compensation’ under Section 75 of the Contracts
Act 1950, the Federal Court did not in fact adopt
the test in its entirety for primary obligation and
secondary obligation. Although, it is important
to note that the first step in claiming under the
liquidated damages clause is to show that there is
a breach of contract.
OTHER COMMON LAW JURISDICTIONS
It is interesting to note that other neighbouring
common law jurisdictions, such as Singapore,
Australia and Hong Kong, have also not adopted
the Cavendish approach wholesale (except
Singapore as explained below).
Singapore
Since the UK Supreme Court decided in the
case of Cavendish, the Singapore courts have
considered and applied the same approach when
it comes to penalty rules or liquidated damages
clauses. This can be seen in cases such as iTronic
Holdings Pte Ltd v Tan Swee Leon [2016] SGHC 77
and Nanyang Medical Investments Pte Ltd v Kuek
Bak Kim Leslie and others [2018] SGHC 263.
However, in another Singapore High Court
case, Hon Chin Kong v Yip Fook Mun [2018] 3
SLR 534, the Court reverted to the Dunlop test
of genuine pre-estimate. The High Court took the
position that the Dunlop approach shall continue
to be law in Singapore, and that the Cavendish
approach is not applicable in Singapore.
Nevertheless, it is important to note that
in Hon Chin Kong, the High Court clarified that
the law of penalties (i.e. the Dunlop approach)
would not apply to true deposits, whereas it was
observed that the Cavendish approach may be
wide enough to apply to true deposits.
In another recent Singapore High Court
case, Seraya Energy Pte Ltd v Denka Advantech
Pte Ltd and another suit (YTL PowerSeraya
Pte Ltd, third party) [2019] SGHC 2, the Court
considered the “legitimate interest” approach in
Cavendish. However, the Court reaffirmed that it
is bound to apply the classic case of Dunlop on
the principles applicable to distinguish between
a provision for liquidated damages and one
imposing a penalty.
Having said that, the Singapore High Court
in Denka Advantech did refer to other Singapore
High Court cases that considered the UK Supreme
Court case of Cavendish. However, as at the
date of this article, there is no Singapore Court
of Appeal decision on this matter. Nevertheless,
the discussions on the Cavendish approach
seem to suggest that there is a slow but
growing acceptance of the Cavendish position in
Singapore.
Australia
The Australia courts similarly adopt the Dunlop
approach when determining whether a liquidated
damages clause is enforceable or should be
considered as a penalty.
In the High Court of Australia case Andrews
and others v Australia and New Zealand Banking
Group Ltd [2012] HCA 30, the Court held that
when the contract requires the payment of
compensation that is non-proportional to the pre-
estimated loss, the clause may be considered as
a penalty and thus is unenforceable.
The law of penalties was also considered in
the Federal Court of Australia case of Paciocco
v Australia and New Zealand Banking Group
Limited [2014] FCA 35. The Federal Court
similarly followed the Dunlop approach and held
that a stipulation (to pay a sum or other property)
will not constitute a penalty at law or in equity
unless it is ‘extravagant and unconscionable in
amount in comparison with the greatest loss
that could conceivably be proved’. Further,
the Federal Court clarified that whether a sum
stipulated is a penalty or liquidated damages is
to be determined upon the terms and inherent
circumstances of the contract, judged at the time
of making of the contract.
To assist further, the Federal Court also set out
some considerations which may be considered:
● ●
Whether the sum stipulated is extravagant
and unconscionable in amount in
comparison with the greatest loss that
could conceivably be proved.
● ●
Whether the breach consists only in not
paying a sum of money, and the sum
stipulated in the clause is a sum greater
than the sum which ought to have been
paid.
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