Liquidated damages and penalties Flashcards
What is the starting point for liquidated damages clauses?
They are generally upheld by the courts
When will courts intervene in LDCs?
Courts will only intervene if the sum seems excessive, deeming it a penalty
What is the test for penalties and where does it come from?
Cavendish v El Makdessi:
1. Is the clause a primary or secondary obligation - if primary, the penalty rule is not engaged.
2. If secondary, determine if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the primary obligation
What questions should be asked to determine limb 2 of the Makdessi test?
- what legitimate business is served and protected by the clause?
- is the detriment imposed to protect that interest extravagant, exorbitant or unreasonable?
Who has the burden of proof in alleging a clause is a penalty under the Makdessi test?
The person alleging the clause is a penalty bears the burden of proof.
Why should the Makdesi Test not be lightly invoked?
It breaches the principle of freedom of contract.
What is Specific Performance?
Specific Performance is a court order requiring the defendant to carry out its obligations under a positive term of the contract.
When is Specific Performance not awarded? (x6)
- When it would cause undue hardship on the defendant.
- For promises with no consideration.
- For breaches of contract of employment.
- In services where there has been a breakdown of trust and confidence or when subjective opinions must be considered.
- When supervision by the court would be necessary.
- When the obligation is not binding on both parties.
What is a Prohibitory Injunction?
A Prohibitory Injunction is a court order restraining a party from breaching a negative term.
When are Specific Performance and Prohibitory Injunctions used?
They are used when damages would be ineffective to provide adequate compensation.
What type of order is SP and PI?
discretionary and equitable remedies
What is a Guarantee in contract law?
A Guarantee is a promise by a party to ensure that another party carries out its obligations, or a promise to fulfil those obligations if the other party does not.
What is required for a Guarantee to be enforceable?
It must be in writing and signed by a guarantor.
What happens to a Guarantee if the original contract is set aside?
As a secondary obligation, the Guarantee is also set aside.
What is an Indemnity in contract law?
An Indemnity is a promise to reimburse someone in the event they suffer a stated loss.
Does a Surety remain liable under an Indemnity if the agreement with the debtor is set aside?
Yes, the Surety remains liable.
