum due and payable by the respondent to appellant in respect of
building works executed and materials supplied by the appellant towards the erection
of a single storey bungalow for the respondent. On the other hand, the sessions court
allowed the respondent’s counterclaims for RM 63,000 for the cost of remedial
works and RM 300 per month from 15 August 1985 to 22 October 1998 for the loss
of rental income from 15 August 1985 to 22 October 1998.
High court allowed the appeal due to some errors done by the trial court,
whereby not refusing the compensation as claimed. By right, the respondent must
prove the alleged damages suffered by adopting the principles of s 75 of the
Contracts Act 1950 ('the Act'). The failure to prove damage should have resulted in
the refusal of the trial court to award compensation in the sum of RM300 per month
for the period of 15 August 1985 to 22 October 1998. The principle in Penang Port
Commission v Kanawagi s/o Seperumaniam 21 followed.
In addition, the respondent had not shown that he had taken any steps to
mitigate his damage. The respondent not ending the alleged loss of rental income, in
relation to his duty to mitigate was not reasonable. An innocent party can recover no
greater damages for breach of contract that the loss he would have sustained had he
acted reasonably to avoid or reduce losses.
20
21
[2003] 5 MLJ 116
[1996] 3 MLJ 427
77
In this case, the damages are assessed on the basis that an aggrieved party has
a duty to mitigate his damages (West v Versil Ltd & Ors Court of Appeal (Civil
Division), The Times, 31 August 1996; Kleinwort Benson Ltd v Birmingham City
Council [1996] 4 All ER 733). Since the employer failed to show that he had taken
steps to mitigate his loss by resuming the works, he could not recover liquidated and
ascertained damages for a period of time, which would have been avoided had he
taken such steps. The settled principle is ‘innocent party can recover no greater
damages for breach of contract than the loss would have sustained had he acted
reasonable to avoid or reduce loss’ as per Goulding J. in Techno Land improvement
Ltd v British Leyland (UK) Ltd. 22
Mitigation of damages is a common law defence. A claim for damages is
subjected to a duty to mitigate the loss (Westwood v Secretary of State for
Employment [1985] AC 20; Maredelanto Compania Naviera SA v Bergbau-Handel
GmbH; 'The Mihalis Angelos' [1970] 3 WLR 601; Boyo v Lambeth London Borough
Council [1994] ICR 727; Hopkins v Norcross plc [1993] 1 All ER 565). In addition,
the right to damages is qualified by a duty to mitigate (T & S Contractors Ltd v
Architectural Design Associated QBD (Official Referee's Business) 16 October
1992).
In short, a party claiming damages for breach of contract is under the duty to
mitigate the losses he has suffered as imposed generally by the common law. From
the case analysis, the case of Joo Leong Timber Merchant v Dr Jaswant Singh a/l
Jagat Singh 23 is the first case which due with the requirements of mitigation in
enforcing LAD provision in Malaysian context. This case had drawn a clear line that
employer as the innocent party in the event of late completion is bound to take
mitigation in order to reduce his losses from such breach in building contracts. As a
result, employers should be aware and more cautious of this requirement while
enforcing the LAD provisions. Further, the requirement of mitigation under common
law is applicable while enforcing the LAD provision in the event of late completion.
22
23
[1979] EGD 519
[2003] 5 MLJ 116
78
4.3
The Extent That Employer Has to Mitigate His Losses in Enforcing LAD
Provisions
There is a general principle that where a breach has occurred, the injured
party who accepts the breach as discharging the contract, must take all reasonable
steps to mitigate the loss occasioned by the breach. 24 However, to what extent does
the employer has to mitigate his losses in the event of late completion while
enforcing LAD is the main issue. Hence, analysis against the principles and rules of
mitigation should be taken.
4.3.1
The Extent in Loss Mitigation
Briefly, mitigation is reduction in the loss resulting from a breach of contract
and the innocent party is under a duty to take all reasonable steps to mitigate his loss
when claiming damages. Failure or negligence to take such steps will debar the
innocent party from claiming any part of the damages as held in British
Westinghouse Electric Co. v Underground Electric Co. of London. 25
As discussed in chapter 3, the “duty to mitigate” only requires the plaintiff to
make reasonable efforts to mitigate damages. The most significant aspect in relation
to the doctrine of mitigation is reasonableness in taking mitigation. The innocent
party is bound to take a reasonable duty to mitigate loss, but the innocent party is not
liable to take mitigation in the event of interlocutory of breach. On the other hand,
the plaintiff does not have to embark on a hazardous or uncertain course of action
that causing him incur substantial expense or inconvenience, damage his reputation,
or breah any contracts, in order to mitigate.
24
25
Upex, R. (1991). Davies on Contract. 6th ed. London: Sweet & Maxwell Limited. pp261
[1912] AC 673
79
4.3.2
Reasonableness in Taking the Duty to Mitigate
The principle of reasonable duty in taking mitigation is governed by the
doctrine of mitigation. A person who suffers from a breach of contract is bound to
do all that a reasonable and prudent man would do in the circumstances to mitigate
his loss, see Pasuma Pharmacal Corp v McAlister & Co Ltd. 26 and Payzu Ltd
Saunders. 27
In addition, a reasonable duty of mitigation is a sensible, rational, logical or a
realistic action that will be taken by a prudent man in reducing his losses. Based on a
previous research’s finding as mentioned in chapter 2, the typical component costs
incorporated to LAD are loss of income, financing loss, business disruption loss,
management cost, and professional cost. Indirectly, the employer will suffer these
losses in the event of late completion.
For example, construction work for a double storey bungalow was in late
completion due to contractor’s fault and this affected the owner could not move in
his house on time. In order to resolve his accommodation problem, the owner might
have to rent a temporary house or hotel for certain duration while waiting for the new
bungalow to be completed. Consequently, the owner can recover his losses by
enforcing the LAD provision for the cost of rental for the duration that the project
has delayed.
For instant, assuming that the bungalow worth around five hundred thousand
and located in a small town area and the owner has two choices, either to rent a three
stars hotel cost RM 300 a day or rent a five stars hotel cost RM 600 a day. In order
to compliance with the requirements of mitigation, the owner is bound to take a duty
26
27
[1965] 1 MLJ 221
[1919] 2 KB 581
80
of mitigation to reduce his losses, whereby, he could not allow the losses increase
without taking any reasonable steps.
In fact, the owner has to rent a place with an equal or likely amount to the
pre-estimate sum as losses that he would suffered. As a result, the owner should rent
a three stars hotel instead of a five stars hotel.
This decision was made by
considering the value of the bungalow and the rental is reasonable.
However, if the owner was going to claim RM 600 a day, it will be an
unreasonable amount of losses that he might be entitled. This is because the amount
is too high and unreasonable if compared to the value of the bungalow and the
location as well, unless the bungalow is worth much more expensive. In further, the
owner is not taking all reasonable steps to mitigate his losses and the court will
refuse to award the damages.
4.3.3
Bottom Line of Mitigation
It should be bear in mind that the “duty to mitigate” only requires the plaintiff
to make reasonable efforts to mitigate damages. There is a bottom line in taking
mitigation. Duty to mitigate is not an action that will embark the plaintiff into
dangerous, risky, unsafe, incur substantial expense or inconvenience, damage his
reputation, or breah any contracts, in order to mitigate.
This principles was applied in Pilkington v Wood 28 . The court remarked:
"The so-called duty to mitigate does not go so far as to oblige the injured party, even
28
[1953] 2 Ch 770; [1953] 3 WLR 522
81
under an indemnity, to embark on a complicated and difficult piece of litigation
against a third party. It is no part of the plaintiff's duty to embark on the proposed
litigation in order to protect his solicitor from the consequences of his own
carelessness' (per Harman J)." 29 Similarly, in Selvanayagam v University of the West
Indies 30 , the plaintiff was not required to undergo an operation which carried a risk
of post-operative complications in order to mitigate the loss. 31
In a same example as discussed in subtopic 4.3.2 in reasonableness in taking
mitigation, the owner of the bungalow is not liable to embark himself into trouble.
For example, he is not necessary to rent hotel which far away from his working place
that will cause him inconvenience in daily travel, or rent a house that located in a
squatters area that the owner will be exposed to the risk of losses, injuries or
troublesome, in order to comply with the duty to mitigate his losses. This is because
none of these are considered a reasonable or sensible steps that a prudent man would
do in the circumstances to mitigate his loss. 32
4.4
Conclusion
It is common that employer will try to recover his damages or losses that he
had suffered in the event of late completion by deducting such amount from any
money due or become to the contractor. The analysis found that the principle of
mitigation is silent in Malaysian law, and it will therefore be referred to English
Common Law. This is because of English common law form part of the Malaysian
law and will applied when a particular subject is absence in local statutes.
29
Cases on Damages. ULT: http://www.lawteacher.net/Contract/Discharge%20and
%20Remedies/Remedies%20Lecture%20htm
30
[1983] 1 WLR 585
31
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp353
32
see Pasuma Pharmacal Corp v McAlister & Co Ltd. [1965] 1 MLJ 221 and Payzu Ltd Saunders.
[1919] 2 KB 581
82
The requirement of mitigation is applied in the event of enforcing LAD
although such requirement is not stipulated in the contract. Joo Leong Timber
Merchant v Dr Jasawant Singh a/l Jagat Singh 33 is the first case which deals
with the requirements of mitigation in enforcing LAD. Whereby, an employer
is bound to make reasonable efforts to mitigate damages, not to take an action that
will embark him on a hazardous or causing him incur substantial expense or
inconvenience, damage his reputation, or breach any contracts as applied in
Pilkington v Wood.
Employers are advised to make sure that he had taken all the reasonable steps
in order to mitigate his losses in the event of late completion, so that they may be
able to recover their losses suffered during the delayed duration.
33
[2003] 5 MLJ 116
CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
CHAPTER 5
CONCLUSION AND RECCOMMENDATIONS
5.1
Introduction
This chapter attempts to conclude the research’s findings based on the
literature review, case studies, and analysis. In brief, it consist of the research’s
findings, research’s constraints, some suggestions for future studies and conclusion
to the whole study.
5.2
Research’s Findings
The objectives of this study is to determine the requirements of mitigation
and the extent that employer has to mitigate his losses in enforcing LAD provisions.
The findings are summarised in following subtopics.
84
5.2.1
Objective 1: To Determine the Requirements of Mitigation in Enforcing
the LAD Provisions in Construction Contracts
Mitigation of damages is a common law defences, often known as the law of
avoidable consequences. 1 English common law and the rules of equity form part of
the laws of Malaysia. 2 English law can be found in the English common law and
rules of equity. However, not all of England’s common law and rules of equity form
part of Malaysian law. A limits of the application of the England law throughout
Malaysia is only in the absence of local statutes on the particular subjects. In other
words, English Law is meant to fill in gaps in the local system. 3 Therefore, whatever
silent in Malaysian law will be referred to English law.
From the analysis, the requirement of mitigation is applied in Joo Leong
Timber Merchant v Dr Jasawant Singh a/l Jagat Singh 4 . If the plaintiff fails to
take all reasonable steps to mitigate the loss consequent to the breach, he will be
debarred from recovering in respect of any part of the damage which is due to his
neglect to take such steps.5 In addition, the burden of proving such failure rests upon
the defendant; see Payzu Ltd v Saunders. 6
It was found that, Joo Leong Timber Merchant v Dr Jasawant Singh a/l
Jagat Singh is the first case that deals with the requirements of mitigation in
enforcing LAD as normally it applied in claiming general damages. The principle
applied is a victim of a breach of contract could not cut short his duty to mitigate his
loss by the mere commencement of an action for damages (see Techno Land
Improvements Ltd v British Leyland (UK) Ltd [1979] EGD 519). Thus, employer
1
TCPALaw.com, Headnote Issues Research. (August 2, 2003). Mitigation of Damages. URL:
http://.www.tcplaw.com/free/head2.pdf
2
Wu, Min Aun. (1982). An Introduction To The Malaysian Legal System. Revised 3rd ed. Malaysia:
Heinemann (Malaysia) Sdn. Bhd. pp24
3
Wu, Min Aun. (1982). An Introduction To The Malaysian Legal System. Revised 3rd ed. Malaysia:
Heinemann (Malaysia) Sdn. Bhd. pp24-25
4
[2003] 5 MLJ 116
5
see Payzu v Saunders [1919] 2 KB 581
6
Richards, P. (2004). Law of Contract. 6th Ed. England; Pearson Education Limited. pp353
85
who claims for LAD is now bound to comply with the duty of mitigation in order to
success in claiming his losses resulted consequent from the contractor’s breach of
contract although such requirement not expressly stipulated in the form of contract.
