CLA News / Liquidated Damages and Penalty Clauses: A Comparative Study of Legal Practice in India, Vietnam, Malaysia, and Singapore by Sagar Kulkarni

Abstract

Liquidated damages (“LD”) clauses occupy a central position in modern commercial contracting, particularly in construction, infrastructure, and cross-border transactions. While their functional objective to provide certainty and allocate risk in advance remains consistent, their legal treatment varies significantly across jurisdictions. This article undertakes a comparative examination of the statutory frameworks, judicial approaches, and commercial practices governing LD and penalty clauses in India, Vietnam, Malaysia, and Singapore. By analysing each jurisdiction independently, the article demonstrates how courts balance contractual freedom against fairness, and how commercial actors adapt drafting strategies to align with local enforcement regimes.

1. India: Statutory Reasonableness Anchored in Judicial Control

The Indian approach to liquidated damages is distinctive in that it is governed not by common law distinctions but by a statutory framework under Section 74 of the Indian Contract Act, 1872. This provision collapses the traditional dichotomy between liquidated damages and penalties and instead mandates that courts award “reasonable compensation” not exceeding the sum stipulated in the contract. The emphasis, therefore, is not on the classification of the clause, but on the quantum that can justifiably be awarded.

Judicial interpretation has consistently reinforced this position. In Fateh Chand v Balkishan Das[1], the Supreme Court clarified that contractual stipulations do not bind the court absolutely; rather, the court retains discretion to determine reasonable compensation. This principle was further developed in ONGC Ltd. v Saw Pipes Ltd.,[2] where the Court recognised that pre-estimated damages may be awarded without strict proof of actual loss, particularly in situations where loss is difficult to quantify, such as delays in infrastructure projects.

However, the position was nuanced in Kailash Nath Associates v DDA,[3] where the Court held that compensation cannot be granted in the absence of actual legal injury. This decision underscored the principle that Section 74 does not permit windfall gains and that some demonstrable loss or injury must underpin the claim.

The principles laid down in ONGC Ltd. vs. Saw Pipes Ltd. were reaffirmed in Construction and Design Services v Delhi Development Authority,[4] where the Supreme Court recognised the practical difficulties associated with quantifying losses arising from delays in construction and infrastructure projects. The Court observed that where damages are inherently difficult to assess, a genuine pre-estimate agreed upon by commercially sophisticated parties may constitute a reasonable basis for compensation under Section 74, provided it does not operate as an unconscionable penalty. The decision reflects a pragmatic judicial recognition of the commercial realities underlying engineering and infrastructure contracts.

In commercial practice, particularly in engineering, procurement, and construction (EPC) contracts, LD clauses are typically structured as delay damages calculated on a per diem or per week basis, subject to an overall cap, commonly ranging between five to ten percent of the contract value. Increasingly, contracts incorporate milestone-linked LD provisions, tying damages to specific stages of project completion rather than merely overall delay.

In effect, India operates a system where contractual autonomy is tempered by judicial oversight. Courts and arbitral tribunals are generally willing to uphold LD clauses where they reflect a reasonable approximation of loss, but they remain equally prepared to reduce or deny enforcement where the stipulated sum appears disproportionate or unsupported by actual injury. The resulting framework is one of controlled enforceability, where fairness and proportionality remain paramount.

2. Vietnam: Statutory Certainty through a Dual Recovery Structure

Vietnam adopts a fundamentally different approach rooted in civil law traditions. The governing framework is derived from the Civil Code 2015 and the Law on Commerce 2005, both of which explicitly recognise the validity of penalty clauses. Unlike common law jurisdictions, Vietnam does not draw a conceptual distinction between liquidated damages and penalties; instead, it treats penalties as a legitimate contractual mechanism subject to statutory limits.

A defining feature of Vietnamese law is the imposition of a statutory cap on penalties in commercial contracts, which is limited to 8% percent of the value of the breached contractual obligation. This cap under Article 301 of the Commercial Law 2005 introduces a high degree of predictability, effectively precluding disputes over whether a clause is excessive or punitive. Unlike many common law jurisdictions, Vietnamese courts are not required to distinguish between liquidated damages and penalty clauses; instead, the enforceability of contractual penalties is determined primarily by compliance with the statutory framework.

