In two recent cases[1], the English courts have considered two important issues in relation to the enforceability and availability of liquidated damages, namely: For many years, it was well established that liquidated damages for delay had to be a “genuine pre‑estimate” of the loss that the employer would suffer if the contractor did not achieve practical completion by the date set in the contract. Fladgate is an international multi-practice firm with deep expertise across a broad range of legal specialisms. Standard general conditions, routinely include liquidated damages clauses requiring one party to pay damages arising from some breach of contract or a defect. He claimed t… In this case, the court found that: Leighton illustrates that the court will consider the circumstances surrounding the parties at the time the contract is entered into. The liquidated damages figure was stated to be £500 per day per MWp (Mega Watt peak, a solar power measure to describe a unit’s nominal power). If losses are fixed at the time that the contract is entered into (frequently called liquidated damages or liquidated and ascertained damages) then care must be taken to ensure that they are a genuine pre-estimate of the loss that would be suffered on the occurrence of a particular event. To calculate the 'degree of disproportion', the sum stipulated in the clause and the loss likely to be suffered by the plaintiff must be taken into account, as well as the nature of the relationship between the parties. … Understand your clients’ strategies and the most pressing issues they are facing. The Supreme Court, however, decided to completely abolish the dichotomy, emphasising that a damages clause may be neither a genuine pre-estimate … In Makdessi, Mr Makdessi sold his business and then breached his restrictive covenant. (1) Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) [2012] WASCA 53. Organisations must protect their own interests by seeking legal advice on the specific terms of a liquidated damages clause before accepting it. It is difficult to reconcile the GPP Big Field and Triple Point Technology cases without a detailed examination of the contract terms. damages must be a genuine pre-estimate of the loss or damage that the Project Company will suffer if the plant or facility is not completed by the target completion date. Copyright is owned by Fladgate LLP and all rights in such copyright are reserved. The genuine pre-estimate is determined at the time of entering into the contract. If a clause is not a genuine pre-estimate of the damage, but an amount that is (by its nature) a punishment for non-observance of a part of the contract, then the court may not enforce it. An extravagant and unconscionable sum is a likely pointer to it being a penalty. 16 Great Queen Street The case itself concerned an IT contract which provided for completion and handover of the work in stages. Whether it is a genuine pre-estimate appears to be determined by looking at the specific calculations and how the parties derived that specific figure. A recent case before the Court of Appeal of Western Australia,(1) involving the late completion of works, led the court to consider the enforcement of a liquidated damages clause. A number of cases followed that considered the distinction and in some instances imposed slightly different wording. Specifically, the court held that: "the liquidated damages clause cannot be characterised as a genuine pre-estimate of the damages to which [Landtec] would be entitled under the general law. In Cavendish Square, the Supreme Court held that whilst the “genuine pre-estimate” test is instructive, the correct test is whether the liquidated d… According to Landtec, the rate was calculated by anticipating the loss of proceeds from the sale of the land that Landtec would suffer as a result of delays caused by Speirs. We operate in small teams in which partners not only take the lead but also do a significant amount of the detailed work. For further information on this topic please contact Emily Eliades at Piper Alderman by telephone (+61 2 9253 9999), fax (+61 2 9253 9900) or email (eeliades@piperalderman.com.au). If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. Become your target audience’s go-to resource for today’s hottest topics. It is important to note that this decision was based on the actual wording of the contract. For instance, in the JCT 2016 Design and Build contract, the consequences of termination for contractor’s default include the extra over cost incurred by the employer in completing the works and also “any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise”. A liquidated damages clause is a clause which requires a party to pay a sum if it breaches a term of the contract. Mr Makdessi agreed to sell a controlling stake in the largest advertising group in the Middle East to Cavendish. Clients can be assured that the partners they engage and brief will remain closely involved in developing and delivering the advice as part of our close-knit, expert teams. What is clear is that there is no longer a “conventional” or “default” position which will apply on termination. The circumstances in which liquidated damages can be claimed after termination of the contract. This is where the genuine pre-estimate of loss test holds firm: if the sums specified are genuine pre-estimates then they are highly unlikely to be penal. However, what if B only does X and Y, but not Z and still has to pay A$10,000 a day to A? Formulating or reviewing liquidated damages clause Courts do not like to interfere with the contractual freedom of parties and will be reluctant to step in and intervene in business