The Legitimate Interest Test (UK) on the Enforceability of Liquidated Damages Clauses and its Implications for Indian Law

Commercial contracts stipulate liquidated damages1 as a standard remedy for breach. The liquidated damages clause comes in a variety of forms, like provisions for payment or forfeiture of stipulated sums, formulae for determination, directions for compulsory transfer of property.2 Lawyers design these clauses to meet contract-specific requirements. Determination of damages falls within the natural domain of judicial assessment, being a matter to be tried and decided based on the evidence adduced. In this light, permitting the contracting parties to agree upon the damages in the contract implies an inroad into the judicial function. Common law jurisdictions, therefore, treat liquidated damages as a justiciable issue and the freedom of contract is far from absolute.

 

In common law jurisdictions, such as the United Kingdom, Australia, New Zealand, Singapore, courts have been exercising substantive judicial review over these clauses, with a view to ensure that the award of damages is restricted to fair compensation for losses suffered. Commonwealth nations, like India and Malaysia, which have codified contract law, have statutory provisions that achieve the same effect.3 Civil law jurisdictions, such as France, Italy and Germany, despite their avowedly limited review of liquidated damages provisions4, empower courts to grant a reduced amount towards damages if the liquidated damages clause stipulate a sum found to be manifestly excessive.5

 

In 2015, the United Kingdom Supreme Court (“UKSC”) broke new ground in Cavendish Square Holding BV v. Makdessi6 (“cavendish”). The vintage position on liquidated damages, based on its contradistinction with penalties, was crystallised by the Lord Dunedin of the House of Lords in Dunlop7 in 1915. The UKSC in Cavendish6 found the Dunlop7 tests to be inadequate to deal with liquidated damages clauses in modern commercial contracts. The Court found that the Dunlop7 tests were meant for assessing ordinary damages, and could no longer be considered apposite to deal with liquidated damages clauses of a more complex variety found in contemporary contracts. For the modern contracts, the UKSC devised a novel test viz. a provision for liquidated damages deserves to be enforced provided that the detriment imposed is not out of all proportion to the legitimate commercial interests the aggrieved party has in the enforcement of the primary obligations under the contract.8

 

This revolutionary test has been applied in subsequent decisions in the United Kingdom. Moreover, common law jurisdictions, like Australia, New Zealand, Singapore and Malaysia, have applied the Cavendish6 formulation in a variety of fact-situations. A wealth of judicial and academic discussion on the subject has, thus, been generated over the last five years across the world. However, superior courts in India have not had an occasion to effectively deliberate upon the new test yet.9 This essay seeks to appreciate the contours of the “legitimate interest” test developed in the United Kingdom, study its application through various rulings handed down by courts globally, and explores the possibility of the assimilation of the “legitimate interest” test in Indian law and the common law jurisdictions in general.

 

THE “LEGITIMATE INTEREST” TEST AND ITS APPLICATION IN THE UNITED KINGDOM

  1. The Dunlop10 Tests (1915)

In Dunlop10, the House of Lords crystallised the legal position on liquidated damages in the form of four tests11 designed to distinguish valid liquidated damages provision from one attracting the vice of being in the nature of penalty and hence unenforceable:

(a) If the sum stipulated is extravagant and unconscionable in comparison with the greatest loss arising from the breach that could conceivably be proved, then the clause is in the nature of a penalty.

(b) If the breach complained of is non-payment of an amount and the clause in question stipulates payment of a greater amount as a remedy, then the clause will be treated as penalty.

(c) There is a presumption that the clause amounts to a penalty, when a single lumpsum amount is directed to be paid by way of remedy for the breaches which consist of one or more or all of several events, some of which may occasion serious and others trifling damage.

(d) If it is impossible to pre-estimate the quantum of damages, then it is probable that the amount named in the clause is a genuine pre-estimate of damages and, hence, a valid liquidated damages clause.

