Liquidated Damages Clauses & Penalty Clauses PDF

Liquidated Damages Clauses and Penalty Clauses Welcome to PLS I – Week 8 with Dr Lorna Gillies  Liquidated Damages Clauses and Penalty Clauses: Introduction Our focus: What are the limits on parties who wish to stipulate in a contract the amount of da...

Liquidated Damages Clauses and Penalty Clauses Welcome to PLS I – Week 8 with Dr Lorna Gillies  Liquidated Damages Clauses and Penalty Clauses: Introduction Our focus: What are the limits on parties who wish to stipulate in a contract the amount of damages that will be payable following a breach?  Example 1 – what kind of clause is this? “If the Manufacturer fails to deliver a bus or buses on the date or dates specified, the Manufacturer will pay to the Company £1,000 per day for every such bus for each day that delivery is delayed” Example 2 – what kind of clause is this? “13.4 If the Price remains unpaid in whole or in part at any time more than 14 days after the due date, the Seller will be entitled to rescind the Missives, and to payment from the Purchaser, at the Seller’s option, of one (but not both) of: 13.4.1 ordinary damages in respect of all proper and reasonable losses arising out of the non-payment of the Price and failure of the Missives (which includes but is not limited to Wasted Expenditure); or 13.4.2 liquidated damages, payable on the end date, calculated as the amount of interest which would have run on the amount of the Price outstanding at the Prescribed Rate from the due date until the end date (under deduction of any amount by which the Price obtained by the Seller on a re-sale of the Property exceeds the Price).” (Source: Scottish Standard Clauses (Edition 5), 2022)  Why use these Clauses? “The purpose of the parties in fixing a sum is to facilitate recovery of damages without the difficulty and expense of proving actual damage; or to avoid the risk of under-compensation, where the rules of remoteness of damage might not cover consequential, indirect or idiosyncratic loss; or to give the promisee an assurance that he may safely rely on the fulfilment of the promise” (Chitty on Contracts pp1251-1252)  Liquidated Damages Clauses A clause in a contract that provides in money terms what is payable where a party breaches a contract Enforceable clauses  Penalty Clauses A clause in a contract that provides in money terms what is payable where a party breaches a contract, but one which involves an element of penalty for the breach Unenforceable clauses (In Scots Law, a penalty clause might be modified by the court to remove the penalty element and render it enforceable)  Measure of Damages “The broad general rule of the law of damages [is] that a party injured by the other party’s breach of contract is entitled to such money compensation as will put him in the position in which he would have been but for the breach” A/B Karlshamns Oljefabriker v Monarch Steamship Co Ltd 1949 SC (HL) 1 per Lord Wright Compensatory not punitive Think about this example as we go along … Andy engages Sara to paint his shed red. The fee is £100. The contract provides “if you [Sara] breach the contract you will pay me [Andy] a penalty of £50,000”. When Sara is buying the paint, she sees a blue colour that she much prefers so paints the shed blue instead. Is this a penalty? What would we have to consider?  Penalty Clause or Liquidated Damages Clause? Clydebank Engineering & Shipbuilding Co Ltd v Castaneda (1906) 7 F (HL) 77 Four torpedo boats Delivery several months late “The penalty for late delivery shall be at the rate of £500 per week for each vessel” Liquidated damages or penalty clause?  The Previous Approach on Liquidated Damages Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd AC 79 Terms used not conclusive Punishment v genuine pre-estimate of loss Nature of clause to be judged at time contract made Things to consider:- Is sum specified extravagant/unconscionable? If the breach is failure to pay, requiring payment of a greater sum as damages is a penalty A single lump sum payable regardless of the nature of the breach If the consequences of the breach could not be estimated, the sum will not automatically be a penalty. Repaying deposits or forfeiting sums paid are not penalty clauses  Moving towards current approach Hill v Stewart Milne Group and Gladedale (Northern) Ltd CSIH 50, per Lord Brodie, at 15, 18 Key points: At the date the contract was concluded, is the clause “exorbitant and unconscionable and designed to operate in terrorem”? Onus on party who seeks to argue that clause is a penalty Cogent evidence must be provided  Current Approach on Liquidated Damages Cavendish Square Holding v Talal El Makdessi; ParkingEye Ltd v Beavis UKSC 67 Three factors 1. Does the ‘wronged’ party have a legitimate interest to protect? Other interests, beyond compensation, may be protected 2. Is the amount specified exorbitant? 3. Is it a Primary / Secondary obligation? Primary – key to the contract – directing the parties’ performance = cannot be a penalty clause Secondary – operative on a breach of the contract – 1 and 2 above apply ie does the clause “impose a detriment out of all proportion to any legitimate interest of the innocent party”? What constitutes a penalty? Sum of money, transfer of property or withholding sum due to the contract breaker. Current Approach on Liquidated Damages: Cavendish Restrictive Covenant – Non-Competition Clause Right to future payments forfeited Right to acquire balance of shares at a low price Legitimate interest? Out of proportion to the interest? “The clause is in reality a price adjustment clause… [it determines] Cavendish’s primary obligations, i.e. those which fix the price, the manner in which the price is calculated and the conditions on which different parts of the price are payable” “The goodwill of this business was critical to its value to Cavendish, and the loyalty of Mr Makdessi… was critical to the goodwill”  Current Approach on Liquidated Damages: Parking Eye ParkingEye Ltd v Beavis Payment for overstaying in a car park – £85 20 signs in car park Was the charge an unenforceable penalty clause and unfair? Considered Unfair Terms in Consumer Contract Regulations 1999 - now Consumer Rights Act 2015 s.62(5) and s.67 Legitimate interest? Clause out of proportion to the particular interest / national law? C-415/11 Aziz v Caixa d’Estalvis de Catalunya 3 CMLR 5 Primary or secondary obligation? Genuine pre-estimate of loss? Whether or not the clause is punitive remains at the heart of the question  Current Approach on Liquidated Damages: Indigo Park Indigo Park Services Ltd v Watson SC DUND, 6th September 2017 Charge for failure to display valid ticket - £40 Costs of enforcement - £96 Legitimate Interests Performance of contracts Management of carpark Income stream Proportionality Nothing unconscionable – difference in amounts according to how late payment turns out to be Nothing unconscionable – a party agreeing to meet reasonable costs incurred in making good a breach of contract Review example to finish! Andy engages Sara to paint his shed red. The fee is £100. The contract provides “if you [Sara] breach the contract you will pay me [Andy] a penalty of £50,000”. When Sara is buying the paint, she sees a blue colour that she much prefers so paints the shed blue instead. Is this a penalty? What would we have to consider?