Introduction

[1] Claims and payments of Liquidated Ascertained Damages (“LAD”) in a Housing Development context have become very contentious in recent years. In the current COVID-19 pandemic and as we come to the conclusion of the current Conditional Movement Control Order, it is very likely that Developers are going to face a tough time completing Housing Development projects within the stipulated contractual period.

[2] Many Developers are likely to be brought to Court for claims on payments of LAD. What baffles Homebuyers is that even when the computation of LAD is expressly provided for in the Sales and Purchase Agreement (“SPA”), the law on LAD requires LAD to be proved. Such position is erroneous. In this Article, the Authors explore the locus classicus decision of Selva Kumar Murugiah v. Thiagarajah Retnasamy [1995] 1 MLRA 188 (“Selva”) and the plethora of cases that followed concerning the issue of proving actual damages which has shaped the law on proving LAD in Housing Development Contracts. The Dilemma In Selva

[3] The facts of this case concerned a dispute between two medical practitioners namely Dr Selvakumar (“the appellant”) and Dr Thiagarajah (“the respondent”). The respondent sold his medical practice to the appellant for RM120,000.00 which was payable by several instalments.

[4] The Agreement between them had a forfeiture clause that in the event the appellant does breach the terms as agreed, then all monies paid to date of such breach shall be forfeited absolutely in favour of the respondent as LAD and the Agreement shall be deemed null and void.

[5] The appellant paid a total of RM96,000.00 for the purchase of the medical practice, which included an earnest money of RM12,000.00 which was paid upon signing of the Agreement. The balance of RM60,000.00 was to be paid by 15 monthly instalments. However, six monthly instalments totalling RM24,000.00 were defaulted.

[6] The respondent terminated the contract and forfeited the entire amount of RM96,000.00 paid by the appellant as damages and sought a declaration that he was entitled to the said forfeiture.

[7] The Federal Court had to decide if said forfeiture by the respondent was valid and enforceable in law.

[8] It is in this context that the Federal Court had the occasion to consider the application of s 75 Contracts Act 1950 that read: ‘When a contract has broken, if the 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’.

[9] The Federal Court decided in favour of the appellant and ordered the respondent to refund the sum of RM84,000.00. The court, in considering the application of s 75 Contracts Act 1950, gave a comprehensive picture on its interpretation by concluding that the qualifying words ‘whether or not actual damage or loss is 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.

[10] From a careful reading of the facts of Selva, it will immediately become apparent that the facts of the said case was simply a partnership dispute and focused on a claim of damages in conjunction with the right of forfeiture. It was in this context that the court made the emphatic statement that damages claimed must be actual loss or damage.

[11] The facts of Selva did not concern a claim for LAD in a housing development contract between a Purchaser and Developer.

[12] This is where the sentiments as expressed by the Federal Court is of concern to purchasers in a housing development contract, since the court held 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, then 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.

[13] Whilst in Selva, the need for the proof of actual loss and damage or at the very least a reasonable compensation amount, can be appreciated as there was absolutely no way of determining the liquidated amount of damages payable, this position must be contrasted with a housing development contract between a Purchaser and Developer.

[14] In a standard housing development contract between the Purchaser and the Developer, there is the specific clause on liquidated damages that spells out the entitlement of a purchaser to claim LAD for late delivery of vacant possession.

[15] The LAD clause expressly provides the percentage of claim that a purchaser is entitled, which usually is a computation of 10% of the purchase price calculated from day-to-day if the developer fails to hand over the vacant possession within the stipulated period. As such, the agreement itself spells out the time period for the developer to deliver Vacant Possession to the purchaser.

[16] There is also the LAD for failure to complete the common properties within the stipulated period as covenanted in the agreement.

[17] A sample LAD clause is reproduced hereinafter with reference to a case authority of Sentul Raya Sdn Bhd v. Hariram Jayaram & Ors And Other Appeals [2008] 1 MLRA 473 (“Sentul Raya”).

[18] With such a simplistic mathematical calculation to compute the LAD payable by the Developer to the purchaser from the date of the contractual completion date to the date of actual delivery of Vacant Possession, the issue of proving actual loss and damages is of no purpose.

[19] This is where the Federal Court when the opportunity does arise, may wish to re-look and/or revisit the decision of Selva and make a categorical qualification and exception that for LAD claims in Housing Development contracts, there is no necessity for the proof of actual proof or damage.

[20] A lower threshold of proof will suffice since the mode of computation of LAD is expressly covenanted by both parties. All that the Court needs to be convinced is that the calculation of LAD is correct based on the commencement of computation and the cut-off date of computation. Johor Coastal Development Sdn Bhd v. Constrajaya Sdn Bhd [2009] 1 MLRA 654 [C] (“Johor Coastal”)

[21] The facts of this case concerned Johor Coastal Development Sdn Bhd (“the appellant”) and Constrajaya Sdn Bhd (“the respondent”) that had entered into two identical SPAs, whereby the respondent agreed to purchase lots 7 and 14 of Johor BahruWaterfront City for RM4,590,000.00 and RM10,830,000.00 respectively.

