Developments in contract: Liquidated damages

​A brief summary of the principles, recent developments and practical tips relating to liquidated damages clauses.

Principles

  • A liquidated damages clause is enforceable regardless of the actual loss suffered by a party, provided the amount payable is not a penalty, ie when it was agreed it was not out of all proportion to the legitimate interest of the innocent party in the enforcement of the primary obligation.

  • Where the amount specified in the liquidated damages clause is a genuine attempt to pre-estimate the loss caused, that will be strong evidence that the clause is not a penalty.

  • Where liquidated damages are payable upon delay to performance of the contract, the court has previously arrived at different conclusions as to whether liquidated damages are payable where performance is never completed.

Recent developments

  • In Triple Point Technology v PTT Public Company Ltd the contractor achieved the first stages of an IT project 149 days late. When the customer refused to make payments for further stages, the contractor suspended work and left the site. The contractor sued on its unpaid invoices and the customer counterclaimed for liquidated damages under the contract.

  • The fact that the liquidated damages were referred to in the contract as a “penalty” did not make the clause unenforceable: the amount represented a genuine pre-estimate of the loss delay would cause.

  • The Court of Appeal held that whether a liquidated damages clause applies at all where the work has not been completed, or whether it ceases to operate when the contract is terminated, will depend upon its exact wording.

  • The wording of the clause here focused on the period between the contractual completion date and the date of actual completion, so did not apply where completion never occurred. Liquidated damages were available for the stages completed late, but not for stages never completed, where a separate claim in damages for breach of contract would be needed.

What this means

  • The courts continue to enforce liquidated damages clauses where the amount payable under them is not exorbitant. The test of whether the clause represents a true attempt to pre-estimate loss is also still one the courts will use.

  • The wording of liquidated damages clauses require close scrutiny to determine whether they will apply where completion is never achieved.

  • The Court expressed doubt about cases where a clause had been interpreted to mean liquidated damages could run until a replacement contractor had achieved completion, as this put control of the length of delay in the hands of the employer and second contractor.

  • Where a liquidated damages clause is not applicable because, on its wording, it does not apply where performance is never achieved, the employer will still have a claim for damages at large, but will have to prove its loss in the usual way.

For more on liquidated damages, see our series of short articles.

This document (and any information accessed through links in this document) is provided for information purposes only and does not constitute legal advice. Professional legal advice should be obtained before taking or refraining from any action as a result of the contents of this document.