Clifford Chance
Singapore Court of Appeal affirms traditional Dunlop Pneumatic Test for Penalty Clauses
4 January 2021
On 15 December 2020, a five-judge bench of the Singapore Court of Appeal delivered judgment in Denka Advantech Private Limited & another v Seraya Energy Pte Ltd & another [2020] SGCA 119 (Denka v Seraya).
The decision provides important guidance on the distinction between liquidated damages and penalty clauses, the latter being unenforceable at law. In Denka v Seraya, the Court of Appeal held that: (i) the correct legal test to be applied is whether the clause provides a genuine pre-estimate of the likely loss as assessed at the time of contracting (i.e. the test articulated by Lord Dunedin in the English case of Dunlop Pneumatic Tyre Company, Ltd v New Garage and Motor Company, Limited [1915] AC 79) (the Dunlop test); and (ii) the rule against penalties only applies to clauses which are triggered by a breach of contract and not other events.
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