CONTRACT LAW – BREACH OF CONTRACT – FORFEITURE OF DEPOSIT

Q: I owned a property worth RM100 million. Mr. A offered to purchase it. I accepted his offer with an earnest deposit of RM1 million paid by him. The acceptance of the offer was premised on the condition that the Sale and Purchase Agreement (“SPA”) will be executed within 30 days, failing which the RM1 million earnest deposit would be forfeited as agreed liquidated damages. Mr. A failed to meet the 30 days deadline to sign the SPA, can I forfeit the deposit?

Yes.

A deposit is not merely a part payment of the purchase. It is also a guarantee for performance of a contract. It is generally not recoverable.

Whether deposit can be forfeited if there is a breach of contract?
Yes.

  • Generally, if there is a breach of contract, any money paid as part-payment of the contract price is recoverable by the defaulting party.
  • However, a deposit serves two purposes i.e. as guarantee of performance of the contract and also as part payment. Hence, if there is a breach of contract, the deposit is not recoverable. A deposit can be forfeited by the innocent party in the event of a breach.
  • However, such forfeiture is also subject to the test of “reasonableness” in section 75 of Contracts Act 1950 (“CA 1950”). In another words, the amount of deposit expected to be forfeited must be reasonable and not excessive.
  • There is no necessity for proof of actual loss or damage under the Federal Court decision in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd – [2019] 6 MLJ 15.
  • The burden of proof is on the defaulting party to show the deposit is unreasonable.

Can I rely on Liquidated Agreed Damages (LAD) Clause in a contract and claim as my losses when there is a breach?
Yes.

STEP 1     :    You need to prove that there is a breach of contract and                             that contract has a LAD clause.

STEP 2     :    The LAD clause will be tested with the “reasonableness”                           test in section 75 of CA 1950. In determining ‘reasonable                           compensation’, the concepts of ‘legitimate interest’ and                             ‘proportionality’ are relevant.

STEP 3     :    If there is a dispute as to what constitute reasonable                                  compensation, the burden of proof falls on the defaulting                        party to show the damages clause is unreasonable.

STEP 4     :    You are entitled to the sum not exceeding the stipulated                            LAD.

What is an LAD clause?
A LAD clause is a clause that entitles a party to recover certain amount of money upon the occurrence of the event (usually a breach). Pursuant to the decision of the Federal Court Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd – [2019] 6 MLJ 15, there is no longer a need to prove actual damage to recover LAD.

Recent Post

INDUSTRIAL LAW – NAVIGATING THE LEGALITIES OF RETRENCHMENT

The dismissal of X by Company ABC, citing economic downturns, presents a compelling case on the complexities of employment termination and retrenchment legality. X contested his redundancy, claiming his role in property management and services was unaffected by the property development market’s challenges. This case probes into the legitimacy of retrenchment under economic duress and the employer’s duty to act in good faith, as guided by Section 20(3) of the Industrial Relations Act 1967. The burden rests on Company ABC to prove the necessity and genuineness of X’s redundancy, with failure to do so possibly leading to a verdict of unjustified termination. This scenario underscores the critical importance of evidence and intention in retrenchment cases, as reflected in precedents like Akilan a/l Subramanian v. Prima Awam (M) Sdn Bhd.

Read More »

PROPERTY LAW – LEGAL IMPLICATIONS OF SALE AND PURCHASE AGREEMENT BREACHES AND THE RIGHT TO OFFSET IN MALAYSIAN PROPERTY TRANSACTIONS

In the realm of Malaysian property transactions, the intricacies of Sale and Purchase Agreements (SPAs) and the enforcement of Liquidated Ascertained Damages (LAD) play pivotal roles in safeguarding the interests of both developers and purchasers. This article delves into the legal framework governing the rights and obligations of parties involved in property transactions, particularly focusing on the consequences of contractual breaches and the conditions under which a purchaser can exercise the right to offset against LAD. Through the examination of relevant case law and statutory provisions, we illuminate the legal pathways available for resolving disputes arising from the failure to adhere to the terms of SPAs, thereby offering insights into the equitable administration of justice in the context of Malaysian property law.

Read More »

WINDING-UP – OFFICIAL RECEIVER AND LIQUIDATOR (“ORL”)

In cases of compulsory winding up, the court would appoint a liquidator under s.478 of the Companies Act 2016 (“CA 2016”) to expeditiously recover and realise the assets of the wound-up company for the distribution of dividends to creditors and administer any outstanding matters involving………..

Read More »

JUDICIAL REVIEW – PROCEDURAL FAIRNESS AND LOCUS STANDI

This excerpt illuminates the foundational principles of judicial review as outlined in Order 53 of the Rules of Court 2012. It highlights the criteria for challenging public decisions on grounds of illegality, irrationality, or procedural impropriety. Central to the discussion is the question of timing in judicial review applications, particularly in cases of procedural unfairness. The practical scenario underscores the significance of a “decision” by the relevant authority as a prerequisite for locus standi, drawing insights from the case of Hisham bin Halim v Maya bt Ahmad Fuad & Ors [2023] 12 MLJ 714.

Read More »

CONTRACT LAW – CONTRACTUAL INTERPRETATION REMEDIES UNVEILED: DECIPHERING CONTRACTUAL CLAUSES AND LEGAL BALANCE

This legal updates explore the principles governing the interpretation of agreements, emphasizing the importance of clarity and unambiguity in contractual terms. It delves into a key issue involving restrictions on remedies for breach of contract, shedding light on the court’s commitment to upholding plain meanings. The illustrative scenario involving shareholders X and Y dissects a pertinent clause, showcasing the delicate balance between restricting remedies and ensuring fairness in legal proceedings.

Read More »
en_USEnglish
× How can I help you?