What Damages Can You Actually Claim? Contracts Act 1950 Rules for High-Value Breach Claims

Malaysian law splits breach of contract damages into two regimes. Where the contract fixes no sum, section 74 of the Contracts Act 1950 governs: you recover loss arising naturally from the breach, or loss both parties contemplated when contracting. Where the contract does fix a sum, section 75 applies, and since the Federal Court's decision in Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd [2019] 2 CLJ 723 you no longer have to prove actual loss in every case to enforce it.

Which regime governs your claim is the single most important question in quantifying it, and it is settled by the contract you signed, not by the size of your loss.

Why this is the first question a CFO asks

The claim is real, the counterparty has failed, and the board wants a number. What tends to happen next is that finance builds a figure from the profit and loss impact, legal builds a figure from the contract, and the two do not agree, because they are answering different questions. Finance is measuring loss. The law is measuring recoverable loss, which is a narrower thing.

This guide sets out the two regimes, what each requires you to prove, and where large claims get reduced.

Section 74 or section 75, which applies?

The two sections do different work and are frequently confused. Section 74 sets out the methodology for assessing compensation where no sum has been fixed. Section 75 addresses the case where a sum has been fixed and the defaulting party says the clause is a penalty.

Note the ceiling in the right-hand column. A liquidated damages clause caps recovery at the figure named. Where your actual loss materially exceeds that figure, a clause intended as protection becomes a limit, which is a drafting question, not a litigation one.

What section 74 lets you recover

Section 74 is treated as the statutory expression of the rule in Hadley v Baxendale. Compensation covers:

• Loss arising naturally from the breach, in the usual course of things; and

• Loss the parties knew, when they made the contract, was likely to result from breach of it.

Two practical consequences follow, and both bite hardest on large claims.

Unusual losses need to have been communicated. If a delayed shipment cost you a downstream contract worth many times the value of the shipment itself, recovery depends on whether that exposure was within the parties' contemplation at the time of contracting. What was said during negotiation, and whether it was recorded, becomes central. This is why supply and services agreements for critical inputs should say what the input is for.

Remote loss is not recoverable, however real it is. Section 74(2) is explicit: compensation is not to be given for any remote and indirect loss or damage sustained by reason of the breach. A genuine, audited, causally connected loss can still fall outside the section because it was not a natural consequence and was never contemplated. The commercial reality of the loss is not the test.

Section 74 also requires the means that existed of remedying the inconvenience caused by non-performance to be taken into account, which is the Explanation to the section. In practice, that is the mitigation principle: you are expected to have taken reasonable steps to limit your loss, and a claim showing no such attempt invites reduction. Mitigation is not a defence the other side has to plead perfectly. It is built into the assessment.

What section 75 lets you recover, and what Cubic Electronics changed

Section 75 provides that where a sum is named in the contract as payable on breach, or the contract contains a stipulation by way of penalty, the innocent party is entitled, whether or not actual damage or loss is proved to have been caused, to reasonable compensation not exceeding the amount named.

For over two decades that provision was read restrictively. Following Selva Kumar a/l Murugiah v Thiagarajah a/l Retnasamy [1995] 1 MLJ 817, an innocent party was generally required to prove actual loss before recovering under a damages clause, which stripped such clauses of much of their point.

Cubic Electronics changed the position. The Federal Court held that there is no necessity for proof of actual loss or damage in every case where an innocent party seeks to enforce a damages clause under section 75. The Court adopted the concepts of legitimate interest and proportionality in determining what amounts to reasonable compensation, and reformulated the burden of proof.

In practical terms, the sequence now runs:

1. The claimant shows there was a breach, and that the contract contains a clause specifying a sum payable on that breach.

2. The clause is prima facie enforceable.

3. The burden shifts to the defaulting party to show the sum is unreasonable, meaning disproportionate to any legitimate interest the innocent party had in performance.

