The law on liquidated damages: a comparative approach across common law jurisdictions

On 9 February 2022, our Hogan Lovells Singapore International Arbitration practice, together
with Fountain Court Chambers, co-hosted their fourth annual seminar on contentious areas of
commercial law, including the law on liquidated damages and two related principles – penalties
and the effect of termination of the contract on the liquidated damages clause.

The panel, comprised of Koh Swee Yen, SC (Partner, WongPartnership LLP), Matt Gearing, QC
(Leading Counsel and Arbitrator, Fountain Court Chambers), Andrew Pullen (Barrister, Fountain Court
Chambers), and Lok Vi Ming, SC (Managing Director, LVM Chambers) and moderated by Kent
Phillips (Partner, Hogan Lovells), discussed the divergence of approaches in relation to liquidated
damages across the leading common law jurisdictions, as well as the pitfalls for parties contracting for
or seeking to enforce liquidated damages clauses.

This article summarizes the lively and thought-provoking panel discussion as well as the key takeaways.

Penalties

As a general principle, a contractual clause that is designed to deter a breach rather than provide genuine
compensation will be considered a penalty. The consequence of a clause being categorized as a penalty
is that it will be deemed unenforceable.

Position under English law

The traditional test in Dunlop Pneumatic Tyre Co Ltd v. New Garage & Motor Co1 provided that the test
as to whether a contractual clause is a penalty is whether the clause is a genuine pre-estimate of loss.

In 2015, the issue of penalty clauses was brought before the UK Supreme Court in Cavendish Square
Holding BV v. Talal El Makdessi and ParkingEye Ltd v. Beavis 2. While the UK Supreme Court
considered that the penalty rule was an “ancient, haphazardly constructed edifice which has not
weathered well,” it rejected calls to abolish or substantially extend the rule against penalty clauses.
Instead, the rule was reformulated – the requirement that the clause has to be a genuine pre-estimate of
loss was abandoned – instead, the UK Supreme Court held that the true test is whether the clause is a
“secondary obligation that imposes a detriment on the contract-breaker out of all proportion to any
legitimate interest of the innocent party in the enforcement of the primary obligation.”
 Position under Australian law

The penalty rule was considered in Australia in Andrews v. Australia & New Zealand Banking Group
Ltd3 a few years prior to the UK Supreme Court Cavendish decision. Andrews arose out of
representative proceedings commenced by Mr. Andrews on behalf of approximately 38,000 group
members against ANZ in relation to certain fees charged by ANZ on its customers. The High Court of
Australia made it clear that the penalty rule is not restricted to secondary obligations and could apply
even in situations where there is no contractual breach. While there was no single test laid down, the
High Court of Australia appeared to take into account a broad assessment of commercial interests and
how one might protect them, recognizing that there is very good reason to leave judgment of protection
of commercial interests to the contracting parties themselves.

It should be noted that the UK Supreme Court in Cavendish considered the Andrews decision but

declined to follow the position in Australia, taking the view that it would “represent the expansion of the
courts’ supervisory jurisdiction into a new territory of uncertain boundaries, which has hitherto been
treated as wholly governed by mutual agreement.” In other words, the UK Supreme Court’s concern
with the Australian position was that it might lead to undue interference by the courts of parties’ own
allocation of contractual obligations and risk.

Post-Andrews there have been several decisions taken at the appellate level. In these decisions, the
courts have chosen to take a hands-off approach to scrutinizing contractual obligations despite the
enlargement of the equitable jurisdiction to supervise the operation of commercial clauses that
the Andrews decision represented.

In the New South Wales Court of Appeal case of Australia Capital Financial Management Pty Ltd v.
Linfield Developments Pty Ltd4 which concerned a call option in a development agreement, the court
held that the call option was not penal in its operation because it was not out of all proportion to the
protection of the developer’s legitimate interests in relation to the proposed development. In a separate
New South Wales Court of Appeal case of Arab Bank Australia Ltd v. Sayde Developments Pty Ltd 5, the
court held that the default interest payable under a commercial loan facility was not a penalty,
highlighting the importance of assessing the likely consequences of default at the time the contract was
made and not at the time of breach.

