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Case Update: Federal Court shifted the position of liquidated damages in Malaysia

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DAMAGES
Sale and purchase agreement – Extension of due date – Breach of contract– Earnest deposits – Interests – Forfeiture of deposits – Liquidated damages clause – Section 75 of the Contracts Act 1950

Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd
Appeal No 02(f) - 64 - 09 2016 (W)
- see the grounds of judgment here

Facts The Respondent offered to purchase a piece of land together with certain plant and machinery on the land (‘the properties’) that was owned by the Appellant who was in liquidation. The Respondent was required to pay an earnest deposit and execute the sale and purchase agreement ("SPA") for the properties within 30 days from the specified date, failing which would result in its forfeiture. The Respondent failed to execute the SPA within the stipulated date and requested an extension. This was granted provided that the Respondent paid a further earnest deposit to the Appellant which will be forfeited as agreed liquidated damages if there was another failure to comply with the deadline to execute the SPA. Subsequently, the Respondent requested for two further extensions which were granted under the same conditions. Upon the request for a fourth extension, the Appellant required the Respondent to pay further earnest deposit with a non-refundable interest on the balance of the deposit for the properties. The Respondent had again failed to meet with the extended deadline which led to the termination of the SPA and forfeiture of the earnest deposits and interest paid. The Respondent then brought an action against the Appellant for wrongful termination and sought for the return of the deposit money and interest paid but it was dismissed by the High Court. The Court of Appeal on the other hand, ruled that the forfeiture of the entire deposit and interest was impermissible but the forfeiture of the first earnest deposit was allowed. Hence, this appeal.

Issue Whether a purchaser who has agreed and willingly paid additional deposit and interest in consideration of an extension of time be entitled to claim a refund of the same in the event he defaults in executing the SPA and paying the balance deposit on the due date under Section 75[1]  of the Contracts Act 1950 (‘the Act’).

Held The Federal Court allowed the appeal and ruled that, in a sale and purchase of land where the terms and conditions have been agreed upon and a date has been fixed for execution, any additional deposit paid for the extension of time for completion possesses the dual characteristics of earnest money and part payment. Thus, it is a deposit and subject to forfeiture in consistent with section 75 of the Act so long as the amount is reasonable.

 
[1] “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.”