The Court of Appeal has since revisited the methodology in Macvilla Sdn Bhd v Mervyn Peter Guan Yin Hui, confirming that sections 74 and 75 address different situations and should not be run together.

Where large claims get reduced

The pattern across all six rows is the same: contemporaneous documentation survives, reconstruction does not. Quantum built for the purposes of a claim reads as exactly that.

What this means for the contract you sign next

The damages you can recover are largely determined before any dispute exists. Three drafting decisions do most of the work:

• Whether to fix a sum at all. A liquidated damages clause gives certainty and, after Cubic Electronics, a materially easier route to recovery, at the cost of a ceiling.

• Whether the figure is defensible. A sum that is disproportionate to any legitimate interest in performance invites the argument the defaulting party now bears the burden of running.

• Whether unusual exposure is disclosed on the face of the contract. Recitals and purpose clauses that say what the goods or services are for are what make downstream loss recoverable under section 74.

Our guide to drafting contracts that hold up commercially covers how these clauses are built. Where a contract is already on foot and failing, how you handle termination affects what you can recover afterwards.

What getting quantum wrong actually costs

An overstated claim is not a neutral opening position. It shapes the pleadings, invites a strike-out application on parts of it, drives up costs on both sides, and, where a large head of loss falls away at trial, can affect the costs order at the end. It also affects settlement: a counterparty that can see a claim is inflated has less reason to engage seriously with the part of it that is sound.

An understated claim costs differently. Heads of loss not pleaded are generally not recovered, and limitation continues to run on anything left out.

Frequently Asked Questions

What is the difference between section 74 and section 75 of the Contracts Act 1950?

Section 74 sets out how compensation is assessed where the contract fixes no sum for breach. Section 75 applies where the contract names a sum or stipulates a penalty, and entitles the innocent party to reasonable compensation not exceeding that sum.

Do I have to prove actual loss to enforce a liquidated damages clause in Malaysia?

Not in every case. Following the Federal Court's decision in Cubic Electronics [2019] 2 CLJ 723, proof of actual loss is not a necessity in every case under section 75; the burden lies on the defaulting party to show the sum is unreasonable.

Can I recover more than the liquidated damages figure in the contract?

Section 75 caps recovery at the sum named. Where actual loss substantially exceeds a fixed figure, the position depends on how the clause is drafted and whether it is exclusive of other remedies.

Can I claim loss of profit for breach of contract?

Yes in principle, under section 74, but it is among the harder heads to establish. The profit must have been genuinely lost because of the breach and must fall within what the parties contemplated when contracting.

Does a penalty clause get struck down in Malaysia?

Malaysian law does not treat penalty and liquidated damages clauses as a strict binary in the way English law historically did. Section 75 covers both, and the question is whether the sum represents reasonable compensation.

Do I have to mitigate my loss?

In substance, yes. The Explanation to section 74 requires the means of remedying the inconvenience caused by non-performance to be taken into account, so a failure to take reasonable steps to limit loss will generally reduce recovery.

How long do I have to bring a claim?

In Peninsular Malaysia, six years from the date the cause of action accrued, under section 6(1)(a) of the Limitation Act 1953, usually the date of breach. Sabah and Sarawak have their own limitation ordinances. See our guide on whether you have a case.

Getting a defensible number before you commit

Quantum is where high-value contract claims are won and lost, and it turns on which section governs, what the contract says, and what your records can actually support. Legal That Works provides organisations with a written legal opinion that identifies the applicable regime, works through the recoverable heads of loss, and sets out where the figure is defensible and where it is exposed. If a claim of this size is being put to a board, that analysis should sit behind the number.

This article is for general information only and does not constitute legal advice. Every transaction and every set of facts is different. Obtain specific advice from a qualified adviser before acting on any part of it.

Related guides

• Breach of contract in Malaysia

• Assessing whether you have a case

• Contract termination

• Custom contract drafting in Malaysia