Liquidated Damages + Penalties Flashcards
What is a liquidated damages clause?
A clause which stipulates a certain sum which is to be payable on a particular breach of contract.
- parties agree it
Purpose of a liquidated damages clause?
a) commercially advantageous - it fixes the amount that will be due for breach as a debt arising under the contract without C having to deal w uncertainty of est its case for damages
b) clarity - makes clear to a party what is at stake if it fails to comply w its obligation. A party can then take the risk into account when determining the price for the contract.
Where are these clauses common in?
construction and technology industries to deal w consequences of non-performance such as delay
Can the court intervene in relation to liquidated damages clauses?
instances where court will intervene.
- strike down a liquidated damages clause if regarded as a penalty on a breaching party + C will only be entitled to ‘unliquidated’ damages (ie damages assessed in the normal way) as compensation for the breach.
Whats a penalty clause?
a liquidated damages clause which req breaching party to pay an excessive sum, such that it becomes a penalty = clause not upheld.
What 2 cases determine whether a clause is a valid ‘liquidated damages’ clause?
1) ParkingEye Limited v Beavis
2) Cavendish Square Holdings BV v Talal El Makdessi
What is the 1st part of the test in Cavendish Square Holdings BV v Talal El Makdessi?
1) Is clause primary/ secondary obligation?
- primary = if part of primary obligations in the commercial context of the contract, ie furthers the commercial objective of the contract.
If primary = clause will not engage the penalty rule at all (so = valid).
- secondary = if an obligation triggered by breach of contract to compensate the innocent party.
What is the 2nd part of the test in Cavendish Square Holdings BV v Talal El Makdessi?
If clause secondary obligation = clause is penalty if imposes a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the primary obligation.
To determine this - 2 steps:
1) What (if any) legitimate business interest is served + protected by the clause?
2) Is the detriment imposed to protect that interest extravagant, exorbitant or unconscionable?
burden = on person alleging clause = penalty
party can have a legitimate interest in enforcing performance which goes beyond simply being compensated for losses - a clause which was not disproportionate to that protection of that legitimate business interest = upheld.
Can the court intervene in a contract because it considers the price of a clause unfair?
No
When will it be hard for the party paying liquidated damages to challenge the validity of it on basis that its a penalty?
where parties have negotiated a contract, on a level playing field and with the assistance of professional advisors
If a clause is a primary obligation, is it a penalty clause?
No
If a clause is a secondary obligation, is it a penalty clause?
No - IF it protects a legitimate business interest + imposes a detriment which is not disproportionate to protect the legitimate interest.
= courts hold this to be a valid liquidated damages clause.
What happens if a court finds that a liquidated damages clause is a penalty?
liquidated damages clause = struck down + C entitled to unliquidated damages assessed by court using normal rules of contract law
Difference between primary + secondary obligation?
primary obligation = won’t engage the penalty rule
secondary obligation = could potentially be a penalty
