5 February, 2019
The Federal Court has, following from similar shifts in both the United Kingdom and India, reformulated the law on forfeiture of deposits. The earlier position that the law on forfeiture of deposits and the law on damages clause under section 75 of the Contracts Act 1950 (“CA 1950”) were mutually exclusive did not properly reflect the parties’ freedom of contract especially where parties have comparable bargaining power and are properly advised.
The new test is to subject the forfeiture of deposits clause to the law on damages clause under section 75 CA 1950. The Court’s new approach is intended to give proper credence to the parties’ own ability to assess their own commercial position and in doing so, allows the damages clause to be used as a “permissible risk allocation tool”. The key features of the test involves:
- requiring the innocent party relying on the damages clause to only show that firstly, there was a breach of contract and secondly, the contract contains a damages clause;
- reversing the burden of proof by requiring the defaulting party to show that the damages clause is unreasonable;
- allowing the court to take into account factors such as legitimate interest and proportionality (as opposed to only “actual loss” under the previous test) when determining whether the sum specified in the damages clause is reasonable.
For further information, please contact:
Sivabalah Nadarajah, Partner, Shearn Delamore & Co
sivabalah@shearndelamore.com
