Liquidated Damages and Late Delivery Claims in Supply Contracts

What Are Liquidated Damages Clauses?

A liquidated damages clause, often called an LAD clause, is a contractual provision that fixes in advance the amount payable if a party breaches the contract. In supply contracts, these clauses commonly address late delivery, allowing the buyer to claim a specified daily or weekly sum for each day the supplier fails to deliver on time.

Business owners favour LAD clauses because they appear to provide certainty. Rather than having to prove losses in court, the parties agree upfront what breach will cost. However, Malaysian law treats these clauses differently from what many business owners expect.

Section 75 of the Contracts Act 1950

The legal framework for liquidated damages in Malaysia is found in section 75 of the Contracts Act 1950. This provision states that when a contract is breached and the contract names a sum to be paid in case of breach, or contains any other stipulation by way of penalty, the party complaining of breach is entitled to a reasonable amount, not exceeding the sum named, whether or not actual damage or loss is proved to have been caused by the breach.

The key idea is reasonableness. The court does not award the stipulated sum simply because a breach occurred, but the agreed figure is the upper limit, and what is reasonable is decided on the facts of each case.

The Distinction from Penalty Clauses

Section 75 applies to both liquidated damages clauses and penalty clauses. Malaysian law does not draw the sharp distinction between the two that exists in English common law. Whether a clause is labelled as liquidated damages or as a penalty, section 75 governs and the same principles apply.

The Cubic Electronics Decision

The Federal Court decision in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd [2019] 6 MLJ 15 clarified how section 75 operates. Before it, earlier cases such as Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817 were widely read as requiring proof of actual loss in most cases.

Key Holdings

The Federal Court held that proof of actual loss is not necessary in every case. The innocent party must prove the breach and the damages clause. The burden then shifts to the party in breach to show that the clause, or the sum in it, is unreasonable. The agreed amount remains a cap on what may be awarded.

The court also said that the ideas of a legitimate interest and proportionality, taken from the English case of Cavendish Square Holding BV v Makdessi, are relevant in deciding what is reasonable. Actual loss can still be a useful starting point, but reasonable damages are not limited to it. Whatever the loss, recovery cannot exceed the agreed figure.

Practical Consequences

The Cubic Electronics decision has significant implications for businesses:

• A buyer relying on an LAD clause need not always prove its actual loss, but it must prove the breach and the clause
• A supplier who says the sum is excessive bears the burden of showing it is unreasonable
• Records of the loss suffered are still valuable, because they help the court decide what is reasonable
• The agreed sum provides a ceiling, not a floor

Late Delivery Claims in Supply Contracts

Late delivery is one of the most common breaches in commercial supply arrangements. When a supplier fails to deliver goods by the agreed date, the buyer may suffer various forms of loss.

Types of Loss from Late Delivery

Losses that may flow from late delivery include:

• Lost profits from inability to fulfil downstream contracts
• Additional costs of procuring substitute goods elsewhere
• Storage and warehousing expenses for other materials awaiting the delayed goods
• Penalty payments the buyer must make to its own customers
• Wasted overheads during the delay period

To succeed in a claim, the buyer must prove these losses with reasonable certainty and show that they flow naturally from the breach or were within the reasonable contemplation of both parties when the contract was made.

Defective Delivery

Where goods are delivered but do not conform to the contract specification, additional remedies may arise under the Sale of Goods Act 1957. The buyer may reject non-conforming goods, claim damages for the difference in value, or claim damages for consequential losses caused by the defects.

Drafting Enforceable LAD Clauses

Given the requirements of section 75 and the Cubic Electronics decision, businesses should approach LAD clauses with realistic expectations. While such clauses remain useful, they must be drafted with care.

Make a Genuine Pre-Estimate

The stipulated sum should reflect a genuine attempt to estimate the likely loss from breach at the time of contracting. While Malaysian law does not void penalty clauses in the same way as English law, a figure that bears no relationship to foreseeable loss may be reduced by the court to what is reasonable.

Document the Basis for the Figure

Retain records showing how the LAD amount was calculated. If the clause is later disputed, contemporaneous documentation demonstrating that the figure was based on estimated daily costs, lost margins, or other quantifiable factors will support its reasonableness.

Specify the Triggering Events Clearly

The clause should clearly identify what constitutes a breach triggering the LAD provision. For late delivery, specify the delivery date, define when delivery is deemed complete, and state the calculation period for the damages, whether daily, weekly, or otherwise.

Include a Cap

Many LAD clauses include a maximum aggregate liability, often expressed as a percentage of the contract value. This protects the supplier from unlimited exposure while still providing the buyer with a remedy.

Address the Relationship with Other Remedies

Consider whether the LAD clause is intended to be the sole remedy for the specified breach or whether the innocent party may also claim general damages. Ambiguity on this point can lead to disputes.

Proving Loss in Practice

Even though actual loss need not always be proved, businesses should maintain thorough records from the outset of any supply relationship. Keep correspondence showing agreed delivery dates, document any delays and their duration, and preserve evidence of costs incurred or revenue lost as a result of breach.

When a dispute arises, this contemporaneous evidence will be essential to establishing the quantum of loss, whether or not an LAD clause applies.

Limitation Periods

Claims for breach of contract, including claims under LAD clauses, are, in Peninsular Malaysia, generally subject to a six-year limitation period under section 6 of the Limitation Act 1953 (Sabah and Sarawak have their own limitation laws). Time generally runs from the date of the breach. Businesses should act promptly when a breach occurs to preserve their rights.

Common questions

Do I automatically get the full LAD amount if the supplier is late?

Not automatically. Under section 75 of the Contracts Act 1950 you can recover a reasonable amount up to the LAD figure. Since Cubic Electronics, you need not always prove actual loss; the supplier must show the sum is unreasonable.

Can the supplier argue that my LAD clause is a penalty and therefore void?

Section 75 covers both penalties and liquidated damages, so the label matters less than reasonableness. The supplier can argue the sum is unreasonable, and it bears the burden of proving that.

What evidence do I need to claim liquidated damages for late delivery?

You need the contract with the LAD clause and proof of the breach, such as the agreed and actual delivery dates. Records of lost profits or extra costs also help if the supplier says the sum is unreasonable.

Is there a time limit to bring a claim for late delivery?

Yes. In Peninsular Malaysia, section 6 of the Limitation Act 1953 generally allows six years from the date of the breach to start court proceedings. Sabah and Sarawak have their own rules.

Is an LAD clause still worth including?

Yes. An LAD clause caps liability, provides a framework for calculating damages, and signals to both parties the expected consequences of breach, which can encourage performance.