Case Summaries

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

SUPREME COURT OF SINGAPORE

15 December 2020

Case summary

Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2020] SGCA 119
Civil Appeals Nos 37, 38, 100 and 101 of 2019

------------------------------------------------------------------------------------------------------

Decision of the Court of Appeal (delivered by Judge of Appeal Justice Andrew Phang Boon Leong):

Outcome: CoA allows Seraya Energy Pte Ltd’s appeal and upholds its claim for liquidated damages under the parties’ electricity retail agreements. In so doing, the CoA affirms that the rule against penalties remains that articulated by Lord Dunedin in Dunlop Pneumatic Tyre Company, Ltd v New Garage and Motor Company, Limited [1915] AC 79, and declines to adopt the wider legitimate interest standard developed by the UK Supreme Court in Cavendish Square Holding BV v Makdessi [2016] AC 1172.

Pertinent and significant points of the judgment:

  • The rule against penalties (“the Penalty Rule”) applies only in the context of a breach of contract, contrary to the present position in Australia as set out by the High Court of Australia in Andrews and others v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205 (at [185(a)]).
  • The Penalty Rule in Singapore remains the statement of principles articulated by Lord Dunedin in Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company, Limited [1915] AC 79. The focus is on whether the clause concerned provides a genuine pre-estimate of the likely loss at the time of contracting. In this regard, the only legitimate interest which the Penalty Rule is concerned with is that of compensation (at [185(b)]).

Facts

1 Seraya Energy Pte Ltd (“Seraya”) is a retailer of electricity and a wholly owned subsidiary of YTL PowerSeraya Pte Ltd (“YTL”), an electricity generator. Seraya is the appellant in CA/CA 38/2019 (“CA 38”) and CA/CA 101/2019 (“CA 101”). Denka Advantech Pte Ltd (“DAPL”) and Denka Singapore Pte Ltd (“DSPL”) are customers of Seraya. DAPL and DSPL (collectively, “Denka”) are the appellants in CA/CA 37/2019 (“CA 37”) and CA/CA 100/2019 (“CA 100”).

2 Seraya commenced the Suits 1328/2014 and 1329/2014 against DAPL and DSPL, claiming breach of contract by Denka’s repudiatory breach of three electricity retail agreements (“ERAs”), pursuant to which Seraya supplied electricity to Denka’s premises. Seraya claimed damages under the liquidated damages (“LD”) clause contained in three ERAs, or common law damages in the alternative.

3 In 2012, DSPL entered into a steam supply agreement (“the SSA”) with PowerSeraya Limited, which novated the contract to YTL with effect from 1 April 2012. DSPL had two core obligations with regard to its purchase of steam under the SSA, namely, to take or pay a certain minimum volume of steam from YTL each month, ie, the TOP Volume, and to ensure that its steam consumption adhered to certain defined levels. However, sometime in June 2012, DSPL requested to reduce the amount of steam that it was obliged to buy under the SSA. Consequently, in August 2012, YTL offered DSPL a concession of the original terms of the SSA (“the Concession Offer”) on the terms and conditions set out in a letter (“the Concession Terms”). DSPL accepted the Concession Terms, which contemplated, amongst other things, that the parties enter into an ancillary supplemental agreement (“ASA”) to formalise the Concession Terms. As it turned out, the parties did not execute the ASA. Nonetheless, the parties began implementing the SSA, as amended by the Concession Terms, on 1 September 2012.

4 Since YTL’s offer of the Concession Terms in August 2012, Seraya had also been negotiating separately with Denka on the standard terms of the ERAs. Seraya began supplying electricity under the ERAs on 1 September 2012. Denka and Seraya entered into three ERAs, namely, ERA 99 (between DSPL and Seraya), ERA 100 (between DSPL and Seraya) and ERA 101 (between DAPL and Seraya). As contemplated in the Concession Terms, the ERAs were for a duration of 101 months and were due to expire only on 31 January 2021. The ERAs each contained an LD clause. These LD clauses were primarily tied to Seraya’s express contractual right to terminate the ERAs under various scenarios, most notably for any breach by Denka of its obligations under the ERAs.

