Case Note

Date01 December 2017
AuthorGOH Yihan LLB (Hons) (National University of Singapore), LLM (Harvard); Advocate and Solicitor (Singapore); Associate Professor, School of Law, Singapore Management University. YIP Man LLB (Hons) (National University of Singapore), BCL (Oxford); Advocate and Solicitor (Singapore); Assistant Professor, School of Law, Singapore Management University.
Citation(2017) 29 SAcLJ 257
Published date01 December 2017

ENGLISH REFORMULATION OF THE PENALTY RULE

Relevance in Singapore?

Cavendish Square Holding BV v Makdessi; ParkingEye Ltd v Beavis[2016] AC 1172; [2015] 3 WLR 1373

English law on the rule against penalty clauses (“penalty rule”) has had a stable if unsatisfactory formulation for a while. The courts have long distinguished between liquidated damages and a penalty, on the basis that the former is a genuine pre-estimate of loss and that the latter is an unjustifiable tool used to coerce the performance of a contract. These long-standing principles have now to be re-evaluated in the light of the much-anticipated joint appeals of Cavendish Square Holding BV v Makdessi and ParkingEye Ltd v Beavis (collectively “Cavendish”). The purpose of this case note is to discuss Cavendish and evaluate the impact it might have on Singapore law. The immediate task for English law is to fully work out the basis and principles of the new rule in Cavendish. The impact on Singapore law will depend on how that pans out.

I. Introduction

1 English law on the rule against penalty clauses (“penalty rule”) has had a stable if unsatisfactory formulation for a while. The courts have long distinguished between liquidated damages and a penalty, on the basis that the former is a genuine pre-estimate of loss and that the latter is an unjustifiable tool used to coerce the performance of a contract. Liquidated damages are upheld not only because they embody the intentions of the contracting parties, but because they also save the court and parties the time and expenses in ascertaining the exact loss suffered by the plaintiff. For years, the governing case that laid down the distinction between liquidated damages and a penalty is the English case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd1 (“Dunlop Pneumatic”). In that case, Lord Dunedin had laid down the following fundamental propositions:2

1. Though the parties to the contract who use the words ‘penalty’ or ‘liquidated damages’ may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. …

2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage …

3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of breach …

4. To assist this task of construction various tests have been suggested … Such are:

(a) It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

(b) It will be held to be a penalty if the breach consists only in not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid … [this is] truly a corollary to the last test. …

(c) There is a presumption (but no more) that it is penalty when ‘a single lump sum is made payable by way of compensation, on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage’…[3]

On the other hand:

(d) It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when

it is probable that pre-estimated damage was the true bargain between the parties ….

Many have treated Lord Dunedin's second proposition in Dunlop Pneumatic as “an exhaustive dichotomy”,4 thereby focusing the analysis on whether the disputed clause was a “genuine pre-estimate” of the claimant's loss.

2 The Singapore position has followed the English position taken in Dunlop Pneumatic for a long time. Thus, in the recent High Court decision of iTronic Holdings Pte Ltd v Tan Swee Leon (“iTronic Holdings”),5 George Wei J confined himself to the Dunlop Pneumatic principles. This was done either on the basis that the Dunlop Pneumatic principles are “said to be adequate and applicable in cases involving straightforward damages clauses” or because the Court of Appeal had in Xia Zhengyan v Geng Changqing6 reaffirmed the applicability of those principles in Singapore law.7

3 These long-standing principles have now to be re-evaluated in the light of the much-anticipated joint appeals of Cavendish Square Holding BV v Makdessi (“Cavendish v Makdessi”) and ParkingEye Ltd v Beavis8 (“ParkingEye v Beavis”) (collectively “Cavendish”). In Cavendish, the UK Supreme Court put forward a reformulation of the rule: a clause will be a penalty if it relates to a secondary obligation which effect is out of all proportion to the legitimate interest sought to be safeguarded by the provision. While Wei J in iTronic Holdings acknowledged the pending importance of Cavendish, he did not apply it, preferring to apply the traditional Dunlop Pneumatic principles. Subsequently, in the High Court case of Allplus Holdings Pte Ltd v Phoon Wui Nyen9 (“Allplus Holdings”), Foo Tuat Yien JC applied the distinction drawn in Cavendish between primary and secondary obligations, marking the first time that a Singapore court had applied the new rules introduced by the case. The purpose of this case note is to discuss Cavendish and evaluate the impact it might have on Singapore law. The immediate task for English law is to fully work out the basis and principles of the new rule in Cavendish. The impact on Singapore law will depend on how that pans out. Before discussing the consequences of Cavendish on English and Singapore law, let us first consider the background facts of the joint appeals in Cavendish.

