YAP YEW CHEONG & ANOR V. DIRGA NIAGA (SELANGOR) SDN BHD

HIGH COURT MALAYA, KUALA LUMPUR
[CIVIL SUIT NO: S6-22-533-2004]
ABDUL MALIK ISHAK J
12 AUGUST 2005
JUDGEMENT
 

Abdul Malik Ishak J:

Introduction

This is an appeal by the defendant in encl. 13 against the learned senior assistant registrar's ("SAR") decision in favour of the plaintiffs' summary application pursuant to O. 14 of the Rules of the High Court 1980 ("RHC").

Factually speaking, the appeal centred on three agreements entered into between the plaintiffs and the defendant. These agreements are not the standard sale and purchase agreements under the Housing Developers (Control and Licensing) Regulations 1989 made under the Housing Developers (Control and Licensing) Act 1966. In fact, these three agreements are "set-off" agreements entered into for purposes of setting-off all the debts due from Europlus Corporation Sdn Bhd to WCT Engineering Bhd. The defendant is an associated or a subsidiary to Europlus Corporation Sdn Bhd while the plaintiffs are the directors of WCT Engineering Bhd. These three agreements are drafted by the plaintiffs' solicitors and they are, incidentally, the solicitors representing the plaintiffs in this action.

It was a term in these agreements that the defendant shall within six (6) months from 23 January 1998 (the date of the sale and purchase agreements) redeem the said parcels (which will be referred to shortly) and deliver to the plaintiffs a letter of disclaimer failing which the defendant shall pay to the plaintiffs as purchasers 12% interest on daily rests on the purchase price from the expiry of the six (6) months to the date of actual redemption (hereinafter referred to as the "LAD").

The plaintiffs purchased parcel no: F 10 at RM371,200 with LAD at RM146,323.98, parcel no: F 41 at RM328,900 with LAD at RM129,649.67 and parcel no: F 42 at RM328,900 with LAD at RM129,649.67. The total LAD came up to RM405,623.32. It was quite substantial.

It is undisputed that the letter of disclaimer was dated 5 November 2001 and calculation-wise the delay was from 22 July 1998 to 5 November 2001 which came up to 1199 days for the three units.

Arguments Advanced By The Defendant

It may be summarised in the following manner:

(a) that the plaintiffs are enforcing a penalty clause which is invalid in the Malaysian context and in Malaysia generally by virtue of and pursuant to s. 75 of the Contracts Act 1950; and

(b) that the plaintiffs are claiming compounding interest by imposing 8% upon 12% which is said to be contrary to s. 11 of the Civil Law Act 1956.

In fact, these are the two salient issues for the court to deliberate upon. The determination of these two issues would dispose off the defendant's appeal in encl. 13, once and for all.

I shall now proceed to examine these two issues summarily.

The First Issue

The clause which is said to be a penalty clause is found in the sale and purchase agreement between the defendant and the plaintiffs dated 23 January 1998 as seen in exh. "YYC1" to the first plaintiff's affidavit affirmed on 2 June 2004 as reflected in encl. 5 (hereinafter referred to as the "said clause") and I must be forgiven for reproducing the said clause:

2. Redemption of the said Parcel

(1) The vendor (referring to the defendant) shall within six (6) months from the date hereof redeem the said parcel from the bridging financier and deliver to the purchaser(s) (referring to the plaintiffs) a letter of disclaimer (hereinafter called the "letter of disclaimer") from the bridging financier disclaiming all rights title and interest to the said parcel and undertaking to exclude the same from any foreclosure proceedings, if any action of such a nature is instituted against the vendor (referring to the defendant) on the said lands.

(2) If upon the expiry of the said six (6) months the vendor (referring to the defendant) shall fail to redeem the said parcel from the bridging financier rendering the said parcel free from all encumbrances the vendor (referring to the defendant) shall pay to the purchaser(s) (referring to the plaintiffs) interests at twelve per centum (12%) per annum on daily rests on the purchase price from the date of expiry of the said six (6) months to the date of actual redemption or it shall cause Europlus to pay to the purchaser(s) (referring to the plaintiffs) the said interests.

