Liquidated damages & penalties

Question 1

What does liquidated damages refer to?

Answer 1

= a clause in the contract that specifies the amount of damages for a type of loss

Question 2

When can court intervene in relation to liquidated damages provision?

Answer 2

imposes a penalty

Question 3

Test to see whether a liquidated damages clause constitutes penalty

Answer 3

• is the clause a primary or secondary obligation? (if primary, valid)
• if secondary, the clause will be a penalty if it imposes a detriment out of all proportion to any legitimate interest of the innocent party in the performance of the primary obligation.

Question 4

BoF for penalty clause

Answer 4

on person alleging that it’s a penalty clause.

Question 5

is it a primary or secondary obligation?

Answer 5

● Primary = furthers commercial objects
● Secondary = obligation triggered by breach of primary clause to compensate innocent

Question 6

Liquidated damages clause:

Answer 6

A clause which stipulates a certain sum which is to be payable on
a particular breach of contract.

Question 7

Penalty clause:

Answer 7

A liquidated damages clause which requires the party in breach to pay an
excessive sum, such that it becomes a penalty, and therefore the clause will not be upheld.

Question 8

Is the clause a primary or secondary obligation?

Answer 8

(i) A clause will be primary if it is part of the primary obligations in the commercial context of the contract, ie furthers the commercial objective of the contract.

(ii) A clause will be secondary if it is an obligation triggered by breach of contract to compensate the innocent party.

Question 9

to determine whether a secondary obligation is a penalty clause, Supreme Court gave two steps:

Answer 9

What (if any) legitimate business interest is served and protected by the clause?
Is the detriment imposed to protect that interest extravagant, exorbitant or
unconscionable?