[22] The respondent was to pay the purchase price by six instalments. The initial payment of 12% was made followed by the subsequent payment of 50%. The respondent defaulted in the balance payments.

[23] The appellant terminated the SPAs and forfeited all the monies paid by the respondent as per the terms of the SPAs.

[24] The issue in the Federal Court was whether the appellant was entitled to forfeit all the monies paid by the respondent.

[25] The Federal Court decided that the appellant cannot retain the monies without proof by evidence of the loss or damage suffered as a result of breach of the SPAs.

[26] The Federal Court in the Johor Coastal held Selva to be good law, that actual damages or reasonable compensation must be proved in accordance with the principles set out in English case of Hadley v. Baxendale [1854] EWHC J70.

[27] The Federal Court held that 10% or 12% which is to be forfeited by the Appellant is not to be challenged by the respondent as not being fair and reasonable compensation. As for the balance, it was held that it was not open for the appellant to keep all the monies and the balance had to be returned to the respondent.

[28] The facts of the Johor Coastal like Selva was glaringly distinct, as this case did not concern a claim for LAD in a Housing Development contract between a Purchaser and Developer.

[29] The same reasoning as explained earlier for Selva will apply, as there is no necessity to prove actual loss or damage where the terms of the Housing Development contract between a purchaser and a Developer has a LAD clause with the percentage and computation as agreed spelt out with clarity.

[30] Both the decisions of Johor Coastal and Selva were focused on the issue of forfeiture of deposits and both did not concern a LAD claim in a Housing Development contract. Cubic Electronics Sdn Bhd v. Mars Telecommunications Sdn Bhd [2019] 2 MLRA 83 (“Cubic Electronics”)

[31] In Cubic Electronics, Mars Telecommunication Sdn Bhd (“the respondent”) had agreed to purchase a piece of land for RM90,000,000.00 from Cubic Electronics (“the appellant”) by accepting the appellant’s information memorandum dated 15 September 2011. The respondent made the first earnest deposit on 3 October 2011 amounting RM1,000,000.00. The acceptance was subject to a term in the information memorandum which stated that the SPA should be executed within 30 days of 7 October 2011, failing which, the earnest deposit would be forfeited as agreed liquidated damages.

[32] Three further extensions were granted and three further deposits were made amounting to RM2,040,000.00 including RM40,000.00 interest. The respondent was cautioned that the deposits made would be forfeited as agreed liquidated damages if the SPA was not executed as per the granted extensions. It was when the respondent requested for a fourth extension, the appellant refused the request and terminate the sale. The appellant informed that all deposit payments made were forfeited accordingly.

[33] The Federal Court was concerned with the issue of whether where terms and conditions of the SPA had been agreed to and a date was fixed for the execution of the SPA, can any additional deposit paid for the extension of time for completion be equally subject to forfeiture.

[34] The Federal Court noted that the focus of the issue is on the treatment of deposits vis-à-vis Section 75 of the Contracts Act 1950.

[35] Relying heavily on the literature of English and Indian case law, the Federal Court held that it was time for Malaysia to adopt the principles of law pertaining to a damages clause, to be equally applicable to forfeiture of deposits.

[36] Section 75 of the Contracts Act 1950 operates as a vital curtailment of absolute freedom of contract, designed to check against potential abuse by a party at another’s expense. As such, parties are not at liberty to contract out of s 75 of the Contracts Act 1950.

[37] As long as a payment has the dual characteristics of earnest money and part payment, it will be deemed as a deposit and subject to s 75 of the Contracts Act 1950. In determining what is “reasonable compensation” under s 75 of the Contracts Act 1950, the Courts must apply the principles of “legitimate interest” and “proportionality”. Only if the amount of compensation is extravagant and unconscionable, it will be considered unreasonable compensation. Otherwise, the damages provided for in the contract should mirror the loss/damage likely suffered by the innocent party.

[38] Section 75 of the Contracts Act 1950 allows reasonable compensation regardless whether actual loss or damage is proven. Actual loss should not be the sole consideration of reasonable compensation but evidence of that may be a useful starting point.

[39] The burden of proof is divided to primary burden of proof and secondary burden of proof.

[40] The primary burden of proof is where the Innocent party seeking to enforce damages clause under s 75 of the Contracts Act 1950 needs to prove breach of contract and the contract provides for a clause specifying a sum to be paid upon breach. At this stage, if the innocent party is successful in establishing the primary burden of proof, the innocent party becomes entitled for a sum not exceeding the amount stipulated in the contract irrespective of whether actual damage or loss is proven. The secondary burden of proof then comes into play where the defaulting party is entitled to prove that the sum stated in the damages clause is unreasonable including if there is a dispute as to what constitutes reasonable compensation.

[41] The Federal Court held that parties were well aware of the fact that earnest deposit payments would be forfeited as “agreed liquidated damages”. The deposits were subject to the same test of “legitimate interest” and proportionality” of the damages clause under s 75 of the Contracts Act 1950.

