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. E: fladgate@fladgate.com The logic is that, following termination, the contractor has no control over the time it takes to complete the works and is therefore at the mercy of the employer and any replacement contractor. 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 Court of Appeal has now considered “penalty clauses”. The applicable principles in distinguishing between an enforceable liquidated damages and an unenforceable penalty were recently re-stated by the High … not a genuine pre-estimate of loss. Whereas liquidated damages are compensatory in nature and are pre-estimated damages. 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’. 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? 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. 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. 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. Is it responsible to remove ‘responsible lending’? 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. 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. 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. "I use the newsfeeds to follow legislative changes and industry trends relevant to my division. 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). Fladgate LLP However, if A can calculate the individual loss for each of X, Y and Z (ie, if X is not done, but Y and Z are, the damages would be A$5,000; if X and Y are done, but not Z, the damages would be A$7,500), then A will be unable to rebut the presumption because the clause will not represent a genuine pre-estimate of the loss. the comparison between the sum provided for in the event of the breach and the greatest loss which could conceivably be proven in light of the total amount of the contract as a whole; the comparison between the sum provided and the nature of the breach; the equivalence of bargaining power at the time the agreement was entered into or whether one party was subject to unreasonable pressure in performance; the potential outcomes to which the clause was directed; and. The court has re-written the rule and introduced a more flexible test, which is intended to be applicable to more complicated cases. A list of members is available at the registered office shown above. Genuine pre-estimate of loss. 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. 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. 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. 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. Parties should avoid stipulating liquidated damages rates which could … What is clear is that there is no longer a “conventional” or “default” position which will apply on termination. The availability of liquidated damages following termination is even less clear. 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. 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. View location, T: +44 (0)20 3036 7000 This case concerned the construction of arrays of solar panels, and there were five similar contracts where the same issue arose. [2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67. 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 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 number of cases followed that considered the distinction and in some instances imposed slightly different wording. The next generation search tool for finding the right lawyer for you. 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. If, after looking at that calculation, the figure is extravagant or unconscionable, then the court will intervene. ", © Copyright 2006 - 2020 Law Business Research. It held that the sum was a penalty and "out of … He claimed t… This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. In the recent case of GPP Big Field, the liquidated damages were actually described in the contract as a penalty. 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. It is difficult to reconcile the GPP Big Field and Triple Point Technology cases without a detailed examination of the contract terms. If the sum to be paid under the liquidated damages clause is greater than the sum which ought to be paid, this will be a penalty (ie, where B must pay A A$100, but if B does not pay A A$100 then A is entitled to liquidated damages in the sum of A$1,000, this would be considered a penalty). Standard general conditions, routinely include liquidated damages clauses requiring one party to pay damages arising from some breach of contract or a defect. 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. There are several conceptual differences as to whether the … 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. Suppliers can take comfort from this, but would (understandably) rather not have this provision included. This amount will be particular to the circumstances of the project, and the parties should calculate it … 16 Great Queen Street 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). This is not the same as having to prove, in every case, the actual loss caused by the actual breach. 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. 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. 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. 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. [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. Our partner-led teams cover the following areas: We offer our clients with international business a technically expert, efficient service, characterised by commercial and cultural awareness and delivered by experienced, multilingual, multi-qualified teams of lawyers. Register for a free subscription. In cases of subcontracts, liquidated damages can be imposed if the contract is not completed by the agreed date. In Makdessi, Mr Makdessi sold his business and then breached his restrictive covenant. 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 delayed completion. 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. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. Introducing PRO ComplianceThe essential resource for in-house professionals. Our clients come to us to solve problems that are often complex and multifaceted. 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’). It is authorised and regulated by the Solicitors Regulation Authority, number 484783. The circumstances in which liquidated damages can be claimed after termination of the contract. However, the Court will ultimately apply the test in Makdessiof whether the sum stipulated is exorbitant or unconscionable … … Understand your clients’ strategies and the most pressing issues they are facing. At the time of termination, the contractor had only completed one stage of the works. 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. 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. Our partner-led teams cover the following areas: Home / Insights / Liquidated Damages: An Update, Christian Charles, Senior Associate, Fladgate LLP (ccharles@fladgate.com). 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. Become your target audience’s go-to resource for today’s hottest topics. The genuine pre-estimate is determined at the time of entering into the contract. The case itself concerned an IT contract which provided for completion and handover of the work in stages. 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. 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. 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. 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. Speirs was late in completing the works and Landtec sought to enforce the liquidated damages 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. 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 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. 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”. The Supreme Court, however, decided to completely abolish the dichotomy, emphasising that a damages clause may be neither a genuine pre-estimate … 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. The UKSC held that neither Clause 5.1 nor 5.6 were penalties because they were primary obligations. 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. 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. However, a genuine “guess” was sufficient. However, what if B only does X and Y, but not Z and still has to pay A$10,000 a day to A? 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. The liquidated damages figure should therefore reflect the loss that the employer would suffer in the event of a specified breach occurring. Questions? However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. 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. There was a difference of over 30% in the expected electricity prices across the various contracts. I find the articles to be of a good quality and the topics are well researched and presented in a very user-friendly format. 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. Further changes followed in the 18th and 19th centuries. Covid-19: Business Continuity & Risk Assessments, The circumstances in which a liquidated damages clause will be struck down as a “penalty”; and. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. damages must be a genuine pre-estimate of loss, because if a court considers that the amount is excessive it may categorise it as being a penalty, then the liquidated damages clause will become unenforceable and its benefits will be lost. 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 LLP is a limited liability partnership, registered in England and Wales with registered number OC334334. Today we are one of the UK’s top 100 law firms, with over 80 partners and a reputation for providing solutions that work. 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. 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].". Pre-estimate of loss. ‘Genuine damages’ means that the amount of damages you are claiming is reflective of the loss that you suffered as a result of the breach, and is not purely contained within the client agreement to penalise the client. 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. 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