Failure in compliance with such requirements will cause the employer failing in
recovery of his losses by enforcing LAD provision.
5.2.2
Objective 2: To Determine the Extent that Employer Has to Mitigate
his Losses in Enforcing LAD Provisions
A party claiming damages for breach of contract is under the duty to mitigate
the loss he has suffered as imposed generally by the common law. The doctrine of
mitigation of loss means that a plaintiff cannot recover damages for any part of loss
which could have been avoided by taking reasonable steps. 7 However, the doctrine
of mitigation in minimising the damages or losses is determined on a case-to-case
basis. In addition, the “Duty to mitigate” is only in the sense that if plaintiff fails to
do it, he will lose the right to collect damages, not in the sense that he has breached
some obligation 8
The research found that the duty to mitigate is subject to certain limitations,
namely reasonableness and the bottom line of mitigation. In other words, the “duty
to mitigate” only requires the plaintiff to make reasonable efforts to mitigate
damages. On the other hand, the bottom line of mitigation is that the plaintiff does
not have to embark on a hazardous or uncertain course of action that will cause him
incur substantial expense or inconvenience, damage his reputation, or breach any
contracts, in order to mitigate, see Pilkington v Wood 9 .
7
Murdoch, J. and Hughes, W. (1997). Construction Contracts: Law and Management. 2nd Ed. UK; E
& FN Spon. pp324
8
Emanuel, S. Emanuel Law Outlines: Contracts: Chapter 10: Remedies.
URL://http:www.stcl/students/sba/EmanuelContractsOutline.doc
9
[1953] 2 Ch 770; [1953] 3 WLR 522
86
5.3
Research’s Constraints
The main constraint of this study is insufficient of time. Due to the fixed
time frame, the extent and scope of this research has been narrowed down and
limited to certain objectives. Besides that, limitation of decided court cases in
relation to the duty to mitigate losses in enforcing LAD also caused the difficulty in
getting a comprehensive finding. This is because the requirements of mitigation
commonly applied in claiming general damages but unlikely in enforcing LAD in
building contracts.
5.4
Suggestions For Further Research
In order to achieve the objective of the study within the time frame, the
research only managed to answer the questions regarding the requirements of
mitigation and the extent that employer has to mitigate his losses in enforcing the
LAD provisions. There are a few aspects not covered in this research due to the
constraints mentioned above. Therefore, in order to encourage further exploration
and investigation on the issues deal with LAD, a few suggestions for further research
emerged:
1.
Study on the causes of delay that will give rise to LAD enforcement.
2.
Study on the approaches that can be used by employer in taking the
duty to mitigate his losses in enforcing LAD provisions.
Perhaps further research may give a more comprehensive guidance and to
safeguard the employers from the challenges while claiming their losses in the event
of late completion.
87
5.5
Conclusion
Most standard construction contracts provide the insertion of liquidated
damages clause. 10 The intention of having LAD provisions in building contracts is
to avoid uncertainties and expenses of long evidentiary battles to establish (or refuse)
the owner’s actual damages, parties to a construction contract may agree in advance
to liquidate those damages. 11 The LAD amount is agreed between the parties to be
paid and provides a certainty to employer to the amount that he will be entitled to
recover without having the difficulty of proving loss in the event of non-performance
of a contractual obligation. Besides that, it also provide the contractor a certainty to
the extent of risk they are taking in tender stage and allow them to estimate and price
the risk within their tender.
In Malaysia, the position on the deduction of LAD is somewhat different
from other common law jurisdictions. 12
Whereby, in Malaysia ‘there is no
difference between penalty and liquidated damages’ 13 , in view of s75 of the
Contracts Act 1950, the court must determine what is reasonable compensation.
Therefore, employer who claims for LAD is required to prove his losses. 14
In
addition, from the analysis, it is found that employer who claims for LAD is required
to mitigate his losses 15 although such requirements are not expressly stipulated in the
form of contract. Failure or negligence of plaintiff in taking all reasonable steps to
mitigate the loss consequent to the breach will debar him from recovering any part of
the damages and the burden of proving such failure rests upon the defendant. 16
10
Blake, P. Liquidated Damages – Case Law Review / Sectional Completion. URL:
http://www.prettys.co.uk/business_law/construction/lads.shtml.
11
Stockenberg, R.A. Building Design & Construction: Liquidated Damages – A two-edged sword.
May, 2002; 43, 5; ABI/INFORM Global. pp29. URL: http://www.bdemag.com
12
Steve, Chan. (2004). Lecture 4: Duty to Mitigate, Constructive Acceleration, Challenges to
Liquidated Damages. Bullet-Proof EOTs-with Particular reference to PWD/JKR standard Forms of
Contract. 27 July, 2004. Kuala Lumpur: James R Knowles (M) Snd. Bhd. pp18
13
Sundra Rajoo. (1999). The Malaysian Standard Form of Building Contract (The PAM 1998
FORM). 2nd ed. Kuala Lumpur; Malayan Law Journal Sdn. Bhd. pp193
14
see Selvakumara/l Murugaih v Thiaragajah a/l Retnasamy [1995] 1 MLJ 817
15
see Joo Leong Timber Merchant v Dr. Jaswant Singh A/L Jagat Singh. [2003] 5 MLJ 116
16
Payzu v Saunders [1919] 2 KB 581
88
However, the “duty to mitigate” only requires the plaintiff to make
reasonable efforts to mitigate damages. The plaintiff does not have to embark on a
hazardous or uncertain course of action that will cause him incurs substantial
expense or inconvenience, in order to mitigate loss. 17
Nevertheless, the Joo Leong Timber Merchant v Dr Jasawant Singh a/l
Jagat Singh is the first case that deals with the issue of requirements and application
of mitigation while enforcing LAD in building contracts. Therefore, employers are
advised to be more prudent and cautious, so that they could claim their losses
successfully. Thus, it can be used as guidance to employer as a significant reference
in enforcing LAD.
Finally, it would be a perfect solution against such challenges in enforcing
LAD, or may beneficial to employer and reducing the dispute in relation to such
matter in construction industry, if the proposed further studies can be carried out
consequently. This is because the judgment did not suggesting any alternative action
that can be used by the employer in order to comply with the requirements of loss
mitigation.
17
Pilkington v Wood [1953] 2 Ch 770; [1953] 3 WLR 522
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http://www.bdemag.com
Stokes, M. and Finuf, J. L. (1986). Construction Law for Owners and Builders.
United States: McGraw-Hill Book Company.
Sundra Rajoo (1999). The Malaysian Standard Form of Building Contract (The PAM
1998 Form). 2nd ed. Malaysia: The Butterworth Group of Companies. pp191195
Syed Ahmand Alsagoof (2003). Principles of the Law of Contract in Malaysia. 2nd
ed. Malaysia: Lexis Nexis Business Solutions. pp370, 387
Turner, D. F. (1971). Building Contracts: A Practical Guide. London: George
Godwin Ltd. pp9, 17
Upex, R. (1991). Davies on Contract. 6th ed. London: Sweet & Maxwell Limited.
pp261
Vohrah, B. and Wu, Min Aun. (2003). The Commercial Law of Malaysia. Malaysia:
Pearson Malaysia Sdn. Bhd. pp176-179
Wallenfang, R.L. (2001). Coordinator – Construction Law Group – Liquidated
Damages for Delay in Construction Contracts. URL:
http://www.concretemasonry.org/design/Liquidated_damages.htm
95
What is the ‘duty to mitigated damages?’ URL:
http://injurylaw.freeadvice.com/property_damage/mitigate_duty.htm
Wu, Min Aun. (1982). An Introduction To The Malaysian Legal System. Revised 3rd
ed. Malaysia: Heinemann (Malaysia) Sdn. Bhd. pp23-25
Zakir Mulla. (25 February 2005). Liquidated damages: North Sea Ventilation Ltd v
Consafe Engineering. URL: htp://www.rics.org
3.11 The Duty to Mitigate Loss (Keeping Costs to a Minimum). (January, 2004).
URL: http://www/taswa.org/tm/chapter3/3_11.htm
APPENDICES
A
General Procedure In Recovery Of Liquidated Damages
B
Clause 40 Of The JKR Forms 203a (Rev 10/83)
C
Clause 22.0 Of The PAM 1998 Forms
D
Clause 26 Of The CIDB Form (2000 Edition)
E
Section 74-76 Of Contracts Act 1950
F
Section 3, 5 Of Civil Law Act 1956
G
Case 1: Joo Leong Timber Merchant v Dr Jasawant Singh a/l Jagat Singh
[2003] 5 MLJ 116
H
Case 2: Payzu Ltd. V Saunders [1919] 2 K.B. 581
I
Case 3: Selva Kumar a/l Murugiah V Thiaragajah a/l Retnasamy
[1955] 1 MlJ 817
APPENDIX A
GENERAL PROCEDURE IN RECOVERY OF
LIQUIDATED DAMAGES
96
APPENDIX A
General Procedure In Recovery Of Liquidated Damages (Part I)
97
APPENDIX A
General Procedure In Recovery Of Liquidated Damages (Part 1I)
98
APPENDIX A
General Procedure In Recovery Of Liquidated Damages (Part III)
APPENDIX B
CLAUSE 40 OF THE JKR FORMS 203A
(REV 10/83)
99
APPENDIX B
Clause 40 of the JKR Forms 203A (Rev 10/83)
APPENDIX C
CLAUSE 22.0 OF THE PAM 1998 FORMS
100
APPENDIX C
Clause 22.0 of the PAM 1998 Forms
101
APPENDIX C
Clause 22.0 of the PAM 1998 Forms
APPENDIX D
CLAUSE 26 OF THE CIDB FORM
(2000 EDITION)
102
APPENDIX D
Clause 26 of the CIDB Form (2000 Edition)
103
APPENDIX D
Clause 26 of the CIDB Form (2000 Edition)
APPENDIX E
SECTION 74-76 OF CONTRACTS ACT 1950
104
APPENDIX E
Section 74-76 of Contracts Act 1950
105
APPENDIX E
Section 74-76 of Contracts Act 1950
106
APPENDIX E
Section 74-76 of Contracts Act 1950
107
APPENDIX E
Section 74-76 of Contracts Act 1950
108
APPENDIX E
Section 74-76 of Contracts Act 1950
109
APPENDIX E
Section 74-76 of Contracts Act 1950
APPENDIX F
SECTION 3, 5 OF CIVIL LAW ACT 1956
110
APPENDIX F
Section 3, 5 of Civil Law Act 1956
111
APPENDIX F
Section 3, 5 of Civil Law Act 1956
112
APPENDIX F
Section 3, 5 of Civil Law Act 1956
113
APPENDIX F
Section 3, 5 of Civil Law Act 1956
APPENDIX G
CASE 1: JOO LEONG TIMBER MERCHANT V DR
JASAWANT SINGH A/L JAGAT SINGH
[2003] 5 MLJ 116
114
APPENDIX G
Case 1:
JOO LEONG TIMBER MERCHANT V DR JASWANT SINGH A/L JAGAT SINGH
[2003] 5 MLJ 116
CIVIL APPEAL NO 12-14 OF 1998
HIGH COURT (MUAR)
DECIDED-DATE-1: 30 NOVEMBER 2002
JEFFREY TAN J
CATCHWORDS:
Contract - Building Contract - Agreement to construct a house - Delay in completion Claim for loss of rental - Whether trial court should have considered s 75 of the Contracts Act 1950 - Whether claim should have been made for liquidated and ascertained
damages - Whether claim for loss of rental has been proved
Contract - Building Contract - Damages - Damages to be awarded - Duty to mitigate Whether failure to mitigate damages must be pleaded
HEADNOTES:
This was an appeal by the appellant against the decision of the sessions court ('the trial
court'), dismissing the appellant's claim for RM31,700, it being allegedly the balance
sum due and payable by the respondent to the appellant in respect of building works
executed and materials supplied by the appellant towards the erection of a single storey
bungalow for the respondent, and allowing the respondent's counterclaim for RM63,000,
it being allegedly the respondent's costs of remedial works, and the respondent's counterclaim for RM300 per month from 15 August 1985 to 22 October 1998, it being allegedly the respondent's loss of rental income for the period 15 August 1985 to 22 October
1998 allegedly occasioned by the appellant's failure to complete the said single storey
bungalow within the contractual period. With regard to the appeal on the claim, it was
agreed that the outcome would be determined by a single finding, based on the appeal
record, as to whether, one KC Ooi was or was not the architect for the proposed bungalow.
