loss before being entitled to the stipulated sum.
Penalties are different. They are legally invalid
and unenforceable because they are inconsistent
with the compensatory function of damages. This
so-called “rule against penalties” accords well with
the principle that damages are compensatory and
not punitive. Penalties serve not to compensate
the injured party for his loss, but to punish or deter
the other party. Punishing a contract breaker is
no function of contract law, and any attempt to
do this is illegal. This prohibition of penalties is an
exception to the general principle that a contract
should be enforced according to its terms.
Most common law jurisdictions have the same
concept of the dichotomy between liquidated
damages and penalties as in England. The
Malaysian situation, with its codified Contracts
Act, stands out differently.
In the Privy Council decision of Bhai Panna
Singh v Bhai Arjun Singh AIR 1929 PC 179,
the issue concerned the interpretation of a
contractual term for the payment of a fixed sum
of money by the defaulting party under s 74 of the
Indian Contract Act 1872 (corresponding to our
s 75). In his judgment, Lord Atkin said that the
effect of that section was that the plaintiffs could
not simply recover the stipulated sum whether
it was a penalty or liquidated damages and that
the plaintiffs must prove the loss that they had
incurred.
In Maniam v The State of Perak [1957] MLJ
75, Thomson J in response to arguments raised
by the parties as to whether a specified sum was
in the nature of a penalty or liquidated damages
said, “In the first place, in this country there is
no difference between penalty and liquidated
damages.” The judge added that it is the law here
that “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.”
Lord Hailsham in Linggi Plantations Ltd v
Jagatheeson [1972] 1 MLJ 89, remarked that the
section “was intended to cut through the rather
technical rules of English law relating to liquidated
damages and penalties.”
Selva Kumar a/l Murugiah v Thiagarajah a/l
Retnasamy
The Federal Court in Selva Kumar a/l Murugiah
v Thiagarajah a/l Retnasamy [1995] 1 MLJ
817 reiterated the principle laid down in Bhai
Panna and held that therefore any argument
as to whether a contractual sum is a penalty or
liquidated damages is futile.
Another Indian decision referred to in
Selva Kumar was Maula Bux v Union of India
[1970] 1 SCR 928 where the Indian Supreme
Court took a unique perspective of the phrase
“whether or not actual loss or damage was
proved to have been caused thereby” which
is that it has reference to two different kinds
of contracts.
The first kind is where the court would
find it very difficult to assess reasonable
compensation. The second kind is where the
court could assess reasonable compensation
by settled rules. In the words of the Shah Ag CJ
in Maula Bux:
In case of breach of some contracts it
may be impossible for the Court to assess
compensation arising from a breach,
while in other cases compensation can be
calculated in accordance with established
rules. Where the Court is unable to assess
the compensation, the sum named by the
parties if it be regarded as a genuine pre-
estimate may be taken into consideration as
the measure of reasonable compensation,
but not if the sum named is in the nature
of a penalty. Where loss in terms of money
can be determined, the party claiming
compensation must prove the loss suffered
by him.
The Federal Court unreservedly adopted
such a construction of the phrase. It held that
the phrase is “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.”
As a necessar y incident of such a
differentiation of contracts, the Federal Court said
that for cases where loss from breach of contract
can be assessed by settled rules, failure to prove
damages for the actual loss will result in the court
refusing to award such damages notwithstanding
the phrase in question.
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