5 On 20 August 2014, DSPL wrote to YTL stating that “the supply of steam and electricity shall cease” under the Concession Offer and the ERAs. In the ensuing correspondence, YTL and Seraya treated the letter of 20 August 2014 as evidence of Denka’s repudiation of the ERAs, while Denka took the position that it was never bound by the ERAs because of the non-execution of the ASA. Seraya accepted DSPL’s repudiation of ERA 100 by way of a letter dated 28 August 2014. ERA 99 and ERA 101 were subsequently terminated by Seraya on other grounds in October and November 2014 respectively, pursuant to the express termination clauses in the contracts.

6 In a letter dated 3 September 2014, Denka offered to continue purchasing electricity under the three ERAs while the dispute between the parties was being determined by the court (“the Mitigation Offer”). Seraya did not accept the Mitigation Offer.

7 Seraya commenced actions against DAPL and DSPL, and these were consolidated by consent. Seraya argued that Denka was liable for breaching all three ERAs. Seraya’s primary claim against Denka was for LD due to the wrongful termination of the three ERAs. Alternatively, Seraya sought common law damages. Denka denied liability for wrongful termination of the ERAs on several bases:

 

  1. First, the ERAs contained no obligation for Denka to purchase a minimum volume of electricity from Seraya each month. Consequently, it was not obliged to purchase electricity from Seraya at all.
  2. Second, its letter of 20 August 2014 stating that Denka did not wish to continue purchasing electricity did not amount to either a termination or repudiation of the ERAs.
  3. Third, the ERAs were not standalone contracts, but were entered into only in exchange for YTL’s grant of the steam concessions and entry into the ASA. The parties did not execute the ASA in the end and Denka was thus free to walk away from the ERAs as well (“the package deal argument”). Denka claimed misrepresentation and estoppel in respect of this last package deal argument.
  4. In the alternative, a term ought to be implied into the ERAs that the signing of the ERAs was contingent on the parties’ entry into the ASA, the failure of which would allow Denka to stop purchasing electricity under the ERAs.

 

8 In terms of remedies, Denka argued that Seraya was not entitled to claim LD as the LD clauses in the ERAs were unenforceable penalties. This was regardless of whether the applicable test was that promulgated in Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company, Limited [1915] AC 79 (“Dunlop”) or Cavendish Square Holding BV v Makdessi [2016] AC 1172 (“Cavendish Square Holding”). Seraya was also precluded from claiming common law damages under ERA 99 and ERA 101 because of certain express provisions therein. Even if Seraya was entitled to either LD or common law damages, Denka contended that Seraya had failed to mitigate its loss.

9 The decision of the trial judge (“the Judge”) on issues of liability is set out in Seraya Energy Pte Ltd v Denka Advantech Pte Ltd and another suit (YTL PowerSeraya Pte Ltd, third party) [2019] SGHC 02 (“Seraya Energy (No 1)”). The Judge held in Seraya’s favour on the question of liability and found that Denka was in repudiatory breach of the ERAs. The ERAs imposed a positive obligation on Denka to buy electricity exclusively from Seraya notwithstanding that there was no minimum quantity specified in the contracts. He dismissed the package deal argument run by Denka. He found that there was no representation made by YTL that Denka could pull out of the three ERAs if the ASA was not signed, and there was also no basis to imply a term to that effect into the ERAs. Accordingly, DSPL’s 20 August 2014 letter constituted repudiatory conduct. The ERAs were terminated as follows:

 

  1. for ERA 100, Seraya relied on its common law right of termination based on Denka’s repudiation;
  2. for ERA 99, Seraya exercised its express right to terminate; and
  3. for ERA 101, Seraya exercised its express right to terminate the contract.

Consequently, the contractual provisions for LD in each of the three ERAs were also engaged.

 

10 In terms of remedies, the Judge found as follows:

 

  1. the Mitigation Offer given by Denka to Seraya was not a reasonable one and that Seraya had not acted unreasonably in rejecting it;
  2. applying the principles in Dunlop, the LD clauses in each of the ERAs were not a genuine pre-estimate of Seraya’s damages and were therefore unenforceable penalty clauses. Even under Cavendish Square Holding, Seraya had failed to plead any legitimate interest as a reason for requiring Denka to pay LD. In any event, Seraya had failed to establish any legitimate interest on the facts. Seraya did not have any legitimate interest in Denka’s continued performance of the ERAs other than financial loss; and
  3. Seraya was entitled to common law damages, taking into account the contract for differences (“CFD”) between YTL and Seraya.