Although the statutory cap continues to represent the prevailing legal position, Vietnam’s legislative framework is presently undergoing significant review. The Vietnamese Government has approved policy proposals contemplating substantial amendments to the Commercial Law, including the proposed repeal of Chapter VII, which presently governs commercial remedies and incorporates the statutory limitation under Article 301. If enacted, these reforms would represent a significant shift towards greater contractual autonomy by aligning commercial contracts more closely with the principles embodied in Article 418 of the Civil Code 2015.^[5]

Nevertheless, these proposals remain at the legislative stage and have not yet come into force. Consequently, the 8% statutory cap continues to govern contractual penalty clauses in commercial contracts. The proposed reforms, however, indicate a gradual transition from a legislatively prescribed model of contractual remedies towards a more commercially flexible regime, reflecting an increasing willingness to recognise party autonomy in sophisticated commercial transactions while maintaining legal certainty during the transition.

Another distinctive feature of Vietnamese law is its recognition of a dual recovery mechanism. In addition to agreeing upon a contractual penalty within the statutory limit, parties may also recover actual damages arising from the breach, provided such damages are established by evidence. This layered approach to compensation differs fundamentally from jurisdictions such as India, where statutory provisions governing liquidated damages and penalties are addressed under a unified framework.

From a commercial perspective, this legal regime has significantly influenced the drafting of construction, infrastructure and energy contracts. It is common practice for parties to include a contractual penalty calibrated to the statutory ceiling, while simultaneously preserving the right to recover additional actual damages where appropriate. Such drafting ensures immediate contractual certainty through the agreed penalty while preserving the possibility of full compensation for losses capable of proof.

Correspondingly, Vietnamese courts have generally adopted a formalistic approach towards the enforcement of contractual penalties. Rather than examining whether a stipulated sum is commercially reasonable or proportionate, the courts primarily assess whether the contractual provisions comply with the statutory requirements and whether any additional claim for damages has been adequately substantiated. Consequently, Vietnam’s approach is characterised by legislative certainty rather than judicial discretion, with the enforceability of contractual penalties depending principally upon compliance with the statutory framework rather than judicial assessment of proportionality or commercial justification.

3. Malaysia: Statutory Compensation and the Evolution towards Commercial Reasonableness

The Malaysian law governing liquidated damages is principally contained in Section 75 of the Contracts Act 1950, which provides that where a contract stipulates a sum to be paid upon breach, the aggrieved party is entitled to receive reasonable compensation not exceeding the amount specified in the contract, irrespective of whether actual damage or loss is proved. Although the statutory language closely resembles Section 74 of the Indian Contract Act, Malaysian jurisprudence has evolved along a distinct path, reflecting an increasing emphasis on commercial practicality while preserving judicial oversight over excessive contractual stipulations.

For several years, the leading authority was Selva Kumar Murugiah v. Thiagarajah Retnasamy,[6] where the Federal Court adopted a relatively strict interpretation of Section 75 by holding that, save in exceptional circumstances where the loss was inherently difficult to quantify, an innocent party was generally required to prove the actual loss suffered before the stipulated sum could be recovered. This approach attracted considerable criticism within commercial circles, particularly in construction and infrastructure projects where quantification of delay-related losses is often complex, time-consuming and commercially impractical.

A significant jurisprudential shift occurred with the Federal Court’s decision in Cubic Electronics Sdn. Bhd. v. Mars Telecommunications Sdn. Bhd.,[7] which revisited the interpretation of Section 75 and clarified that proof of actual loss is not an indispensable pre-requisite for the recovery of liquidated damages in every case. The Court held that the statutory requirement is the award of reasonable compensation, and that a negotiated liquidated damages clause may itself constitute persuasive evidence of what the parties regarded as reasonable at the time of contracting. Nevertheless, the courts retain the discretion to examine whether the stipulated amount is proportionate and commercially justifiable, thereby ensuring that contractual clauses do not operate oppressively or produce an unconscionable result.

