: 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. This is not the same as having to prove, in every case, the actual loss caused by the actual 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. The Supreme Court, however, decided to completely abolish the dichotomy, emphasising that a damages clause may be neither a genuine pre-estimate … 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. The Court of Appeal has now considered “penalty clauses”. 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. 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. 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 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. 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. 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 availability of liquidated damages following termination is even less clear. Speirs was late in completing the works and Landtec sought to enforce the liquidated damages clause. Today we are one of the UK’s top 100 law firms, with over 80 partners and a reputation for providing solutions that work. 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. 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. In cases of subcontracts, liquidated damages can be imposed if the contract is not completed by the agreed date. This distinction between liquidated damages and penalty is suspended in the Indian Contract Act but the English law upholds the distinction. An extravagant and unconscionable sum is a likely pointer to it being a penalty. LADs are a pre-determined amount of damages or sum determined by reference to a formula/fixed rate as stipulated 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. the amount was divided into specific items, with a cost beside each individual item. 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 liquidated damages figure should therefore reflect the loss that the employer would suffer in the event of a specified breach occurring. 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. If you would like to learn how Lexology can drive your content marketing strategy forward, please email enquiries@lexology.com. Mr Makdessi agreed to sell a controlling stake in the largest advertising group in the Middle East to Cavendish. Fladgate is an international multi-practice firm with deep expertise across a broad range of legal specialisms. 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. If, after looking at that calculation, the figure is extravagant or unconscionable, then the court will intervene. [2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. However, what if B only does X and Y, but not Z and still has to pay A$10,000 a day to A? 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. F: +44 (0)20 3036 7600 The purpose liquidated damages are to promote certainty especially in the commercial field. 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). 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. That said, it can often be quite difficult to estimate the effect of delay. 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. 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 “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 back office functions are claimed, these must be directly caused by the breaches of contract. 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 has re-written the rule and introduced a more flexible test, which is intended to be applicable to more complicated cases. The employer terminated the contract following a series of substantial delays to the work. 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 … E: fladgate@fladgate.com 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. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. For more information, please see our Terms of Business and our Personal data processing notice. 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. Traditionally, the contractor would challenge liquidated damages as being excessively high compared to the likely loss sustained. They are attractive as they avoid need for the injured party to prove actual loss resulting from breach. Organisations must protect their own interests by seeking legal advice on the specific terms of a liquidated damages clause before accepting it. If a court considers that the amount is out of all proportion it may consider it to be a penalty. Covid-19: Business Continuity & Risk Assessments, The circumstances in which a liquidated damages clause will be struck down as a “penalty”; and. 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. Leighton provides a practical application of the above considerations. Further changes followed in the 18th and 19th centuries. To be enforceable, the liquidated damages sum must be a genuine pre-estimate of loss. Liquidated damages clauses are commonly used in construction contracts to provide the employer with a ready-made remedy for delay. The terms of a share sale agreement (“the Agreement”) contained restrictive covenants requiring Mr Makdessi not to become involved in a competing business. I find the articles to be of a good quality and the topics are well researched and presented in a very user-friendly format. 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. 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 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. A list of members is available at the registered office shown above. Keep a step ahead of your key competitors and benchmark against them. 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. 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