Held, allowing the appeal:
(1) The trial court had not considered s 75 of the Contracts Act 1950 ('the Act'). On the
facts of the case, cl 22 of the building agreement providing that the sum of RM25 for
each day's delay payable by the appellant as 'liquidated and ascertained damages', was
unquestionably a clause falling within s 75 of the Act. The respondent must prove alleged damages suffered. The trial court did not appreciate that. The respondent had not
proved the loss of rental for the period between 15 August 1985 to 22 October 1998.
That failure to prove damage should have resulted in the refusal of the trial court to
award compensation in the sum of RM300 per month for the period of 15 August 1985
to 22 October 1998. The trial court fell into error by not refusing the compensation as
claimed (see pp 122G, 123G-124B); Penang Port Commission v Kanawagi s/o Seperumaniam [1996] 3 MLJ 427 followed.
115
(2) The respondent had not shown that he had taken any steps to mitigate his damage. The conduct of the respondent by not [*117] bringing the alleged loss of rental
income to an end, in relation to his duty to mitigate was not reasonable. An innocent
party can recover no greater damages for breach of contract that the loss he would have
sustained had he acted reasonably to avoid or reduce loss. In Malaysia, there is no legal
authority which states that the failure to mitigate damages must be pleaded (see p125BC, H); Techno Land Improvement Ltd v British Leyland (UK) Ltd[1979] EGD 519 followed.
(3) It might be so that KC Ooi had not expressly stated that he was the architect. But
KC Ooi had clearly conducted himself as the architect. The certificate of payment might
have had been for a collateral purpose to obtain a bank loan. But it remains that only the
architect could have issued the certificate of payment, and KC Ooi would not have issued the certificate if he had not accepted the appointment. And by issuing the certificate of payment, which was a deliberate act, KC Ooi had conducted himself as the architect, who was entitled to issue the certificate (see p 126G-I).
Bahasa Malaysia summary
Ini adalah rayuan perayu terhadap keputusan mahkamah sesyen ('mahkamah perbicaraan') yang menolak tuntutan perayu untuk jumlah RM31,700, yang dikatakan sebagai baki jumlah tertunggak dan perlu dibayar oleh responden kepada perayu bagi kerjakerja pembinaan yang telah dilakukan dan bahan-bahan binaan yang telah dibekalkan
oleh perayu untuk tujuan pembinaan sebuah banglo satu tingkat responden, dan membenarkan tuntutan balas responden untuk jumlah RM63,000, yang dikatakan sebagai
kos responden melakukan kerja-kerja pemulihan, dan tuntutan balas responden untuk
RM300 sebulan dari 15 Ogos 1985 hingga 22 Oktober 1998, yang dikatakan sebagai
kerugian pendapatan sewa bagi tempoh 15 Ogos 1985 hingga 22 Oktober 1998 yang
disebabkan oleh kegagalan perayu untuk menyiapkan banglo setingkat tersebut mengikut tempoh yang dijanjikan. Untuk rayuan bagi tuntutan tersebut, adalah telah dipersetujui bahawa keputusan akan ditentukan dengan hanya satu penemuan yang berdasarkan
kepada rekod rayuan, bahawa sama ada seorang KC Ooi adalah arkitek bagi pembinaan banglo tersebut.
Diputuskan:
(1) Mahkamah perbicaraan telah tidak menimbangkan s 75 Akta Kontrak 1950 (' Akta
tersebut'). Dari fakta-fakta kes, kl 22 perjanjian pembinaan tersebut memperuntukkan
bahawa perayu perlu membayar jumlah RM25 untuk setiap hari kelewatan sebagai 'liquidated and ascertained damages', yang mana tanpa ragu-ragu adalah satu klausa
yang termasuk di dalam lingkungan s 75 Akta tersebut. Responden perlulah membuktikan kerugian [*118] yang dikatakannya. Mahkamah perbicaraan tidak mengambil kira
perkara tersebut.Responden tidak membuktikan kerugian sewa bagi tempoh 15 Ogos
1985 hingga 22 Oktober 1998. Kegagalan untuk membuktikan kerugian tersebut
sepatutnya akan menyebabkan mahkamah perbicaraan enggan untuk memberi award
bagi pampasan berjumlah RM300 sebulan untuk tempoh 15 Ogos 1985 hingga 22 Oktober 1998. Mahkamah perbicaraan telah khilaf kerana tidak menolak pampasan seperti
yang dituntut (lihat ms 122G, 123G-124B); Penang Port Commission v Kanawagi s/o
Seperumaniam [1996] 3 MLJ 427 diikut.
(2) Responden tidak menunjukkan bahawa beliau telah mengambil tindakan untuk
mengurangkan kerugian yang di alaminya. Perbuatan responden yang tidak mengambil
tindakan untuk menghentikan kerugian bagi pendapatan sewanya, berhubung dengan
tanggungjawab beliau untuk mengurangkan kerugiannya, adalah tidak wajar. Pihak
yang tidak bersalah boleh mendapat gantirugi yang tidak lebih daripada gantirugi bagi
kemungkiran perjanjian yang akan ditanggungnya sekiranya beliau telah mengambil
116
tindakan yang sewajarnya bagi mengelak atau mengurangkan kerugian tersebut. Di Malaysia, tidak terdapat autoriti undang-undang yang mengatakan bahawa kegagalan untuk mengurangkan kerugian mesti diplidkan (lihat ms 125B-C, H); Techno Land Improvement Ltd v British Leyland (UK) Ltd[1979] EGD 519 diikut.
(3) Memang berkemungkinan bahawa KC Ooi tidak mengatakan yang beliau adalah
arkitek tersebut. Tetapi KC Ooi telah dengan jelas bertindak sebagai arkitek. Sijil pembayaran tersebut telah mungkin digunakan dengan tujuan mendapatkan pinjaman bank.
Tetapi hanya arkitek sahaja yang boleh mengeluarkan sijil pembayaran tersebut dan KC
Ooi tidak akan mengeluarkan sijil tersebut jika beliau tidak menerima perlantikan sebagai arkitek. Dan dengan mengeluarkan sijil pembayaran tersebut, yang mana adalah
satu
perbuatan yang sengaja, KC Ooi telah bertindak sebagai arkitek, yang mana beliau
dibenarkan untuk mengeluarkan sijil tersebut (lihat ms 126G-I).]
NOTES:
Notes
For cases on damages awarded in building contracts, see 3 Mallal's Digest (4th Ed,
2000 Reissue) paras 2141-2143.
Cases referred to
Aik Ming (M) Sdn Bhd & Ors v Chang Ching Chuen & Ors and another appeal [1995] 2
MLJ 770
Anderson v Benson Court of Appeal (Civil Division) 11 July 1991
Boyo v Lambeth London Borough Council [1994] ICR 727 [*119]
British Westinghouse Electric and Manufacturing Company v Underground Electric Railways Company of London Ltd [1912] AC 673
Chik binti Abdullah v Itam binti Saad [1974] 1 MLJ 221
Goldburg v Shell Oil Co of Australia Ltd 95 ALR 711
Geest v Lansiquot [2002] 1 WLR 3111
Hadley v Baxendale (1854) 9 Exch 341
Hopkins v Norcross plc [1993] 1 All ER 565
Khushvinder Singh Chopra v Mookka Pillai Rajagopal & Ors [1999] 1 SLR 589
Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733
Maredelanto Compania Naviera SA v Bergbau-Handel GmbH; 'The Mihalis Angelos'
[1970] 3 WLR 601
Penang Port Commission v Kanawagi s/o Seperumaniam [1996] 3 MLJ 427
Reliance Shipping & Travel Agencies v Low Ban Siong [1996] 2 MLJ 543
Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817
T & S Contractors Ltd v Architectural Design Associated QBD (Official Referee's Business) 16 October 1992
Techno Land Improvement Ltd v British Leyland (UK) Ltd [1979] EGD 519
Wearne Brothers (M) Ltd v Jackson [1966] 2 MLJ 155
West v Versil Ltd & Ors Court of Appeal (Civil Division), The Times, 31 August 1996
Westwood v Secretary of State for Employment [1985] AC 20
Yew Wan Leong v Lai Kok Chye [1990] 2 MLJ 152
Legislation referred to
Contracts Act 1950 s 75
Supreme Court Rules [Eng] O 18 rr 12(1)(c), 13(4)
Civil Suit No 52(62)-63 of 1998 (Sessions Court, Batu Pahat)
KS Dass ( K Sila Dass & Partners) for the appellant.
CC Aiyathurai ( CC Aiyathurai & Co) for the respondent.
117
APPFROM: Civil Suit No 52(62)-63 of 1998 (Sessions Court, Batu Pahat)
LAWYERS: KS Dass ( K Sila Dass & Partners) for the appellant.
CC Aiyathurai ( CC Aiyathurai & Co) for the respondent.
JUDGMENTBY: JEFFREY TAN J
: This is an appeal by the appellant/plaintiff against the decision of the Batu Pahat Sessions Court, dismissing with costs the appellant's claim for RM31,700, it being allegedly
the balance sum due and payable by the respondent to the appellant in respect of building works executed and materials supplied by the appellant towards the erection of a
single storey bungalow for the respondent, and allowing with costs the respondent's
counterclaim for RM63,000, it being allegedly the respondent's costs of remedial works,
and the respondent's counterclaim for RM300 per month from 15 August 1985 to 22 October 1998, it being [*120] allegedly the respondent's loss of rental income for the period 15 August 1985 to 22 October 1998 allegedly occasioned by the appellant's failure
to complete the said single storey bungalow within the contractual period, together with
interests at the rate of 8% per annum from 15 August 1985.
According to Mr KS Das for the appellant, the trial court held that the appellant must
prove that one KC Ooi was the architect of the proposed bungalow, and that the trial
court was entirely wrong to have taken that issue to determine the claim, as whether KC
Ooi was the architect was not a pleaded issue. Mr CC Aiyathurai for the respondent did
not respond to that contention but suggested instead that the appeal on the claim be
determined by a finding by this court, based on the appeal record, as to whether KC Ooi
was the architect for the proposed bungalow. Mr Aiyathurai said, 'If the finding, based on
the appeal record, is that KC Ooi was the architect and entitled to issue the certificate [of
payment -- P8), then ... the claim should be allowed. On the other hand, if the finding is
otherwise, the appeal on the claim should be dismissed'. And in a snap, that suggestion
was accepted by Mr Das. Hence with regard to the appeal on the claim, it was agreed
that the outcome would be determined by a single finding by this court, based on the
appeal record, as to whether KC Ooi was or was not the architect for the proposed bungalow.
But with regard to the appeal on the counterclaim, both learned counsel said that both
parties would be free to advance all argument to attack or defend the trial court's judgment.
Nonetheless, there was consensus in this court, that there were indeed works executed
not according to approved plan (D4(A-D) and D5(A-D)). As a matter of fact, SP3, a consulting engineer, testified in the court below that he inspected the work and found that
the level of the master bedroom was 30 inches lower than the level in the approved
plan, that the levels of the ground beam and dining hall were lower than the levels in the
approved plan, and that the level of the rooms was six inches off the level in the approved plan (see pp 52, 53 and 58 of the appeal record ('the AR')). Not surprising therefore, it was readily conceded by Mr Das that 'there were works executed not in accordance with the plans'. But Mr Das contended that the floor levels and size of the beams
were varied at the specific request of the respondent.