From a commercial perspective, the Malaysian position has enhanced certainty in the drafting and enforcement of construction and infrastructure contracts. Liquidated damages provisions are routinely incorporated into EPC and FIDIC-based agreements, typically providing for delay damages calculated on a daily or weekly basis and subject to an overall contractual cap. While Malaysian courts continue to exercise supervisory jurisdiction under Section 75, they have increasingly demonstrated a willingness to respect negotiated commercial risk allocation between sophisticated parties, provided the stipulated amount represents a genuine and reasonable measure of compensation.

The evolution from Selva Kumar to Cubic Electronics illustrates Malaysia’s transition from a strict evidentiary model towards a more commercially responsive framework. Although judicial oversight remains an integral feature of the statutory regime, contemporary Malaysian law seeks to balance contractual certainty with equitable compensation, thereby promoting both commercial efficacy and fairness in the enforcement of liquidated damages clauses.

4. Singapore: Commercial Certainty through Contractual Autonomy

Singapore has established itself as one of the leading jurisdictions for the enforcement of liquidated damages clauses, underpinned by a legal framework that places significant emphasis on contractual autonomy, commercial certainty and minimal judicial intervention. Rooted in common law principles, Singaporean courts have consistently recognised that commercially sophisticated parties are best placed to allocate contractual risks and determine the consequences of contractual breach. Consequently, the courts generally refrain from interfering with negotiated contractual bargains unless such provisions offend established legal principles governing contractual remedies.[8]

The modern Singaporean approach has been shaped by a series of decisions of the Court of Appeal that reaffirm the importance of preserving negotiated commercial bargains. In Leiman, Ricardo and another v Noble Resources Ltd. & Anr., the Court emphasised that contracts negotiated between commercially experienced parties should ordinarily be enforced according to their agreed terms, recognising that contractual provisions frequently represent a carefully negotiated allocation of commercial risks. This commercial philosophy was subsequently reinforced in Denka Advantech Pte Ltd v Seraya Energy Pte Ltd, where the Court of Appeal comprehensively examined the law relating to liquidated damages and penalty clauses. While considering developments in other common law jurisdictions, the Court declined to adopt the broader “legitimate interest” formulation articulated by the United Kingdom Supreme Court and instead reaffirmed Singapore’s continued adherence to the traditional common law principles governing penalties. The Court observed that the enforceability of a liquidated damages clause must be assessed by reference to the established principles governing penalty clauses and the commercial context in which the agreement was negotiated, while giving due weight to the parties’ freedom to allocate contractual risk.[9]

The practical application of these principles is particularly evident in construction, infrastructure and energy projects, where liquidated damages provisions constitute an integral component of contractual risk management. Standard-form construction contracts, including the FIDIC Conditions of Contract, routinely provide for delay damages as a pre-agreed contractual remedy for late completion, thereby reducing the need for employers to establish actual losses arising from delayed project delivery.[10] Singapore-governed contracts frequently incorporate sophisticated liquidated damages mechanisms, including milestone-based obligations, tiered delay damages, liability caps and detailed performance benchmarks, reflecting the commercial objective of providing certainty in compensation while efficiently allocating project risks.

Singapore’s reputation as a leading seat for international arbitration has further reinforced this commercial approach. Parties selecting Singapore law frequently do so with the expectation that negotiated contractual remedies will be upheld and that judicial intervention will remain limited. This pro-enforcement philosophy has enhanced Singapore’s attractiveness as a governing law for cross-border commercial, engineering and infrastructure contracts, where predictability and certainty in contractual enforcement are fundamental considerations.[11]

The Singaporean position may therefore be characterised as one of principled judicial restraint. Rather than reassessing the commercial wisdom or fairness of a negotiated damages provision, the courts seek to preserve contractual certainty by respecting the parties’ allocation of commercial risk, intervening only where a clause is legally unenforceable under established principles governing penalties. This balanced approach promotes commercial efficacy while maintaining an appropriate level of judicial supervision, reinforcing Singapore’s position as one of the world’s leading jurisdictions for international commercial arbitration and complex infrastructure disputes.

5. Drafting Takeaways Across Jurisdictions

The comparative analysis demonstrates that liquidated damages clauses cannot be drafted using a “one-size-fits-all” approach. While the commercial objective of providing certainty and allocating risk remains consistent, their enforceability ultimately depends on the governing law. Parties negotiating cross-border construction, infrastructure and commercial contracts should therefore tailor liquidated damages provisions to reflect the statutory framework, judicial approach and commercial practices of the chosen jurisdiction.