[42] Among others, the deprivation of chances for the appellant to enter into negotiations with third parties, goal of securing the execution of the SPA and avoiding delay in its completion were all “legitimate interest”. The total deposit amounted to 3.33% of the purchase price, which was deemed proportionate under the principle of “proportionality”. In turn, the respondent could not prove that such amount was unreasonable or exorbitant. The deposits were reasonable compensation under s 75 of the Contracts Act 1950.

[43] It must be borne in mind that similar to both the decisions of Johor Coastal and Selva, Cubic Electronics focused on the issue of forfeiture of deposits and did not concern a claim for LAD in the context of a Housing Development contract. SENTUL RAYA

[44] The Authors will rely on this decision of our Court of Appeal in Sentul Raya to fortify the contention, that the time is ripe for our Federal Court to revisit the decision of Selva.

[45] This is supported by the fact that Sentul Raya was a case concerning a Housing Development contract which is the main borne of contention in advocating a change in the law of proof of damages.

[46] The brief facts are that Sentul Raya Sdn Bhd, a housing developer, whose activities are controlled by the Housing Development (Control and Licensing) Act 1966 and Housing Development (Control and Licensing) Regulations 1989 (“HDR”) thereunder entered into agreements with members of the public to sell them apartments in a condominium which Sentul Raya Sdn Bhd agreed to construct.

[47] However, Sentul Raya Sdn Bhd was unable to make delivery of the apartments and Hariram Jayaram and others commenced action to recover damages for late delivery of vacant possession of their respective apartments.

[48] The relevant clauses in the Statutory Contract prescribed by Sub- Regulation 11(1) of the HDR on the entitlement of LAD were cls 22 and 24.

[49] Clause 22(2) of the SPA on the LAD for the parcel/unit reads: ‘If the vendor fails to hand over vacant possession of the said parcel to which water and electricity supply are ready for connection to the said parcel, in time, the vendor shall pay immediately to the purchaser liquidated damages calculated from day to day at the rate of ten percent (10%) per annum of the purchase price’.

[50] Clause 24 of the SPA on the LAD for the common properties reads: ‘The common facilities serving the said housing development shall be completed by the vendor within thirty-six (36) calendar months from the date of this agreement. ‘If the vendor fails to complete the common facilities in time the vendor shall pay immediately to the purchaser liquidated damages to be calculated from day to day at the rate of ten percent (10%) per annum of the last twenty per cent (20%) of the purchase price.’

[51] The salient part of the judgment of Sentul Raya that is of relevance here is the purchasers were not under a duty to prove the damages that they had suffered because the LAD clause was a statutory contract that provided that damages were liquidated and calculated in accordance with the formula prescribed by the clause and that no further onus lay upon the purchasers.

[52] The Court went further to say that once the date for delivery of vacant possession had passed, the developer’s liability to pay liquidated damages calculated in accordance with the formula provided in the said LAD clause became immediate.

[53] This is in the respectful views of the Authors should be the correct proposition of the law on the proof of damages for Housing Development agreements as the need to proof actual loss should not arise where there is a prescribed formula for computation in the SPA.

[54] The losses are easily quantifiable and it is easy to compute the liquidated amount payable by the developer to the purchaser.

[55] The need to proof actual loss when there is already a computation and formula prescribed imposes an unnecessary onerous task on the entitlement of the purchasers on their rightful entitlement to LAD on account of the delay in completion of their parcel/units and delay in completion of the common properties.

[56] The begging question of the purchasers of a Housing Development will then be as to why is there a need to proof actual loss of damages suffered when parties have covenanted on their entitlement to LAD.

[57] The decision in Sentul Raya is a very practical decision which should be the position in law for housing development contracts.

[58] In fairness, the facts of the cases of Selva, Johor Coastal and Cubic Electronics were a far cry from the facts of the Sentul Raya, as all these three cases were not cases concerning Housing Development. The factual matrix in the said cases did not deal with an agreement with an express clause on LAD.

[59] This explains the reason why the decision of Sentul Raya decision was not referred to in any one of the said decisions by the Federal Court.

Conclusion

[60] The Authors having expressed their views, are of the opinion that the time is right to revisit the decision of Selva and to distinguish or depart from the said decision to clarify the position on the law proving LAD in Housing Development contracts.

[61] The Authors are mindful of the fact, that the Honourable Federal Court Judges, when the occasion does arise, will adopt the findings of the Court of Appeal in Sentul Raya in its totality.

[62] A purchaser in a Housing Development transaction ought not to be troubled to prove damages in a LAD claim especially since the computation of such claim is covenanted in the Housing Development SPA.

[63] The correct position for the Law on proving LAD in a Housing Development context should be the total removal of the need to proof actual loss and damages. This position would be in line with the covenants of the Housing Development SPA whereby the formula for computing LAD is already covenanted in the said SPA.

[64] As long as the Developer has defaulted by not delivering vacant possession within the stipulated period, the Developer should be immediately liable to pay LAD in accordance with the covenants of the Housing Development SPA. Such position is also consistent with commercial and contract law where the freedom of contract must prevail and covenants of such contracts must be respected and given effect.