Contracts
Commentary: court of appeal strikes down “clever drafting” designed to circumvent the penalty doctrine: a case of too clever by half?
In 2020, the Court of Appeal (the “CA”) reiterated that the penalty doctrine is restricted in its application to secondary obligations; primary obligations are insulated from the doctrine: Leiman, Ricardo and another v Noble Resources Ltd and another [2020] 2 SLR 386. It described this restriction as the “threshold issue.” The rationale for this differential treatment was explained by the UK Supreme Court in Cavendish Square Holding BV v Makdessi [2016] AC 1172 (“Cavendish”) in the following terms (at [13]): “There is a fundamental difference between a jurisdiction to review the fairness of a contractual obligation and a jurisdiction to regulate the remedy for its breach. Leaving aside challenges going to the reality of consent, such as those based on fraud, duress or undue influence, the courts do not review the fairness of men’s bargains either at law or in equity. The penalty rule regulates only the remedies available for breach of a party’s primary obligations, not the primary obligations themselves.”
21 February 2023