Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals

• Jurisdiction: Singapore
• Judge: Sundaresh Menon CJ
• Judgment Date: 15 December 2020
• Neutral Citation: [2020] SGCA 119
• Court: Court of Appeal (Singapore)
• Docket Number: Civil Appeals Nos 37, 38, 100 and 101 of 2019
• Published date: 31 December 2020
• Year: 2020
• Hearing Date: 04 March 2020,17 July 2020
• Plaintiff Counsel: Lee Eng Beng SC, Tay Twan Lip Philip and Yip Li Ming (Rajah & Tann Singapore LLP),Thio Shen Yi SC, Melvin Chan, Koh Li Qun Kelvin and Nguyen Vu Lan (TSMP Law Corporation)
• Subject Matter: Contract,Breach,Discharge,Remedies,Liquidated damages,Damages,Liquidated damages or penalty,Mitigation
• Citation: [2020] SGCA 119

Andrew Phang Boon Leong JA (delivering the judgment of the court): Introduction

For almost a century, the law relating to contractual penalties (hereafter the “Penalty Rule”) was regarded as being very well-established across the Commonwealth. The leading statement of principles was that famously laid down by Lord Dunedin in the House of Lords decision of Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company, Limited [1915] AC 79 (“Dunlop”); indeed, these principles have been described as having “been treated in Australia as holy writ for over 100 years” (see N C Seddon & R A Bigwood, Cheshire & Fifoot Law of Contract – Eleventh Australian Edition (LexisNexis Butterworths Australia, 2017) at p 1230). This was in 1914. Nearly a century later, in 2012, the High Court of Australia, in Andrews and others v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205 (“Andrews”), extended the scope of the law in this area in a rather radical fashion (specifically by holding that a breach of contract was no longer a prerequisite to the application of the Penalty Rule). Shortly thereafter, in 2015, the UK Supreme Court, in Cavendish Square Holding BV v Makdessi [2016] AC 1172 (“Cavendish Square Holding”), not only disagreed with Andrews but also restated the substantive criteria (previously laid down in Dunlop) for ascertaining whether a particular clause was a penalty clause. The present appeal affords this court the opportunity of considering these developments in the context of the Penalty Rule in Singapore.

Not surprisingly, much academic ink has been spilt on the Penalty Rule in recent years – in particular, with regard to both Andrews and Cavendish Square Holding. In addition to the numerous articles and case notes, both the aforementioned cases have also been considered in two learned (and recent) treatises (see Roger Halson, Liquidated Damages and Penalty Clauses (Oxford University Press, 2018) (“Halson”) and Nicholas A Tiverios, Contractual Penalties in Australia and the United Kingdom – History, Theory and Practice (The Federation Press, 2019) (“Tiverios”)). Indeed, the first treatise comes from the pen (or, perhaps more appropriately in these more modern times, keyboard) of a leading contract scholar whilst the second is based on a doctoral thesis (which is, in the nature of things, the scholarly fruit of many years of extremely focused academic labour (see also, by the same author, Nicholas A Tiverios, “A Restatement of Relief Against Contractual Penalties (I): Underlying Principles in Equity and at Common Law” (2017) 11 J Eq 1 and “A Restatement of Relief Against Contractual Penalties (II): A Framework for Applying the Australian and English Approaches” (2017) 11 J Eq 185)).

What is interesting, in our view, is that the various academic views have in fact diverged (often quite radically). Hence, whilst these views are useful in setting out as well as illustrating the various controversies and arguments, we are best served by going back to first principles. In this regard (and as we shall see), we will need to examine not only the past in terms of the history of the Penalty Rule but also the present in relation to the logic and coherence of the (doctrinal) rules and principles proffered in the various cases. Finally, we will also need to consider the theoretical underpinnings of the aforementioned rules and principles which (by their very nature) transcend both space and time. All three aspects (also present in the sub-title of Tiverios) reflect the interactive elements of the law in general and the Penalty Rule in particular. The historical aspect is particularly important in the context of ascertaining the scope of the Penalty Rule, whilst the doctrinal and theoretical aspects are of special importance in ascertaining the content of that rule.

However, before proceeding to set out the issues as well as our decision on what ought to be the applicable law in relation to contractual penalties in the Singapore context, it should be noted that the present appeal presents an issue of whether or not there had been a breach of contract by the defendants in the first place. This particular issue becomes especially crucial if we reject the approach adopted in Andrews (which, it will be recalled, permits the invocation of the Penalty Rule even in the absence of a breach of contract). Accordingly, after setting out the legal principles applicable to the Penalty Rule, we deal with that particular issue first before considering the second issue which relates to the remedies (if any) that are available to the plaintiff (including whether or not the relevant contractual clauses are penalties). In order to deal with these issues, we need to turn, first, to the factual background as well as the decision in the court below.