Indeed, it was the testimony of SP3 in the court below, that the respondent had confirmed to him that he (respondent) had authorized those variations to the approved plan
(see pp 53 and 55 of the AR), and it was the testimony of the appellant in the court below that 'Dr Jaswant asked for a variation not in the RC plan' (see p 34 of the AR) and
that the respondent agreed to the level of the master bedroom being 'two feet above
normal' (see p 40 of the AR). Anyway, it could be said straightaway, that it was not
pleaded by the appellant that such works executed not in accordance with the approved
plan were so executed at the request of and/or approved by the respondent. It was specifically pleaded by the respondent (see para 5 of his defence and counterclaim) that the
118
ground beams of the master bedroom were constructed at the wrong levels, and [*121]
that the construction of the bungalow was 'carried out ... in complete disregard and at
variance to the architectural, structural and engineering drawings'. The alleged 'defective
works' were particularized in para 5 of the defence and counterclaim. But all that was
pleaded by the appellant, in his short reply to the defence and counterclaim, was that 'he
delivered a house according to the architectural and engineering drawings and duly certified by the architect'. The appellant refuted the alleged defective works and required
the respondent to strictly prove the alleged defective works. But it was not pleaded by
the appellant that such works executed not in accordance with the approved plan were
so executed at the request and/or with the approval of the respondent, an omission in
the pleading that did not escape Mr Aiyathurai who submitted that it was not pleaded
that the respondent had varied the approved plans and that all evidence adduced in
connection with that non-pleaded issue should not have been admitted.
It is settled law, that parties are bound by their pleadings (see Yew Wan Leong v Lai
Kok Chye [1990] 2 MLJ 152), and that non-pleaded issues should not be heard (see Aik
Ming (M) Sdn Bhd & Ors v Chang Ching Chuen & Ors and another appeal [1995] 2 MLJ
770 at p 794). There lies the importance of pleadings. A case in point is Chik binti Abdullah v Itam binti Saad [1974] 1 MLJ 221, where the Federal Court held that since it was
not pleaded it was too late to raise the argument that the agreement had been entered
into by the defendant in her personal capacity. There are countless other authorities on
the function of pleadings, but an authoritative commentary of what is the law can be
found in Halsbury's Laws of Malaysia Vol 1 para 10.3.129, which reads as follows:
The function of pleadings is to give fair notice of the case which has
to be met and to define the issues on which the court will have to
adjudicate in order to determine the matters in dispute between the
parties. Thus, a party is bound by his pleadings and his case is
confined to the issues raised in the pleadings unless and until they
are amended. A plaintiff who at the trial radically departs from his
case as pleaded, however, is likely to fail. It follows that the
pleadings enable the parties to decide in advance of the trial which
evidence will be needed. From the pleadings, the appropriate method of
trial can be determined. They also form a record which will be
available if the issues are sought to be litigated again. The matters
in issue are determined by the state of pleadings at their close.
No issue was raised in the pleadings in the instant case that such works so executed not
in accordance with the approved plan were so executed at the request and/or with the
approval of the respondent. No notice was given in the pleadings, that the appellant
would raise that issue. And since it was not pleaded, it could not be argued, be it here or
below, that such works so executed not in accordance with the approved plan were so
executed at the request and/or with the approval of the respondent ( Chik binti Abdullah
v Itam binti Saad followed). The only pleaded issue that concerned the counterclaim,
was whether the work executed was in accordance with approved plans. And that issue
could only have been settled by the trial court in favor of the respondent, for both engineering report ('P16') [*122] produced by the appellant and testimony of SP3 who pertinently was a witness for the appellant, affirmed that the levels of the floors and ground
beams were not in accordance with the levels in the approved plans. Here it was admitted by Mr Das, that 'there were works executed not in accordance with the plans'. Then
the appellant could not have 'delivered a house according to the architectural and engineering drawings and duly certified by the architect'. Hence, the trial court's finding that
the respondent had proved that work was executed not in accordance with approved
plans, supported by the evidence from both sides, could not be disturbed. Indeed, it was
the only proper finding that could have been reached.
According to the testimony in the court below of DW3, the professional engineer who
prepared the report (D24 -- see pp 221-238 of the AR) on 'the civil/structural shortcomings, mistakes, inadequacies, and/or non compliance with the relevant architectural and
civil/structural drawings, remedial works would cost RM63,000 (see pp 87 and 227 of
119
the AR). And that testimony and report of DW3 on the costs of remedial works were not
challenged by the appellant who had not adduced any opposing evidence on the costs
of remedial works, a point also conceded by Mr Das. Hence, the trial court had only one
set of evidence on the costs of remedial works to formulate its award. Then the trial
court who had only one set of evidence to formulate its award, and unchallenged evidence at that, was only right to award RM63,000 towards remedial works, as the trial
court without any opposing evidence had no evidential support to award anything less
than RM63,000 towards remedial works, a fact that was appreciated by the trial court
who decried that SP3's report had 'failed to quantify the remedial works or in any way to
refute the observation in D24' (see p 162 of the AR). Hence, given the body of evidence,
the award of RM63,000 towards remedial works was the only award that could have
been made in the circumstances.
But it is rather difficult to endorse the trial court's award of RM300 per month for the period 15 August 1985 (the due date of completion) to 22 October 1998. First, the trial
court had not given a single reason to justify the compensation of RM300 per month and
for that lengthy period.
Secondly, the trial court had not considered s 75 of the Contracts Act 1950. When a
contract has been broken, and if a sum is named in the contract as the amount to be
paid in case of such breach, s 75 of the Contracts Act 1950 states:
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.
The effect of s 75 was clearly enunciated in Wearne Brothers (M) Ltd v Jackson [1966] 2
MLJ 155 per Abdul Aziz J at p 155 of the holdings, as follows: [*123]
whether the clause in the agreement was a penalty clause or not was
irrelevant in view of s 75 of the Contracts (Malay States) Ordinance
1950 which provides that in every case the court must determine what is
the reasonable compensation. The effect of the section is that the
plaintiff is disentitled from recovering simpliciter the sum fixed in
the contract whether as penalty or liquidated damages and must prove
the damages suffered by him unless the sum named is a genuine
pre-estimate.
The effect of s 75 was further enunciated in Selva Kumar a/l Murugiah v Thiagarajah a/l
Retnasamy [1995] 1 MLJ 817, where it was held by the then Federal Court per Peh
Swee Chin FCJ that in every case the court must determine what is the reasonable
compensation, that despite the words 'whether or not actual damage or loss is proved to
have been caused thereby' a plaintiff who is claiming for actual damages in an action for
breach of contract must still prove the actual damages or the reasonable compensation
in accordance with the principle in Hadley v Baxendale (1854) 9 Exch 341 and that failure to prove such damages will result in the refusal of the court to award such damages,
that the words 'whether or not actual damage or loss is proved to have been caused
thereby' shall only apply where the court finds it difficult to assess damages for the actual damages, and that where the words 'whether or not actual damage or loss is proved
to have been caused thereby' apply, the damages shall not in any event exceed the sum
so named in the contractual provision, and also in Reliance Shipping & Travel Agencies
v Low Ban Siong [1996] 2 MLJ 543, where it was held by the Court of Appeal that the
words 'whether or not actual damage or loss is proved to have been caused thereby' are
limited to those cases where the court would find it difficult to assess damages for the
actual damages or loss, that a clause in an agreement falling within s 75 of the Contracts Act 1950 must be subject to the court's determination that such agreed damages
is reasonable compensation for the injured party, that damages allegedly suffered must
be proved, and that the measure of damages stated in an agreement is enforceable
120
provided that there is proof of the loss or damages limited to the extent of the quantum
of the agreed compensation.
The instant cl 22 of the agreement ('D18') providing that the sum of RM25 for each day's
delay payable by the appellant as 'liquidated and ascertained damages' (see p 219 of
the AR), was unquestionably a clause falling within s 75. But that was overlooked by the
trial court. Alleged damages suffered must be proved by the respondent. That was not
appreciated by the trial court, who adopted the quantum claimed, albeit with a deduction
of RM60 per month that in the event was not explained by the trial court, as the true
measure of damage without the respondent proving any loss. Yes, the respondent had
not proved the loss of rental for the period between 15 August 1985 to 22 October 1998.
The only 'evidence' on the loss of rental income was a solitary unavailing statement by
the respondent that, 'I have counterclaimed RM360' (see p 100 of the AR), which was
not any evidence tending towards any proof of any loss of rental income for the period
15 August 1985 to 22 October 1998. That failure to prove damage should have resulted
in the refusal of the trial court [*124] to award compensation in the sum of RM300 per
month for the period of 15 August 1985 to 22 October 1998. 'Damages are not awarded
simply because the plaintiff has thrown them at the head of the court. The loss must be
shown to have been actually occurred and also be recoverable in law before the award
can be made' ( Penang Port Commission v Kanawagi s/o Seperumaniam [1996] 3 MLJ
427 at p 435 per Mahadev Shankar JCA). With respect, the trial court fell into error by
not refusing the compensation as claimed.
That is not however to say that the trial court should not award any compensation. There
was undoubted delay and there should be compensation, even if nominal. The trial court
should have determined the reasonable compensation. But what could have been the
reasonable compensation in the instant case? There was evidential material for such an
assessment before the trial court. To begin with, the contractual period for completion of
all works was eight and a half months (see p 219 of the AR). If construction of the entire
bungalow could be completed within eight and a half months, then remedial work or reconstruction should not reasonably take more than eight and a half months. The respondent would have to engage a new contractor who would have to mobilize workmen,
equipment, and materials. There would be a passage of time before any actual remedial
work could begin. A period of six months should be sufficient for the respondent to engage a new contractor and for the new contractor to mobilize workmen, equipment, and
materials. The appellant discontinued all work in December 1985 (see p 241 of the AR)
or in early 1986 (see p 245 of the AR). The respondent through another contractor could
have resumed work in December 1985 or in early 1986. And if the respondent had resumed work in December 1985 or in early 1986, then the bungalow could have been
completed within 14[half] months from December 1985 or early 1986, ie by April 1987,
give or take a month or two. Given the evidential material before the trial court, the reasonable compensation could have been a sum approximating RM360 x 20 months (delay from 15 August 1985 to April 1987). But the alleged loss of rental income for the period from May 1987 to 22 October 1998 was not proved by the respondent, and it was
not right to award any compensation for that period.
It was also not right to award compensation for the period after May 1987 for a further
reason. Damages are assessed on the basis that an aggrieved party has a duty to mitigate his damages ( West v Versil Ltd & Ors Court of Appeal (Civil Division), The Times,
31 August 1996; Kleinwort Benson Ltd v Birmingham City Council [1996] 4 All ER 733).
A claim for damages is subject to a duty to mitigate the loss ( Westwood v Secretary of
State for Employment [1985] AC 20; Maredelanto Compania Naviera SA v BergbauHandel GmbH; 'The Mihalis Angelos' [1970] 3 WLR 601; Boyo v Lambeth London Borough Council [1994] ICR 727; Hopkins v Norcross plc [1993] 1 All ER 565), and the right
to damages is qualified by a duty to mitigate ( T & S Contractors Ltd v Architectural Design Associated QBD (Official Referee's Business) 16 October 1992). A victim of a
breach of contract cannot cut short his duty to mitigate his loss by the mere [*125]
commencement of an action for damages (see Techno Land Improvements Ltd v British
Leyland (UK) Ltd [1979] EGD 519). Commercial good sense pointed not towards the
121
deferment of remedial or reconstruction works but to the resumption of work upon cessation of work by the appellant (see Khushvinder Singh Chopra v Mookka Pillai Rajagopal & Ors [1999] 1 SLR 589 at p 598). Early completion of remedial or reconstruction work would have brought the alleged loss of rental income to an end (see British
Westinghouse Electric and Manufacturing Company v Underground Electric Railways
Company of London Ltd [1912] AC 673). But the respondent had not shown that he had
taken any steps to mitigate his damage. Suffice to say that the conduct of the respondent by not bringing the alleged loss of rental income to an end, in relation to his duty to
mitigate was not reasonable. And 'it is well settled that innocent party can recover no
greater damages for breach of contract than the loss he would have sustained had he
acted reasonably to avoid or reduce loss' ( Techno Land Improvement Ltd v British Leyland (UK) Ltd [1979] EGD 519 per Goulding J).
