Assessing the reasonableness of LAD in the context of Cubic Electronics
- Gavin Jayapal
- Nov 25
- 4 min read
LAD post-Cubic
In Cubic Electronics, the FC determined that LAD Clauses would not automatically deprive a party from the right to claim. Instead, the Court would take a balanced approach wherein a LAD clause would be prima facie applicable and enforceable. However, if it could be demonstrated that the clause was unreasonable, then it (LAD clause) would be liable to be struck-down.
The CA in Kementerian Pertahanan v SME Ordnance [Civil Appeal No.: W-01(NCVC)(W)-598-11/2023] has provided useful guidance on the evidential burden that needs to be met to prove that an LAD clause is unreasonable.
The decision of the CA also provides useful guidance as to when a party ought to seek leave to cross-examine further when new evidence comes to light in re-examination. A tricky issue, this. One gets better with experience.
The facts
SME Ordnance secured a contract (valued at RM41m) to supply missiles to the Ministry of Defence.
The contract contained a specific LAD clause wherein LAD was to be calculated at 2% per month of the equipment value.
SME Ordnance could not supply the missiles on-time (this was due to Pakistan, the missile-producer, needing the same for its own domestic use).
The Ministry sought to impose LAD of ~RM10m. SME Ordnance then filed suit and sought a declaration that this LAD was unreasonable.
The HC’s decision
Post-trial, the HC determined that the interest imposed was unreasonable. The HC was taken by the observations of the Ministry’s own witness, who remarked that the LAD was excessive.
The CA reverses
In reversing the HC, the CA observed that the remarks made by the Ministry’s own witness were premised upon his own personal observations. The CA noted that in re-examination, DW-1 emphasised that his views on the LAD clause being excessive were his own personal views. They would not serve to bind the Ministry:
[23] In this regard we are of the view that the learned HCJ erred on the facts and the law in arriving at his decision for the following reasons:
Firstly, the High Court's finding that the LAD amount was unreasonable was largely hinged on the admission by the Appellants' witness (DW1) that the amount was "excessive" and that no "financial losses" were suffered by the Appellants. However, it is crucial to consider DW1's testimony in its entirety. Based on the evidence, DW1 had clarified during re-examination that his assessment of the LAD as "excessive" was a personal opinion ("pandangan peribadi saya lah yang excessive") but that as a contract administrator, he was bound to execute the terms of the contract ("sebagai pentadbir kontrak, kita akan execute apa yang ada dalam kontrak dan setuju bersama oleh kedua-dua pihak").
[24] We are of the view that this clarification was significant and should be given due weight and ought not to be taken as the position of the Appellant as a whole.
The CA further observed that if the learned HCJ had determined that LAD was excessive, the correct procedure would have been to consider whether SME Ordnance had led any evidence as to what would constitute reasonable damages:
[25] Further as stated earlier, once the LHJ concluded that the Appellants had a right to impose damages (LAD) for the Respondent's breach in the late delivery, the burden then shifts to the defaulting party (Respondent) to prove the unreasonableness of the damages clause, or the sum stated therein.
[26] From the evidence, we note that the Respondent did not adduce any evidence to demonstrate that the contractual LAD was unreasonable or to propose a reasonable alternative amount apart from relying entirely on the personal opinion of DW1. The failure to discharge this burden was in our view was due to the fact that the Respondent’s case was premised merely on their claim for a full refund based on the argument that time was at large, and that the LAD was therefore unlawful. While the Respondent later introduced the argument of excessiveness, we note they did not substantiate it with evidence beyond relying on DW1's personal opinion.
The CA then allowed the appeal and set-aside the High Court’s findings with no order as to costs (probably to not add insult to injury, given that SME Ordnance had just been deprived of ~RM10m).
Key takeways
Although brief, the CA’s Grounds provide a wealth of information. They are:
In re-examination, if new evidence is led, parties must immediately move to challenge the same and to seek leave to cross. There can be no excuse to sit idly by;
In a claim where one alleges that LAD imposed is excessive, evidence must be led. It simply will not do to use the injured party’s own evidence (or hocus-pocus “feelings”) to claim that LAD is unreasonable. It would be best to lead expert evidence on this issue (maybe a claims consultant or contract analyst).
The CA’s Grounds provide much fodder for thought and are a welcome distillation of the Cubic principles. It clearly demonstrates the need for an analytical mind when one is in the throes of trial.
GAVIN JAYAPAL
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