Given the number of issues (and sub-issues) involved in the present judgment, it is helpful to set out a table of contents for reference:

A glossary of key terms and their abbreviations used in this judgment is also annexed after the end of this judgment.

The factual background

The present appeals arise from the consolidated trial below of HC/S 1328/2014 and HC/S 1329/2014 (“the Suits”). The plaintiff in the Suits is Seraya Energy Pte Ltd (“Seraya”). It is a retailer of electricity and a wholly owned subsidiary of YTL PowerSeraya Pte Ltd (“YTL”), an electricity generator. Together, Seraya and YTL form what is known as a “gentailer”, which refers to the vertical integration of a generation company and its corresponding retailer chiefly for the purpose of mitigating the group’s exposure to price fluctuations. YTL is the third party to the counterclaims in the Suits.

The defendants in the Suits are Denka Advantech Pte Ltd (“DAPL”) and Denka Singapore Pte Ltd (“DSPL”). DAPL and DSPL are customers of Seraya. As many of the claims and arguments are common to both entities, we refer to the two defendants simply as “Denka” where it is not important to differentiate between them.

Seraya commenced the Suits against DAPL and DSPL, claiming Denka’s repudiatory breach of three electricity retail agreements (“ERAs”). Seraya claimed damages under the liquidated damages (“LD”) clause contained in each ERA, or common law damages in the alternative.

To understand the issues in contention, it is necessary to set out briefly the structure of the electricity market and the context in which the parties entered into the ERAs. As most of these facts are comprehensively set out in the decision of the High Court judge (“the Judge”) below, we detail only the facts that are essential to the appeals.

The structure of the electricity market

All electricity in Singapore is bought and sold through the National Electricity Market of Singapore (“NEMS”). NEMS is regulated by the Energy Market Authority, which facilitates market transactions through the Energy Market Company Pte Ltd (“EMC”). The electricity market is divided into two sections: the wholesale market in which generation companies operate, and the retail market in which retailers operate.

In the wholesale market, electricity generators such as YTL are required to sell electricity to NEMS. Every half hour, generation companies submit bids to NEMS for the quantity and price of electricity they are able and willing to supply. Based on supply and demand, NEMS’s computer model generates a fixed price known as the Uniform Singapore Energy Price (“USEP”). The USEP represents the weighted average of all the nodal prices of nodes from which electricity is deemed to be withdrawn in that half hour. All bids that do not exceed the USEP are accepted, and generators whose bids are accepted will be called upon to supply electricity and are paid at the USEP.

In turn, NEMS sells electricity to energy retailers such as Seraya. The price of electricity sold to retailers is known as the Pool Price, which is derived, in the main, by adding an Hourly Energy Uplift Charge (“HEUC”) to the USEP.

In turn, energy retailers may only sell electricity to contestable consumers such as Denka. Contestable consumers are consumers with a high average electricity consumption of at least 2,000 kWh per month and are typically commercial or industrial entities.

If a contestable consumer does not wish to purchase electricity from a specific retailer, it may also purchase from the wholesale market, either from the Market Support Services Licensee (“MSSL”), ie, SP Services Ltd, at the Pool Price, or as a direct market customer registered with the EMC. Purchasing from one retailer, however, allows the parties to fix the price of electricity or peg the price to a different index, instead of being subject to fluctuations in the USEP and the Pool Price.

As between YTL, NEMS, Seraya and Denka, the pricing relationship between them is illustrated as follows:

(Diagram 1 – Pricing relationship in the gentailer structure)

We pause to note Seraya’s submission that in a gentailer, it is common for parties to enter into a contract for differences to enable the group as a whole to mitigate its exposure to the fluctuations of the USEP and Pool Price. YTL and Seraya had a Contract for Differences dated 1 April 2012 (“the CFD”) under which YTL bore most of the risk from Seraya’s contracts with its customers. Should Seraya suffer losses from its contract price being lower than the Pool Price, the CFD provided for YTL to pay the difference to Seraya. Conversely, if Seraya made a profit from its contract price being higher than the Pool Price, Seraya would pay a portion of the excess of the contract price over the Pool Price to YTL. We return to this point later as it assumes some significance in analysing Seraya’s remedies for breach of contract.

With this context in mind, we turn to the specifics of the parties’ contractual relationships.

The Steam Supply Agreement

Denka first became customers of Seraya in May 2005,...