Mr Aiyathurai submitted that the issue of mitigation of damages 'should be pleaded'
(counsel tendered the case of Goldburg v Shell Oil Co of Australia Ltd 95 ALR 711 as
authority for his proposition) but was not pleaded by the appellant, and that the appellant
had not adduced any evidence to show how damages could have been mitigated. With
respect, Goldberg v Shell was just an action where mitigation of damages was pleaded
but is not any authority that the issue of mitigation of damages should be pleaded by the
appellant. Under O 18 r 12(1)(c) to be read together with r 13(4) of the former English
Supreme Court Rules, it was 'incumbent upon the defendant, in order to be more informative about his defence to state the grounds on which he intends to contest the
amount of damages by giving particulars of all the facts on which he relies to support
any such ground as, for example, in mitigation of or otherwise in relation to, the amount
of damages. The burden is cast upon the defendant to plead and prove the facts he relies on to support any positive case to contest the amount of damages claimed. In accordance with its policy of openness in pleading, the rule is expressed in general terms,
so that the rule will apply to a plea in mitigation, not only in defamation actions but to all
classes of actions, whether in contract or tort; and the rule will also apply to any ground
on which it is open to the defendant to contest the amount of damages' (English Supreme Court Practice 1997 para 18/12/6). Perhaps it is a duty in England to plead the
failure to mitigate damages (see Geest v Lansiquot [2002] 1 WLR 3111; Anderson v
Benson Court of Appeal (Civil Division) 11 July 1991). But in Malaysia, there is no such
O 18 r 12(1)(c) or corresponding rule in the Rules of the High Court 1980, and there is
no legal authority which states that the failure to mitigate damages must be pleaded. As
far as is known, there is no such rule that the failure to mitigate damages must be
pleaded.
As for the finding -- 'whether KC Ooi was the architect and entitled to issue the certificate
of payment' -- specifically requested by both parties, the Appeal Record discloses the
following: [*126]
(1) The preamble to the agreement between the appellant and respondent stated that
KC Ooi Associates was the architect (see p 200 of the AR) and clause 30 of the agreement provided that 'at the period of interim
certificate ... the architect [meaning KC Ooi Associates] shall issue a certificate stating
the amount due to the contractor from the employer' (see p 215 of the AR);
(2) SP3 testified that KC Ooi 'came into the picture sometime in late Oct 1985. The
original architect and engineer had been terminated' (see p 53 of the AR), that the respondent had asked him to get a new architect ... and he asked KC Ooi to assist' (see p
53 of the AR), that the appointment of KC Ooi was done verbally (see p 55 of the AR),
that the respondent's letter dated 5 November 1985 was the letter appointing KC Ooi
Associates (see p 60 of the AR)
;
(3) KC Ooi testified that he was asked 'to come into the project to certify the construction value in order to secure the bank's release of payment' and that he entered the project in good faith (see p 43 of the AR),
122
that he had no appointment letter (see p 44 of the AR), that 'if I was retained I would
have prepared the drawings for the remedial works' (see p 46 of the AR), and that he
'stepped in with the expectation of appointment' (see p 47 of the AR);
(4) In his solicitors' letter dated 31 July 1986 to the Lembaga Arkitek Malaysia, KC Ooi
stated that he had entered the project in utmost good faith and at the request of the respondent (see p 174 of the AR);
(5) The respondent testified that he did not issue the letter appointing KC Ooi Associates 'as KC Ooi was already on record as the architect' (see p 100 of the AR), that he
accepted KC Ooi as the architect (see p 94 of the AR);
(6) In his letter dated 5 November 1985 to the Yang DiPertua Majlis Daerah Batu Pahat, the respondent informed the local authority that KC Ooi Associates was his architect
(see p 171 of the AR);
(7) In his letter dated 13 May 1986 to KC Ooi Associates, the respondent stated that
KC Ooi was the architect and held himself as a client of KC Ooi Associates (see p 178
of the AR);
Mr Aiyathurai conceded that the respondent had 'accepted Ooi as the architect', but contended that in actual fact there was no architect as 'KC Ooi did not say that he was the
architect'. It might be so that KC Ooi had not expressly stated that he was the architect.
But KC Ooi had clearly conducted himself as the architect. The certificate of payment
might have had been for a collateral purpose to obtain a bank loan. But it remains that
only the architect could have issued the certificate of payment, and KC Ooi would not
have issued the certificate if he had not accepted the appointment. And by issuing the
certificate of payment, which was a deliberate act, KC Ooi had conducted himself as the
architect, who was entitled to issue the certificate. The issue could only be answered in
favor of the appellant. [*127]
For the reasons above, this appeal is allowed, but subject to the following orders; (i) the
respondent is to pay to the appellant the sum of RM31,700 together with interest at the
rate of 8% per annum from 1 November 1985 to date of satisfaction; (ii) the appellant is
to pay to the respondent the sum of RM63,000 towards the costs of remedial works, and
the sum of RM7,200 towards loss of rental income from 15 August 1985 to April 1987,
both awards carrying interest at the rate of 8% per annum, the rate ordered by the trial
court; (iii) costs below to be apportioned; (iv) all orders by the trial court, unless affirmed,
are hereby set aside; and (v) no orders as to costs in this appeal.
Appeal allowed.
LOAD-DATE: September 22, 2003
APPENDIX H
CASE 2: PAYZU LTD. V SAUNDERS
[1919] 2 K.B. 581
123
APPENDIX H
Case 2:
Payzu, Ltd v Saunders
COURT OF APPEAL
[1918-1919] All ER Rep 219; [1918-19] All ER Rep 219
HEARING-DATES: 6, 7, 8 MAY 1919
27 JUNE 1919
CATCHWORDS:
Damages - Mitigation - Duty to mitigate loss - What it is reasonable to do in mitigation a
question of fact - No right to recover in respect of damage due to failure to mitigate.
HEADNOTE:
Where one party to a contract has broken the contract the other party must take all reasonable steps to mitigate the loss consequent on the breach, and, if he fails to do so, he
is debarred from recovering in respect of any part of the damage which is due to his neglect to take such steps. What it is reasonable for a person to do in mitigation of his
damage is a question of fact and not of law.
Per SCRUTTON, LJ: In commercial contracts it is generally reasonable to accept an
offer by the party in default.
Appeal from an order of McCARDIE J.
The following statement of facts is taken from His Lordship's judgment. The defendant
was a dealer in silk, and on 9 November 1917, she agreed to sell to the plaintiffs a large
quantity of silk - 200 pieces at the price of 4s 6d and 200 pieces at the price of 5s 11d,
the total amount of the contract being about 3,500 pounds. Delivery was to be between
January 1918, and September 1918; the payment was to be 2 1/2 per cent. discount
one month. The meaning of those words in the trade is, that goods delivered up to the
20th of the month shall be paid for subject to the discount of this 2 1/2 per cent on or
about the 20th of the next mouth. In the very first month of the contract, however, the
defendant, at the express request of the plaintiffs, delivered certain goods prior to the
date of the first contract obligation. Those goods amounted in value, less the 21 per cent
discount, to 76 pounds 14s 2d. On 21 December 1917, the plaintiffs drew a cheque for
that amount, noted the cheque on the counterfoil, and also noted it in the cash-book. At
that time the plaintiffs' staff was greatly depleted by reason of the war; the managing
director was seriously ill, and another director was also suffering from illness. The
cheque so drawn was either not posted, or, if posted, failed to reach the defendant. The
circumstances disclosed in the evidence are curious, but, after considering the facts, I
am not satisfied that there was any dishonesty of conduct which could be charged
against the plaintiffs. The cheque, if it had been received by the defendant and paid into
the bank, would have at once been met by the plaintiffs' bankers in spite of the fact that
a substantial overdraft already existed. At the beginning of January the defendant telephoned to the plaintiffs inquiring why the cheque had not been received. The plaintiffs
answered that the cheque had in fact been sent on December 21, and the defendant
then informed the plaintiffs that the cheque had not been received. Thereupon the plaintiffs stopped payment of the cheque of December 21 and they prepared another cheque
of January 9. Owing to the difficulties of obtaining the signature of one of the directors,
there was some little delay with regard to the matter; but on January 16 a second
cheque for 76 pounds 14s 2d was sent to the defendant as for goods delivered in November less 2 1/2 per cent discount. The defendant did receive that cheque which the
124
plaintiffs had dispatched with a letter asking for further deliveries of goods. The defendant had formed a suspicious view with regard to this matter and hence she wrote the
following letter:
"Sir. - We are in receipt of your order by telephone; but before executing this order, we
must insist on cash cover as we cannot do business on the terms you are taking. The
account just paid was due net. You deduct 2 1/2 per cent which we will overlook this
time. Then again the cheque was dated Jan 9."
Further correspondence ensued between the parties, and on 4 February 1918, the plaintiffs, it is agreed, accepted the defendant's repudiation of the contract. At that time the
market had risen further. The plaintiffs went to much trouble in trying to buy elsewhere,
and undoubtedly incurred expense in doing so, but they were unable to purchase goods
from any quarter. They claimed damages as from the middle of February 1918, and they
based that claim upon the market price which prevailed at that date. McCARDIE, J, held
that the delay in payment by the plaintiffs did not amount to a repudiation of the contract
by them, and therefore, the defendant was liable in damages for breach of contract; that
the plaintiffs, however, were under a duty to mitigate any loss they might suffer through
the defendant's breach and should have accepted the defendant's offer to supply the
goods for cash which offer was bona fide. By not accepting, the plaintiffs had sustained
a greater loss than they might have, and therefore, the damages must be limited to the
loss they would have suffered if they had accepted the defendant's offer. The plaintiffs
appealed as regards the damages.
NOTES:
Notes
Referred to: Banco de Portugal v Waterlow & Sons, Ltd (1931) 100 LJKB 465; on appeal, [1932] All ER Rep 181; Houndaditch Warehouse Co v Waltex, Ltd, [1944] 2 ER
518; Pilkington v Wood, [1953] 2 All ER 810.
As to duty of plaintiff to mitigate damages, see 11 HALSBURY'S LAWS (3rd Edn) 289 et
seq; and for cases see 17 DIGEST (Repl) 108-111.
CASES-REF-TO:
Cases referred to:
(1) British Westinghouse Electric and Manufacturing Co, Ltd v Underground Electric
Railways Co of London, Ltd, [1912] AC 673; 81 LJRB 1132; 107 LT 325; 56 Sol Jo 734,
HL; 17 Digest (Repl) 108, 226.
(2) Dunkirk Colliery Co v Lever (1878) 9 Ch D 20; 39 LT 239; 26 WR 841, CA; 17 Digest
(Repl) 108, 225.
COUNSEL:
JB Matthews, KC, and HJ Turrell for the plaintiffs.; Compston, KC, and RJ Willis, for the
defendant, were not called on to argue.
Solicitors: WH Martin & Co; S Myers & Son.
Reported by EDWARD JM CHAPLIN, ESQ, Barrister-at-Law.
PANEL: BANKES AND SCRUTTON LJJ AND EVE J
JUDGMENTBY-1: BANKES LJ:
JUDGMENT-1:
BANKES LJ:
125
At the trial of this action the defendant raised two points first, she contended that she
had committed no breach of the contract of sale, and secondly that, assuming there was
a breach, she had nevertheless offered and was always ready and willing to supply the
pieces of silk, the subject of the contract, at the contract price for cash; that it was not
reasonable on the part of the plaintiffs to refuse to accept that offer, and that therefore
they cannot claim damages beyond what they would have lost by paying cash with each
order instead of having a month's credit and a discount of 2 1/2 per cent. We must take
it that this was the offer made by the defendant. The case was fought and McCARDIE,
J, has given judgment upon that footing. It is true that the correspondence suggests that
the defendant was at one time claiming an increased price. But in this court we must
take it that the offer was to supply the goods at the contract price, with this difference
only, that payment was to be made by cash instead of being on credit. In these circumstances the only question which arises is whether the plaintiffs can establish that as
matter of law they were not bound to consider any offer made by the defendant because
of the attitude she had taken up.