 

11 Therefore, the Judge directed that parties attempt to agree, inter alia, on the quantum for Seraya’s loss of profit based on the above premises. The Judge then issued a supplementary judgment on liability published as Seraya Energy Pte Ltd v Denka Advantech Pte Ltd and another suit (YTL PowerSeraya Pte Ltd, third party) [2019] SGHC 18 (“Seraya Energy (No 2)”). There is a further supplementary judgment on costs and disbursements: see Seraya Energy Pte Ltd v Denka Advantech Pte Ltd and another suit (YTL PowerSeraya Pte Ltd, third party) [2019] SGHC 100 (“Seraya Energy (No 3)”).

12 Seraya appealed against the Judge’s decision on LD and costs in CA 38 and CA 101. Denka cross-appealed in CA 37 and CA 100 against the Judge’s decision on liability, the quantum of common law damages awarded and costs.

13 The issues before the Court were:

  1. whether Denka breached the ERAs and is thus liable for wrongful termination of the same;
  2. if Denka breached the ERAs, whether the LD clauses in the three ERAs are enforceable;
  3. if the LD clauses are unenforceable because they are penalties, what common law damages are payable by Denka to Seraya;
  4. whether Seraya was justified in rejecting Denka’s Mitigation Offer;
  5. whether Denka was required to pay for the additional electricity supplied to it after 20 August 2014 at the higher contractual rate under the respective ERAs or at the open market rate;
  6. Seraya’s entitlement to statutory interest on the damages awarded; and
  7. the various issues relating to costs as between the parties.

The Penalty Rule

14 The Court noted that the case of Dunlop was, until recently, the seminal case on the rule against penalties (“the Penalty Rule”) in the common law universe. However, the test in Dunlop had been recently overtaken by developments in Australia and the UK. First, in Andrews and others v Australia and New Zealand Banking Group Limited (2012) 247 CLR 205 (“Andrews”), the High Court of Australia held that the Penalty Rule’s scope of application was not limited to clauses operating only upon a breach of contract. Subsequently, in Cavendish Square Holding, the UK Supreme Court reformulated the substance of the Penalty Rule such that a clause was a penalty only if it was a secondary obligation imposing a detriment on the contract-breaker “out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”. Significantly, such “legitimate interest” need not be an interest in compensation only and could include wider “commercial interests”. There were accordingly two questions for consideration: first, whether the Penalty Rule should be confined only to clauses imposing secondary obligations for a breach of contract; and second, what the applicable legal criteria for the Penalty Rule should be: at [64]–[72].

The scope of the Penalty Rule

15 The Court declined to extend the Penalty Rule to situations outside of breach of contract. In Andrews, the High Court of Australia had held that the Penalty Rule applied to any term being in the nature of a security or collateral to ensure the fulfilment of some primary stipulation, which need not be a strict contractual obligation. This was because the Penalty Rule, as it was originally developed in equity, was never limited to situations involving a breach of contract: at [78], [79] and [82].

16 Although the removal of the breach requirement appeared attractive at first blush, the Penalty Rule was developed in relation to a very specific situation relating to the enforcement of penal bonds. There was no reason given for why that form of the Penalty Rule should be extended to apply in the same manner to all modern contracts. On the contrary, any extension of the Penalty Rule to situations outside of a breach of contract would vest in the courts a discretion that was at once both wide as well as uncertain. It would permit the courts to review a wide range of clauses on substantive grounds, thus constituting a significant legal incursion into the freedom of contract: at [82].

17 There were persuasive reasons in logic and principle as to why the prerequisite of a breach of contract was to be preferred. The concept of a breach of contract means that the Penalty Rule is confined to the sphere of secondary obligations only. In this regard, primary obligations between the contracting parties are not interfered with at all, unlike in the broader equitable jurisdiction mooted in Andrews. Apart from being a practically enforceable limit on the penalties doctrine, the breach of contract requirement is also normatively sensible given a common law court’s reluctance to intervene in the contents of the parties’ contractual bargain: at [92]–[93].

