Penalty & Liquidated Ascertained Damages in Commercial Retail Tenancy Agreement

 Q1. What constitutes a penalty?

Answer:

Whether a clause in an agreement is a penalty is a matter of construction and depends on the intention of the parties to be gathered from the whole of the contract/ agreement.

If the intention is to secure the performance of the contract by the imposition of a fine or penalty, then the sum payable is a penalty. If the intention is to assess damages for breach of the contract, it is liquidated damages. An agreed sum is a penalty only if it is extravagant, exorbitant or unconscionable in relation to the loss likely to be suffered.

Q2. Are the landlords allowed to impose such penalty clause on the tenants due to the breach of the Commercial Retail Tenancy Agreement (“CRTA”)?

Answer:

Yes. When the tenant breached the terms under CRTA, the landlord can claim for a sum that is contained in the penalty clause as a damage pursuant to Section 75 of the Contracts Act 1950.

Q3. What does Section 75 of the Contracts Act 1950 provide?

Answer:

Section 75 of Contracts Act 1950 provides that: –

“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.”

Section 75 of Contracts Act 1950 is a provision on the liquidated ascertained damages which means that when a contract has been breached and a clause in the said contract stipulated the amount of damages to be paid, then the defaulting party of the contract is entitled to pay a reasonable compensation not exceeding the amount specified in the contract, even though no actual damage or loss has been proven.

Q4. Can the landlord claim for liquidated ascertained damages from the tenants who breached the CRTA?

Answer:

Yes. The landlord can claim for liquidated ascertained damages that is provided in the CRTA. The landlord is only entitled to the actual losses that is proven suffered by him due to the non-performance and/or breach of the tenant under the CRTA. The law is clear that damages are not meant to enrich the landlord, but only to put parties back to the position they would have been in had the contract been performed.

However, if the tenant believes that the damages claimed by the landlord is exorbitant and unreasonable, the burden of proof is on the tenant to prove that the damages sought is unreasonable as decided in the case of Cubic Electronics Sdn Bhd (In Liquidation) v Mars Telecommunications Sdn Bhd.

Q5. What is Malaysian legal position on the enforceability of the penalty/ liquidated ascertained damages clause under CRTA?

Answer:

Generally, Section 75 of the Contracts Act 1950 allows reasonable compensation as agreed by the parties in the liquidated damages clause of the CRTA to be awarded by the courts regardless of whether actual loss or damage is proven. This restored the viability of liquidated damages clauses which is based on the fundamental principle that as long as the liquidated damages clause is not a “penalty” or “unreasonable”, the innocent party can enforce such a clause to claim for the sum agreed therein without having to prove actual loss. Parties who are seeking to enforce a damages or liquidated clause in the CRTA must essentially:

a. prove that there was a breach of contract; and

b. the contract contains a damages or liquidated clause which stipulates a sum to be paid in the case of a breach.

It is settled that it is unnecessary for the innocent party to prove his/her actual loss or damage in every case whenever they are claiming for liquidated ascertained damages due to the breached. The amount claimable is also subject to the maximum amount stated in the contract.

However, if the defaulting party feels that the compensation/damages stipulated under the CRTA is unreasonable, the burden of proof then lies on the defaulting party to prove that such sum is unreasonable. A sum will be held to be unreasonable if it is extravagant, exorbitant and unconscionable in comparison with the highest conceivable loss which could possibly flow from the breach.

Q6. Is the fine imposed by the landlord on the tenants for late opening and non-operation of the premise under Retail Tenancy Agreement is allowed?

Answer:

Subject to the CRTA, the tenants can be fined for late opening and non-operation of the premise because the tenants are bound by the CRTA and regulations set by the complex management as the landlord. Hence, if the tenants failed to follow the regulations, they might be fined to pay for damages as it constitutes a breach under the CRTA.

Q7. Does the forfeiture of deposit by the landlord due to a breach constitutes a penalty?

Answer:

No. A deposit paid which is not merely part payment of the contract but as a guarantee of performance of the contract is generally not recoverable. If a payment possesses the dual characteristics of earnest money and part payment, it is a deposit. Thus, Section 75 is applicable to the forfeited deposit. The Federal Court in the case of Cubic Electronics followed the courts in the United Kingdom and India which have held that the principles of law on damages clause are equally applicable to forfeiture of deposits.

FOOTNOTES

[1] Metramac Coporation Sdn Bhd v Fawziah Holdings Sdn Bhd;

[2] Tan Sri Halim Saad & Che Abdul Daim Hj Zainuddin (Interveners) [2007] 4 CLJ 725;

[3] Silver Concept Sdn Bhd v Brisdale Rasa Development Sdn Bhd [2005] 3 CLJ 259;

[4] Section 75 of Contracts Act 1950;

[5] Cubic Electronics Sdn Bhd (In Liquidation) v Mars Telecommunications Sdn Bhd [2019] 6 MLJ 15;

[6] Cavendish Square Holdings BV v Talal El Maksessi [2015] UKSC 67.

THIS FAQS ARE PREPARED AND PUBLISHED BY MESSRS GAN & ZUL, ADVOCATES & SOLICITORS, KUALA LUMPUR.-CONSTRUCTION & ALTERNATIVE DISPUTE RESOLUTION DIVISION-