Position under Singapore law

The Singapore Court of Appeal had the opportunity to consider the development of the penalty rule in
the UK, the divergence of approach in Australia, and clarify the Singapore position in Denka Advantech
Pte Ltd v. Seraya Energy Pte Ltd6.  Similar to the UK Supreme Court, the Singapore Court of Appeal
rejected the position in Andrews taking the view that extending the application of the penalty rule to
primary obligations would impinge on parties’ freedom of contract. That being said, the Singapore
Court of Appeal declined to abolish the penalty rule altogether, opting to retain the power where there is
a breach of contract to decide the appropriate remedy for the innocent party.

The Singapore Court of Appeal also took the opportunity to analyze the Cavendish decision. Instead of
following the legitimate interest approach in Cavendish the court reiterated its endorsement of
the Dunlop test and held that the test of whether the contractual provision concerned provided a genuine
pre-estimate of the likely loss was wholly consistent with the fact that the focus was on the secondary
obligation on the part of the party in breach to pay damages by way of compensation.

Application of a liquidated damages clause

The panel also discussed the comparative approaches under English law and Singapore law on
liquidated damages following the UK Supreme Court case of Triple Point Technology Inc v. PTT Public
Company Ltd7.

Triple Point concerned a dispute between Triple Point and PTT under a staged milestone payment
contract. The contract subsequently ran into delay, and Triple Point stopped work on the grounds of
non-payment. PTT then terminated the contract on the basis that Triple Point had wrongfully suspended
work under the contract.

The two key issues that were discussed in the case were (i) whether liquidated damages accrued up to
the date of termination even when termination had occurred before PTT had accepted the delayed work
and (ii) whether or not there was a cap on liquidated damages.

Position under English law

On the first issue, the Supreme Court in Triple Point restored the orthodox position that where a contract
is terminated, liquidated damages would accrue up until termination (even if the delayed works had not
been accepted), and that general damages could be claimed thereafter.

In respect of the second issue, there was a limitation of liability clause in the contract which provided:

“This limitation of liability shall not apply to contractor’s liability resulting from fraud, negligence,
gross negligence or wilful misconduct of contractor or any of its officers, employees or agents.”

In considering this clause the Supreme Court held that the word “negligence” had the effect of excluding
breaches of contractual negligence, and to restrict negligence to tortious negligence would give the word
a meaning other than its natural and ordinary meaning.
 Position under Singapore law

The position under Singapore law as to the first issue appears to be aligned with the Supreme Court’s
position in Triple Point. In the Singapore High court case of LW Infrastructure Pte Ltd v. Lim Chin San
Contractors Pte Ltd8 the High Court held that the termination of a contract does not affect the right to
liquidated damages which would have accrued before termination. This decision was criticized by the
Court of Appeal in Triple Point, but the Supreme Court in overturning the Court of Appeal’s decision
appeared to agree with the judgment in LW Infrastructure.

On the second issue, like the position taken in the UK, the Singapore courts maintain the conceptual
difference between contractual and tortious negligence, although both liabilities do generally
overlap. Whether or not a contractual clause would have the effect of covering both contractual
negligence and tortious negligence would likely come down to the way the clause is drafted and the
natural and ordinary meaning of the words, like in the Triple Point Supreme Court case.

Conclusion

Over the years, both similarities and divergences in the various common law jurisdictions’ approaches
to liquidated damages have developed. Where the approaches have diverged – such as in relation to the
penalty rule – it remains to be seen whether the different approaches yield different results.

Authored by Shi Jin Chia.

References
1.  [1915] AC 79
2. [2016] AC 1172
3.  [2012] HCA 30
4.  [2017] NSWCA 99
5. [2016] 93 NSWLR 231
6.  [2020] SGCA 119
7. [2021] UKSC 29
8.  [2011] SGHC 163