The substance of the Penalty Rule

18 The Court declined to follow the legitimate interest approach in Cavendish Square Holding and endorsed the statement of principles set out by Lord Dunedin in Dunlop instead. This was because the test as to whether the contractual provision concerned provided a genuine pre-estimate of the likely loss is wholly consistent with the fact that the focus is on the secondary obligation on the part of the defendant to pay damages by way of compensation. In contrast, a contractual provision which stipulated for an amount of damages to be paid in the event of breach that is more than the pre-estimate of the likely loss must necessarily be (on a normative level) penal, as opposed to compensatory, in nature – notwithstanding that it might have been in the commercial interests of the plaintiff to have included such a provision on a factual level: at [151]–[152].

19 The affirmation of the Dunlop principles was consistent with this Court’s decision in PH Hydraulics & Engineering Pte Ltd v Airtrust (Hongkong) Ltd and another appeal [2017] 2 SLR 129 (“PH Hydraulics”) which held that, as a general rule, punitive damages cannot be awarded for breach of contract. The concept of “legitimate interest” was, moreover, a very general concept that could utilised in a myriad of ways, particularly in the process of application to the relevant facts and circumstances of a given case. Its protean character lent itself – potentially at least – to be utilised too flexibly and this would lead to too much uncertainty both prior to the entry into the contract concerned as well as with regard to the specific result arrived at by the court thereafter: at [154]–[155].

20 The rejection of the legitimate interest test did not mean that the key elements that weighed heavily with the court in Cavendish Square Holding (including that of commercial interest as well as the relative bargaining power of the contracting parties) were entirely irrelevant at the level of legal principle. Indeed, the equal bargaining power of the parties may be a strong factor in favour of upholding the clause concerned. Another consideration in the application of the Penalty Rule may be the purpose of the underlying transaction and the particular primary obligation breached, which was consistent with the emphasis on a composite view of the parties’ contract and the nature of their relationship: at [153], [173] and [176].

The Court’s decision

Did Denka breach the ERAs?

21 Not all of the ERAs were terminated as a result of Seraya’s common law right to accept the repudiation and terminate the contract. Only ERA 100 was terminated in such a manner, ie, Situation 2 per RDC Concrete Pte Ltd v Sato Kogyo (S) Pte Ltd and another appeal [2007] 4 SLR(R) 413 (“RDC Concrete”). Although Seraya relied on contractual grounds for termination in ERAs 99 and 101 (ie, Situation 1 per RDC Concrete), those grounds for termination were at least indirectly based on or brought about by Denka’s position that it wanted to cease the operation of all ERAs, ie, repudiatory breach at common law: at [187].

22 The Court rejected the package deal argument. There was nothing in the Concession Offer or the ERAs which referred to the non-execution of the ASA as a basis for Denka to extricate itself from its obligations to purchase electricity from Seraya. The Court also rejected Denka’s submissions on misrepresentation and implied terms. In so far as the claim of misrepresentation was concerned, the Court noted amongst other things that there was no clear representation made by Seraya or YTL to Denka. There was also no basis for Denka’s argument to imply a term into the ERAs that would allow it to withdraw from them if the ASA is not executed: at [194], [198] and [205].

23 The ERAs imposed an obligation on Denka to only purchase whatever electricity it needed from Seraya. The fact that the ERAs were silent as to the minimum quantity of electricity to be purchased is irrelevant: at [209] and [213].

24 Denka had wrongfully repudiated the three ERAs. With regard to ERA 99 and ERA 101, whilst Seraya had relied on an express termination clause in the contracts (ie, Situation 1 of RDC Concrete), such termination could not be divorced from Denka’s repudiation of the contracts (ie, Situation 2 of RDC Concrete). In the circumstances, Seraya had validly terminated the ERAs: at [231].

Were the LD clauses in the ERAs penalties?

25 The LD clauses in all the ERAs were secondary obligations on the facts, and hence the Penalty Rule was applicable: at [249].

26 The LD payable under the ERAs was determined by the formula: A x B x 40%, where A referred to the number of months (rounded down to the nearest month) between the date the Contract Duration was terminated and the Expiry Date; and B was the arithmetic average of the amount payable by Denka in the stipulated period prior to termination: at [236] and [238].

