The defendant appealed. At the CA, the defendant argued that since the second agreement was entered as part of the settlement of the breach of the first agreement, the liquidated damages clause in the second agreement should be regarded as an attempt to deter the defendant from breaching its contractual obligations again, and was thus a penalty and was unenforceable. The CA too, rejected the defendant's argument and held in favour of the plaintiff.
Decision
In arguing for an unenforceable penalty clause, the defendant referred to the Dunlop case and then further suggested that assistance be derived from the approach in Murray v Leisureplay Plc [2005] EWCA Civ 963, where Arden LJ set out a five-stage test to determine whether a clause was a penalty:
i. To what breaches of contract does the contractual damages provision apply? ii. What amount is payable on breach under that clause in the parties' agreement? iii. What amount would be payable if a claim for damages for breach of contract was brought under common law? iv. What were the parties' reasons for agreeing the relevant clause? v. Has the party who seeks to establish that the clause is a penalty shown that the amount payable under the clause was imposed in terrorem, or that it does not constitute a genuine pre-estimate of loss for the purposes of the Dunlop case, and, if he has shown the latter, is there some other reason which justifies the discrepancy between (ii) and (iii) above?
The CA rejected the restrictive approach in Murray. Instead the CA cited an earlier Hong Kong case Ip Ming Kin v Wong Siu Lan (unreported, 28 May 2013, CA, CACV 201/2012) as support for adopting a broader approach. If the Court had adopted the restrictive approach in Murray, it would have been necessary to adduce evidence and calculate damages. The CA held this would have been inconsistent with the purpose of a liquidated damages clause, which was precisely to dispense with the need to adduce evidence and calculate damages.
It is not clear whether in adopting the broader approach the Court would go as broad as the approach taken in Cavendish Square Holding BV v Talal El Makdessi; ParkingEye Limited v Beavis [2015] UKSC 67, which now represents the current law on penalty clauses in England & Wales. The Supreme Court found that penalty clauses should be determined based on whether the innocent party's legitimate interest in enforcing the counterparty's contractual obligations were "out of all proportion". While it could be potentially more flexible than the traditional test, the Cavendish test has not been formally considered by the Hong Kong Courts.
Hence, the traditional "genuine pre-estimate of loss" test from Dunlop and its guidelines remain in place at least for the time being. Even so, the CA in Brio did consider that the