Material is not to be reproduced in whole or in part without prior written consent. Difficulty in quantifying losses that flow from the damages will not prevent a party from claiming damages. 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. London Please contact email@example.com. 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. That said, it can often be quite difficult to estimate the effect of delay. 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. Keep a step ahead of your key competitors and benchmark against them. However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. 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. 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. 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. They are attractive as they avoid need for the injured party to prove actual loss resulting from breach. 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 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. We have been providing practical legal solutions to businesses and private clients for over 250 years. the amount was divided into specific items, with a cost beside each individual item. 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. : 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. Copyright is owned by Fladgate LLP and all rights in such copyright are reserved. Liquidated damages clauses are commonly used in construction contracts to provide the employer with a ready-made remedy for delay. 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. 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. 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? If back office functions are claimed, these must be directly caused by the breaches of contract. However, the Court will ultimately apply the test in Makdessiof whether the sum stipulated is exorbitant or unconscionable … Leighton provides a practical application of the above considerations. not a genuine pre-estimate of loss. 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 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). It is difficult to reconcile the GPP Big Field and Triple Point Technology cases without a detailed examination of the contract terms. Despite all of this, the Commercial Court held that the figure was not a penalty. The terms of a share sale agreement (“the Agreement”) contained restrictive covenants requiring Mr Makdessi not to become involved in a competing business. Liquidated damages are a genuine pre-estimate of the loss and damage caused by a breach. 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, 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. 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. 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. 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. 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. ", © Copyright 2006 - 2020 Law Business Research. Even then, the cases do not sit easily together. Covid-19: Business Continuity & Risk Assessments, The circumstances in which a liquidated damages clause will be struck down as a “penalty”; and. 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 “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. For more information, please see our Terms of Business and our Personal data processing notice. However, the court will not intervene simply because a hard bargain has been driven. 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. 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. The parties agree that the amounts recoverable under this Section 6(d) are a reasonable pre-estimate of loss and not a penalty. The sanctions for default were that Mr Makdessi would: (i) forfeit the balance of price payable by Cavendish for his shares; and (ii) be required to transfer all his remaining shares to Cavendish at a price which excluded any goodwill value. 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. An extravagant and unconscionable sum is a likely pointer to it being a penalty. 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. 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].". This article was first published by the International Law Office, a premium online legal update service for major companies and law firms worldwide. 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. 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. 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. Fladgate is an international multi-practice firm with deep expertise across a broad range of legal specialisms. Parties should avoid stipulating liquidated damages rates which could … 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 court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. Drafting Tips. E: firstname.lastname@example.org This case concerned the construction of arrays of solar panels, and there were five similar contracts where the same issue arose. DX: 37971 Kingsway. 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. In Makdessi, Mr Makdessi sold his business and then breached his restrictive covenant. Questions? Traditionally liquidated damages clauses (or "LDs") were defined as a genuine pre-agreed or pre-estimate of damages or a fixed sum of money (or other benefit) for the happening or non-happening of a specified event, typically that event is a breach of contract. The Court of Appeal has now considered “penalty clauses”. 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. 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. At the time of termination, the contractor had only completed one stage of the works. In the recent case of GPP Big Field, the liquidated damages were actually described in the contract as a penalty. For example, the High Court of Australia in AMEV-UDC Finance Ltd v Austin was of the view that a sum would be a penalty if there were a "degree of disproportion" sufficient to point to oppressiveness. The court held that the liquidated damages were not a genuine pre-estimate of the loss flowing from Speirs. 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. 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