Section 75, Contracts Act states 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.

Selva Kumar a/I Murugiah v. Thiagarajah a/I Retnasamy [1995] 1 MLJ 817, FC
There is no distinction between liquidated damages and penalties as understood under English law, in view of s 75 of the Contracts Act 1950 which provides that in every case the court must determine what is the reasonable compensation, ‘whether or not actual damage or loss is proved to have been caused thereby’

Kok Swee Chin v General Factoring & Credit Sdn Bhd [2004] 6 MLJ 276
The plaintiff secured a loan from the defendant to part finance the purchase of a condominium unit. Both parties entered into a loan agreement cum assignment.
The interest charged by the defendants for the said loan under the said agreement were:
1. 14%pa compound interest on monthly rests on all moneys advanced or released;
2. Default interest or late payment interest at 18%pa compound interest in addition to (a) on the amount of each instalment;

The Plaintiff’s argument:
1.The rates of interest and each of them and charging the same on compound interest basis is excessive, harsh and unconscionable. The compound late payment interest charged is also a penalty;
2.The plaintiff asserts further that the defendant is not entitled to charge compound interest and compound default interest or penalty interest.

The Defendant’s argument:
1. That all agreed interest rates and late payment charges contained in the Loan Agreement Cum Assignment are agreeable by both contracting parties viz the defendant as lender and the plaintiff as borrower;
2.The plaintiff is estopped from denying the plaintiff’s obligation to pay for the agreed interest and agreed late payment charges as the plaintiff had paid agreed installments for a period of time.

Held:
The onus of showing that a specified sum was a penalty lay upon the party who was sued for his recovery. The plaintiff failed to discharge the burden of proving that the late payment charge at 18%pa was a penalty.
Even if the late payment charge was a penalty, it should not be a ground to nullify the agreement. The plaintiff simply could not rely on s 75 of the Contracts Act 1950 and allege that the late payment charge was a penalty and hence was irrevocable.
As such, in this situation the late payment charge was a liquidated damage which represented a genuine pre-estimate of the defendant’s loss for breach of contract by the plaintiff. It was by no means exorbitant, harsh or unconscionable but served as a ‘reasonable compensation’ to the defendant as per illustration (d) of s 75 of the Contracts Act.
The plaintiff had been a voluntary party to the agreement and been repaying the loan and payment of interest as well as the late payment charges for almost 12 years. Thus, the plaintiff should be treated as having waived her rights and be estopped from challenging her liability to pay the agreed interest and late payment charges; challenging the validity of the agreement; requesting for a refund for a sum of RM260,940.57 and other reliefs from the defendant

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