Dunlop7 was consistently applied and followed in the United Kingdom.12

2. The — “Legitimate Interest” in Cavendish6 (2015)

In Cavendish6, the UKSC held that, the legal position in Dunlop7, while perfectly adequate in deciding cases arising from standard consumer contracts involving normal damages, was inapposite when it came to commercial contracts of a more complex variety. The Court recognised that, in several contemporary contracts, liquidated damages clauses are designed to safeguard commercial interests which go beyond the recovery of normal damages, purely compensatory in nature. These legitimate supra-compensatory, commercial interests merited enforcement, unless found to be extravagant or unconscionable.13 Lord Mance summarized the test thus:

 

    1. 152. … What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served and protected by the clause, and, second, whether, assuming such an interest to exist, the provision made for the interest is nevertheless in the circumstances extravagant, exorbitant or unconscionable.14, 15

 

The legitimate business or commercial interest test traverses beyond the “genuine pre-estimate of damages vis-à-vis penalty” dichotomy in Dunlop7 and radically alters the fundamental rules of the game.16 Practitioners and academic scholars have welcomed this new formulation, since it signifies a deep respect for party autonomy by increasing the chances of enforcement of the liquidated damages clauses.17

 

A resonant criticism of the new test, on the other hand, is that, it generates significant uncertainties, owing chiefly to the absence of clarity as to the commercial interests the courts will recognise as “legitimate” under this test.18 In this context, Professor Rowan of the London School of Economics (LSE) has opined that a liquidated damages clause is more likely to be enforced under the “legitimate interest” regime, if it relates to an essential obligation of the contract, the breach whereof would have serious consequences for the contracting parties, or third parties, including the public at large.19

 

Illustratively, two interests were found “legitimate” in the Cavendish6 ruling:

(i) The interest of Cavendish Square Holding in enforcing a non-competition clause in a share purchase contract with Mr Makdessi, the erstwhile owner and founder of the company taken over by Cavendish Square, on the ground that the clauses in question were a mechanism for ensuring the loyalty of Mr Makdessi to the enterprise, which was necessary to maintain the goodwill of the business, and therefore, its value.

(ii) The interest of ParkingEye, a parking management service, in requiring a customer to observe the two-hour limit for availing free car-parking at a shopping centre, 6 since the clause promoted the commercially efficient use of parking spaces for the retail park.

 

On the question of proportionality, Professor McKendrick points out that one of the crucial considerations to assess the questions of “extravagance, exorbitance or unconscionability”, which but manifestations of proportionality, is the bargaining power of the contracting parties and their access to legal advice.20 Obviously, courts are more likely to enforce liquidated damages clauses in contracts between commercial actors on a par. To similar effect, Professor Rowan has opined that a thoroughly negotiated clause between sophisticated commercial actors would be far easier to enforce under the new test, other things being equal.21

 

3. The Application in Post-Cavendish6 Precedents

A study of the post-Cavendish6 decisions in the United Kingdom is necessary to assess the implications of the “legitimate interest” test for various kinds of liquidated damages clauses.

(1) Gray v. Braid Group22

The Scottish Court of Session (Inner House), per majority, found that a company had a legitimate interest in enforcing a clause in its articles of association which provided that a shareholder, who is dismissed from his employment or directorial post for reasons of gross misconduct (whether or not it may cause any loss or harm to the company), must risk losing whatever value has been added to his shares since his subscription, by compulsory sale on a par value. The gross misconduct in this case, being indulging in bribery offences, was held to be highly damaging to the financial position as well as the reputation of the company, which were held to be “legitimate interests” of the company, protected by the clause.

(2) Vivienne Westwood Ltd. v. Conduit Street Development Ltd.23

In a dispute between a landlord and his lessee in respect of a commercial property, the High Court, despite rendering a finding that the provision concerned in the side letter agreement was penal in nature, assessed it using the Cavendish6 formulation. The Court found that the clause, which in effect required the lessee to pay a significantly high amount on breach of the lease terms, in addition to the usual liability towards compensation for the breach, to be grossly and substantially disproportionate to any “legitimate interest” the landlord may have in preserving his cash flow and protecting the value of his reversionary right by ensuring the lessee’s performance under the lease. Although the “legitimate interest” element was present, the clause offended the proportionality condition of the Cavendish6 test.