Upon this point McCARDIE, J, referred to British Westinghouse Electric and Manufacturing Co v Underground Electric Railways Co of London, Ltd (1) ([1912] AC at p 689)
where LORD HALDANE, LC, said:
"The fundamental basis is thus compensation for pecuniary lose naturally flowing from
the breach; but this first principle is qualified by a second, which imposes on a plaintiff
the duty of taking all reasonable steps to mitigate the loss consequent on the breach,
and debars him from claiming any part of the damage which is due to his neglect to take
such steps. In the words of JAMES, LJ, in Dunkirk Colliery Co v Lever (2) (9 Ch D at p
25): 'The person who has broken the contract is not to be exposed to additional cost by
reason of the plaintiff's not doing what they ought to have done as reasonable men, and
the plaintiffs not being under any obligation to do anything otherwise than in the ordinary
course of business.'"
It is plain that the question what is reasonable for a person to do in mitigation of his
damages cannot be a question of law, but must be one of fact in the circumstances of
each particular case. There may be cases where as matter of fact it would be unreasonable to expect a plaintiff in view of the treatment he has received from the defendant to
consider an offer made. If he had been rendering personal services and had been dismissed after being accused in presence of others of being a thief, and if after that his
employer had offered to take him back into his service, most persons would think he
would be justified in refusing the offer, and that it would be unreasonable to ask him in
this way to mitigate the damages in an action of wrongful dismissal. But that is not to
state a principle of law, but a conclusion of fact to be arrived at on a consideration of all
the circumstances of the case. Counsel for the plaintifs complained that the defendant
had treated his clients so badly that it would be unreasonable to expect them to listen to
any proposition that she might make. I do not agree. In my opinion each party to the
contract was ready to accuse the other of conduct unworthy of a high commercial reputation, and there was nothing to justify the plaintiffs in refusing to consider the defendant's offer. I think the learned judge came to a right conclusion on the facts, and that
the appeal must be dismissed.
JUDGMENTBY-2: SCRUTTON LJ:
JUDGMENT-2:
SCRUTTON LJ:
I am of the same opinion. Whether it be more correct to say that a plaintiff must minimise his damages, or to say that he can recover no more than he would have suffered if
he had acted reasonably, because any further damages do not reasonably follow from
the defendant's breach the result is the same. The plaintiff must take "all reasonable
steps to mitigate the loss consequent on the breach" and this principle "debars him from
claiming any part of the damage which is due to his neglect to take such steps": British
126
Westinghouse Electric and Manufacturing Co v Underground Electric Railways Co of
London, Ltd (1) per LORD HALDANE, LC. Counsel for the plaintiffs has contended that
in considering what steps should be taken to mitigate the damage all contractual relations with the party in default must be excluded. That is contrary to my experience. In
certain cases of personal service it may be unreasonable to expect a plaintiff to consider
an offer from the other party who has grossly injured him; but in commercial contracts it
is generally reasonable to accept an offer from the party in default. However, it is always
a question of fact. About the law there is no difficulty.
JUDGMENTBY-3: EVE J:
JUDGMENT-3:
EVE J:
I agree. But for the difficulty introduced by the defendant's demand for a higher price
than that named in the contract, I think this is a plain case. That difficulty is more apparent than real. It was not raised is the court below, and there is not enough evidence to
enable us to give effect to it, assuming it to be a matter of substance.
DISPOSITION:
Appeal dismissed.
APPENDIX I
CASE 3: SELVA KUMAR A/L MURUGIAH V
THIARAGAJAH A/L RETNASAMY
[1955] 1 MLJ 817
127
APPENDIX I
Case 3:
SELVA KUMAR A/L MURUGIAH V THIAGARAJAH A/L RETNASAMY
[1995] 1 MLJ 817
APPEAL NO 02-289-93
FEDERAL COURT (KUALA LUMPUR)
DECIDED-DATE-1: 7 APRIL 1995
MOHAMED AZMI, PEH SWEE CHIN AND WAN ADNAN FCJJ
CATCHWORDS:
Contract - Damages - Liquidated damages - Failure to pay instalments due after several
payments made - Clause in contract provided that aggrieved party entitled to forfeit all
money paid to date of breach - Sum paid included deposit paid upon signing of agreement - Whether aggrieved party could forfeit money - Whether penalty - Whether proof
of actual damage required - Contracts Act 1950 s 75
Contract - Deposit - Forfeiture - Breach of contract - Whether deposit forfeitable per se Whether court must determine if amount is reasonable - Contract Act 1950 s 75
HEADNOTES:
Both the appellant and respondent in this case are medical practitioners.The appellant
entered into an agreement in writing ('the agreement') with the respondent whereby the
respondent sold his clinic to the appellant for a total purchase price of RM120,000. Pursuant to the agreement, the appellant paid to the respondent RM12,000 on signing the
agreement, and thereafter paid a further sum of RM48,000. The balance of RM60,000
was to be paid by 15 monthly instalments of RM4,000 each. However, at the stage when
the appellant had paid up to a total sum of RM96,000 towards the total purchase price,
he refused to go on paying the remaining six monthly instalments. The respondent
sought to forfeit the RM96,000 by relying on a clause in the agreement which in effect,
provided that if the appellant defaulted, all moneys paid to date of such breach would be
forfeited absolutely to the respondent as agreed liquidated damages, and the agreement
would be terminated. The respondent successfully obtained a declaration from the High
Court that the clause was valid and enforceable. The appellant appealed.
Held, allowing the appeal in part by ordering the respondent to refund the sum of
RM84,000 to the appellant:
(1) In Malaysia, there is no distinction between liquidated damages and penalties as
understood under English law, in view of s 75 of the Contracts Act 1950 which provides
that in every case the court must determine what is the reasonable compensation,
'whether or not actual damage or loss is proved to have been caused thereby' ('the
words in question').
(2) However, the words in question must be given a restricted construction. Hence,
despite the words in question, a plaintiff who is claiming for actual damages in an action
for breach of contract must still prove the actual damages or the reasonable compensation in accordance with the settled principles in Hadley v Baxendale(1854) 9 Exch 341;
[1843-60] All ER Rep 461. Any failure to prove such damages will result in the refusal of
the court to award such damages.
128
[*818]
(3) However, for cases where the court finds it difficult to assess damages for the actual damage as there is no known measure of damages employable, and yet the evidence clearly shows some real loss inherently which is not too remote, the words in
question will apply. The court ought to award substantial damages as opposed to nominal damages which are reasonable and fair according to the court's good sense and fair
play. In any event, the damages awarded must not exceed the sum so named in the
contractual provision.
(4) The instant case falls into the category of cases where damages could be proved
by settled rules. The respondent could have proved the actual loss of, for example, use
of the medical equipment in the clinic, but failed to do so. Therefore, the court could not
quantify any award of damages to him.
(5) In any event, apart from the real loss that had not been proved, the respondent
was entitled to forfeit a reasonable amount of the deposit. The sum of RM12,000 was
not too large to prevent it from being fully forfeitable. Accordingly, the respondent had to
refund the sum of RM96,000 less the deposit to the appellant.
Bahasa Malaysia summary
Kedua-dua perayu dan responden dalam kes ini adalah pengamal perubatan. Perayu
telah mengikat suatu perjanjian bertulis ('perjanjian tersebut') dengan responden di
mana responden telah menjual kliniknya kepada perayu bagi jumlah harga belian sebanyak RM120,000. Mengikut perjanjian tersebut, perayu membayar kepada responden
jumlah RM12,000 apabila menandatangani perjanjian tersebut, dan selepas itu membayar jumlah selanjutnya sebanyak RM48,000. Baki sejumlah RM60,000 perlu dibayar
melalui 15 bayaran ansuran, setiapnya berjumlah RM4,000. Bagaimanapun, pada peringkat apabila perayu telah membayar RM96,000 terhadap jumlah harga belian, beliau
enggan untuk meneruskan enam bayaran ansuran yang tertinggal. Responden cuba
melucuthakkan RM96,000 tersebut berlandaskan suatu fasal di dalam perjanjian tersebut yang secara keseluruhannya, memperuntukkan bahawa jika perayu ingkar, kesemua wang yang telah dibayar sehingga tarikh kemungkiran perjanjian tersebut akan dilucuthakkan kepada penentang sebagai ganti rugi jumlah tertentu yang dipersetujui, dan
perjanjian tersebut akan ditamatkan. Responden berjaya mendapatkan suatu deklarasi
dari Mahkamah Tinggi bahawa fasal itu adalah sah dan boleh dikuatkuasakan. Perayu
telah membuat rayuan.
Diputuskan, membenarkan sebahagian rayuan tersebut dengan memerintahkan supaya responden mengembalikan wang berjumlah RM84,000 kepada perayu:
(1) Di Malaysia, tidak terdapat perbezaan di antara ganti rugi jumlah tertentu dengan
penalti, sepertimana yang terdapat di bawah undang-undang Inggeris, melihatkan s 75
Akta Kontrak 1950[*819] yang memperuntukkan bahawa dalam setiap kes, mahkamah
mesti menentukan apa yang merupakan pampasan yang munasabah, 'sama ada kerosakan atau kerugian sebenar yang disebabkan olehnya telah dibuktikan atau tidak'
('perkataan yang berkenaan').
(2) Namun demikian, perkataan yang berkenaan mesti diberi pentafsiran yang terhad.
Oleh itu, meskipun perkataan yang berkenaan, seorang plaintif yang menuntut ganti rugi
sebenar di dalam suatu tindakan bagi kemungkiran kontrak masih perlu membuktikan
kerosakan sebenar atau pampasan yang munasabah menurut rukun mantap di dalam
Haxley v Baxendale(1854) 9 Exch 341; [1843-60] All ER Rep 461. Sebarang kegagalan
untuk membuktikan kerosakan sedemikian akan mengakibatkan keengganan
mahkamah untuk membuat award ganti rugi sedemikian.
(3) Walau bagaimanapun, bagi kes di mana mahkamah mendapati susah untuk mentaksir ganti rugi untuk kerosakan sebenar oleh kerana tidak terdapat cara penyukatan
129
ganti rugi yang diketahui yang boleh digunakan, tetapi keterangan pula menunjukkan
dengan jelasnya bahawa memang terdapat suatu kerugian sedia ada yang bukan di luar
dugaan, perkataan yang berkenaan akan terpakai. Mahkamah patut mengawardkan
ganti rugi yang substantial dan bukan nominal, yang munasabah dan adil mengikut akal
budi mahkamah.
(4) Kes ini jatuh ke dalam kategori kes di mana kerosakan boleh dibuktikan berdasarkan rukun-rukun yang mantap. Responden harus boleh membuktikan kerugian sebenar,
misalnya, kegunaan alat-alat perubatan di dalam klinik, tetapi gagal berbuat demikian.
Oleh itu, mahkamah tidak dapat menyatakan kuantiti untuk sebarang award ganti rugi
kepadanya.
(5) Walau bagaimanapun, selain daripada kerugian sebenar yang tidak dibuktikan,
responden berhak untuk melucuthakkan sejumlah deposit yang munasabah. Deposit
sebanyak RM12,000 itu tidak begitu besar jumlahnya untuk menghalangnya daripada
dilucuthakkan dengan sepenuhnya. Dengan yang demikian, responden harus mengembalikan wang berjumlah RM96,000 tolak deposit tersebut kepada perayu.]
NOTES:
Notes For cases on liquidated damages, see 3 Mallal's Digest (4th Ed, 1994 Reissue)
paras 1467-1472. For cases on forfeiture of deposit, see 3 Mallal's Digest (4th Ed, 1994
Reissue) paras 1497-1505.