27 Applying the greatest loss principle in Dunlop, the question to be asked in evaluating the LD clauses was whether 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”. Three subsidiary questions arose from the consideration of Seraya’s greatest loss (at [254]):

  1. First, in considering Seraya’s loss arising from breaches of the ERAs, should the presence of the CFD between Seraya and YTL be taken into account such that Seraya’s loss is reduced?
  2. Second, how does the LD clause compare with the damages at common law that Seraya might receive?
  3. Third, is the 40% multiplier in the LD formula justified?

28 In summary, the Court found that there was no violation of the greatest loss principle since:

  1. The CFD, being a purely internal arrangement that was not strictly enforced, ought not to factor in the analysis of Seraya’s loss: at [265].
  2. Seraya was entitled to claim the loss of the bargain under common law damages even though it had terminated ERA 99 and ERA 101 under an express termination clause, applying the principles in Financings Ltd v Baldock [1963] 2 QB 104 and Lombard North Central Plc v Butterworth [1987] QB 527: at [283].
  3. Having regard to the expert evidence, the 40% multiplier in the LD clauses was well within the range of loss that may reasonably be incurred by Seraya and cannot be said to be extravagant: at [302].

29 While the LD clauses did appear to violate the single lump sum principle in Dunlop, this only gave rise to a rebuttable presumption that the clauses are penalties. Where the court has found that the LD clause is not extravagant or out of all proportion to the greatest loss that could arise under the contract, this should lead the court to the conclusion that the LD clause is a genuine pre-estimate of loss and not a penalty. This is especially true where the court is dealing with sophisticated commercial parties, as both Seraya and Denka were: at [305].

30 Therefore, the LD clauses were not penalties. Accordingly, the Court awarded Seraya the net sum of $30,829,369.79 being the sum owed to it under the LD clauses in the three ERAs. In the circumstances, it was not necessary to determine the question of common law damages: at [309], [310] and [329].

Did Seraya fail to mitigate its losses?

31 The Court endorsed the Judge’s finding that the Mitigation Offer was unreasonable as it was a purely one-sided bargain that benefited only Denka. The Mitigation Offer amounted to nothing more than a suggestion that the parties should continue with the ERAs as before, despite Denka’s repudiation, even as the matter went to litigation. There was no obligation on Seraya to accede to Denka’s request to continue with the ERAs, and Seraya was perfectly entitled, in law, to choose to terminate the ERAs instead and to claim the benefit of the LD clauses from that point onward. Despite Denka suggesting that the performance of the ERAs might continue as before, Denka was not offering any additional benefit to Seraya for choosing to continue with the ERAs. Accordingly, Seraya had not failed to mitigate its loss: at [317]– [320].

Was Denka obliged to pay for the additional electricity at the open market price?

32 Denka argued that if its letter of 20 August 2014 amounted to a repudiation of the ERAs, it was entitled to pay for electricity supplied by Seraya after that date at the lower market price and not the higher contractual rate for ERA 99 and ERA 101: at [321].

33 This argument was dismissed. What amounted to a reasonable time for indicating acceptance of a repudiation must depend on all the circumstances of the case. Seraya’s conduct in waiting to confirm that DSPL was not willing to withdraw its repudiation of ERA 99, and that DAPL was taking the same position as regards ERA 101, was reasonable in the circumstances. Denka was therefore required to pay for the electricity supplied at the agreed contractual rates until the actual dates of termination of the ERAs: at [322].

Costs and interest

34 In the light of the Court’s decision to allow the appeal on Seraya’s claim for LD, the costs ordered at the trial below had to be reconsidered. The Court awarded Seraya the costs of the trial below to be taxed or agreed: at [326]–[327].

35 As for the rate and period of interest to be awarded on the LD sum of $30,829,369.79, the Court was inclined towards a more modest interest rate and more limited period of time than was typically awarded, and invited the parties’ submissions on this issue: at [329].

 

This summary is provided to assist in the understanding of the Court’s judgment. It is not intended to be a substitute for the reasons of the Court. All numbers in bold font and square brackets refer to the corresponding paragraph numbers in the Court’s judgment.

YOU MAY ALSO BE INTERESTED IN