(3) ZCCM Investment Holdings Plc. v. Konkola Copper Mines Plc.24; and

(4) Holyoake v. Candy25

In ZCCM24, the High Court found that stipulations like acceleration of payments (immediate repayment of all instalments — including the ones due in future) and increase in the rate of interest26 in the agreement which was in the nature of a loan (triggered by the borrower’s default) complied with the Cavendish6 test. The Court found that the lender had a “legitimate interest” in enforcing these clauses to control the credit risk, which gets enhanced by a default in repayment. The decision in Holyoake25, in the context of a stipulation in a loan agreement which provided for an increase in the rate of interest in case of default, is on materially identical lines as ZCCM24.

(5) GPP Big Field LLP v. Solar EPC Solutions SL27

In this case dealing with disputed claims under certain Engineering, Procurement and Construction (EPC) contracts for solar power generation plants, the High Court found that the client had a “legitimate interest” in ensuring timely setting-up of the power generation plant by the contractor, which was essential for the client’s income generation. On facts, the provision of liquidated damages, in the form of a sum payable for each day’s delay, was not found to be disproportionate, when calculated in reference to the opportunity loss occasioned by the delay.

(6) SHB Realisations (in liquidation), In re28

The High Court applied the Cavendish6 test to a clause in a Company Voluntary Agreement (CVA) between the company and its landlord (creditor) triggered in the event of liquidation of the company, which required the company to pay rent at the actual market rate for the entire tenure of the lease, as opposed the reduced, concessional rate of rent it availed under the CVA. The Court found the clause to be enforceable, on the ground that the landlord, as a creditor of the company, had a “legitimate interest” in the success of the CVA i.e. preventing the company from going into liquidation.29

(7) Signia Wealth Ltd. v. Vector Trustees Ltd.30

The High Court was concerned with a stipulation in the articles of association of a private, start-up company, which entitled the company to compulsorily transfer to the company’s promoters the shares of the company held by its employees at a significant undervalue, in case of their termination. The clause was triggered in this case by acts like manipulation of the books of accounts by the Chief Executive Officer. The Court found that the clause complied with the Cavendish6 formulation, given that the company, a start-up, had a “legitimate interest” in ensuring that the shareholding is not diffuse and remains vested in persons directly concerned with the development of the company. The clause performed an important function in this context by incentivising the employees to retain their job and perform for the company.

(8) Cargill International Trading Pte Ltd. v. Uttam Galva Steels Ltd.31

The High Court relied upon its decision in Holyoake25 to uphold a clause providing an enhanced interest rate32 in a contract which provided for repayment of advances paid by the customer to the supplier under a steel supply agreement, in the case of default in the repayment obligations.

 

RECEPTION OF THE CAVENDISH 6 TEST IN COMMON LAW JURISDICTIONS

Professor Furmston had observed that Cavendish6 should be carefully considered in other common law jurisdictions too, since the ruling is likely to provoke a number of precedents.33 True to this prophecy, Cavendish6 has been extensively debated and applied in common law jurisdictions beyond the United Kingdom.

1. Australia

In Paciocco v. Australia and New Zealand Banking Group Ltd.34 (“paciocco”), a class action litigation, the High Court of Australia (the Apex Court) considered the provision of late payment fees charged by a bank in credit card contracts in the light of the “legitimate interest” test laid down in Cavendish6. The Court found that the bank had a “legitimate interest” to ensure prompt repayment which improves the profitability of its business by reducing the cost of its facilities to all its customers, so that it can attract more customers which would translate to higher revenues.

 

Delayed payments spell significant adverse consequences for the bank, which then has to make provisions for them, in the form of costs for the increase in provision for bad and doubtful debts as well as increased costs of regulatory capital and collection. On facts, the Court found that the late payment fees were not grossly disproportionate to these costs.

Professor Zeller has pointed out that Paciocco case34 involved uneven bargaining power between the contracting parties and the clause was contained in a standard form contract.35 This is quite interesting inasmuch as the underlying contract is qualitatively different from a typical commercial contract which has been meticulously negotiated between seasoned commercial actors i.e. the type of contract the Cavendish6 test was originally designed for.