Bhai Panna Singh v Bhai Arjun Singh AIR [1929] PC 179
Chaplin v Hicks [1911] 2 KB 786, 1911-13 All ER Rep DEFAULT 224 (refd)
[*820]
Davies v Galmoye (1888) 39 Ch D 323 (refd)
Fateh Chand v Balkishen Das [1964] 1 SCR 515, 1963 AIR SC 1405 (folld
Hadley v Baxendale [1854] 9 Exch 341, [1843-60] All ER Rep 461 (refd)
Linggi Plantations Ltd v Jagatheeson [1972] 1 MLJ 89 (folld)
Maniam v The State of Perak [1957] MLJ 75 (folld)
Maula Bux v Union of India [1970] 1 SCR 928 (folld)
Wearne Brothers (M) Ltd v Jackson [1966] 2 MLJ 155 (refd)
Contracts Act 1950 s 75
Rules of the High Court 1980 O 28
Contract Act 1872 s 74 [Ind]
Originating Summons No 34-340-91 (High Court, Shah Alam)
RR Sethu (HS Dhillon with him) (HS Dhillon & Co) for the appellant.
N Chandran (Sri Dev Nair with him) (Ram, Rais & Partners) for the respondent.
JUDGMENTBY: PEH SWEE CHIN FCJ (DELIVERING THE JUDGMENT OF THE
COURT)
PEH SWEE CHIN FCJ (DELIVERING THE JUDGMENT OF THE COURT) This appeal
raises a difficult but important question of interpretation of s 75 of the Contracts Act
1950, which is set out below for ease of reference (s 75 is hereafter 'the section in question'):
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.
130
Both parties are medical practitioners. The respondent (hereafter 'the vendor'), sold his
medical practice on certain terms and conditions under the name and style of 'Poliklinik
dan Surgeri Thiager' to the appellant (hereafter 'the purchaser'), for a total price of
RM120,000 and for this purpose they entered into an agreement in writing on 15 October 1988. The relevant parts of the agreement are set out below:
The agreement made on this 15 October 1988 ...
Whereas -Now this agreement witnesseth as follows:
In consideration of the covenants, undertakings and payments set out
hereinafter the parties mutually agree between themselves as follows:
[*821]
(1) (a) The vendor shall sell the said premises free of all
encrumbrances to the purchaser for the total of RM120,000 the
payment terms being as follows:
(i) The purchaser shall pay to the vendor and hereby pays the vendor
receipt of which the vendor hereby acknowledges by signing this
agreement, the sum of RM12,000.
(ii) The purchaser shall pay the vendor the sum of RM48,000 on or by
27 October 1988.
(iii) The purchaser shall pay the vendor fifteen (15) equal monthly
instalments of RM4,000 a month on or before the end of each month
the first of which fifteen (15) payments is to commence on 30
November 1988.
(2) (a) The vendor as tenant shall continue to hold the tenancy as
trustee for and on behalf of the purchaser till the expiry date
of 30 November 1989 and if requested by the purchaser shall in
accordance with the tenancy agreement renew the said tenancy. On
the expiry of the extended period if there shall not be any
clause for further extension, the vendor's obligation in this
clause shall cease and the purchaser will have full liberty to
negotiate a new tenancy but so long as there shall be extensions
to the current tenancy the vendor shall continue to hold the same
for and to the benefit of the purchaser and to act on the
purchaser's instructions.
(b) Both parties represent to each other that they will not do
anything to breach the terms of the tenancy and in the event of
such breach occurring the party at fault shall and hereby ...
fully indemnify the other party.
...
(15)(a) In the event the vendor shall default in his obligations herein
the purchaser shall be entitled to specific performance in which
event all the costs incurred shall be to the vendor's account.
(b) In the event the purchaser shall default in his obligations
herein all moneys paid to date of such breach shall be forfeited
absolutely to the vendor as agreed liquidated damages and
thereupon this agreement shall be deemed null and void and the
purchaser shall give up vacant possession of the said premises
and shall give up the said practice to the vendor and shall have
no further rights whatsoever.
Signed by the abovenamed )
Dr Thiagarajah a/l Retnasamy ) --Sgd-the said vendor in the presence )
of:
[*822]
--Sgd-KB Thuraisingham
131
Advocate & Solicitor
Kuala Lumpur
Signed by the abovenamed )
Dr Selva Kumar a/l Murugiah ) --Sgd-the said purchaser in the presence )
of:
--Sgd-KB Thuraisingham
Advocate & Solicitor
Kuala Lumpur
The premises where the clinic is situated have, at all material times, belonged to a third
party who had earlier granted a tenancy of the same to the vendor, who, after and under
the agreement dated 15 October 1988, was 'to hold the tenancy as trustee for and on
behalf of the purchaser ...', vide its cl 2 but the rent payable would be paid by the purchaser after the date of the said agreement to the vendor who would then in turn pay to
the vendor's landlord.
RM12,000 was paid on the signing of the agreement by the purchaser who was to pay a
further sum thereafter in pursuance of the agreement leaving some balance to be paid
by fifteen monthly instalments of RM4,000 each. Subsequently, to cut the story short,
thus, sometime before 22 December 1989, the purchaser refused to go on paying the
monthly instalments, leaving six instalments unpaid (RM24,000), and by then, a sum of
RM96,000 had been paid by the purchaser to the vendor towards the aforesaid purchase price of the clinic. At that time, the purchaser had also failed to reimburse the
vendor the rent payable to the extent of RM4,808.
On 22 December 1989, the vendor wrote to the purchaser through his solicitors, terminating the said agreement, forfeiting the sum of RM96,000 and requiring the purchaser
to hand over the medical equipment and vacant possession of the premises of the clinic.
The originating summons herein was subsequently filed, claiming declarations that the
said agreement was terminated, that the vendor was entitled to forfeit the sum of
RM96,000, that in regard to the tenancy which the vendor held in trust for the purchaser,
such trust be terminated and that the vendor be entitled to resume vacant possession of
the clinic.
Apart from the important interpretation of the section in question, there are several small
points which may be very well briefly disposed of first.
The first of such small points is to the effect that the purchaser was induced to enter into
the said agreement by the misrepresentation from the vendor about the average
monthly income of the clinic from the source of the 'contract patients' being at RM5,000,
but the purchaser alleged that the actual income earned was half of that sum. This bare
allegation was made by the purchaser apparently in order to explain the refusal or reluctance to go on paying the aforesaid monthly instalments.
However, inter alia, no particulars at all were given in respect of such patients for the
period from the date of the agreement in question. It was a mere allegation, equivocal,
inconsistent, and insubstantial for reasons mentioned by the learned judge that compelled him to reject it. We are satisfied that the learned judge has not erred in doing so.
We also reject such allegation.
Yet another mundane point is to the effect that the learned judge has failed at the outset
to make an order under O 28 of the Rules of the High
[*823] Court 1980 to direct that the proceeding by the originating summons herein be
continued as if it were begun by writ to determine the issue of misrepresentation.
The purchaser at the hearing before the learned judge was represented by counsel. He
never raised this procedural point at all. An appellant could be barred from raising an
132
objection to a point of procedure on appeal when such objection was not raised in the
court below. Please see Davies v Galmoye (1888) 39 Ch D 323. By the same token, the
purchaser as appellant, should be also barred from raising the procedural point in question, quite apart from the fact that this procedural point proved to be futile with hindsight.
It is also desirable to mention two other matters, viz that the question of arrears of rent
has not been submitted on by both parties before us, and the court is therefore prepared
to treat this as being no longer an issue before us, and that it was common ground in the
court below that the purchaser began to fail to pay those monthly instalments towards
the purchase price as from July 1989.
We now deal with the question of concern, ie the section in question; and the facts that
call for its interpretation in this case are as follows. A total sum of RM96,000 was collected by the vendor from the purchaser to account of the total purchase price of the
clinic, leaving a sum of RM24,000, the amount of six monthly instalments remaining unpaid. On 22 December 1989, the vendor wrote, inter alia, in effect, terminating the
agreement, on the ground of failure to pay the balance of RM24,000, and stating that the
said sum of RM96,000 had been forfeited absolutely as 'agreed damages'. This must
have reference to cl 15 of the agreement as set out above.
We have long known the object for which the section in question was enacted first in
India and later here in our country. Thomson J (as he then was) in Maniam v The State
of Perak [1957] MLJ 75 , commenting on arguments advanced before him as to whether
a certain sum was to be regarded either as a penalty or as liquidated damages, said [at
p 76]:
In the first place, in this country there is no difference between
penalty and liquidated damages. Section 75 of the Contract Ordinance
which is the same as s 74 of the Indian Contract Act reads as follows:
'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.'
As is said in Pollock and Mulla on the Indian Contract Act(7th Ed)
at p 410, 'This section boldly cuts the most troublesome knot in the
common law doctrine of damages'. In brief, in our law in every case if
a sum is named in a contract as the amount to be paid in case of breach
it is to be treated as a penalty. See Bhai Panna Singh v Bhai Arjun
Singh AIR 1929 PC 179.
It is obvious that any submission as to whether a certain clause in a contract is a penalty
or liquidated damages is an exercise in futility.
[*824] Clause 15(b) of the agreement before us is therefore unenforceable and is to be
regarded as a penalty, void in equity for being unconscionable.
At common law, where there is no such section in question, the effect of a sum being
found as a penalty, is therefore that the innocent party to a breach of contract is not left
with no remedy, he can still recover damages or compensation which he has however to
prove, and it is immaterial that such compensation if proved, exceeds or not, the stipulated penalty.
However, the wording of the section in question seems to also differ from the common
law on the aspect of proof of damages when a provision in a contract turns out to be a
penalty. The relevant words in the section in question are:
... the party complaining of the breach is entitled, whether or not
actual damage or loss is proved to have been caused thereby, to receive
133
... reasonable compensation not exceeding the amount so named or ...
the penalty stipulated for.
(The quoted words will be hereafter 'the expression in question'.)
In particular, from the expression in question, the words, 'whether or not actual damage
or loss is proved to have been caused thereby' (they are hereafter 'the words in question'), are unambiguous and plain, and by the primary rule of construction, ie literal construction of the same, they may seem to indicate clearly the dispensation of proof of actual damage or loss by an innocent party to a breach of contract, and this seems to be a
departure from the common law brought deliberately about by the legislature. Let us examine the acceptability of this construction. It is useful to bear in mind that there is no
such thing as a fixed hierarchy of application of rules of construction in which the primary rule of literal construction will be at the top of it.
In the first place, such a literal construction would seem to be beyond the object of the
section in question, viz the abolition of the distinction between a penalty and liquidated
damages; secondly, it will produce a most unreasonable result in that it will change the
existing law which is that if a plaintiff seeks to recover damages for the actual damage
caused, he ought to prove them, unless he is content with the symbolic award, eg of
nominal damages, for any infraction of his rights under a contract. This even seems to
be a rule of some antiquity.
We hold first, that the literal construction should not be strictly adhered to and the words
in question should be given a restricted or limited construction though the language
used in the words in question expresses really no circumscription of the area of operation.
Having decided on a more limited construction of those words in question, we must now
revert, at least briefly, to the more important and relevant cases in our own courts and
the Privy Council, and the Indian Supreme Court to decide for ourselves how precisely
the words in question should be construed.
In Bhai Panna Singh v Bhai Arjun SinghAIR 1929 PC 179, an Indian appeal in the Privy
Council in connection with a provision in a contract for
[*825] the party in breach to pay Rs10,000, Lord Atkin said in connection with s 74 of
the Indian Contract Act 1872 (corresponding to the section in question in our Act), held:
The effect of s 74 of the Contract Act of 1872 is to disentitle the
plaintiffs to recover simpliciter the sum of Rs10,000, whether the
penalty or liquidated damages. The plaintiffs must prove the damages
they have suffered.
In that case, the plaintiffs managed to prove as their actual damage, the sum of Rs500
which they recovered.
Lord Hailsham in Linggi Plantations Ltd v Jagatheeson [1972] 1 MLJ 89 observed at p
92 that the section 'was intended to cut through the rather technical rules of English law
relating to liquidated damages and penalties ...'.
