Whereas liquidated damages are compensatory in nature and are pre-estimated damages. 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 … Our clients come to us to solve problems that are often complex and multifaceted. 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. It is important to note that this decision was based on the actual wording 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. 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. E: fladgate@fladgate.com The employer terminated the contract following a series of substantial delays to the work. Leighton provides a practical application of the above considerations. Fladgate is an international multi-practice firm with deep expertise across a broad range of legal specialisms. Become your target audience’s go-to resource for today’s hottest topics. A liquidated damages clause is a clause which requires a party to pay a sum if it breaches a term of 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. 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 employer claimed liquidated damages for the delays to the completed and uncompleted works. Liquidated damages are generally enforceable unless it constitutes a penalty, i.e. This case concerned the construction of arrays of solar panels, and there were five similar contracts where the same issue arose. 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 court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. the amount was divided into specific items, with a cost beside each individual item. In most standard form construction contracts, there are specific provisions which deal with losses suffered by the employer on termination for the contractor’s default. 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. 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 Court of Appeal has now considered “penalty clauses”. Mr Makdessi agreed to sell a controlling stake in the largest advertising group in the Middle East to Cavendish. 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 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. However, the Court will ultimately apply the test in Makdessiof whether the sum stipulated is exorbitant or unconscionable … "I use the newsfeeds to follow legislative changes and industry trends relevant to my division. Even then, the cases do not sit easily together. 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. 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. Today we are one of the UK’s top 100 law firms, with over 80 partners and a reputation for providing solutions that work. F: +44 (0)20 3036 7600 ‘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. 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. The next generation search tool for finding the right lawyer for you. 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". The two disputes that were considered, Cavendish Square Holding BV v El Makdessi and ParkingEye Ltd v Beavis,could not be more different. The purpose liquidated damages are to promote certainty especially in the commercial field. Penalty clauses are void and unenforceable, so all the benefits of a liquidated damages clause will be lost. The parties agree that the amounts recoverable under this Section 6(d) are a reasonable pre-estimate of loss and not a penalty. The clause was therefore enforceable. An extravagant and unconscionable sum is a likely pointer to it being a penalty. 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. Material is not to be reproduced in whole or in part without prior written consent. London [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. In cases of subcontracts, liquidated damages can be imposed if the contract is not completed by the agreed date. 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 amount will be particular to the circumstances of the project, and the parties should calculate it … However, if it can be shown that the damages caused by the breach are of an uncertain nature, the presumption will be rebutted. 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. 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. We operate in small teams in which partners not only take the lead but also do a significant amount of the detailed work. 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’. A list of members is available at the registered office shown above. 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. Equally, the courts are not there to help remedy a bad bargain. 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. 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. They are attractive as they avoid need for the injured party to prove actual loss resulting from breach. Register for a free subscription. 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. 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 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 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. If back office functions are claimed, these must be directly caused by the breaches of contract. 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. The term partner is used to refer to a member of Fladgate LLP. LADs are a pre-determined amount of damages or sum determined by reference to a formula/fixed rate as stipulated in the contract. 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. 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? 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].". 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. 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. Difficulty in quantifying losses that flow from the damages will not prevent a party from claiming damages. 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 is not the same as having to prove, in every case, the actual loss caused by the actual breach. 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. not a genuine pre-estimate of loss. 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. 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. 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. 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). Copyright is owned by Fladgate LLP and all rights in such copyright are reserved. The case itself concerned an IT contract which provided for completion and handover of the work in stages. Pre-estimate of loss. 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. 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 availability of liquidated damages following termination is even less clear. 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 liquidated damages figure should therefore reflect the loss that the employer would suffer in the event of a specified breach occurring. Our partner-led teams cover the following areas: Home / Insights / Liquidated Damages: An Update, Christian Charles, Senior Associate, Fladgate LLP (ccharles@fladgate.com). The Supreme Court, however, decided to completely abolish the dichotomy, emphasising that a damages clause may be neither a genuine pre-estimate … 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. [2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67. DX: 37971 Kingsway. At the time of termination, the contractor had only completed one stage of the works. The applicable principles in distinguishing between an enforceable liquidated damages and an unenforceable penalty were recently re-stated by the High … Organisations must protect their own interests by seeking legal advice on the specific terms of a liquidated damages clause before accepting it. 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. Understand your clients’ strategies and the most pressing issues they are facing. He claimed t… 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. However, the court will not intervene simply because a hard bargain has been driven. 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 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). However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. 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 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. 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. It is difficult to reconcile the GPP Big Field and Triple Point Technology cases without a detailed examination of the contract terms. If they are not, and the court views them as a penalty, they will not be enforceable. 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. 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. 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. These recent cases illustrate that the law in relation to liquidated damages is far from settled. 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. Parties should avoid stipulating liquidated damages rates which could … We have been providing practical legal solutions to businesses and private clients for over 250 years. I find the articles to be of a good quality and the topics are well researched and presented in a very user-friendly format. Introducing PRO ComplianceThe essential resource for in-house professionals. 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. 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. 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. 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. 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. This decision represents a significant redefinition of the law. 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. Genuine pre-estimate of loss. The employer was therefore entitled to claim liquidated damages for the entire period of delay, including delays which extended beyond the date of termination. 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 … : 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. There was a difference of over 30% in the expected electricity prices across the various contracts. 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. A number of cases followed that considered the distinction and in some instances imposed slightly different wording. 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. Even if the payment on breach is extravagant and unreasonable this is not conclusive that it is penal. 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. 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. Speirs was late in completing the works and Landtec sought to enforce the liquidated damages clause. 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. However, whether the parties intended the sum to be a penalty or genuine pre-estimate will have no bearing on the court's decision. 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. 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. https://hklegal.co.uk/2014/03/31/liquidated-damages-whats-enforceable However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. To be upheld by the courts, a liquidated damages clause must be a genuine pre-estimate of any loss likely to be sustained. Traditionally, the contractor would challenge liquidated damages as being excessively high compared to the likely loss sustained. Despite all of this, the Commercial Court held that the figure was not a penalty. What is clear is that there is no longer a “conventional” or “default” position which will apply on termination. 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 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 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. That said, it can often be quite difficult to estimate the effect of delay. However, a genuine “guess” was sufficient. 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. 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. 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’). In Cavendish Square, the Supreme Court held that whilst the “genuine pre-estimate” test is instructive, the correct test is whether the liquidated d… 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. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. To be enforceable, the liquidated damages sum must be a genuine pre-estimate of loss. The UKSC held that neither Clause 5.1 nor 5.6 were penalties because they were primary obligations. 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. … 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. Is it responsible to remove ‘responsible lending’? Keep a step ahead of your key competitors and benchmark against them. 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