Both Paciocco34 and Cavendish6 were applied and followed by the Court of Appeal of the Supreme Court of Victoria in Melbourne Linh Son Buddhist Society Inc. v. Gippsreal Ltd.36 Here, the Court found that the lender has a “legitimate interest” in ensuring prompt repayment of loans, which, in this case, the lender had sought to protect by recovering an establishment fee, as a component of liquidated damages claimed from a defaulting borrower. The Court found support in Paciocco34 reasoning, which made it clear that “the identification of legitimate interests for the purposes of the penalty inquiry is not confined to loss and damage causally connected with the breach”, and that lenders were in a position to justify these charges on the basis of fixed business costs incurred by them. In Arab Bank Australia Ltd. v. Sayde Developments Pty Ltd.37, the Court of Appeal of the Supreme Court of New South Wales applied Paciocco34 and Cavendish6 to uphold a clause providing for an increased rate of interest in case of repayment default under a bank loan agreement.

 

2. New Zealand

The Court of Appeal of New Zealand applied the legitimate interest test in its decision in Wilaci Pty Ltd. v. Torchlight Fund No. 1 LP38 to dispute between a borrower and a lender in a private finance contract involving a challenge to an agreed late payment fee. The Court of Appeal, after noting that both the parties were seasoned business entities and the contract was a thoroughly negotiated one, found that the lender had a “legitimate interest” in due repayment of the loan which the clause in question sought to serve. The Court undertook a credit risk and cost analysis, as in the High Court of Australia’s Paciocco34 ruling, and on facts, found the fees as not being grossly disproportionate to the legitimate interest protected by the clause.

 

The Court of Appeal of New Zealand had another occasion to apply the Cavendish formulation in 127 Hobson Street Ltd. v. Honey Bees Preschool Ltd.39 in the context of a rather unique indemnity clause in an agreement collateral to the lease. This clause entailed that in the event of failure to install a second (additional) lift in the building within the specified time, the landlord was liable to refund the rental amounts and other ancillary charges received from the tenant. The Court of Appeal found that the tenant, which was a preschool, had a “legitimate interest” in securing the construction of this second lift given that the building housed a number of businesses, including a hotel, and residential premises, and was in dire need of lift access. The Court held that risk and reward could be structured by parties in a variety of ways in commercial settings, and so long as the structure is not out of all proportion to the legitimate interest, the provision should be enforced.

 

3. Singapore

The Singapore High Court has considered the Cavendish6 ruling in two recent decisions. In iTronic Holdings Pte Ltd. v. Tan Swee Leon40, the High Court found the impugned clause to be in the nature of a conditional primary obligation (as opposed to a secondary obligation which is triggered by a breach of the contract) to which the legitimate interest test did not apply.41 The Court did not expressly hold whether this new formulation is accepted in Singapore, where the Dunlop7 paradigm otherwise governs the field on liquidated damages.

In a later decision, in Allplus Holdings Pte Ltd. v. Phoon Wui Nyen42, the High Court, despite holding that the Dunlop7 tests were adequate to decide the matter, applied the Cavendish6 formulation to the facts. In this case, the borrower had challenged the default clause in a settlement agreement executed in the course of legal proceedings, which imposed an obligation upon it to pay to the lender an amount two-and-a-half times the original dues along with interest at the rate of 12 per cent per annum. The Court found that although the lender did have a “legitimate interest” in securing timely repayment under the settlement agreement, the clause imposed a grossly disproportionate and exorbitant detriment on the borrower and hence was not enforceable under the Cavendish6 formulation.

Professors Yihan and Man have sounded a note of caution in this regard, in that until the Singapore Court of Appeal, the Apex Court in Singapore, does not accept Cavendish6 as a part of the national jurisprudence, the true significance of the legitimate interest test in Singapore remains uncertain.43

 

4. Malaysia

The law of contracts in Malaysia has been codified into the Contracts Act, 1950, just as in the case of India. In 2018, in Cubic Electronics Sdn. Bhd. (in liquidation) v. Mars Telecommunications Sdn. Bhd.,44 the Federal Court of Malaysia (its Apex Court) grappled with the “legitimate interest” test in the context of a clause imposing forfeiture of deposits made by prospective buyers in an agreement for sale of a property of a company in liquidation. The Court held that the concepts of “legitimate interest” and “proportionality” in the Cavendish6 formulation were relevant in deciding what amounted to “reasonable compensation” within the meaning of Section 75 of the Contracts Act, 1950.

