In a recent English judgment, Heritage Travel and Tourism Ltd v Windhorst [2021] EWHC 2380 (Comm), the English High Court held that a clause in a settlement agreement requiring immediate payment of all outstanding amounts in the event of a late payment (i.e. an acceleration clause) was capable of falling within the penalty doctrine, but an obligation to pay a daily sum accruing pro rata on any outstanding amounts was not.

The English High Court applied the test set out by the Supreme Court decision Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (considered here and here). That is, whether the relevant provision was a secondary obligation which imposed a detriment on the defendants that was out of all proportion to the claimant’s legitimate interest in enforcing the defendants’ primary obligations under the agreement. The English High Court held that the acceleration clause in the agreement was a secondary obligation as it was triggered by a breach of a requirement to pay a certain amount by a particular date. However, a separate clause in the same agreement – which provided that a daily sum would accrue so long as, and to the extent that, a further amount remained outstanding – had to be considered a primary obligation. The fact that the daily sum was payable only to the extent that the further amount was outstanding did not mean the obligation to pay it was triggered by any breach; these provisions merely defined the accrual period. In light of the conclusion that the obligation to pay the daily sum was a primary obligation, the judge did not need to consider whether it imposed a detriment on the defendants that was out of all proportion to any legitimate interest of the claimants in enforcing the primary obligations. Accordingly, it did not attract the operation of the rule against penalties.

The Hong Kong Court of Appeal has recently adopted the modern test for penalty clauses (in Law Ting Pong Secondary School v Chen Wai Wah [2021] CA 873) following the UK Supreme Court’s decision in Cavendish.  As this latest judgment by the English High Court applies the same doctrine set out in Cavendish, it is likely to be considered by the Hong Kong courts if a case was to arise where acceleration clauses are at issue.  The decision provides a helpful illustration of the circumstances in which a contractual obligation may be susceptible to the rule on penalties, and how it may be possible in some circumstances to avoid the application of the rule by drafting an obligation to ensure that it is not triggered by breach and thus is determined to be a primary obligation under the contract.

For a detailed discussion of the judgment, please click here.

Gareth Thomas
Gareth Thomas
Partner, Head of Commercial Litigation, Hong Kong
+852 2101 4025
Jojo Fan
Jojo Fan
Partner, Hong Kong
+852 2101 4254
Priya Aswani
Priya Aswani
Professional Support Lawyer
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