ENGINEERING & LAW
INGENIEUR
ENGINEERING & LAW
INGENIEUR
Are Liquidated Damages Clauses Useless ?
By Teng Kam Wah , Dr Rosli Said and Dr Mohd Suhaimi Bin Mohd Danuri , Faculty of Built Environment , University of Malaya
Probably the most important aspect of Malaysian construction law that is shrouded in uncertainty concerns the status of liquidated damages clauses . Proving loss in construction projects can be arduous and daunting . It can be very difficult , time-consuming and expensive . To surmount this problem , it is a common feature of construction contracts to fix a sum for loss suffered by the employer in the event of a particular breach by the contractor occurring . Such an ascertained sum is known as “ liquidated damages ” particularly if the sum is a genuine pre-estimate of the loss suffered and not merely arbitrary or intended to exert undue pressure on the contractor to perform his obligations under threat of being penalised .
Liquidated damages are almost synonymous with delay claims , which are usually in the form of a daily , weekly or monthly rate . The issue is whether contracting parties are at liberty to specify the amount of damages payable in the event of breach of the contract and which is enforceable in law .
A liquidated damages clause , if enforceable , saves the parties from having to endure costly , lengthy and hazardous dispute resolutions by allocating risks when the contract is born with a pre-estimate of the damages due in the event of a breach . A provision for liquidated damages benefits both parties : the injured party is spared the need to prove his actual loss whereas the other party is assured that his liability is limited . It makes commercial sense for both contracting parties to remove the uncertainty by providing for a liquidated damages clause in the contract .
Section 75 of the Contracts Act 1950
The effect of such an agreed sum in the contract payable upon breach is governed by the Contracts Act 1950 (“ the Act ”) which is modelled on the Indian Contract Act 1872 . Many of the sections are in fact couched in identical language . Section 75 of the Act is 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 .
Liquidated Damages and Penalties
Liquidated damages are a pre-determined sum representing a genuine pre-estimate of the nondefaulting party ’ s losses arising from a breach of contract . Liquidated damages clauses have a compensatory purpose . Penalty clauses serve a deterrent purpose . The distinction is therefore primarily a function of their purpose .
Under English law , liquidated damages are legally valid and enforceable . They conform to the compensatory function of damages except that the injured party does not have to prove his actual
76 VOL 70 APRIL-JUNE 2017