 

Applying the legitimate interest test, the Court proceeded to hold that the seller company had a “legitimate interest” in the timely completion of the sale of the property without delay, which was sought to be protected by the forfeiture clause. The clause was meant to guard against frivolous offers which would deprive the seller company of its chances to enter into negotiations with third parties. The Court, on facts, found that the amounts forfeited under the clause were not grossly disproportionate to the interest, considering that they represented only a minor fraction (3.33%) of the total sale consideration of the properties under the agreement.

 

In a rather curious development, in 2019, the Malaysian Court of Appeal (which is bound by the law laid down by the Federal Court) observed in Macvilla Sdn. Bhd. v. Mervyn Peter Guan Yin Hui45, that the Federal Court’s decision in Cubic Electronics44 created uncertainty in the commercial world. The Court of Appeal reasoned that the concepts of “legitimate interest” and “proportionality” in Cavendish6 did not fall within the strict statutory formula of Section 75 of the Contracts Act, 1950. Although Cubic Electronics44 continues to be good law in Malaysia, its criticism by the penultimate national court raises some concerns over the acceptability of the test.

 

Certain practitioners have sounded a different note of caution in this regard, in that the Cavendish6 test makes liquidated damages clauses more attractive for powerful contracting parties, which may require developments in the law on unconscionability alongside the legitimate interest test.46 Professor Palmer of the University of Otago (New Zealand) believes that courts must not lose sight of the requirement of “legitimacy” of the interest, and ensure that this test is not used to justify exemplary damages.47

 

POSSIBILITIES FOR THE “LEGITIMATE INTEREST” TEST IN INDIAN LAW

1.The Present Position in Indian Law

India, like Malaysia, has codified the law of contracts in the Contract Act, 1872. Section 74 of the Contract Act, 1872 which deals with liquidated damages, essentially provides that parties are entitled to reasonable compensation under these clauses, irrespective of whether the clause is in the nature of a liquidated damages clause or a penalty.

This position has been recently crystallised by the Supreme Court of India48 in Kailash Nath Associates v. DDA49. Drawing upon six decades of judicial interpretation of Section 7450, the Supreme Court laid down the following propositions:

(i) A party is entitled to nothing beyond reasonable compensation under the liquidated damages clauses and the stipulated amount is merely the upper limit that can be awarded.

(ii) Liquidated damages can be recovered only in cases where actual loss has been suffered, not otherwise. The law guards against both punishment and profit as motivations for liquidated damages.

(iii) In ordinary cases, the claimant must prove such loss through evidence.51 It is only in rare and exceptional cases of difficulty or impossibility of proof, that the stipulated amount may be awarded, if found to be a genuine pre-estimate of damage.

(iv) Reasonable compensation shall be determined as per settled contract law principles enshrined in Section 73 of the Contract Act, 1872.

The above principles are applicable regardless whether the stipulated amount has been paid or payable, as also whether it is the claimant (plaintiff) or the respondent (defendant) who seeks liquidated damages.52

2. The “Legitimate Interest” Test in the context of Indian law

The present legal regime in India views liquidated damages clauses in a purely compensatory light. The possibility that such clauses are designed by parties to meet supra-compensatory commercial interests has not been entertained in judicial discourse in India till date. There is, however, no normative reason as to why commercial actors in India should not be permitted to organise their risk-reward mechanisms freely, and protect interests deemed vital to the value of their businesses so long as such clauses do not foster penalising or profiteering, the two evils Section 74 of the Contract Act, 1872 is designed to guard against.

 

The Indian judiciary might have to grapple with the legitimate interest test, considering the experience of the common law jurisdictions. The Indian position on liquidated damages is governed by statute, rendering it immune from drastic revisions by judicial fiat. It is, thus, not as easy to import the Cavendish6 formulation in India, as it was in common law jurisdictions like UK and Australia, where the general law governing contracts has remained uncodified. The surest way to introduce the Cavendish6 formulation in Indian law is legislative intervention.

