INGENIEUR
As the Australian courts have yet to consider
the case of Cavendish, it would be interesting to
see whether the Australian courts will depart from
the Dunlop approach.
Hong Kong
The issue relating to liquidated damages clause
was recently decided by the Hong Kong Court of
Appeal in the case of Brio Electronic Commerce
Ltd v Tradelink Electronic Commerce Ltd [2016]
HKEC 989. In this case, the contract in dispute
had a non-solicitation clause whereby parties
agreed not to ‘poach’ each other’s clients. The
contract further provided a sum of HK$5 million
as liquidated damages for the breach. In the
Court of Appeal, the defendant did not challenge
the finding that it was in breach of contract.
However, the defendant contended that the
term fixing damages at HK$5 million was not
an enforceable liquidated clause as it was not a
genuine pre-estimate of damages (following the
Dunlop approach).
In arguing its case, the defendant’s counsel
suggested that the Hong Kong Court of Appeal
follow the English Court of Appeal decision
in Murray v Leisureplay Plc [2005] EWCA Civ
963, which provided a step by step guide to the
questions the court should ask itself to determine
whether a clause is a penalty. In doing so, the
court would have to make a comparison between
the amount stipulated in the contract as payable
in the event of breach and the amount that would
be payable for such breach under common law.
Nevertheless, the Hong Kong Court of Appeal
took the view that the approach taken in Murray
was too rigid. In upholding the liquidated damages
clause, the Court of Appeal held, among others,
as follows:
● ●
A comparison, as suggested in the
English Court of Appeal case of Murray,
would remove one of the commercial
advantages that a liquidated damages
clause is recognised as achieving, i.e. the
dispensation with the need to adduce
evidence on damages and to calculate
them, particularly in cases where proof
of the amount of damages suffered may
be difficult to achieve to any degree of
precision.
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JUNE 2013
When considering whether a clause is valid
liquidated damages clause or a penalty,
one must consider the standpoint of the
parties at the time when they entered into
the contract.
● ●
Where a breach could have a range of
outcomes or consequences, a clause will
be held to be a penalty where the amount
stipulated is extravagant compared with
the greatest loss that could be proved
to flow from the breach. This approach
recognises that the consequence of a
breach may not be foreseen with precision
and hence, allows parties to stipulate a
sum representing adequate compensation
in the event of breach.
Although the case of Brio was decided
af ter the UK Supreme Cour t delivered its
decision in Cavendish, the Hong Kong Court of
Appeal did not take the opportunity to express
its views on Cavendish. It remains to be seen
whether the new test laid down in Cavendish
would be adopted by the Hong Kong courts in
the future.
● ●
CONCLUSION
Although the other neighbouring common law
jurisdictions have yet to align their laws on
penalties with the UK position in Cavendish, the
courts are certainly more reluctant to disturb
parties’ freedom to contract, especially in
commercial contracts.
As for Malaysia, the Federal Court decision
of Cubic Electronics has certainly provided some
clarification on the law on liquidated damages
clause. Parties therefore ought to ensure that
the amount stipulated in the liquidated damages
clause is a reasonable amount of compensation
for the breach.
Specifically for construction contracts, parties
should properly consider the genuine pre-estimate
of losses and the reasonable time for completion
of the works when agreeing on the liquidated
damages clause given that there is no longer a
requirement for the innocent party to prove actual
loss. We await further judicial guidance on the
application of these principles in construction
contracts.