Can the said clause be considered to be a penalty clause? Can we construe the said clause to be a liquidated damages clause? These are pertinent questions to pose in adjudicating the defendant's appeal in encl. 13. The essential difference between penalties and liquidated damages has been lucidly explained in Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor Co., Ltd.[1914-15] All ER Rep. 739, a decision of the House of Lords with a coram of Lord Dunedin, Lord Atkinson, Lord Parker and Lord Parmoor. There, Lord Dunedin has this to say (see p. 741 to p. 742 of the report):

We had the benefit of a full and satisfactory argument, and a citation of the very numerous cases which have been decided on this branch of the law. The matter has been handled, and at a recent date, in the courts of highest resort. I particularly refer to Clydebank Engineering Co. v. Yzquierdo y Castaneda (Don Jose Ramos)[1905] AC 6; 74 LJPC 1; 91 LT 666; 21 TLR 58, HL; 17 Digest (Repl.) 149, 489, in your Lordships' House, and Public Works Comr. v. Hills[1906] AC 368; 75 LJPC 69; 94 LT 833, PC; 17 Digest (Repl.) 149, 490 and Webster v. Bosanquet[1912] AC 394; 81 LJPC 205; 106 LT 357; 28 TLR 271, PC; 17 Digest (Repl.) 156, 532, in the Privy Council. In all these cases many of the previous authorities were considered. In view of that fact, and of the number of the authorities available, I do not think it advisable to attempt any detailed review of the various cases, but I shall content myself with stating succinctly the various propositions which I think are deducible from the decisions which rank as authoritative:

(i) Though the parties to a contract who use the words penalty or liquidated damages may prima faciebe supposed to mean what they say, yet the expression used is not conclusive. The court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case. (ii) The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage: Clydebank Engineering Company v. Yzquierdo y Castaneda (Don Jose Ramos)[1905] AC 6; 74 LJPC 1; 91 LT 666; 21 TLR 58, HL; 17 Digest (Repl.) 149, 489. (iii) The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach: Public Works Comr. v. Hills[1906] AC 368; 75 LJPC 69; 94 LT 833, PC; 17 Digest (Repl.) 149, 490 and Webster v. Bosanquet[1912] AC 394; 81 LJPC 205; 106 LT 357; 28 TLR 271, PC; 17 Digest (Repl.) 156, 532. (iv) To assist this task of construction various tests have been suggested, which, if applicable to the case under consideration, may prove helpful or even conclusive. Such are: (a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivable be proved to have followed from the breach - illustration given by Lord Halsbury, LC, in the Clydebank Engineering Company v. Yzquierdo y Castaneda (Don Jose Ramos)[1905] AC 6; 74 LJPC 1; 91 LT 666; 21 TLR 58, HL; 17 Digest (Repl.) 149, 489. (b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid: Kemble v. Farren[1829] 6 Bing. 141; 3 Moo. & P. 425; 7 LJO SCP 258; 130 ER 1234; 17 Digest (Repl.) 157, 546. This, though one of the most ancient instances, is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that, when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable - a subject which much exercised Jessel, MR, in Wallis v. Smith[1882] 21 Ch. D. 243; 52 LJ Ch. 145; 47 LT 389; 31 WR 214, CA; 17 Digest (Repl.) 77, 14 - is probably more interesting than material. (c) There is a presumption (but no more) that it is a penalty when

a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damages:

per Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co.[1886] 11 App. Cas. 332; 35 WR 17, H.L.; 17 Digest (Repl.) 158, 555 (11 App. Cas. at p. 342). On the other hand: (d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties:Clydebank Engineering Company v. Yzquierdo y Castaneda (Don Jose Ramos)[1905] AC 6; 74 LJPC 1; 91 LT 666; 21 TLR 58, HL; 17 Digest (Repl.) 149, 489 per Lord Halsbury; Webster v. Bosanquet[1912] AC 394; 81 LJPC 205; 106 LT 357; 28 TLR 271, PC; 17 Digest (Repl.) 156, 532 per Lord Mersey.

That is certainly an interesting exposition of the law. In Malaysia, it seems that there is no difference between a penalty and liquidated damages and, accordingly, it would attract the provisions of s. 75 of the Contracts Act 1950. The position has been lucidly stated by Thomson J in SS Maniam v. The State Of Perak[1956] 1 LNS 112; [1957] MLJ 75 in this way (see p. 76 of the report):

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 section 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 Edition, page 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 SinghAIR [1929] PC 179.

