The law of damages: a comparative approach between common law jurisdictions | Hogan Lovells

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

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

Penalties

As a general rule, a contractual clause which aims to deter default rather than to offer real compensation will be considered a sanction. The consequence of qualifying a clause as a penalty is that it will be deemed unenforceable.

English law post

The traditional test of Dunlop tire Tire Co Ltd v New Garage & Motor Co1 provided that the test for whether a contract term is a penalty is whether the term is a true prior estimate of loss.

In 2015, the issue of penalty clauses was brought to the UK Supreme Court in Cavendish Square Holding BV v Talal El Makdessi and ParkingEye Ltd v Beavis2. While the UK Supreme Court has held that the sentencing rule is a old haphazardly constructed edifice that has not held up well,” he rejected calls for the abolition or substantial extension of the rule against penalty clauses. Instead, the rule was reformulated – the requirement that the clause must be a true prior estimate of loss was dropped – instead the UK Supreme Court ruled that the true test is whether the clause is a “secondary obligation which imposes prejudice on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the performance of the principal obligation”.

Position under Australian law

The penalty rule was considered in Australia in Andrews v Australia & New Zealand Banking Group Ltd3 a few years before the Supreme Court of the United Kingdom Cavendish decision. andrew arose out of representative proceedings brought by Mr Andrews on behalf of approximately 38,000 Class Members against ANZ relating to certain fees charged by ANZ to its customers. The High Court of Australia has clarified that the penalty rule is not limited to secondary obligations and could apply even in situations where there is no breach of contract. Although no single test has been established, the High Court of Australia appeared to consider a broad assessment of commercial interests and how they might be protected, recognizing that there are very good reasons to leave the judgment of the protection of commercial interests to the contracting parties themselves.

It should be noted that the UK Supreme Court in Cavendish considered the andrew ruling but refused to follow Australia’s position, saying it would ‘represent the expansion of the courts’ supervisory jurisdiction into new territory with uncertain borders, which has so far been treated as entirely governed by agreement mutual”. In other words, the concern of the UK Supreme Court with the Australian position was that it could lead to undue interference by the courts in the allocation of contractual obligations and risks by the parties.

To post-andrew several decisions were taken on appeal. In these decisions, the courts chose to take a hands-off approach to reviewing contractual obligations despite the expansion of equitable jurisdiction to oversee the operation of commercial terms that the andrew decision represented.

In the New South Wales Court of Appeal case Australia Capital Financial Management Pty Ltd v Linfield Developments Pty Ltd4 which concerned a call option in a development contract, the court held that the call option was not penal in its operation because it was not disproportionate to the protection of the legitimate interests of the developer by relation to the development project. In a separate case from the New South Wales Court of Appeal Arab Bank Australia Ltd v Sayde Developments Pty Ltd5, the court held that default interest payable under a commercial loan facility was not a penalty, emphasizing the importance of assessing the likely consequences of default at the time of entering into the contract and not at the time of the break.

Position under Singapore law

The Singapore Court of Appeal had the opportunity to review the evolution of the penalty rule in the UK, the divergence of approach in Australia and to clarify Singapore’s position in Denka Advantech Pte Ltd v Seraya Energy Pte Ltd6. Like the UK Supreme Court, the Singapore Court of Appeal rejected the position andrew considering that the extension of the application of the penalty rule to the main obligations would infringe the contractual freedom of the parties. That being said, the Singapore Court of Appeal refused to abolish the penalty rule entirely, opting to retain the power in breach of contract to decide the appropriate remedy for the innocent party.

The Singapore Court of Appeal also took the opportunity to analyze Cavendish decision. Instead of following the legitimate interest approach in Cavendish the court reiterated its approval of the dunlop and held that the test for determining whether the contractual provision at issue provided a true pre-estimate of probable loss was entirely consistent with the focus on the breaching party’s subsidiary obligation to pay compensation damages.

Application of a liquidated damages clause

The panel also discussed comparative approaches in English law and Singaporean law to damages following the UK Supreme Court case Triple Point Technology Inc v PTT Public Company Ltd7.

triple point concerned a dispute between Triple Point and PTT in connection with an installment payment agreement. The contract then fell behind schedule and Triple Point halted work for non-payment. PTT then terminated the contract on the grounds that Triple Point had wrongfully suspended the work under the contract.

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

English law post

On the first question, the Supreme Court of triple point reinstated the orthodox position that when a contract is terminated, liquidated damages would accrue until termination (even if the delayed work had not been accepted) and that general damages could be claimed afterwards.

Regarding the second question, there was a limitation of liability clause in the contract which stated:

“This limitation of liability does not apply to liability of the contractor arising from fraud, negligence, gross negligence or willful misconduct of the contractor or any of its officers, employees or agents.”

In reviewing this clause, the Supreme Court held that the effect of the word “negligence” was to exclude breaches of contractual negligence, and to restrict negligence to tort would give the word a meaning other than its natural and ordinary meaning.

Position under Singapore law

The position of Singaporean law on the first question appears to be aligned with the position of the Supreme Court in triple point. In the High Court of Singapore case 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 damages which would have accrued before the termination. This decision was criticized by the Court of Appeal in triple pointbut the Supreme Court, in reversing the decision of the Court of Appeal, seemed to agree with the judgment LW infrastructure.

On the second question, like the position taken in the UK, the Singapore courts maintain the conceptual difference between negligence in contract and tort, although the two responsibilities generally overlap. Whether or not a contract term would operate to cover both negligence in contract and negligence in tort would likely depend on how the term is drafted and on the natural and ordinary meaning of the words, as in the triple stitch Supreme Court case.

Conclusion

Over the years, similarities and differences in the approaches of various common law jurisdictions to liquidated damages have developed. Where approaches have diverged – for example with respect to the sanctions rule – it remains to be seen whether the different approaches produce different results.

References

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