Penalty Rule: Three Different Approaches in the UK, Australia and Singapore

    View Author December 2020

    The highest courts in Singapore, Australia and the UK cannot agree on a uniform approach to determining if a contractual provision is unenforceable as a penalty. This has significance for the choice of governing law. As a broad summary:

    • More provisions are likely to be a penalty under Singaporean law than under Australian or English law
    • More provisions are likely to be a penalty under Australian law than under English law

    The leading decisions for each jurisdiction are:

    • Singapore: Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2020] SGCA 119
    • UK: Cavendish Square Holding BV v Makdessi [2016] AC 1172
    • Australia: Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28 and Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30

    There are two aspects to the scope of the penalty rule – the test and the types of obligations to which it applies. Singapore applies a less stringent test to only one type of provision; Australia applies a more stringent test to more types of provisions; and the UK applies a more stringent test to only one type of provision, with the result that a smaller group of sanctions are more likely to be a penalty.