The Supreme Court of Singapore, in the judgment of Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2020] SGCA 119, has rejected the Australian and UK expansion of the penalty doctrine in considering a liquidated damages (LD) clause.

The appeal related to three electricity retail agreements (ERAs) between Seraya Energy Pte Ltd (Seraya) the electricity retailer, and Denka Advantech Pte Ltd (Denka) who were customers of Seraya. Denka had two core obligations under the ERAs, which they entered into with Seraya in 2012:

to take or pay a certain minimum volume of steam; and to ensure that its steam consumption adhered to certain defined levels.

Denka requested to reduce the amount of steam it was obliged to buy. The parties agreed to a concession of the original terms, which were implemented however there a formal agreement was not executed.

The ERAs also contained LD clauses. The LD clauses were tied to Seraya's express contractual right to terminate the agreements in certain situations, for example, if Denka repudiated the contracts. Denka wrote to Seraya stating that 'the supply of steam and electricity shall cease'. Seraya treated the letter as evidence of repudiation of the ERAs and subsequently terminated the contracts.

Seraya commenced proceedings against Denka claiming breach of contract and claimed damages under the LD clauses in the ERAs or common law damages in the alternative. Denka denied liability for LDs for wrongful termination arguing that they were not bound by the ERAs as a formal agreement containing the concessional terms agreed by the parties had not been executed. Denka also argued that the LD clauses were unenforceable penalties.

At first instance, the trial judge found that Denka had repudiated the contracts but that the LD clauses in each ERA was not a genuine pre-estimate of damages and were therefore unenforceable penalty clauses.

The Supreme Court of Singapore allowed an appeal from Seraya and held that the LDs clauses were not unenforceable penalties. The Court undertook a detailed review of the case law regarding liquidated damages in the UK and Australia, ultimately coming to a conservative view grounded in the decision of the UK case Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company Limited [1915] AC 79. The traditional test espoused in Dunlop is that if the LD provision is disproportionate to a genuine pre-estimate of the likely damages the innocent party can recover, then that provision is unenforceable.

Applying Dunlop, the Supreme Court of Singapore rejected both the Australian High Court's expansion of the penalty doctrine to instances where there is no breach of contract and the UK position that LDs will not be penalties if they uphold a legitimate interest. The Court reasoned that expanding the doctrine would involve reopening agreed provisions between parties resulting in an unjustified incursion into freedom of contract.

This decision has significance for the choice of governing law for businesses operating across Australia, Singapore and the UK as more LD provisions are likely to be interpreted by the court as a penalty under Australian or English law. It is imperative when drafting liquidated damages clauses to also consider including a choice of law provision as well as suitable mechanisms for extending time if necessary to reduce the risk of the court holding LD clauses unenforceable.