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2H. Liquidated Damages and Related Situations.docx
2H._Liquidated_Damages_and_Related_Situations.docx
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2H. Liquidated Damages and Related Situations.docx...
2H._Liquidated_Damages_and_Related_Situations.docx-Liquidated Damages and Penal Clauses A
2H. Liquidated Damages and Related ...
2H._Liquidated_Damages_and_Related_Situations.docx-Liquidated Damages and Penal Clauses A
Page 1
Liquidated Damages and Penal Clauses
A liquidated damages clause provides for damage in situations where there is a
breach of contract. They are intended to overcome the difficulty of litigating for
damages and providing guidance when litigation does occur:
Kemble v Farren
(1829).
Robophone
[1966] UKCA: Diplock LJ
-
Special circumstances can be claimed (second stage of
Hadley’s
test)
without the guilty party having been communicated those circumstances.
The liquidated damages clause allows recovery for
all
loss irrespective of
regular remoteness rules.
-
You cannot claim more than a liquidate damages clause though — it caps
recovery.
-
A genuine estimate may not align directly with the actual loss, but they
should be commensurable: 50% recoverable under the clause with a 48-
57% recoverability under the common law.
Approach to assess a clause from
Robophone
:
1.
What damages was the plaintiff likely to suffer on breach of the contract
at the time it was entered into (per
Hadley
)?
2.
What is the size of damages awardable under the liquidated damages
clause?
3.
Is the amount under the damages clause disproportionately large
compared to the common law estimate of damages?
4.
If so, the presumption is that the clause is penal and unenforceable.
Recoverable damages under the common law.
5.
If not, the clause in the contract is applied.
Factors assessing a clause:
A liquidated damages clause will be
a genuine pre-estimation of
potential losses
, whereas a penalty clause will be a penalty:
Kemble
.
If
the loss is indirect or difficult to assess
then this will
support
a
finding of a liquidated damages clause so long as the quantification is
genuine:
Dunlop
.
If the value of the clause exceeds that of the damage that would arise then
this gives a presumption that the clause is a penalty clause:
Robophone
.
A number of principles may apply;
Dunlop
.
o
The clause must be a penalty in nature, irrespective that it is called
a liquidated damages clause.
o
The breach stems from a failure to pay money and the clause is of a
greater value.
o
The clause applies to any breach however minor:
Kemble
.
o
It supports the clause if there is a near-impossibility of assessing
the actual damages that may occur.
Page 2
Exception: Awards for Voluntary Termination
When a contract is voluntarily terminated and the party is required to pay
a certain sum, such as a percentage value of the item that was hired, then
this will not be vitiated:
Hall
[1938] CA.
o
Returning a bike with a 50% payment fee clause
If the clause is contained in the contract and arises from a voluntary
termination allowed for within the contract then the parties are bound:
Hall
[1938] CA.
Exception: Forfeiture of Deposits
If the contract requires a deposit and allow that deposit to be forfeited
when the contract is breached, such as through defaulting on payments,
then this is the intention of the parties and outside equity’s jurisdiction:
Galbraith
[1965].
If the contract requires a deposit for the purchase of land then it must be
reasonable to be outside of equity’s reach. A reasonable deposit is 10%
based on historical principle:
Dojap
[1993] PC.
o
25% deposit was held to be too much
If a deposit for purchase of land is greater than 10% then it must be
justified as reasonable in regards to special reasons, otherwise it will be
vitiated and the entirety of the deposit will be returned to the vendor:
Dojap
[1993] PC.
Stockloser
per Lord Denning: a deposit may be so large as to be penal in
nature.
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