The Supreme Court, however, decided to completely abolish the dichotomy, emphasising that a damages clause may be neither a genuine pre-estimate … Parties should avoid stipulating liquidated damages rates which could … 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. Material is not to be reproduced in whole or in part without prior written consent. In Cavendish Square, the Supreme Court held that whilst the “genuine pre-estimate” test is instructive, the correct test is whether the liquidated d… Covid-19: Business Continuity & Risk Assessments, The circumstances in which a liquidated damages clause will be struck down as a “penalty”; and. In addition to the above words 'extravagant', 'unconscionable' and 'out of all proportion', in Multiplex Constructions Pty Ltd v Abgarus Pty Ltd the court used "greater and unreasonably or inequitably so" and "true damages reasonably assessed". This decision represents a significant redefinition of the law. The genuine pre-estimate is determined at the time of entering into the contract. 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. [2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67. 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. 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. 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. 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. not a genuine pre-estimate of loss. That said, it can often be quite difficult to estimate the effect of delay. 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. This case concerned the construction of arrays of solar panels, and there were five similar contracts where the same issue arose. Please contact customerservices@lexology.com. 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). Further changes followed in the 18th and 19th centuries. 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. It is difficult to reconcile the GPP Big Field and Triple Point Technology cases without a detailed examination of the contract terms. [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. Fladgate LLP is a limited liability partnership, registered in England and Wales with registered number OC334334. 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. ‘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. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. 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. 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… 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. The Court of Appeal has now considered “penalty clauses”. This amount will be particular to the circumstances of the project, and the parties should calculate it … The employer was therefore entitled to claim liquidated damages for the entire period of delay, including delays which extended beyond the date of termination. This distinction between liquidated damages and penalty is suspended in the Indian Contract Act but the English law upholds the distinction. 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. 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. 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. 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. Today we are one of the UK’s top 100 law firms, with over 80 partners and a reputation for providing solutions that work. 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. LADs are a pre-determined amount of damages or sum determined by reference to a formula/fixed rate as stipulated in the contract. WC2B 5DG
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. Fladgate has a long heritage of delivering high-quality legal advice. 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. If they are not, and the court views them as a penalty, they will not be enforceable. At the time of termination, the contractor had only completed one stage of the works. 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. 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. 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. 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. 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. 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. If, after looking at that calculation, the figure is extravagant or unconscionable, then the court will intervene. 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. Equally, the courts are not there to help remedy a bad bargain. It is important to note that this decision was based on the actual wording of the contract. 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. Mr Makdessi agreed to sell a controlling stake in the largest advertising group in the Middle East to Cavendish. 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. Our partner-led teams cover the following areas: Home / Insights / Liquidated Damages: An Update, Christian Charles, Senior Associate, Fladgate LLP (ccharles@fladgate.com). The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. 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. 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 … In Makdessi, Mr Makdessi sold his business and then breached his restrictive covenant. We operate in small teams in which partners not only take the lead but also do a significant amount of the detailed work. 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. 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. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. The OFT’s view was … To be enforceable, the liquidated damages sum must be a genuine pre-estimate of loss. 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. The employer claimed liquidated damages for the delays to the completed and uncompleted works. 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. Despite all of this, the Commercial Court held that the figure was not a penalty. 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. There was a difference of over 30% in the expected electricity prices across the various contracts. To be upheld by the courts, a liquidated damages clause must be a genuine pre-estimate of any loss likely to be sustained. https://hklegal.co.uk/2014/03/31/liquidated-damages-whats-enforceable It held that the sum was a penalty and "out of … 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. Between the decisions in Dunlop and AMEV-UDC, a number of cases diluted the standard imposed by Dunlop. 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. Whereas liquidated damages are compensatory in nature and are pre-estimated damages. 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. Traditionally, the contractor would challenge liquidated damages as being excessively high compared to the likely loss sustained. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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 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. 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. Genuine pre-estimate of loss. F: +44 (0)20 3036 7600
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 a court considers that the amount is out of all proportion it may consider it to be a penalty. These recent cases illustrate that the law in relation to liquidated damages is far from settled. 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. 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. 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. The clause was therefore enforceable. 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. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. The employer terminated the contract following a series of substantial delays to the work. 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. 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. 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. 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). However, the Court will ultimately apply the test in Makdessiof whether the sum stipulated is exorbitant or unconscionable … 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”. 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. I find the articles to be of a good quality and the topics are well researched and presented in a very user-friendly format. ", © Copyright 2006 - 2020 Law Business Research. Leighton provides a practical application of the above considerations. 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