Penalty Clause in Contract Malaysia
In Malaysia, a penalty clause in a contract refers to a provision that specifies an amount of money that one party must pay to the other if they fail to fulfill their contractual obligations. Penalty clauses are typically included in contracts as a means of discouraging breach of contract and protecting the interests of the parties involved.
Penalty clauses in Malaysia are governed by the Contracts Act 1950 and the common law. The Contracts Act 1950 provides that a penalty clause in a contract must be a genuine pre-estimate of the damages that would be suffered in the event of breach of contract. This means that the amount specified in the penalty clause must be reasonable and reflect the actual losses that the innocent party would incur as a result of the breach.
If the penalty clause is found to be excessive or unreasonable, it may be struck down by the court as a penalty. In such cases, the innocent party would still be entitled to claim damages for the actual losses suffered as a result of the breach, but would not be able to claim the amount specified in the penalty clause.
It is important to note that penalty clauses should not be confused with liquidated damages clauses. Liquidated damages clauses specify a fixed amount of damages that the innocent party would be entitled to claim in the event of breach of contract. Unlike penalty clauses, liquidated damages clauses are generally enforceable as long as they represent a genuine pre-estimate of the loss suffered.
To ensure that a penalty clause in a contract is enforceable in Malaysia, it is important to ensure that it is:
– Reasonable and proportionate to the loss suffered
– Consistent with the nature and scope of the contract
– Included in the contract at the time of formation
– Clearly and unambiguously stated in the contract
In conclusion, penalty clauses in contracts in Malaysia are an important tool for protecting the interests of the parties involved and discouraging breach of contract. However, it is important to ensure that penalty clauses are reasonable and proportionate to the actual losses suffered in the event of breach, to avoid the risk of them being struck down as penalties.