14 December 2010 by Vincent Billings

Liquidated damages off a ducks back

Liquidated damages clauses in commercial contracts provide for the payment of a specified amount by a party who is in breach of contract, to the other party. Such clauses are enforceable if the amount stated in the contract is a genuine pre-estimate of the loss suffered by the other party.

However, a clause purporting to be a liquidated damages clause which, in reality, seeks to act as a deterrent from one party breaching the contract by specifying an unreasonably high sum (which is not a genuine pre-estimate of loss) is a penalty, and is unenforceable. That said a liquidated damages clause is not unenforceable merely because it does not only represent a pre-estimate of loss. Such a clause may be upheld if it has a commercial justification and is not intended to be a deterrent.

In the recent case of Azimut-Benetti SpA (Benetti Division) v Darrell Marcus Healey, the High Court has upheld a liquidated damages clause using the “commercial justification” test. In this case the parties entered into a contract which included a liquidated damages clause in the contract which stated that if one party did not make a payment within a stipulated time, the other party had the right to terminate the contract and retain or recover 20% of the contract price together with the non-defaulting party repaying the balance of the contract monies to the defaulting party.

The High Court found the liquidated damages clause enforceable using the following reasoning:

  • The clause was not a penalty, and the division between a genuine pre-estimate of damages and a penalty does not necessarily cover all possibilities, it is possible for a clause to fall into neither category and still be enforceable by virtue of being commercially justifiable, provided that the main purpose of such a clause must not be to deter the other party from breach.
  • Each party agreed to the liquidated damages clause, and as the clause also provided for the possibility of repayment, the clause could not be seen as a deterrent, rather, it was commercially justifiable as providing a balance between the parties on lawful termination in the circumstances.
  • Evidence of negotiation can be adduced to demonstrate the intent of the parties in determining whether or not a clause had a commercial purpose.
  • In commercial contracts of this kind, what the parties have agreed should normally be upheld.

Although this decision did not explicitly state the requirements of a valid commercial justification, it does create some room for manoeuvre for liquidated damages clauses in commercial contracts. However, parties must be prepared to justify any proposed figures as a genuine pre-estimate of loss, as this remains the most reliable way to justify such a clause. A record of oral and written negotiations of the relevant clause should also be kept to provide support for such a justification.

5 November 2010 by

Duty Bound

The Chancellor of the Exchequer announced in this year’s budget that VAT will increase from the present rate of 17.5% to 20% with effect from 4 January 2011.

15 November 2010 by Sonal Ghelani

Houses of Multiple Occupation

If you are a Landlord of a house which you let out to up to six tenants, then you should be aware that the law has changed from 1 October 2010, as you no longer need to apply for planning permission for a change of use from a dwelling house to a small HMO (House of Multiple Occupation).

Signup To Our Weekly e-News

"*" indicates required fields

We’ll never share your details with any third party in line with our privacy policy.