Is it responsible to remove ‘responsible lending’? If they are not, and the court views them as a penalty, they will not be enforceable. The Supreme Court, however, decided to completely abolish the dichotomy, emphasising that a damages clause may be neither a genuine pre-estimate … The Supreme Court of Queensland was recently asked to consider a modified AS4300-1995 general conditions contract and determine whether or not the liquidated damages clause was a penalty clause. 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. The position is far from clear, however, and the courts have signalled that the outcome of each case will depend on the particular wording of the contract. Register for a free subscription. What is clear is that there is no longer a “conventional” or “default” position which will apply on termination. DX: 37971 Kingsway. Genuine pre-estimate of loss. Suppliers can take comfort from this, but would (understandably) rather not have this provision included. The two disputes that were considered, Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis,could not be more different. It is important to note that this decision was based on the actual wording of the contract. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. 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. 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. "I use the newsfeeds to follow legislative changes and industry trends relevant to my division. Leighton provides a practical application of the above considerations. Further changes followed in the 18th and 19th centuries. 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. 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). For more information, please see our Terms of Business and our Personal data processing notice. 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. Our partner-led teams cover the following areas: Home / Insights / Liquidated Damages: An Update, Christian Charles, Senior Associate, Fladgate LLP (ccharles@fladgate.com). 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. Organisations must protect their own interests by seeking legal advice on the specific terms of a liquidated damages clause before accepting it. However, if the sum stipulated in the clause resembles a penalty (as opposed to a genuine pre-estimate of the loss likely to be suffered as a result of the breach), the clause may be unenforceable. This decision represents a significant redefinition of the law. 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. The terms of a share sale agreement (“the Agreement”) contained restrictive covenants requiring Mr Makdessi not to become involved in a competing business. not a genuine pre-estimate of loss. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. [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. Drafting Tips. (1) Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) [2012] WASCA 53. Fladgate LLP is a limited liability partnership, registered in England and Wales with registered number OC334334. Between the decisions in Dunlop and AMEV-UDC, a number of cases diluted the standard imposed by Dunlop. You should draft liquidated damages in construction contracts in a way that reflects a genuine estimate of a party’s foreseeable loss directly flowing from the other party’s default. https://hklegal.co.uk/2014/03/31/liquidated-damages-whats-enforceable We operate in small teams in which partners not only take the lead but also do a significant amount of the detailed work. Liquidated damages have been defined by Lord Dunedin in a court case in 1913 as ‘a genuine covenanted pre-estimate of damages’, and as such is the compensation payment by a vendor to a purchaser when the goods are not delivered by the contract date. There was a difference of over 30% in the expected electricity prices across the various contracts. These provisions allow the employer to claim or deduct a specified sum of money without having to prove its actual loss in a claim for damages. ", © Copyright 2006 - 2020 Law Business Research. 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. A list of members is available at the registered office shown above. I find the articles to be of a good quality and the topics are well researched and presented in a very user-friendly format. Liquidated damages are a genuine pre-estimate of the loss and damage caused by a breach. The sanctions for default were that Mr Makdessi would: (i) forfeit the balance of price payable by Cavendish for his shares; and (ii) be required to transfer all his remaining shares to Cavendish at a price which excluded any goodwill value. The next generation search tool for finding the right lawyer for you. This is not the same as having to prove, in every case, the actual loss caused by the actual breach. 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. Difficulty in quantifying losses that flow from the damages will not prevent a party from claiming damages. An extravagant and unconscionable sum is a likely pointer to it being a penalty. However, a genuine “guess” was sufficient. Today we are one of the UK’s top 100 law firms, with over 80 partners and a reputation for providing solutions that work. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. It held that the sum was a penalty and "out of … The employer terminated the contract following a series of substantial delays to the work. The court has re-written the rule and introduced a more flexible test, which is intended to be applicable to more complicated cases. Delay in the performance of the [contract between Speirs and Landtec] was incapable of causing any relevant financial loss to [Landtec] until [the condition] was satisfied…..Thus, the sum stipulated is extravagant in amount in comparison with the greatest loss that could potentially be suffered by delay in practical completion under the [contract between Speirs and Landtec].". 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). A liquidated damages clause is a clause which requires a party to pay a sum if it breaches a term of the contract. The rate for liquidated damages was required to be a genuine pre-estimate of the loss which would be incurred in the event of delay. The term partner is used to refer to a member of Fladgate LLP. Material is not to be reproduced in whole or in part without prior written consent. Keep a step ahead of your key competitors and benchmark against them. However, whether the parties intended the sum to be a penalty or genuine pre-estimate will have no bearing on the court's decision. The circumstances in which liquidated damages can be claimed after termination of the contract. Power up your legal research with modern workflow tools, AI conceptual search and premium content sets that leverage Lexology's archive of 900,000+ articles contributed by the world's leading law firms. 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. 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”. Even if the payment on breach is extravagant and unreasonable this is not conclusive that it is penal. These recent cases illustrate that the law in relation to liquidated damages is far from settled. 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. If, after looking at that calculation, the figure is extravagant or unconscionable, then the court will intervene. That said, it can often be quite difficult to estimate the effect of delay. 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. He claimed t… Become your target audience’s go-to resource for today’s hottest topics. The OFT expressed the view to the BPA that when claiming liquidated damages, they must meet the requirement of being a genuine pre estimate of loss. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. Assessing whether a sum is a penalty or a genuine pre-estimate of the loss must be judged as at the time of the making of the contract, not at the time of the breach. 