To me, the distinction between liquidated damages and penalty is of no significance. It is of no legal importance simply because it is the duty of the court in either case to determine the quantum of what is the reasonable compensation to be handed out. It is wrong to say that a penalty clause is invalid by virtue of s. 75 of the Contracts Act 1950. Both the liquidated damages and penalties exist side by side. In liquidated damages, there will be a genuine pre-estimate of the loss that will be caused to one party in a situation where the contract is broken by the other. It is this liquidated damages that would be recoverable and it requires no proof of actual damage (per Cotton LJ in Wallis v. Smith[1882] 21 Ch D 243 at 267). Whereas it is said that a penalty clause constitutes a threat held against the opposite party in terrorem; more in the nature of a security extended to the promisee to the effect that the contract will be performed. But Lord Radcliffe in Bridge v. Campbell Discount Co Ltd[1962] AC 600 at 622, [1962] 1 All ER 385 at 395 has been very vocal and his Lordship has expressed his scepticism that a penalty is based on a threat in terrorem of the opposite party. Be that as it may, a penalty clause is always subject to the equitable jurisdiction of the court. So, the courts of equity would always ensure that a promisee is sufficiently compensated for his actual loss. However, there may be cases where the agreed sum may be less than the damage actually suffered yet the promisee may recover his actual loss (Public Works Comr v. Hills[1906] AC 368 at 375; Wall v. Rederiaktiebolaget Luggude[1915] 3 KB 66; and Watt, Watts & Co Ltd v. Mitsui & Co Ltd[1917] AC 227). In Bulsing Ltd v. Joon Seng & Co[1971] 1 LNS 13; [1972] 2 MLJ 43, Chua J was of the view that, in a penalty clause situation, the promisee has an option whether to sue under the penalty clause or to sue for damages and recover damages in full. At the end of the day, it is purely a matter of construction for me to decide by looking upon and perusing the terms and inherent circumstances of each particular case viewed objectively as at the time of entering into the contract and not at the time of the breach thereof. This is the approach recommended by other Judges before me in the following cases:

(1) Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor Co., Ltd. (supra);

(2) Lombank Ltd v. Excell[1963] 3 All ER 486; and

(3) Phoenix Heights Estate (Pte) Ltd v. Lee Kay Guan[1982] CLJ 44 (Rep) ; [1982] 2 MLJ 86.

Lopes J puts it rather well in the case of Law v. Redditch Local Board[1982] 1 QB 127 at 132:

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.

And the onus of showing that the specified sum is a penalty lies upon the shoulders of the party who is being sued for its recovery (Robophone Facilities Ltd v. Blank[1966] 1 WLR 1428 at 1447). According to Lord Dunedin in Dunlop Pneumatic Tyre Co., Ltd. v. New Garage and Motor Co., (supra)notwithstanding the fact that the parties may have used expressions like "penalty" or "liquidated damages" it is not conclusive and it is up to the court to decide whether it is a penalty or liquidated damages.

I reiterate that it is wrong to say as was said by the defendant that a penalty clause is invalid in Malaysia in the context of s. 75 of the Contracts Act 1950. In Malaysia, the distinction between liquidated damages and penalties has no significance. It has been put into oblivion by s. 75 of the Contracts Act 1950 (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 (supra); Wearne Bros (M) Ltd v. Jackson[1966] 2 MLJ 155; Linggi Plantations Ltd v. Jagatheesan[1971] 1 LNS 66; [1972] 1 MLJ 89; and Wee Wood Industries Sdn Bhd v. Guannex Leasing Sdn Bhd[1990] 2 CLJ 1060; [1990] 3 CLJ (Rep) 355). Section 75 of the Contracts Act 1950 enacts as follows:

Compensation for breach of contract where penalty stipulated for.

75. 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.

Explanation - A stipulation for increased interest from the date of default may be a stipulation by way of penalty.

Exception - When any person enters into any bail-bond, recognizance, or other instrument of the same nature, or, under the provisions of any law, or under the orders of the Federal Government or the Government of any State, gives any bond for the performance of any public duty or act in which the public are interested, he shall be liable, upon breach of the condition of any such instrument, to pay the whole sum mentioned therein.

Explanation - A person who enters into a contract with Government does not necessarily thereby undertake any public duty, or promise to do an act in which the public are interested.

ILLUSTRATIONS

(a) A contracts with B to pay B $1,000, if he fails to pay B $500 on a given day. A fails to pay B $500 on that day, B is entitled to recover from A such compensation, not exceeding $1,000, as the court considers reasonable.

(b) A contracts with B that, if A practices as a surgeon within Calcutta, he will pay B $5,000. A practices as a surgeon in Calcutta. B is entitled to such compensation, not exceeding $5,000, as the court considers reasonable.

(c) A gives a recognizance binding him in a pena1ty of $500 to appear in court on a certain day. He forfeits his recognizance. He is liable to pay the whole penalty.

(d) A gives B a bond for the repayment of $1,000 with interest at 12 per cent. at the end of six months, with a stipulation that, in case of default, interest shall be payable at the rate of 75 per cent. from the date of default. This is a stipulation by way of penalty, and B is only entitled to recover from A such compensation as the court considers reasonable.

(e) A who owes money to B, a moneylender, undertakes to repay him by delivering to him 10 gantangs of grain on a certain date, and stipulates that, in the event of his not delivering the stipulated amount by the stipulated date, he shall be liable to deliver 20 gantangs. This is a stipulation by way of penalty, and B is only entitled to reasonable compensation in case of breach.

