Agreed Damages Clauses and the Penalty Doctrine Contrasting Approaches: A Problem Too Big to Resolve?

This article argues that the recent cases from the highest courts in Australia and the UK, namely Paciocco v. Australia and New Zealand Banking Group Pty Ltd (Paciocco) in Australia and Cavendish Square Holding BV v. Makdessi (Cavendish) in the UK, have adopted a legitimate interest test for determining whether an agreed damages clause is an unenforceable penalty.1 The test appears to be clear, but confusion rests with its application. Indeed, since Paciocco and Cavendish, courts have sought to grapple with the problem of defining and applying a new test for determining whether an agreed damages clause is an unenforceable penalty. This issue is highly controversial, and no final position has been reached—as seen by the recent decision by the Singapore Court in Denka Advantech Pte Ltd v. Seraya Energy Pte Ltd.2 This article will discuss mostly the common law approach. It argues that, ideally, the common law should adopt the transnational approaches set forth in the Vienna Sales Convention (CISG), among others, and augmented by the UNIDROIT Principles (UPICC). This would lead to a nuanced treatment of penalties, resulting in more commercially sound outcomes.