II. Background facts

A. Cavendish v Makdessi

4 In the Cavendish v Makdessi appeal, Makdessi was the founder of the largest advertising and marketing communications group in the Middle East (“the Group”). By an agreement on 28 February 2008, he and a partner agreed to sell their controlling stake in the Group's holding company (“the Company”) to Cavendish. Consequently, Cavendish held 60% of the Company while Makdessi and his partner retained 40%.

5 As was typical of acquisition agreements in the marketing sector, a proportion of the purchase price represented goodwill. To safeguard Cavendish's interests, cl 11.2 provided that Makdessi shall not, until two years after he ceased to hold any shares in the Company or the date of any final payment, (a) provide, solicit or accept enquiries/orders for goods or services which competed with the Group companies in countries in which any of the Group companies carried on businesses; (b) divert orders, enquiries or business from any Group company, or (c) employ or solicit any senior employee or consultant of any Group company.

6 Significantly, breach of cl 11 and other obligations under the contract by Makdessi and his partner would result in the variation of Cavendish's payment of the purchase price. Had there been no breach, Cavendish was to pay US$34m upon the completion of the transaction. It was then to pay a further US$31.5m into escrow, to be paid out over a period of time. It was also to pay an “interim payment” and “final payment” 30 days after agreement of the Group's operating profits for 2007–2009 and 2007–2011 respectively. On the other hand, if Makdessi was in breach of cl 11.2, cl 5.1 provided that Makdessi shall lose his entitlement to receive the interim payment and/or the final payment. Further, pursuant to cl 5.6, Cavendish would have an option to require Makdessi to sell all his remaining shares in the Company to Cavendish at a certain price that excluded the value of the goodwill of the business.

7 Makdessi defended against Cavendish's invocation of cll 5.1 and 5.6 on the basis that these clauses were penalty provisions and therefore unenforceable. At first instance, Burton J held that the clauses were valid and enforceable,10 but the Court of Appeal found to the contrary.11 On appeal, the Supreme Court unanimously overturned the Court of Appeal's ruling.

B. ParkingEye v Beavis

8 In the second appeal, ParkingEye Ltd managed a car park in a retail park owned by the British Airways Pension Fund. ParkingEye displayed about 20 large, prominent and legible signs at the entrance of and throughout the car park so that any reasonable user would have a fair opportunity to read them. 80% of these signs informed that ParkingEye had been “solely engaged to provide a traffic space maximisation scheme”– users would be limited to a free two-hour maximum stay in the car park and a “Parking Charge” of £85 would be imposed against any user who overstayed.

9 Beavis overstayed by nearly an hour and received a “first parking charge notice” from ParkingEye. The notice demanded payment of £85 within 28 days but also stated that, if Beavis should pay within 14 days, the sum would be reduced to £50. Beavis ignored this notice, as well as a subsequent reminder notice and warning letter. ParkingEye then sued Beavis in the County Court to recover the £85. The main issue was whether the charge was unenforceable as a penalty, or unfair and thus unenforceable under the Unfair Terms in Consumer Contracts Regulations 1999. Both the Court of Appeal and the judge at first instance found for ParkingEye. Beavis therefore appealed to the Supreme Court.

III. New penalty rule

10 The two appeals presented a ripe opportunity for the Supreme Court to consider afresh the contemporary relevance and operation of the penalty rule. In fact, as Lord Mance put it, the two cases occupied “opposite ends of a financial spectrum”, thereby affording the Supreme Court a clear overview of...

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