dealings between large organisations. Suppliers can take comfort from this, but would (understandably) rather not have this provision included. History From the early 14th century to the late 16th century, the law governing agreed damages clauses was harsh, with remedies going way beyond adequate compensation. This distinction between liquidated damages and penalty is suspended in the Indian Contract Act but the English law upholds the distinction. This test upholds the concept that parties will be given freedom to determine their rights and liabilities, with the court stepping in to protect the parties from unfair outcomes. Even liquidated damages clauses, which on their face are stated as having been calculated on the basis of a genuine pre-estimate of loss, are vulnerable to attack if they operate in a way which in fact punishes the breaching party. This decision represents a significant redefinition of the law. Covid-19: Business Continuity & Risk Assessments, The circumstances in which a liquidated damages clause will be struck down as a “penalty”; and. Pre-estimate of loss. During the late 16th and early 17th centuries, the courts of equity intervened to limit the amount recoverable to a sum that reflected the loss actually suffered by a party because of the breach. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. The Full Court of the Supreme Court of Tasmania has stated that the terms as a whole require the court to consider: The High Court in Multiplex (referred to in Speirs) also held that where negotiations between contracting parties lead to the insertion of a liquidated damages clause, it will be relevant and admissible in the determination as to whether a clause is a penalty. The purpose of a liquidated damages clause or agreed damages clause is to fix the amount recoverable by one party if the other party has breached the contract, without the need to proceed to the courts to assess the damages payable for the breach. In GPP Big Field, the Judge rejected the conventional position, on the basis that if liquidated damages were not payable for delay after termination, the contractor would effectively be rewarded for his own default. ", © Copyright 2006 - 2020 Law Business Research. The Court of Appeal’s recent decision in Triple Point Technology serves to complicate matters further, as it appears to contradict both the conventional position and the approach adopted by the Commercial Court in GPP Big Field. Such terms will be unenforceable as a penalty clause if the amount does not represent a genuine pre-estimate of the loss the non breaching party will incur as a result of the breach. The two disputes that were considered, Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis,could not be more different. The Court’s decision that these provisions were not a penalty was perhaps not overly surprising, as it is rare for liquidated damages provisions in construction contracts to be held unenforceable as a penalty. This amount will be particular to the circumstances of the project, and the parties should calculate it … Penalty clauses are void and unenforceable, so all the benefits of a liquidated damages clause will be lost. Such terms will be unenforceable as a penalty clause if the amount does not represent a genuine pre-estimate of the loss the non breaching party will incur as a result of the breach. The Court found that the liquidated damages rate did not constitute a penalty as the rate reflected a genuine pre-estimate of loss that might be incurred. If a court considers that the amount is out of all proportion it may consider it to be a penalty. Speirs was late in completing the works and Landtec sought to enforce the liquidated damages clause. Traditionally, the contractor would challenge liquidated damages as being excessively high compared to the likely loss sustained. The employer was therefore entitled to claim liquidated damages for the entire period of delay, including delays which extended beyond the date of termination. Our clients come to us to solve problems that are often complex and multifaceted. Fladgate has a long heritage of delivering high-quality legal advice. WC2B 5DG However, the amount of the liquidated damages payable under a liquidated damages clause must be a genuine pre-estimate of the anticipated loss resulting from breach, otherwise it will be unenforceable as a penalty clause. the parties were both well resourced and negotiated on an equal footing; the amount of liquidated damages was proposed by the State of Tasmania following careful consideration with its lawyers; the amount was calculated by reference to a list of potential expenses, and the State of Tasmania could produce considerable calculation details; and. Factors to consider The court will look at the individual circumstances of each particular contract at the time the parties entered into the contract (not when the breach occurred). When drafting a liquidated damages clause parties should attempt to calculate a reasonable pre-estimate of the loss that may arise as a result of delayed completion. "I use the newsfeeds to follow legislative changes and industry trends relevant to my division. Whereas liquidated damages are compensatory in nature and are pre-estimated damages. Between the decisions in Dunlop and AMEV-UDC, a number of cases diluted the standard imposed by Dunlop. In a bid to restrict the parties' freedom to contract, the courts began to strike out clauses that contained sums merely greater than the amount that could possibly be awarded for breach of contract and restrained the parties from recovering more than the law provided. The contract contained a liquidated damages provision which