 

In the absence of an amendment to the Contract Act, the only solution could be a nuanced and liberal interpretation of Section 74 and in particular its controlling expression “reasonable compensation” in the light of the legitimate interest. A similar feat has been attempted by the Malaysian Federal Court’s judgment in Cubic Electronics44 and the provision in the Contract Act, 1872 being in pari materia with the Malaysian equivalent,53 the courts can be persuaded to explore this route. If they do so, the insistence on an equivalence between the loss and liquidated damages will have to give way to a broader test of “correspondence” between the amounts, as would be sufficient to satisfy the condition of proportionality under the Cavendish6 formulation. This necessarily entails a substantial revision of the propositions laid down by the Supreme Court in Kailash Nath Associates54.

 

That said, importing the Cavendish6 formulation in its original form is far from the only option. The Indian judiciary may choose to develop different tests and caveats suitable to Indian realities, to ensure the protection of legitimate commercial interests within the bounds of proportionality and fairness.

 

CONCLUSION

The protection of legitimate interests in modern commercial contracts is normatively desirable. Contracts are meant to be enforced and, as such, the policy of the law is to avoid substantive review of their terms, save for compelling reasons. The “legitimate interest” test promotes party autonomy, a watchword in contemporary jurisprudence internationally. In recent years, the Supreme Court of India has handed down various important rulings in the field of commercial law favouring principles such as party autonomy and freedom of contract,55 and embracing the Cavendish6 formulation would be a step in the right direction.

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*The article has been published with kind permission of SCC Online cited as (2021) 2 SCC J-37

BA, LLB (Hons.), NLSIU, Bangalore and Advocate, Bombay High Court. The author thanks Mr Arvind P. Datar, Senior Advocate, for his guidance and comments on a previous draft of this piece.

1 “Liquidated damages” refers to the stipulated and agreed damages provided for in a contract as and by way of compensation for the breach of a significant or material nature.

2Ewan McKendrick (Ed.), Goode on Commercial Law (5th Edn.) 134-5 (London, UK: Penguin, 2016). Usually, the transfer of shares, debentures, etc. is specified as compensation by way of liquidated damages.

3 The Indian Contracts Act, 1872 (Section 74) and the Malaysian Contracts Act, 1950 (Section 75).

4 M. Berger, “Damages and International Contract Law”, 4 IBLJ 427-443 (2004).

5 M. Armandola, “Liquidated Damages in International Arbitration”, 2 IBLJ 2013 99-107; Ugo Draetta et al, “Liquidated Damages and Penalty Clauses in International Trade Practice”, 3 IBLJ 1993 261-272; M. Pargendler, “The Role of the State in Contract Law”, 43 Yale J Int’l Law 143 (2018); L, Miller, “Penalty Clauses in England and France”, ICLQ 2004, 53(1), 79-106; P. Rosher, “Delay analysis in international construction projects: a comparative study in English and French law”, 6 IBLJ 427-443 (2014).

6[2016] A.C. 1172 : 2015 UKSC 67 (“Cavendish”) (Seven-Judge Bench). The UKSC was deciding two distinct appeals in this case:

(i) Cavendish Square Holding BV v. Makdessi and

(ii) ParkingEye v. Beavis. They are collectively referred to in this Article as “Cavendish”.

7Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 79 (HL) (Four-Judge Bench) (“Dunlop”).

8Cavendish Square Holding BV v. Makdessi, [2016] A.C. 1172 : 2015 UKSC 67 (“Cavendish”) (Seven-Judge Bench), per Lord Neuberger of Abbotsbury and Lord Sumption. This test is referred to hereinafter variously as “the Cavendish test/formulation” and “the legitimate interest test”.

9 The only Indian ruling referring to Cavendish, [2016] A.C. 1172 : 2015 UKSC 67 is the Madras High Court judgment in Electronics Corpn. of T.N. Ltd. v. ICMC Corpn. Ltd., 2020 SCC OnLine Mad 244 (para 19), wherein the Court merely cited certain stray sentences from the Cavendish, [2016] A.C. 1172 : 2015 UKSC 67 ruling and did not elaborate on either the judgment or its effect on the Indian law on the subject.

10Dunlop Pneumatic Tyre Co. Ltd. v. New Garage & Motor Co. Ltd., [1915] A.C. 79 (HL) (Four-Judge Bench) (“Dunlop”), at pp. 87-88.

