Simplifying disputes: With liquidated damages losses are estimated ex ante, (at the time of contracting). But things have begun to change. Losses that cannot be easily quantified, such as reputational issues, goodwill and third party interests (i.e. A fool proof clause of liquidated damages in the contract would address all of these issues as higher degree of contractual certainty would be granted. In 1914, the U.K. House of Lords in Dunlop Pneumatic Tyre Co. v New Garage and Motor Co.,  UKHL 861 [Dunlop] created a test to determine whether LDs are a penalty. Accordingly, it was not penal. But compensation is not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations.”. It was found the provisions did not reflect a genuine pre-estimate of loss, were extravagant and unreasonable compared with the likely damage arising from the breach, and had no commercial justification. The Cavendish Appeal concerned the effect of two clauses related to non-compete covenants in an agreement regarding the sale of a controlling stake in business. The sanctions for default were that Mr Makdessi would: (i) forfeit the balance of price payable by Cavendish for his shares; and. <>/ExtGState<>/XObject<>/ProcSet[/PDF/Text/ImageB/ImageC/ImageI] >>/MediaBox[ 0 0 595.32 841.92] /Contents 4 0 R/Group<>/Tabs/S/StructParents 0>> The traditional test for distinguishing between a liquidated damages clause and a penalty clause was laid down in the seminal House of Lords decision in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (“Dunlop”). However, pursuant to Article 390 of the Law of Civil Transactions of the State of the United Arab Emirates, Federal Law No. The facts of the case are that Dunlop believed that New Garage had breached an agreement not to resell their tyres at a lower price than that stipulated in the contract, and so sued them. The Singapore Court of Appeal, in Xia Zhengyan v Geng Changqing  3 SLR 732, shortly before the decision in Cavendish was issued, endorsed again (at ) the test set out in Dunlop for whether a liquidated damages clause is penal. • In SG, Dunlop Pneumatic genuine pre-estimate of loss test applies Four out of the five developments failed to be commissioned by the relevant due dates, with the delays ranging from 44 to 285 days.  QCA 291 the Court of Appeal applied the Dunlop test and confirmed that the liquidated damages clause was not extravagant and unconscionable in amount in comparison with the greatest loss that could be conceivably proved. Accordingly, the charge was enforced. Mr Makdessi agreed to sell a controlling stake in the largest advertising group in the Middle East to Cavendish. First there was the decision of the High Court of Australia in Andrews v ANZ. Such clauses avoid that judges have to compute the damages ex post. Introduction . In the context of construction projects this new test will require cons… The Dunlop approach was predicated on the assumption that the sole purpose of a liquidated damages clause is to compensate the innocent party for losses arising from a breach of contract. Students of construction law love writing papers about the distinction between liquidated damages clauses and penalty clauses.Traditionally, it has been relatively firm ground, and in particular, everybody trots out the dicta of Lord Dunedin in Dunlop v New Garage.. stream The case of Dunlop Pneumatic Tyre Co. Ltd. v New Garage and Motor Co. Ltd.  created a precedent for the extent to which liquidated damages may be sought for failure to perform a contract.. The decision of the Supreme Court in the Cavendish and Beavis Appeals has replaced the century-old test in Dunlopwith a more modern and flexible test. The £85 charge was therefore upheld. These appeals provided the first opportunity for the Supreme Court, or the House of Lords, to consider the law concerning penalty clauses in approximately 100 years. But things have begun to change. The Dunlop test, in accordance of which the enforceability of liquidated damages mainly rests upon difficulty of proof of loss and the disproportion of the agreed sum, is relatively rigid from the point of view of commercial contractors that seek for a more the same thing for the purpose of the aforementioned test. The test, formulated by the majority and set out at paragraph 32 of the Judgment, is whether: “… the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation.”, “The innocent party can have no proper interest in simply punishing the defaulter. (i) whether the £85 charge was unenforceable at common law on the basis it was a penalty; and. The key authority on liquidated damages remains the speech of Lord Dunedin in Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited  AC 79 where he set out a series of propositions on the distinction between liquidated damages and penalties. Is the clause a penalty clause? It noted that the purpose of a penalty clause was to deter breaches of contract, and a clause would only be a penalty if it was “extravagant” and “unconscionable”. Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd  UKHL 1 (1 July 1914) is an English contract law case, concerning the extent to which damages may be sought for failure to perform of a contract when a sum is fixed in a contract. liquidated damages clauses and damages at common law. The test in Singapore on whether an LD clause is enforceable continues to ... decision of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 79. The terms of a share sale agreement (“the Agreement”) contained restrictive covenants requiring Mr Makdessi not to become involved in a competing business. The test reflects the fact that parties may have a legitimate commercial interest to protect in enforcing the performance of contractual obligations which may extend beyond compensation for any identifiable commercial losses that breach may cause, or the deterrence of a breach of contract. A liquidated damages provision fixes the sum payable as damages for a party’s breach and acts as a liability cap. The established test for a penalty was laid down in Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd and affirmed in Ringrow Pty Ltd v BP Australia Ltd (2005) We regularly produce newsletters, articles and papers to keep our clients and other stakeholders up to date with the latest developments and debates in construction and energy law. A penalty is a stipulated payment of money meant to frighten or deter a party from breaching a term. %PDF-1.5 GPP, the employer, and Prosolia UK, the contractor, entered into five EPC contracts for the development of five different solar power generation plants