LAD after Cubic Electronics: what employers and contractors get wrong

Liquidated ascertained damages — LAD — is the pre-agreed sum a contractor pays for each day (or week) of culpable delay. Two myths persist about it in the Malaysian market: that an employer can simply deduct the full contractual rate as of right, and that a contractor can escape it by calling the clause a penalty. The Federal Court’s decision in Cubic Electronics Sdn Bhd v Mars Telecommunications Sdn Bhd [2018] recalibrated both.

Section 75 and the old distinction

Section 75 of the Contracts Act 1950 abolishes the English distinction between liquidated damages and penalties: the innocent party is entitled to reasonable compensation not exceeding the stipulated sum. For years this was read to mean an employer had to prove actual loss to recover LAD, which made LAD clauses feel toothless.

What Cubic Electronics changed

The Federal Court held that a party may recover the stipulated sum as reasonable compensation without proof of actual loss, provided the clause is not unreasonable. The practical burden shifts: it is now for the party challenging the LAD — usually the contractor — to show that the sum, or the clause, is unreasonable in the circumstances. The stipulated figure is a starting point, not merely a cap that must be independently justified.

Where the real fight is: net delay days

Because the rate is usually fixed by the contract, the contest often moves to the number of days it is applied to. Every day of extension of time the contractor secures is a day removed from the period of culpable delay against which LAD can be levied. That is why extension-of-time entitlement and LAD are two sides of one coin, and why a defensible delay analysis is the most effective answer to an LAD deduction. You can model the exposure at different net delay figures with our LAD & Delay-Damages Calculator.

Practical takeaways

For employers: your LAD clause is more robust than the old cases suggested, but keep some evidence of the type of loss delay causes you, in case reasonableness is put in issue. For contractors: do not assume the clause is a penalty — pursue your extensions of time diligently and contemporaneously, because the days you save are worth the daily rate.