11 These four tests were founded on previous rulings viz. Kemble v. Farren, (1829) 6 Bing 141 : 130 ER 1234; Commr. of Public Works v. Hills, [1906] A.C. 368 (PC); Webster v. Bosanquet, [1912] A.C. 394 (PC); Clydebank Engg. & Shipbuilding Co. Ltd. v. Don Jose Ramos Yzquierdo Y. Castaneda, [1905] A.C. 6 (HL), inter alia.

12 The more important ones amongst these are: Bridge v. Campbell Discount Co. Ltd., [1962] A.C. 600 : [1962] 2 WLR 439 (HL), Ariston SRL v. Charly Records, 1990 WL 753432 (CA); Murray v. Leisureplay, 2005 EWCA Civ 963 (CA); CMC Group Plc. v. Zhang, 2006 EWCA Civ 408 (CA); Lansat Shipping Co. Ltd. v. Glencore Grain BV, 2009 EWCA Civ 855 (CA).

13 The Cavendish, [2016] A.C. 1172 : 2015 UKSC 67 ruling is also debated for its inroads into the “rule against penalties” in the United Kingdom. However, this aspect of the decision is not relevant for our purposes and hence, has not been elaborated here. Section 74 of the Contract Act, 1872 which deals with liquidated damages in India has done away with the distinction between damages and penalty. See: Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405 (Five-Judge Bench).

14 Id, 1247, para 152.

15Cavendish Square Holding BV v. Makdessi, [2016] A.C. 1172 at pp. 1247-48: 2015 UKSC 67.

16 Robert Elliot, “Penalties: A Brief Guide to Three Revolutions”, 32(6) Construction Law Journal 644-658 (2016).

17 Lorna Richardson, “Commercial justification for penalty clauses: the death of the old dichotomy?”, 19(1) Edinburgh L Rev 119-124 (2015); William Day, “A Pyrrhic Victory For the Doctrine Against Penalties”, 2 Journal of Business Law 115-127 (2016); Bobby Lindsay, “Penalty Clauses in the Supreme Court: a Legitimately Interesting Decision?”, 20(2) Edinburgh L Rev 204-210 (2016); Mark Stamp, “The Penalty Rule in Corporate Contracts – Is it Offside?”, 37(7) Company Lawyer 219-222 (2016).

18 Solene Rowan, “The Legitimate Interest in Performance in the Law on Penalties”, 78(1) Cambridge Law Journal 148-174 (2019); Mathias Cheung, “Shylock’s Construction Law: The Brave New Life of Liquidated Damages?”, 33(3) Construction Law Journal 173-187 (2017); Prof. Larry DiMatteo, “An Examination of Judicial Reasoning – When A Penalty Is Not A Penalty”, 85 Geo Wash L Rev 1846 (2017); Jonathan Morgan, “The Penalty Clause Doctrine: Unlovable But Untouchable”, 75 Cambridge Law Journal 11 (2016).

19 Solene Rowan, “The Legitimate Interest in Performance in the Law on Penalties”, 78(1) Cambridge Law Journal 148-174 (2019). A similar view is expressed in Sam Cathro et al, “New Variations on the Rule Against Penalties: Options for New Zealand”, 27 NZULR 1087 (2017).

20Ewan McKendrick (Ed.), Goode on Commercial Law (5th Edn.) 134-5 (London, UK: Penguin, 2016).

21 Solene Rowan, “The Legitimate Interest in Performance in the Law on Penalties”, 78(1) Cambridge Law Journal 148-174 (2019).

22(2016) 8 WLUK 293 (Court of Session – Inner House, Scotland) (Three-Judge Bench).

232017 EWHC 350 (Ch) (High Court of Justice – Chancery Division).

242017 EWHC 3288 (Comm) (High Court of Justice – QBD: Commercial Court).

252017 EWHC 3397 (Ch) (High Court of Justice – Chancery Division).

26 The increased rate applicable in case of default in this case was LIBOR + 10 %.

272018 EWHC 2866 (Comm) (High Court of Justice – QBD: Commercial Court).

282018 EWHC 402 (Ch) (High Court of Justice – Chancery Division).

29 Since what was levied under the clause was the normal market rate, there was no question of it being exorbitant or unconscionable.