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. Pre-estimate of loss. It is common for drafters of liquidated damages clauses in commercial contracts to run a fine line between a genuine pre-estimate of damages and a penalty. To be enforceable, the liquidated damages sum must be a genuine pre-estimate of loss. Understand your clients’ strategies and the most pressing issues they are facing. A number of cases followed that considered the distinction and in some instances imposed slightly different wording. LADs are a pre-determined amount of damages or sum determined by reference to a formula/fixed rate as stipulated in the contract. 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 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. Penalty clauses are void and unenforceable, so all the benefits of a liquidated damages clause will be lost. Traditionally, the contractor would challenge liquidated damages as being excessively high compared to the likely loss sustained. In some cases, liquidated damages which may be designed to deter a party from breach, and which do not represent a genuine pre-estimate of loss, may now be enforced. At the time of termination, the contractor had only completed one stage of the works. However, the Court will ultimately apply the test in Makdessiof whether the sum stipulated is exorbitant or unconscionable … 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. Please contact customerservices@lexology.com. 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. The applicable principles in distinguishing between an enforceable liquidated damages and an unenforceable penalty were recently re-stated by the High … 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. To be upheld by the courts, a liquidated damages clause must be a genuine pre-estimate of any loss likely to be sustained. It held that the sum was a penalty and "out of all proportion", on the basis that Landtec would suffer no financial loss as a result of the delay in practical completion by Speirs until the relevant condition was satisfied. This breadth of expertise enables us to provide clients with practical, ‘joined-up’ solutions in the following areas: We have the expertise to provide our clients with a wide range of commercially focused legal services and have in-depth experience of a number of industry sectors. 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 OFT’s view was … 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. 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. 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. The party wishing to rely on the clause would need to show that a legitimate business interest was served by the clause, and that it was not ‘ext… Liquidated damages are generally enforceable unless it constitutes a penalty, i.e. Prior to the decision of the Supreme Court in Cavendish Square Holdings BV (Appellant) v Tatal El Makdessi (Respondent), in order to be recoverable, the predetermined level of liquidated damages had to represent a genuine pre-estimate of the employer’s likely loss shoul… 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. The availability of liquidated damages following termination is even less clear. If back office functions are claimed, these must be directly caused by the breaches of contract. Our clients come to us to solve problems that are often complex and multifaceted. 16 Great Queen Street 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. 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. However, what if B only does X and Y, but not Z and still has to pay A$10,000 a day to A? 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. E: fladgate@fladgate.com Standard general conditions, routinely include liquidated damages clauses requiring one party to pay damages arising from some breach of contract or a defect. The liquidated damages figure should therefore reflect the loss that the employer would suffer in the event of a specified breach occurring. Therefore, the party resisting enforcement of the clause must demonstrate that the sum is extravagant, unconscionable and out of all proportion with the greatest loss that could conceivably be proven from the breach. 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 court does not want to restrict the parties' freedom to contract and will intervene only to provide relief against a clause that is so oppressive or unconscionable that the clause is more penal than compensatory. For example, a clause says that B must do X, Y and Z; if B does not do X, Y and Z, B must pay liquidated damages of A$10,000 a day to A. If a court considers that the amount is out of all proportion it may consider it to be a penalty. … 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 … There are several conceptual differences as to whether the … This decision does show that, following Makdessi, whether the liquidated damages was a genuine pre-estimate of loss is still an important aspect of whether the provisions are a penalty. This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. 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. The courts have grappled with this issue on a number of occasions. The purpose liquidated damages are to promote certainty especially in the commercial field. We have been providing practical legal solutions to businesses and private clients for over 250 years. It is up to A to show that the individual damages are so uncertain that they cannot be calculated separately, and that the overall total sum of A$10,000 for one or more breaches is a genuine pre-estimate regardless of whether there is one or more breaches. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. London 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. Despite all of this, the Commercial Court held that the figure was not a penalty. The Court of Appeal has now considered “penalty clauses”. If the sum is an extravagant or unconscionable amount in comparison to the greatest amount that could conceivably be proved to have followed from the breach, the sum will be a penalty. In Makdessi, Mr Makdessi sold his business and then breached his restrictive covenant. Whereas liquidated damages are compensatory in nature and are pre-estimated damages. 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. 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). We draw together the multiple strands of a business or personal challenge into a coherent, integrated legal response that combines the knowledge and experience of experts in all the relevant fields. Fladgate has a long heritage of delivering high-quality legal advice. 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. In the recent case of GPP Big Field, the liquidated damages were actually described in the contract as a penalty. 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. This amount will be particular to the circumstances of the project, and the parties should calculate it … Copyright is owned by Fladgate LLP and all rights in such copyright are reserved. 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. In drawing a distinction between primary and secondary obligations, the court held that it does not review the fairness of the parties’ primary obligations, such as the consideration promised for a given standard … 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. Traditionally, a liquidated damages clause was an unenforceable penalty if the amount payable was extravagant in comparison to a genuine pre-estimate of the loss flowing from the breach. Even then, the cases do not sit easily together. 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’). [2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67. 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’. 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. However, if it can be shown that the damages caused by the breach are of an uncertain nature, the presumption will be rebutted. 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. Introducing PRO ComplianceThe essential resource for in-house professionals. 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. The employer was therefore entitled to claim liquidated damages for the entire period of delay, including delays which extended beyond the date of termination. Fladgate LLP 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. The UKSC held that neither Clause 5.1 nor 5.6 were penalties because they were primary obligations. 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