29 May 2017
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Supreme Court Note: PH Hydraulics & Engineering Pte Ltd v Airtrust (Hong Kong) Ltd and another appeal [2017] SGCA 26 (punitive damages for breach of contract)

Supreme Court Note
26 Apr 2017

The respondent in this appeal purchased a Reel Drive Unit (“RDU”) from the appellant. Under the Sale and Purchase Agreement (“SPA”), the respondent was to design and supply the RDU. It also undertook to obtain industry certification from the American Bureau of Shipping. The RDU malfunctioned and the respondent commenced a suit against the appellant for breach of the SPA in failing to deliver an RDU that was of merchantable quality and fit for its purpose. The High Court ruled that the appellant had breached the SPA and there was no appeal against this finding. A separate issue which arose was whether the appellant had been fraudulent in the manner it had secured the industry certification. The High Court ruled that the appellant had been fraudulent and imposed an award of punitive damages.

The Court of Appeal unanimously allowed the appeal on these two points. It held that there was no cogent evidence that the appellant had acted fraudulently. It went on to address the issue of whether punitive damages could, in principle, be awarded for breach of contract. The Court of Appeal noted that it was well-established that punitive damages could be awarded in tort, and therefore, that a plaintiff who had causes of action in both contract and tort might be able to recover punitive damages by pleading a claim in tort. The present judgment was concerned only with whether punitive damages could be awarded for breach of contract absent concurrent liability in tort.

The Court of Appeal found that there were powerful reasons founded on principle, precedent, and policy against the recognition of punitive damages as a remedy for breach of contract. As a matter of principle, allowing the courts to punish a party who had breached a contract sat uneasily with the concept of a contract as an obligation arising from a voluntary and binding agreement. Further, the argument that it was necessary to have a residual discretion to award punitive damages in contract law because existing remedies were inadequate to punish and deter outrageous behaviour was neutral at best. There were other extra-compensatory remedies which arguably had punitive or deterrent effects; these were preferable as they remained primarily compensatory in purpose in that they protected a plaintiff’s interest in contractual performance. Another argument against recognising punitive damages for breach of contract was the absence of clear criteria by which to determine when punitive damages should be awarded, and the consequent uncertainty this would lead to.

The Court of Appeal also noted, surveying cases from the United Kingdom, Australia, and New Zealand, that the weight of case law authority was against the recognition of punitive damages. Although there was Canadian case authority to the contrary (which the High Court had relied on), the Court of Appeal found that it was not persuasive authority for the availability of punitive damages for breach of contract.

Finally, the Court of Appeal observed that policy considerations also militated against recognising the availability of punitive damages for breach of contract. Doing so might add to the length, complexity and costs of litigation and confer upon plaintiffs an undue advantage in forcing large (or larger) settlements. Also, punitive damages were most commonly awarded in circumstances where there was a heightened risk of reprehensible conduct because of the unequal bargaining power of the parties; such risk was more appropriately managed by regulation rather than by judicial remedies such as an award of punitive damages.

On punitive damages, see PH Hydraulics & Engineering Pte Ltd v Airtrust (Hong Kong) Ltd and another appeal [2017] SGCA 26 at paras 62–136.

To view the judgment, click <here>.

Disclaimer: The above 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. The full judgment of the Court is the only authoritative document.