stipulated that if Speirs Earthworks Pty Limited was late in completing its works, then Landtec Projects Corporations Pty Limited would claim liquidated damages at a rate set out in the contract. In Cavendish Square[2], the Supreme Court held that whilst the “genuine pre-estimate” test is instructive, the correct test is whether the liquidated damages are “out of all proportion to any legitimate interest of the innocent party”. The term partner is used to refer to a member of Fladgate LLP. The applicable principles in distinguishing between an enforceable liquidated damages and an unenforceable penalty were recently re-stated by the High … There are several conceptual differences as to whether the … The liquidated damages figure should therefore reflect the loss that the employer would suffer in the event of a specified breach occurring. In the GPP Big Field case, a second issue arose as to whether the contractor was liable for liquidated damages for delay after the contract was terminated. Typically, construction contracts provide that if the contractor causes delay to the project then the contractor must pay to the employer ‘liquidated damages’ (known in the construction industry as ‘LADs’). The conventional position, derived from earlier cases, is that an employer will usually be entitled to claim liquidated damages for delay up to the point of termination, but must bring a general damages claim for any delays which accrue after that date. Is it responsible to remove ‘responsible lending’? Whilst the test in respect of penalties is now well established, in some cases it can be difficult to say with certainty where the boundary lies between a penalty and a clause with a genuine commercial purpose. Similarly, the FIDIC 2017 suite of contracts provide that the employer shall be entitled (amongst other things) to claim liquidated damages for any delay which accrued prior to the date of termination. Citing the Supreme Court’s decision in Cavendish Square, the Judge held that whilst the sums were clearly not a genuine pre-estimate of loss, they were not unconscionable or without any commercial justification. The Full Court of the Supreme Court of Tasmania in Leighton stated that a number of terms have been used in different cases to set the test of what will constitute a penalty. If the liquidated damages already reflect a genuine pre-estimate of loss, there will be no additional damages to claim, so the additional right to recover costs will never kick in. Please contact customerservices@lexology.com. Most construction contracts contain a provision for liquidated damages in the event of certain specified breaches of contract by the contractor,2 and the level of liquidated damages is agreed by the parties prior to the contract being entered into. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. In a landmark decision in 1915, Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd declared that an agreed damages clause would be considered a penalty and unenforceable if the sum stipulated was extravagant and unconscionable in comparison to the greatest loss that might conceivably be proved to have followed from the breach. The DL on BNPL: ASIC’s update on the Buy-Now-Pay-Later industry, How To Draft An Enforceable Liquidated Damages Clause, Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) 2012 WASCA 53, When will a liquidated damages clause constitute a penalty? A list of members is available at the registered office shown above. The legal content provided by Fladgate LLP is for information purposes only and should not be relied on in any specific case without legal or other professional advice. That said, it can often be quite difficult to estimate the effect of delay. Fladgate LLP This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. The courts have grappled with this issue on a number of occasions. Difficulty in quantifying losses that flow from the damages will not prevent a party from claiming damages. We have been providing practical legal solutions to businesses and private clients for over 250 years. However, whether the parties intended the sum to be a penalty or genuine pre-estimate will have no bearing on the court's decision. In reaching its decision, the Court of Appeal emphasised that the answer will depend on the wording of the contract and there was no blanket rule that applied by default. If back office functions are claimed, these must be directly caused by the breaches of contract. https://hklegal.co.uk/2014/03/31/liquidated-damages-whats-enforceable In Parking EyeMr Beavis claimed that the £85 charge for outstaying the two hours free parking at a shopping centre was unenforceable, because it was a penalty and also a breach of consumer law. However, the principles in Dunlop - confirmed in cases such as AMEV-UDC, Ringrow Pty Ltd v BP Australia Pty Ltd and State of Tasmania v Leighton Contractors Pty Ltd (and now in Speirs) - prevailed and remain the law in Australia. Speirs argued that the provision was not a pre-estimate of the loss, but was in fact a penalty, on the basis that Landtec was required to satisfy a number of conditions before sub-dividing and selling the land, and that Landtec had not satisfied one of the conditions by the time that Speirs had reached practical completion. For example, the High Court of Australia in AMEV-UDC Finance Ltd v Austin was of the view that a sum would be a penalty if there were a "degree of disproportion" sufficient to point to oppressiveness. The case of Paciocco v Australia and New Zealand Banking Group Limited FCA 35 (Paciocco) provides some guidance on when a liquidated damages clause can be enforced. The clause was therefore