Chris Nillesen reviews penalty & liquidated damages clauses
The recent cases of Unaoil Ltd v Leighton Offshore Pte Ltd [2014] EWHC 2965 (Comm), [2014] All ER (D) 102 (Sep) and Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC), [2014] All ER (D) 36 (Jul) show that the debate and interpretation between valid liquidated damages clauses and void penalty clauses remains highly relevant for all practising lawyers.
In the Unaoil case the court held a payment obligation to be a penalty and therefore void because it was “extravagant and unconscionable with a predominant function of deterrence”.
Whereas in the Bluewater case a damages clause was upheld as valid on the grounds that the sums in question were not unconscionable and had been assessed by experienced professionals at the time (an accurate pre-estimate of loss was not possible).
The two judgments show that parties should exercise care when drafting clauses which purport to attach financial consequences to contract breaches. The fact that experienced commercial operators negotiate and agree damages clauses (having the benefit of independent legal counsel) will not avail