in the United Kingdom. Therefore, the penalty rule kicked in and the court had to consider whether clause 4 was a legitimate liquidated damages clause. However, if the amount of liquidated damages bore absolutely no resemblance to the loss, was extravagant and unconscionable, and was intended to deter a breach of contract, the court would be more willing to construe it as an unenforceable penalty. The penalties rule is changing and we can expect to see new and interesting cases debating the topic. The fact that the term “penalty” or “liquidated damages” is used is an ... essence of liquidated damages is a genuine covenanted pre-estimate of damage. It held that only if a sum is of an unconscionable amount will it be considered penal and unenforceable. He refused to pay on the basis that the clause was a penalty and was therefore unenforceable. You can browse some of our most recent materials Here, or sign up to our monthly publications below to receive them directly to your inbox. A number of points arise out of the judgment: The decision of the Supreme Court in the Cavendish and Beavis Appeals has replaced the century-old test in Dunlop with a more modern and flexible test. The court found that the genuine pre-estimate of loss test in Dunlop was still applicable in a straightforward damages clause such as clause 4. endobj As a result, they were unconscionable. Whereas liquidated damages are compensatory in nature and are pre-estimated damages. This distinction between liquidated damage… Conclusion. Cavendish appealed to the Supreme Court. Also where the loss to be recovered is greater than the pre-determined loss then it amounts to a penalty. This then brought the parties back to those principles and the tests mentioned in Dunlop Pneumatic: Though the parties to a contract who use the words “penalty” or “liquidated damages” may on the face of it be supposed to mean what they say, yet the expression is not conclusive. The court found that the genuine pre-estimate of loss test in Dunlop was still applicable in a straightforward damages clause such as clause 4. However, the Judge found that the charge was commercially justifiable, was not improper or excessive in amount in the circumstances, and was not unfair pursuant to the Unfair Terms in Consumer Contract Regulations 1999 (“UTCCR”). Pre-Makdessi You will all be familiar with the test from Dunlop Pneumatic Tyre Co v New Garage Motor Co Ltd for distinguishing between a liquidated damages clause and a penalty. Introduction . They also set up some tests (point 4): The parties' choice of titling the clause a 'liquidated sum' or 'penalty' has no effect. Conversely, “if the contract does not impose… an obligation to perform the act, but simply provides that, if one party does not perform, he will pay the other party a specified sum, the obligation to pay the specified sum is a conditional primary obligation and cannot be a penalty.”. Currently, the law on liquidated damages in Singapore is that as stated in Dunlop. At first instance HHJ Moloney QC found in favour of ParkingEye. The court held that the charge was not a genuine pre-estimate of loss; it was aimed at deterring motorists from overstaying the permitted period; was not extravagant or unconscionable; and crucially, was justifiable for both commercial and social reasons. (ii) whether the charge was unfair (and therefore unenforceable) under the UTCCR. In relation to the question as to what makes a contractual provision penal, reference was made to the four tests formulated by Lord Dunedin in Dunlop and to the essential question as to whether the agreement was “unconscionable” or “extravagant”. (ii) what makes a contractual provision penal? The Supreme Court considered the development of the law in relation to penalty clauses. In relation to the circumstances in which the rule is engaged, it is necessary to consider how the obligation is framed, i.e., whether it is a conditional primary obligation or a secondary obligation providing an alternative to damages. other commercial. However, pursuant to Article 390 of the Law of Civil Transactions of the State of the United Arab Emirates, Federal Law No. For us in construction, that means working out the level of liquidated damages that are necessary to protect the client’s legitimate interest of having the project complete on time. His interest is in performance or in some appropriate alternative to performance. Th… The Judge found that the predominant purpose of the £85 charge was to deter motorists from breaching the maximum two-hour free stay period (and therefore the contract), which would at first glance render it a penalty. In the context of construction projects this new test will require cons… Mr Beavis overstayed the maximum stay by one hour, as a result of which he was charged £85. The most important proposition of law impacting on liquidated damages provisions typically found in construction contracts is derived from the leading judgment of Lord Dunedin in Dunlop Pneumatic Tyre Company Ltd v New Garage Motor Co Ltd (1915).2. In the context of liquidated damages in construction or supply contracts, the COVID-19 Act provides that in calculating the amount of liquidated damages payable as a result of an inability to perform an obligation, where the default occurs during the Relevant Period, then that period shall not be included in the calculation of period of delay of performance by the defaulting party. The interest of ParkingEye was income from the £85 charge which met the running costs of what was considered by the Supreme Court to be a legitimate commercial scheme, plus a profit margin. GPP, the employer, and Prosolia UK, the contractor, entered into five EPC contracts for the development of five different solar power generation plants in the United Kingdom. This is fundamental as “where a contract contains an obligation on one party to perform an act, and also provides that, if he does not perform it, he will pay the other party a specified sum of money, the obligation to pay the specified sum is a secondary obligation which is capable of being a penalty”. This principle was established over 100 years ago in the Dunlop case 2 where Lord Dunedin explained that “the essence of liquidated damages is a genuine covenanted pre-estimate of damage … it will be held to be a penalty if the sum stipulated for it is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from … The High Court noted that the law in Singapore remains that articulated in Dunlop, and therefore applied the test in Dunlop. 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