The rule against penalties – a primer
For well over a century, commercial parties have stipulated liquidated damages clauses (LD clauses) in contracts to avoid the cumbersome task of assessing damages payable upon the occurrence of an event, typically, a breach of contract. However, such clauses risk being unenforceable if they flout the rule against penalties. The courts in most Commonwealth jurisdictions (including Singapore) have traditionally regarded LD clauses as penalties that are unenforceable if they do not represent a genuine pre-estimate of loss, and go beyond compensating a party for its loss.
This approach reflects a judicial policy of ensuring that parties do not ‘overreach’, and has its roots in Lord Dunedin’s judgment in