CASE UPDATE: LEIMAN, RICARDO AND ANOTHER V NOBLE RESOURCES LTD AND ANOTHER [2020] SGCA 52
The Court of Appeal in Leiman, Ricardo and another v Noble Resources Ltd and another [2020] SGCA 52 (“Leiman v Noble Resources”) considered various issues, including touching on the issue of the approach to liquidated damages. This short update briefly examines some of the points raised by the Court of Appeal in this regard, given the importance of certainty in the approach to liquidated damages.
The “uncertain” position of Cavendish in Singapore. Since the decision of Cavendish Square Holding BV v Makdessi [2016] AC 1172 (“Cavendish”), there have been many local decisions dealing with whether Cavendish has, inter alia, reformulated the law on penalty as set out in the locus classicus decision of Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company, Limited [1915] AC 79 (“Dunlop Pneumatic Tyre”).
For instance, in the High Court decision of Seraya Energy Pte Ltd v Denka Advantech Pte Ltd and another suit (YTL PowerSeraya Pte Ltd, third party) [2019] SGHC 2 (“Seraya Energy”), the High Court decided that it was bound to apply Dunlop Pneumatic Tyre and not Cavendish ([178] Seraya Energy), though the High Court nonetheless proceeded to consider the legitimate interest approach in Cavendish. Hence, there was an “uncertainty” as to whether Cavendish would apply in Singapore.
The “uncertainty”" remains. In [98] Leiman v Noble Resources, the Court of Appeal held that “[w]e have yet to determine whether the principles laid down in Dunlop Pneumatic Tyre continue to apply in light of the UK Supreme Court’s decision in Cavendish … [however] the applicability of the Cavendish test need not be decided in the present appeal because we are satisfied that cl 3(a) of the Settlement Agreement is a penalty regardless of whether this test or the Dunlop Pneumatic Tyre test is applied. As for cl 3(c), and, for that matter, cl 3(d), the question does not arise as we are satisfied that they cannot possibly be regarded as penalty clauses. This is because they do not concern secondary obligations that were triggered by … breach of contract.”
So, whether the principles as laid down in Dunlop Pneumatic Tyre will continue to apply in Singapore in light of Cavendish remains undecided by the Singapore Court of Appeal.
The distinction between primary and secondary distinction. We note that the Court of Appeal was careful to emphasize at [100] Leiman v Noble Resources that the rule against penalties only applies to clauses that impose secondary obligations.
In this regard, it is perhaps a useful reminder to note the following clear statement of principle by the Court of Appeal at [100] Leiman v Noble Resources:
“… In line with the principle of freedom of contract, the court will give effect to the intention of the parties and hold them to their duty to perform their primary obligations under their contract. The corollary of recognising the parties’ freedom of contract is that the law also allows them the freedom to change their mind and break their contractual undertakings if they so wish, albeit at a price. To address this, the common law imports into contracts a secondary obligation to pay compensatory damages to remedy breaches of contract. … Where a clause imposes a stipulated consequence following a breach of contract by one party, and that consequence, in the opinion of the court, is not reflective of the innocent party’s interest in being compensated but is in fact stipulated in terrorem of the contract-breaker, that clause will be regarded as an unenforceable penalty clause.”
While this is a trite principle, we note that it is nonetheless a principle of vital importance, and legal advisors would do well to heed this principle, especially when it comes to the drafting of obligations under the contract.
Open to Cavendish? But perhaps more interesting is [101] Leiman v Noble Resources, where the Court of Appeal stated the following:
“101 In our judgment, in considering whether a given clause imposes a primary or a secondary obligation, the court should approach the issue as a matter of substance rather than form. The inquiry should, in our view, be directed towards and guided by:
(a) the overall context in which the bargain in the clause was struck;
(b) any reasons why the parties agreed to include the clause in the contract; and
(c) whether the clause was entered into and contemplated as part of the parties’ primary obligations under the contract in order to secure some independent commercial purpose or end, or whether it was, in the round, to hold the affected party in terrorem in order thereby to secure his compliance with his primary obligations.”
(emphasis added)
The emphasized portions of sub-paragraph (b) and (c) are interesting because they appear to suggest that the Court of Appeal is open to the approach in Cavendish, as the reference to “reasons” and “independent commercial purpose of end” appears to hearken to, e.g., [32] Cavendish where Lord Neuberger and Lord Sumption (with whom Lord Carnwath agreed) stated that “… compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations. …”
Conclusion. So, while Leiman v Noble Resources has not settled the issue of whether the principles in Dunlop Pneumatic Tyre continue to apply in Singapore in light of Cavendish, it appears to the authors that Leiman v Noble Resources has (at the very least) not shut the door on the application of Cavendish either.
While we would have welcomed greater clarity on this issue, we note that for most straightforward contracts, this issue should not be controversial because, and this has been highlighted at [32] Cavendish, “[i]n the case of a straightforward damages clause, [the] interest [of an innocent party] will rarely extend beyond compensation for the breach… Lord Dunedin’s four tests [in Dunlop Pneumatic Tyre] would usually be perfectly adequate to determine its validity.”
However, for other contracts, drafters should always bear in mind the distinction between primary and secondary obligations, as the law against penalties (if it applies) can have harsh consequences.
Tags: Liquidated damages; Cavendish v Makdessi; Dunlop Pneumatic Tyre
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