46 law Unto the breach ...
This month Derek Rodgers, managing partner of Gardner Leader solicitors, talks about contractual clauses and how best to prepare for any potential breach of contract
As the England football team has found out the hard way on more than one occasion, penalties can be tricky.
The same is true when drafting contractual clauses.
Including a
provision which says, in effect, “and if you breach this contract you will pay me £250,000” can seem attractive. Simple, clear and a good deterrent. But almost certainly unenforceable.
The basic rule in English law is that if a clause is primarily intended to deter a party from breach, it is a penalty. The court will not enforce it and the parties will have to fall back on the normal rules for assessing damages in a breach of contract case.
Often however, the parties will genuinely want to avoid the cost and uncertainty that a damages claim will involve. They will try to resolve the damages in advance by agreeing that, if the contract is breached, the ‘innocent’ party’s loss is likely to be a certain amount and that is what the party in breach must pay.
If
this ‘liquidated damages’ clause is a genuine pre-estimate of loss which is likely to arise from the breach, then it will be enforceable.
The difference between hitting the
back of the net with a liquidated damages clause and shooting wide with a penalty can be very small. The words used will be helpful but not conclusive – calling something a liquidated damages clause when it is clearly a penalty will not make it enforceable. Evidence that the parties have considered the likely loss and arrived at a reasonable figure will be essential.
It is obviously unlikely
that the sum agreed in advance will exactly match the actual loss. The fact that the liquidated damages sum is more than the actual loss will not in itself make it unenforceable. However, if it is more than the actual loss could ever have been, then it is likely to be considered a penalty.
Liquidated damages clauses are often used for minor or partial breaches of a contract such as late delivery. They are less appropriate where a party has failed altogether in performing its obligations.
It may be tempting to put in a provision which is arguably a penalty and hope that it serves its deterrent purpose, or that the other party will just pay up in the event of a breach and not argue about it. The risk however is that you end up in an
even messier litigation – arguing first about whether the provision is enforceable and then, if it is not, having the very argument about damages you wanted to avoid.
Details: Derek Rodgers 01635-508080
www.businessmag.co.uk
THE BUSINESS MAGAZINE – THAMES VALLEY – DECEMBER 12/JANUARY 13
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