Significance: Court of Appeal partly allows appeal against High Court decision and declines to decide on whether the law in Singapore on penalty clauses should be modified in the light of the new UK Supreme Court test for penalty clauses in Cavendish Square Holding BV v Makdessi [2016] AC 1172 (UKSC) (“Cavendish“) which the High Court below applied.
The Court at [97] affirmed the existing legal position outlined in Xia Zhengyan v Geng Changqing [2015] 3 SLR 732 (CA) at [78] which upholds the principles laid down by Lord Dunedin in the House of Lords decision of Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company, Limited [1915] AC 79 (“Dunlop Pneumatic Tyre”) at 86–88.
The legal principles comprising the classic position as laid down in Dunlop Pneumatic Tyre are:
1. Though the parties to a contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case.
2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre‑estimate of damage (Clydebank Engineering and Shipbuilding Co. v. Don Jose Ramos Yzquierdo y Castaneda [[1905] AC 6]).
3. The question whether a sum stipulated is [a] penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach (Public Works Commissioner v. Hills [[1906] AC 368] and Webster v. Bosanquet [[1912] AC 394]).
4. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. Such are:
(a) It will be held to be [a] penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach. (Illustration given by Lord Halsbury in [the] Clydebank Case [[1905] AC 6].)
(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid (Kemble v. Farren [(1829) 6 Bing 141]). This though one of the most ancient instances is truly a corollary to the last test. Whether it had its historical origin in the doctrine of the common law that when A. promised to pay B. a sum of money on a certain day and did not do so, B. could only recover the sum with, in certain cases, interest, but could never recover further damages for non-timeous payment, or whether it was a survival of the time when equity reformed unconscionable bargains merely because they were unconscionable,—a subject which much exercised Jessel M.R. in Wallis v. Smith [(1879) 21 Ch D 243]—is probably more interesting than material.
(c) There is a presumption (but no more) that it is [a] penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’ (Lord Watson in Lord Elphinstone v. Monkland Iron and Coal Co. [(1886) 11 App Cas 332]).
On the other hand:
(d) It is no obstacle to the sum stipulated being a genuine pre‑estimate of damage, that the consequences of the breach are such as to make precise pre‑estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre‑estimated damage was the true bargain between the parties (Clydebank Case, Lord Halsbury [[1905] AC 6 at 11]; Webster v. Bosanquet, Lord Mersey [[1912] AC 394] at 398).
At [100]-[101], the Court further stated:
100 … Where a clause imposes a stipulated consequence following a breach of contract by one party, and that consequence, in the opinion of the court, is not reflective of the innocent party’s interest in being compensated but is in fact stipulated in terrorem of the contract-breaker, that clause will be regarded as an unenforceable penalty clause.
101. In our judgment, in considering whether a given clause imposes a primary or a secondary obligation, the court should approach the issue as a matter of substance rather than form. The inquiry should, in our view, be directed towards and guided by:
(a) the overall context in which the bargain in the clause was struck;
(b) any reasons why the parties agreed to include the clause in the contract; and
(c) whether the clause was entered into and contemplated as part of the parties’ primary obligations under the contract in order to secure some independent commercial purpose or end, or whether it was, in the round, to hold the affected party in terrorem in order thereby to secure his compliance with his primary obligations.
On the issue of a contracting party exercising its rights and whether a duty of fairness applies to such an exercise, the Court stated:
133 We consider, drawing from the cases we have considered above, that where a contractually appointed body makes decisions regarding a party’s rights under a contract, the position may be stated as follows. There is no general requirement or expectation that a party purporting to exercise a particular contractual right, or to act in a particular way that might be prejudicial to the other party, has a general duty to act fairly, or a more specific duty to observe any particular requirements of natural justice. Contracting parties are generally entitled to act in their own interests. If, in doing so, it should turn out that a party has breached its contractual obligations, then it may be liable in damages.
134 This general position may, however, be displaced by the terms that the parties have agreed on, whether expressly or impliedly. The court’s assessment of whether the exercise of a particular contractual right has been made subject to any duty of fairness or to the observance of any particular procedure will be a contextual one that duly considers the particular contractual right in question, the language of the provision setting out or conditioning the right, the consequences of any decision made under that provision and what, if anything, was contemplated by way of any procedural requirements. As a claim that any requirement of fairness has been breached is in actuality a claim in breach of contract, the first port of call must always be the terms of the contract.