From a practical perspective, contracts governed by Indian and Malaysian law should ensure that the stipulated sum is commercially justifiable and capable of being regarded as reasonable compensation. In Vietnam, careful drafting is required to comply with the statutory penalty framework while preserving the right to recover additional damages where permitted. Under Singapore law, greater emphasis should be placed on clearly documenting the parties’ negotiated allocation of risk and incorporating well-defined performance milestones, liability caps and delay damages mechanisms. Ultimately, carefully drafted jurisdiction-specific liquidated damages clauses not only enhance enforceability but also minimise disputes, preserve commercial relationships and provide greater certainty in dispute resolution.

6. Conclusion

Although liquidated damages clauses serve a common commercial purpose across jurisdictions, their legal treatment reflects distinct legislative and judicial philosophies. India adopts a balanced approach that subjects contractual stipulations to judicial scrutiny in the interest of fairness. Vietnam continues to favour statutory certainty through a legislatively prescribed framework, albeit with indications of gradual reform towards greater contractual autonomy. Malaysia seeks to reconcile equitable compensation with commercial practicality, while Singapore remains firmly committed to respecting negotiated contractual risk allocation and commercial certainty.

For parties engaged in cross-border transactions, construction projects and international infrastructure developments, the effectiveness of a liquidated damages clause depends not merely upon its drafting, but upon its compatibility with the governing law. A jurisdiction-sensitive drafting strategy, informed by both legal principles and commercial practice, remains essential to ensuring enforceability, reducing disputes and safeguarding the parties’ commercial expectations.

Author: Sagar Kulkarni, Advocate, FCIArb, FAIADR | Counsel, Arbitrator & Mediator

Disclaimer: This article presents a comparative analysis of the legal treatment of liquidated damages and penalty clauses in selected jurisdictions and is intended for academic and professional discussion. While every effort has been made to ensure the accuracy of the legal position at the time of writing, legislative amendments and judicial developments may subsequently alter the legal landscape. Readers are encouraged to verify the current law and obtain independent legal advice before acting upon any aspect of this article.

NOTES:

[1] Fateh Chand v. Balkishan Das, (1963) AIR 1405, SC; (1964) 1 SCR 515.

[2] Oil & Natural Gas Corporation Ltd. vs. Saw Pipes Ltd., (2003) 5 SCC 705.

[3] Kailash Nath Associates vs. Delhi Development Authority (DDA), (2015) 4 SCC 136.

[4] Construction and Design Services vs. Delhi Development Authority, (2015) 14 SCC 263.

[5] See Article 301 Commercial Law No. 36/2005/QH11; Civil Code 2015; Resolution No. 141/NQ-CP dated 1 June 2026 approving the policy for amendment of the Commercial Law; Dentons LuatViet, Key Policy Proposals for Amending the Law on Commerce (2026); Viet An Law, Draft Vietnam Commercial Law: Removal of the 8% Contract Penalty Limit (2026).

[6] Selva Kumar A/L Murugiah v Thiagarajah A/L Retnasamy (1995) 1 MLJ 817.

[7] Cubic Electronics Sdn Bhd (in liquidation) v Mars Telecommunications Sdn Bhd  (2019) 6 MLJ 15.

[8] See generally Leiman, Ricardo and another v Noble Resources Ltd and another (2020) 2 SLR 386 (CA).

[9] Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2021] 1 SLR 631; [2020] SGCA 119, especially [179]–[193], where the Court declined to adopt the broader approach formulated by the UK Supreme Court in Cavendish Square Holding BV v Makdessi and reaffirmed Singapore’s adherence to the traditional penalty doctrine.

[10] Fédération Internationale des Ingénieurs-Conseils (FIDIC), Conditions of Contract for Construction for Building and Engineering Works Designed by the Employer (Red Book) (2nd edn, 2017) cl 8.8; see also Conditions of Contract for Plant and Design-Build (Yellow Book) (2nd edn, 2017) cl 8.8.

[11] Singapore International Arbitration Centre, Annual Report (latest available edition); see also Denka Advantech Pte Ltd v Seraya Energy Pte Ltd (2021) 1 SLR 631.