(f) A undertakes to repay B a loan of $1,000 by five equal monthly instalments, with a stipulation that, in default of payment of any instalment, the whole shall become due. This stipulation is not by way of penalty, and the contract may be enforced according to its terms.

(g) A borrows $100 from B and gives him a bond for $200 payable by five yearly instalments of $40, with a stipulation that, in default of payment of any instalment, the whole shall become due. This is a stipulation by way of penalty.

Some critics say that in order to recover compensation in the course of the trial, the plaintiff must prove the actual damage suffered. But this would run counter to the phrase "whether or not actual damage or loss is proved to have been caused thereby" that appears in s. 75 of the Contracts Act 1950. What constitutes "reasonable compensation" within the meaning of s. 75 of the Contracts Act 1950 must necessarily be the actual damage suffered by the plaintiff. The Federal Court in the case ofSelva Kumar a/l Murugiah v. Thiagarajah a/l Retnasamy[1995] 2 CLJ 374 speaking through Peh Swee Chin FCJ who after going through some Indian precedents held that proof of damage or loss was necessary.

In short, the Selva Kumar's case requires an injured party to prove his actual loss and it is depriving him of the very benefit a liquidated damages clause was intended to confer viz, recovery without proof of actual loss. According to Mr. Seah Ban Kiat, the learned counsel for the defendant, who hails from the law firm of Messrs Yeap & Yong, that the Selva Kumar's case bears grave implications for the construction industry since an injured party must prove his actual loss for late completion notwithstanding the liquidated damages clause. The Federal Court in Selva Kumarheld that:

(1) by reason of s. 75 of the Contracts Act 1950, a liquidated damages clause is deemed to be penal and therefore invalid except as a ceiling for recovery. Accordingly, the sum expressed as liquidated damages cannot, in and of itself, be automatically recovered by the injured party;

(2) so much so that even if a contract has a liquidated damages clause, an injured party must still prove his actual loss, for instance, an employer must prove his actual loss for late completion;

(3) but, if it is very difficult for the injured party to prove his actual loss because there is "no known measure of damages employable" for the breach in question then his claim would not fail. Instead, s. 75 of the Contracts Act 1950 would permit him to recover a "reasonable compensation" which is "reasonable and fair according to the court's good sense and fair play" capped at the value of the sum expressed as liquidated damages; and

(4) that the relevant words in s. 75 of the Contracts Act 1950 that permits the injured party to obtain recovery despite being unable to prove his actual loss are the words "whether or not actual damage or loss is proved to have been caused thereby". These words are therefore to be narrowly interpreted and should not be taken to mean that an injured party could simply deduct the liquidated damages by using a liquidated damages clause without having to prove his actual loss.

It is appropriate, at this juncture, to reproduce the speech of Peh Swee Chin FCJ in Selva Kumar's case:

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.

Continuing in the case of Selva Kumar, Peh Swee Chin FCJ expressed his views thus:

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, 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.

The learned counsel for both the plaintiffs by the name of Miss Jashirita binti Mohd Bashir from Messrs Yip & Co submits with vigour and vitality that the facts in Selva Kumarare different from the facts of the present case. According to her, in Selva Kumar, the clause pertaining to the liquidated ascertained damages was unreasonable because the said clause stated that in the event the purchaser defaulted, all monies paid by the purchaser may be forfeited by the vendor. There, according to her, the vendor sought to forfeit all the monies paid by the purchaser which was 80% of the purchase price. Therefore, according to her, surely the Federal Court in that case was minded to find that s. 75 of the Contracts Act 1950 would not apply in the strict sense of the word. She emphasised that the case of Selva Kumarwas a case concerning the sale and purchase of a medical practice. And that the Federal Court was of the opinion that the respondent would have proved the actual loss or the damage that he has suffered, for example, the use of medical equipments at the clinic. But, unfortunately, according to her, the respondent has failed to do so and, consequently, the Federal Court was unable to quantify any award of damages to him.

I am attracted to the case of Sakinas Sdn Bhd v. Siew Yik Hau & Anor[2002] 3 CLJ 275, a decision of Abdul Aziz Mohamed J (now JCA). That case would be more relevant and appropriate in adjudicating the present appeal at hand. It was a construction related case and it involved purchasers of a condominium apartment. The agreement was in accordance with reg. 11 of the Housing Developers (Control and Licensing) Regulations 1989 read with Schedule "H" thereto and they were made under the Housing Developers (Control and Licensing) Act 1966. It was in the nature of a mandatory contract for the sale and purchase of the condominium apartment. The developers defaulted and failed to hand over vacant possession of the condominium apartment in time and there was also a corresponding failure to complete the common facilities in time. In both situations, the delay came up to 3