PH Hydraulics v Airtrust: SGCA declines to award punitive damages for pure breach of contract cases

This article has been produced with Holborn Law, which operates in association with CMS.

Introduction

In the recent landmark decision of PH Hydraulics & Engineering Pte Ltd v Airtrust (Hong Kong) Ltd [2017] SGCA 26, Singapore’s apex court, the Court of Appeal (“Court”) considered the issue of whether there can be any legal basis for the court to award punitive damages for breach of contract.

Ultimately, the Court found that there should be a general rule against the award of punitive damages for breach of contract.

Significantly, the Court held that, even if there had been fraudulent conduct on the part of the party in breach, this would not, in and of itself, be sufficient to justify an award of punitive damages.

Background

PH Hydraulics & Engineering Pte Ltd (“PH”) designs, manufactures and supplies heavy machinery for offshore use in the marine and gas industry.

Pursuant to a Sale and Purchase Agreement (“SPA”), Airtrust (Hong Kong) Ltd (“Airtrust”) contracted to purchase a 300-ton Reel Drive Unit (“RDU”) from PH.

Under the SPA, PH was to provide Airtrust with full American Bureau of Shipping (ABS) certification to ensure that an independent entity would review the design, survey the manufacturing processes and witness the testing of the RDU to ensure conformity with the requisite design, construction and structural codes and standards.

In the court below (i.e. the High Court), the High Court Judge (“trial judge”) found that PH had been reckless, dishonest and/or fraudulent in the manner it had secured certification from ABSG Consulting Inc. (“ABSG”) for the RDU.

The trial judge held that PH’s conduct merited the award of punitive damages. PH appealed against the High Court’s decision.

The Court of Appeal’s Findings

Fraud

On the issue of fraud, the Court found in favour of PH on (amongst other grounds) as follows:

• There was insufficient evidence to establish that PH had a motive for fraud. Consequently, there was insufficient evidence to support the trial judge’s inference that PH and/or Dr Liu Li – PH’s appointed freelance structural engineer – had knowingly made a false representation to ABSG that wind load did not need to be considered.
• There was insufficient evidence to suggest that PH had not instructed and had never intended to ask ABSG to perform a full mechanical review of the RDU’s hydraulic system. The Court referred to various documents and correspondence exchanged by the parties that suggested that PH might well have been under the impression that ABSG was indeed providing a mechanical review. As such, the Court rejected the trial judge’s finding that PH must have known that ABSG had not in fact performed any mechanical design review of the RDU.

The Court therefore held that there was insufficient cogent evidence to support a finding of fraud against PH. At the most, PH could only be said to have been grossly negligent.

Punitive Damages

The Court discussed at length the arguments for and against the award of punitive damages in the purely contractual context, considering the legal positions from other common law jurisdictions such as England and Wales, Australia and New Zealand, and Canada.

Ultimately, the Court concluded that there ought to be a general rule that punitive damages cannot be awarded for breach of contract as:

• Contracts arise from a voluntary and binding agreement between the parties, unlike in the area of tort, where liability is “imposed by law as a matter of policy and affects persons generally”. The aim of contract law is to compensate the aggrieved party so that it is put in the same situation as if the contract had been performed, and not to punish the party in breach. The award of damages generally carries with it no disapproval of what the contract-breaker has done, regardless of its motive for breaching the contract.
• Contracting parties would have been afforded the opportunity to consider various matters relevant to their contractual relationship, including remedies in general and damages in particular. This is why parties provide for a liquidated damages clause in their contracts, so that an aggrieved party may be compensated based on a genuine pre-estimate of its loss.
• Accordingly, it would be anomalous or even inappropriate for the court to regulate the contracting parties’ conduct by imposing an award of punitive damages on the party in breach by way of what is in effect an external standard. Such an external standard is antithetical to the very nature and function of contract law in general and its remedial structure in particular.

No remedial gap to fill

The Court rejected the notion that there is a “remedial gap” which only an award of punitive damages can fill. As a start, there is no gap to fill if one accepts that it is inappropriate for contract law to be used to punish rather than to compensate.

In any event, parties could still “fill the gap” by pursuing other remedial options with punitive or deterrent effects, such as

• “Wrotham Park damages” (i.e. damages that an aggrieved party could claim by permitting the party in breach to break a restrictive covenant or other legal restriction);
• an award for account of profits; and
• an award of damages for mental distress caused to the aggrieved party resulting from the breach.

Absence of criteria and consequent uncertainty

The Court also rejected the notion of awarding punitive damages as it found that the concept of an “outrageous” breach is particularly elusive in a commercial context, where self-serving behaviour is generally accepted as the norm between contracting parties.