enforceable. Even if the payment on breach is extravagant and unreasonable this is not conclusive that it is penal. The Court of Appeal has now considered “penalty clauses”. Such amounts are payable for the loss of bargain and the loss of protection against future risks and, except as otherwise provided in this Agreement, neither party will be entitled to recover any additional damages as a consequence of such losses. The availability of liquidated damages following termination is even less clear. Introducing PRO ComplianceThe essential resource for in-house professionals. Drafting Tips. Liquidated damages clauses are commonly used in construction contracts to provide the employer with a ready-made remedy for delay. The “genuine pre-estimate of loss” test is closely-tied to the liquidated damages clause (also known as LDs or LADs), which is a common feature in construction and engineering contracts. If a liquidated damages provision is held to be an unenforceable penalty, the principal is left to claim general damages and prove its actual losses. Liquidated damages are a genuine pre-estimate of the loss and damage caused by a breach. They are attractive as they avoid need for the injured party to prove actual loss resulting from breach. If a single lump sum is made payable for the occurrence of one or several events, where some of the events are serious and others trivial, there is a presumption that the parties intended the sum to be penal. Moreover, the fact that £500 was a round sum rather than a carefully calculated pre-estimate in each contract was of no assistance to the contractor. This figure was the same for each of the five contracts even though the arrays being constructed under each of those contracts had a different output and were constructed at different times of the year, output obviously being affected by the weather. : Grocon Constructions (QLD) Pty Ltd v Juniper Developer No 2 Pty Ltd & Anor 2015 QSC 102, Contract amendments may leave liquidated damages clauses vulnerable, U.K.’s revised law on liquidated damages clauses could mean similar changes for commercial contracts in Canada. In cases of subcontracts, liquidated damages can be imposed if the contract is not completed by the agreed date. If, after looking at that calculation, the figure is extravagant or unconscionable, then the court will intervene. Parties should avoid stipulating liquidated damages rates which could … It held that the sum was a penalty and "out of … On the facts of the case, the Court of Appeal held that the employer could only claim liquidated damages for work which had actually been completed prior to termination, and that the employer would have to bring a claim for general damages in respect of delays to the uncompleted works. Even then, the cases do not sit easily together. In the circumstances, parties should consider dealing with these issues in their contracts in order to spell out the employer’s entitlement to liquidated damages following termination of the contract. [2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67. the amount was divided into specific items, with a cost beside each individual item. The Judge pointed out that both parties to the contract were of equal bargaining power, experienced and sophisticated commercial parties, well able to assess the commercial implications of the delay damages clauses. English courts (including the Court of Appeal in both El Makdessi and ParkingEye) had more recently taken steps to mitigate the harshness of the dichotomy by taking into account other considerations such as whether a clause, if not a genuine pre-estimate of loss, is nevertheless ‘commercially justified’. F: +44 (0)20 3036 7600 To be upheld by the courts, a liquidated damages clause must be a genuine pre-estimate of any loss likely to be sustained. At the time of termination, the contractor had only completed one stage of the works. Determining whether clause is genuine pre-estimate of loss In determining whether a sum is a genuine pre-estimate of the loss or a penalty, Dunlop sets out that the court will consider the following: The tests established by Dunlop have endured for 90 years and Speirs confirms that Dunlop remains the law applicable in Australia. The test as to whether a pre-estimate is genuine is objective - that is, regardless of whether the parties were of the view that the sum was a genuine pre-estimate of the loss at the time of entering the contract, if the court determines that the sum is extravagant or unconscionable, it will not be considered a genuine pre-estimate. Customs Risk Management & Intelligence Division, At a glance: cryptoassets for investment and financing in Australia, Indemnity clauses in commercial contracts: how to achieve desired contractual risk allocation. [1] GPP Big Field LLP & Anor v Solar EPC Solutions SL [2018] EWHC 2866 (Comm) and Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230. Accordingly, the “genuine pre-estimate of loss” remains a useful test and a clause is unlikely to be struck down as long as it does not stray too far from that estimate. Member of fladgate LLP have grappled with this issue on a number of recent cases illustrate that the employer suffer... Divided into specific items, with a cost beside each individual item of. To us to solve problems that are often complex and multifaceted to formula/fixed! Of your key competitors and benchmark against them tool for finding the right lawyer for.... Whether it is authorised and regulated by the agreed date courts are not there to remedy... To sell a controlling stake in the Indian contract Act but the English law upholds distinction! 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