In Maniam v State of Perak [1957] MLJ 75 , the object of the section in question suggested by Pollock and Mulla, the joint authors of the Indian Contract and Specific Relief
Acts, was repeated by Thomson J (as he then was) with approval as set out above, but
unfortunately the section in question was found by his Lordship to be irrelevant to the
facts of that case, and consequently there was no expounding on the words in question.
The view of Lord Atkin was adopted in our High Court case, viz Wearne Brothers (M)
Ltd v Jackson [1966] 2 MLJ 155 , though the learned trial judge, while correctly holding
that in a provision in a contract amenable to the section in question, the plaintiffs must
prove damages they had suffered, erred in saying further [at p 156] that, 'unless the sum
... is a genuine pre-estimate'. It must be remembered that the expression 'liquidated
damages' is the name for the contracting parties' supposedly genuine pre-estimate of
134
the loss to the innocent contracting party when the contract is broken by the other. Every
such provision to which the section in question is applicable is to be regarded effectually
as a penalty and is therefore void or unenforceable.
The Indian Supreme Court in two leading cases adopted the view of Lord Atkin in Bhai
Panna Singh v Bhai Arjun Singh that a plaintiff must prove the actual damage, ie he
must prove the damages for the actual damage or loss, despite those words in question.
The two Indian Supreme Court cases are cases in which the interpretation of this section in question was not a sideshow as in most of other cases mentioned, but was the
main prominent issue discussed and dealt with. It will be necessary to set out the gist of
them.
The first of these two cases is Fateh Chand v Balkishen Das[1964] 1 SCR515; AIR 1963
SC 1405. This case concerns a sale of land for the price of Rs121,500. Rs1,000 was
paid as earnest money. A part payment of Rs24,000 was further paid, whereupon the
possession of the land was given by the vendor to the purchaser. The section in question was the issue before the court.
The case was heard before a subordinate judge and on appeal against his decision to
the High Court, the High Court allowed the appeal and held that the purchaser was in
breach of contract for failing to pay the balance of the purchase price. There was a
clause providing for forfeiture
[*826] of all money paid for breach by the purchaser. The High Court however, ordered
the purchaser to pay only a sum equivalent to 10% of the purchase price as reasonable
compensation under the section in question in addition to and apart from the forfeiture of
the sum of Rs1,000 being earnest money paid on signing the agreement. The High
Court made also orders for payment of mesne profit for use of the land and for redelivery of premises of the land to the vendor.
The Supreme Court of India held that reasonable compensation should be awarded 'to
make good loss or damage which naturally arose in the usual course of things or which
the parties knew when they made the contract, to be likely to result from the breach'. It
cannot be lost on the mind of anybody that the Indian Supreme Court was reasserting
the celebrated ratio in Hadley v Baxendale (1854) 9 Exch 341; [1843-60] All ER Rep
461. The Indian Supreme Court further found the award of the sum equivalent to 10% of
the purchase price by the High Court as being an arbitrary assumption based on no
principle they could find. The Supreme Court then went about their way to ascertain apparently, the reasonable compensation by looking at the evidence to find if there was
any loss other than the loss suffered by being kept out of possession. The Supreme
Court found no evidence of depreciation of the value of the land in question there. The
Indian Supreme Court found that there was absence of proof of damage, but stated that
the forfeiture of earnest money and the advantage of having the earlier use of Rs24,000
as being sufficient compensation. The Indian Supreme Court, therefore did not in effect
and in reality award any distinctly and separately 'reasonable compensation' under the
section in question, despite what might be regarded as a mere consolatory statement
just mentioned, with the greatest respect.
The ratio of the case seems to be that such 'reasonable compensation' must be proved
according to the usual principles, and the court undertakes a consideration of the evidence adduced to see if there is any such proof or such evidence of such actual damage or loss. If there is no such evidence, there will be no award of such reasonable
compensation. This ratio seems to be in accord with the view of Lord Atkin set out
above.
The second case is Maula Bux v Union of India [1970] 1 SCR 928. There, Bux agreed to
supply certain foodstuffs to some military headquarters and deposited Rs18,500 with the
Indian Government. The contract provided that for failure by Bux to perform it, the sum
of Rs18,500 'would stand forfeited and be absolutely at the disposal of the Government
without prejudice to any other remedy or action that the Government may have taken'.
135
Bux failed to perform the contract and the sum of Rs18,500 was forfeited. Bux sued for
the return of the sum. The subordinate court ordered the return on the ground that the
Government had not suffered any loss. The Government appealed to the High Court.
The High Court allowed the appeal and allowed the Government to retain the sum on
the ground that the sum might be regarded as earnest money. Bux appealed to the Supreme Court. The Supreme Court disagreed that the sum was earnest money and held
to the effect that the sum was not a reasonable
[*827] amount as earnest money, so that the sum would fall within the section in question. The Supreme Court ordered the refund to Bux of the sum with the interest at the
rate of 3% from the date of action to the date of satisfaction. Fateh Chand v Balkishen
Das[1964] 1 SCR 515; AIR 1963 SC 1405was clearly affirmed.
With regard to the words in question, the Supreme Court held that the Government must
prove the loss and thus could have produced but failed to produce evidence to prove the
prices of the said foodstuffs in question when Bux failed to deliver them.
But what is far more interesting in that case is that the Indian Supreme Court, when referring to the words in question, ie 'whether or not actual loss or damage was proved to
have been caused thereby' stated that the words in question were intended to cover two
kinds of contracts. In the first kind, the court would find it very difficult to assess such
reasonable compensation. In the second kind, the court could assess such reasonable
compensation with settled rules. Such dichotomy of contracts by the Indian Supreme
Court represents, in our view, a logical basis for the words in question, words added by
the legislature to the section in question without seemingly any thoughtfulness about the
desirability of some appropriate limitations thereto. We agree with the Indian Supreme
Court's dichotomy of such contracts.
Secondly, we therefore further hold that the words in question, viz 'whether or not actual
damage was proved to have been caused thereby', are limited or restricted to those
cases where the court would find it difficult to assess damages for the actual damage or
loss, as distinct from or opposed to all other cases, when a plaintiff in each of them will
have to prove the damages or the reasonable compensation for the actual damage or
loss in the usual ways.
However, there remains to be done further work, for their Lordships in the Indian Supreme Court did not further identify or elaborate the contracts of the kind for the breach
of which the court finds it difficult to assess damages or 'the reasonable compensation'
for actual loss or damage. The search will have to continue for the precise attributes of
this kind of contract.
Conceivably, the archetype of cases of the kind just mentioned, in our view, is undoubtedly the well-known case of Chaplin v Hicks [1911] 2 KB 786 ; [1911-13] All ER Rep
224. In that case, Ms Chaplin, an actress agreed with Hicks, a theatrical manager, for
Ms Chaplin to be at a meeting for him to interview her and also 49 other actresses
where he would select 12 out of such 50 actresses for giving remunerative employment
to. He was in breach of contract for not giving Ms Chaplin a reasonable opportunity to
attend the interview. It was also argued for him in the Court of Appeal that only nominal
damages were payable, and the award for substantial damages by the High Court was
wrong. The submission of nominal damages was to the effect that she would have had
only a chance of one in four of being successful. The argument for nominal damages
was rejected by the Court of Appeal and the High Court's award was upheld.
[*828]
Very clearly, Ms Chaplin failed to prove the damages for the actual damage, ie the
amount for such damage or loss, and one may query as to why she should be given
substantial damages and not merely nominal damages, as would have been seemingly
and normally the case. We feel we ought to explain even further below.
136
A few words may first be necessary to explain the nature of nominal damages, which
are damages of, say RM10 (traditionally of about 40 shillings in England), which could
be awarded in each and every breach of contract, in the absence of actual loss or damage, inherently in such a case, or alternatively in the absence or failure of proof of such
actual loss or damage.
To revert to the poser above about Ms Chaplin, basically, the evidence in Ms Chaplin's
case indubitably suggested a real loss, a loss that was not too remote, going by the
rules in Hadley v Baxendale(1854) 9 Exch 341;[1843-60] All ER Rep 461, but at the
same time it was quite difficult to assess the damages or the amount of money that
should be given to her for such loss of such opportunity to be selected.
In a good number of cases, rules for quantifying amounts of money for damages have
evolved in courts for some but not all types of cases, in other words, a measure of damages for some of these cases has been respectively established, eg the measure of
damages in a sale of goods being the difference between market value and contract
price, etc. However, a measure of damages, ie a settled rule for assessing damage, has
not been developed for cases of the type of Ms Chaplin's, and such measure for her
case has still not been established. It would still be left to the good sense and fair play of
the court to fix a reasonable amount as compensation. Thus, it will mean that for lack of
an established measure of damages in any particular case, that case will be one in
which the court finds it difficult to ascertain the amount of actual loss or damage. The
court will not shirk its duty, however, when such actual loss or damage is manifested
from the evidence and it is not too remote, to find a reasonable sum for the plaintiff.
It is significant to add that there are cases of contract in which the evidence therein
shows there can be no real loss inherently, and in such event, nominal damages will be
the only damages for a judgment obtained by a successful plaintiff either to use it 'as a
peg to hang his costs on', or to establish a right or a declaration of right. It is not difficult
to imagine such a case when the evidence shows clearly there can be no real loss.
For an illustration of such a case clearly showing no real damage or loss where nominal
damages would be the only remedy, let us say, eg that A, a doctor promises to examine
the next day, B, a regular patient of his, who is very keen to have A examine him routinely on the following day, and A fails to do so the next day. Here A is in breach of contract; but the evidence here clearly shows no actual loss or damage. Whether in any
particular case the evidence shows any real damage or not, appears to be largely a matter of common sense.
Thirdly, therefore, we hold that the precise attributes of such contracts in which it is difficult for a court to assess damages for the actual damage or loss, are cases where there
is no known measure of damages employable,
[*829] and yet the evidence clearly shows some real loss inherently and such loss is
not too remote; then the court ought to award, not nominal damages, but instead, substantial damages not exceeding the sum so named in the contractual provision, a sum
which is reasonable and fair according to the court's good sense and fair play.
Fourthly, we hold that in any case where there is inherently any actual loss or damage
from the evidence or nature of the claim and damage for such actual loss is not too remote and could be assessed by settled rules, any failure to bring in further evidence or
to prove damages for such actual loss or damage, will result in the refusal of the court to
award such damages, despite the words in question.
Having expressed our views above, we now deal with the facts in the instant case before us. The evidence shows clearly some actual loss, damages for which could be assessed by settled rules. The purchaser, eg was using the medical equipment. This is,
therefore, a case where damages could be proved by settled rules. But the vendor has
brought no evidence to prove damages for the actual loss as explained earlier, so that
we could have awarded at least some damages as compensation for loss of use of the
137
medical equipment from some evidence of its rental value should it be rented out. Thus
the real damage cannot be quantified. In other words, the damages have not been
proved. The sum of RM96,000 paid towards the purchase price, less the sum comprised
therein which was paid as earnest money, would have to be refunded to the purchaser
by the vendor subject to what is to be further said below about the sum representing the
earnest money or the deposit.
Apart from the real loss (which has not been proved), the vendor ought to be entitled, in
any event, to forfeit any reasonable amount of earnest money or deposit. We have in
our case, the deposit or earnest money, ie the sum of RM12,000 which was paid on
signing the agreement by the purchaser to the vendor, see cl 1(a)(i) of the agreement.
The sum is equivalent to 10% of the purchase price and is part of the said sum of
RM96,000 sought earlier to be forfeited by the vendor under cl 1(a)(i) of the agreement.
The sum of RM12,000, in all the circumstances of this case, is not too large to prevent it
from being fully forfeitable. We would not interfere with it, and would allow the vendor to
forfeit it or keep it.
We therefore allow the appeal in part by ordering the respondent to refund forthwith the
sum of RM96,000 less the sum of RM12,000, ie to refund the sum of RM84,000 and to
pay 8%pa as interest thereon from the date of judgment to the date of satisfaction. The
order of the High Court below dated 8 November 1991 is to be varied accordingly, to
take account of the said refund and interest thereon. The respondent is to pay the costs
of appeal here but costs in the court below remain payable by the appellant.
Order accordingly
LOAD-DATE: March 14, 2005