The Court considered that most parties enter into a contract with self or vested interest as a main consideration. Accordingly, what is “outrageous” will vary from person to person.

The Court also pointed out that control mechanisms which regulate improper conduct by contracting parties are not unusual and are often embodied within the internal legal framework of the common law of contract itself.

The Canadian position

The Canadian Supreme Court’s decision of Whiten v Pilot Insurance Company (2002) 209 DLR (4th) 257 (“Whiten”) was singled out as it formed the basis of the trial judge’s decision to award Airtrust punitive damages. The Court rejected the trial judge’s reliance on Whiten on (among others) the following grounds:

• Whiten held that punitive damages will only be awarded for breach of contract where the conduct complained of simultaneously constituted an “independent actionable wrong” which caused the injury to the plaintiff. This meant that an award of punitive damages could only be realised if the party in breach committed more than one breach. However, the Court found this difficult to accept as there is no principled reason why a single, egregious breach of contract should not justify an award of punitive damages.
• The award of punitive damages tended to be arbitrary and incoherent. In Whiten, the trial court had awarded punitive damages of C$1 million against an insurance company which it had found to have behaved in a manner which was “malicious, high-handed, arbitrary as well as capricious”. On appeal, however, the Ontario Court of Appeal reduced the quantum of punitive damages to C$100,000. The Canadian Supreme Court however restored the original award to C$1 million upon further appeal.
• Whiten was heard on the same day as another Canadian Supreme Court case, Performance Industries Ltd v Sylvan Lake Golf & Tennis Club Ltd [2002] 1 SCR 678 (“Sylvan”). In Sylvan, two businessmen entered into an oral agreement. One of them deliberately changed one of the terms to his advantage when the agreement was reduced into writing. However, in Sylvan, the Supreme Court held that while “fraud is generally reprehensible”, it was only in exceptional cases that it would attract punitive damages. The court therefore declined to award punitive damages.
• These two cases show that the Canadian Supreme Court had only intended to allow punitive damages for breach of certain exceptional types of contracts. However, there is no agreement amongst commentators as to what such contracts should be.
• The Court also considered whether the existence of a duty of good faith – which has been expressly recognised under Canadian law – would change its position in regard to punitive damages. The Court concluded that, even if there is an organising principle of good faith under Singapore law (which does not yet exist), it would still not necessarily follow that punitive damages would be awarded as it could be argued that any damages awarded to an aggrieved party could be viewed as compensation for breach of such a good faith obligation.

Conclusion

Allowing PH’s appeal, the Court decided that an award of punitive damages was not appropriate in the present claim, even if PH had acted fraudulently (which the Court found otherwise).

In particular, the Court observed that, had PH made a fraudulent misrepresentation, Airtrust would have been able to make a claim for a generous measure of damages under common law and pursuant to section 2 of the Misrepresentation Act. At common law, the quantum of damages would include all losses flowing directly from Airtrust’s entry into the SPA with PH, whether foreseeable or otherwise, and all consequential damages.

Given the availability of such a potentially generous remedy, it would have rendered a further award in punitive damages even more unreasonable.

Comment

This case is clear authority that the Singapore courts will generally not consider an award of punitive damages to be appropriate in the purely contractual and/or commercial context. This would be so even in cases of fraudulent conduct by the breaching party.

This settles what was previously left undecided in MFM Restaurants Pte Ltd and another v Fish & Co Restaurants Pte Ltd and another appeal [2011] 1 SLR 150 (“MFM Restaurants”). In MFM Restaurants, the Court had left open the possibility that punitive damages may be awarded if the defendant’s conduct was “so highly reprehensible, shocking or outrageous that the court finds it necessary to condemn and deter such conduct by imposing punitive damages”.

The present case affirms the cardinal principle in contract law which seeks to compensate an innocent party for its loss of the bargain without punishing the party in breach. Unlike in criminal law and the law of torts, it is generally not the Court’s intention to regulate the behaviour of contracting parties.

As contracts are binding agreements which parties voluntarily enter into and for which they have agreed their own terms, the Court is reluctant to award damages that go beyond the bargain struck by the parties.

However, punitive damages may still be available to a party where there is concurrent liability in tort from the party in breach.

With typical prudence, the Court has left the door slightly ajar for it to consider, in future, whether there might be circumstances and/or scenarios where an award of punitive damages would be appropriate in purely contract cases. This is left to be decided on another day as the Court did not enunciate any clear principles as to when such an exception may apply.