302018 WL 02107059 (High Court of Justice – Chancery Division).

312019 EWHC 476 (Comm) (High Court of Justice – Queen’s Bench Division).

32 The increased rate applicable in case of default in this case was LIBOR + 12 %.

33 Michael Furmston, “Recent Developments about Penalties”, 28 (1) NLSI Rev 18 (2016).

342016 HCA 28 (Five-Judge Bench).

35 Bruno Zeller, “Penalty Clauses – What Has Changed?”, 30 Pace Int’l L Rev 147 (2017).

362017 WL 2730505 (Three-Judge Bench).

372016 NSWCA 328 (Three-Judge Bench).

382017 NZCA 152 (Three-Judge Bench).

392019 NZCA 122 (Three-Judge Bench).

402016 SGHC 77.

41Cavendish Square Holding BV v. Makdessi, [2016] A.C. 1172, at p. 1216: 2015 UKSC 67.

422016 SGHC 144.

43 GOH Yihan and Yip Man, “English Reformulation of the Penalty Rule: Relevance in Singapore”, 29 Singapore Academy of Law Journal 257 (2017).

44(2019) 2 CLJ 723 (Malaysia) (Five-Judge Bench).

452019 SCC OnLine MYCA 58 (Three-Judge Bench).

46 Larissa Welmans et al, “The ‘Interest’ Based Penalty Tests in Paciocco and Cavendish/Parkingeye and the Law of Penalties and Damages in Australia and the United Kingdom”, 43(2) University of Western Australia Law Review 174 (2018).

47 Jessica Palmer, “Implications of the New Rule against Penalties”, 47 Vict. U. Wellington L Rev 305 (2016).

48 The Supreme Court of India is the highest Court in the country, charged with the constitutional mandate to lay down the law, under Article 141 of the Constitution of India.

49(2015) 4 SCC 136 (Two-Judge Bench).

50 The Court relied on a host of precedents, prominent among them being (a) Fateh Chand v. Balkishan Dass, AIR 1963 SC 1405 (Five-Judge Bench), (b) Maula Bux v. Union of India, (1969) 2 SCC 554 (Three-Judge Bench), and (c) ONGC Ltd. v. Saw Pipes, (2003) 5 SCC 705 (Two-Judge Bench).

51 This view is consistent with the Privy Council’s ruling in Bhai Panna Singh v. Bhai Arjun Singh, 1929 SCC OnLine PC 43 : AIR 1929 PC 179 (Three-Judge Bench) (per Lord Atkin), which construed Section 74 to require proof of damages suffered.

52Kailash Nath Associates v. DDA, (2015) 4 SCC 136 (Two-Judge Bench), paras 43 to 43.7, at pp. 162-3.

53 The provision on liquidated damages viz. Section 75 of the Malaysian statute, is identical to the corresponding provision in Indian law, section 74 of the Contract Act, 1872.

54Kailash Nath Associates v. DDA, (2015) 4 SCC 136 (Two-Judge Bench) paras 43 to 43.7.

55 An illustrative list of such judgments includes:

(i) Satya Jain v. Anis Ahmed Rushdie, (2013) 8 SCC 131 and

(ii) Transmission Corpn. of Andhra Pradesh Ltd. v. GMR Vemagiri Power Generation Ltd., (2018) 3 SCC 716 [on the application of the “business efficacy” test];

(iii) BALCO v. Kaiser Aluminium Technical Services Inc., (2012) 9 SCC 552 (Five-Judge Bench) [on the interpretation of provisions in the Arbitration and Conciliation Act, 1996];

(iv) Dyna Technologies (P) Ltd. v. Crompton Greaves Ltd., (2019) 20 SCC 1 (Three-Judge Bench) [on the permissibility of unreasoned arbitral awards];

(v) Markfed Vanaspati & Allied Industries v. Union of India, (2007) 7 SCC 679 [on the duties of arbitrators];

(vi) Mary v. State of Kerala, (2014) 14 SCC 272 [generally on the construction of commercial contracts].

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