Singapore Court Of Appeal Sends Acceleration Of Interest Payment Clause To The Penalty Box

• Law Firm: Reynolds Porter Chamberlain LLP
• Subject Matter: Finance and Banking, Corporate/Commercial Law, Litigation, Mediation & Arbitration, Financial Services, Contracts and Commercial Law, Trials & Appeals & Compensation
• Author: Mr Yuankai Lin and Abel George
• Published date: 08 May 2023

Commercial contracts commonly include clauses providing for liquidated damages, accelerated repayment or late payment interest in the event one party breaches the contract.

It is trite that such clauses are not enforceable as of right. The Singapore Courts have consistently affirmed the test set out in the seminal decision of Dunlop Pneumatic Tyre Co, Ltd v New Garage and Motor Co, Ltd [1915] AC 79 ("Dunlop") that a contractual clause will be considered a "penalty clause" (and therefore unenforceable) if it was found to be designed to deter a breach of contract rather than to provide for genuine compensation for the party.

Despite landmark decisions in the UK and Australia¹ casting some uncertainty over Dunlop's "genuine pre-estimate of loss" test, the Singapore Court of Appeal affirmed the continued application of the test in Dunlop.²

The recent decision in Ethoz Capital Ltd v Im8ex Pte Ltd and others [2023] SGCA 3 ("Ethoz Capital") is the latest case affirming the test in Dunlop, where the Court of Appeal interestingly found an accelerated repayment clause to be a penalty clause and thus unenforceable.

Relevant Background Facts

Ethoz Capital Ltd ("Ethoz") lent $6.3 million to Im8ex Pte Ltd ("Im8ex") under several loan facilities which were secured by mortgages over several different properties ("Properties").

The parties subsequently renewed these loan facilities under a new set of 4 loan facilities (the "Facilities"). Pursuant to the Facilities, the amount advanced to Im8ex was $6.3 million (the "Advance") and was similarly secured by mortgages over the Properties.

The Facilities included several important clauses which were essentially:-

1. The Advance was extended at an interest rate of 3.75% p.a. to be paid equally over 180 monthly instalment payments.
2. An amount termed "Total Interest" (which was the aggregate of all the interest payments) was "deemed earned and accrued in full upon the drawdown of the Advance", and if Im8ex defaults on payment, it will pay interest ("Default Interest") on the Advance and Total Interest at a rate of 0.065% per day ("the Default Interest Rate").
3. If Im8ex failed to pay any sum when due, Ethoz could declare that "all amounts due and owing under [the Facilities] including the Advance and the Total Interest and any default interests ... be immediately due and payable."

When Im8ex defaulted on payment, Ethoz applied for vacant possession of the Properties, payment of the Advance, the Total Interest and the Default...