Penalty clauses and liquidated damages: traps for the unwary

Liquidated damages (LDs) clauses stipulate that a certain specified sum of money will be payable by one (‘guilty’) party to the other (‘innocent’) party, where there has been a particular breach of contract.

LDs are a useful contracting tool in commercial agreements, but there is a danger that, if they are not considered properly or drafted correctly, they may be construed as a ‘penalty clause’, and therefore unenforceable under English law. The recent judgment in E-Nik Ltd v Department for Communities and Local Government has reignited the debate about ‘take or pay’ clauses by confirming that such provisions could also fall foul of the rule against penalties.

LDs are often payable where there is a delay in delivery or completion of a particular service, or where a service fails to meet certain specified targets. LDs bring a greater degree of certainty than relying on the contract law rules regarding claiming general damages - you know how much you can recover (or how much you will pay) if a certain type of breach occurs…

If you are registered and logged in to the site, click on the link below to read the rest of the Shoosmiths briefing. If not, please register or sign in with your details below.

Briefings from Shoosmiths

View more briefings from Shoosmiths

Analysis from The Lawyer

  • Hester: declined bonus worth almost £1m

    Pay checks

    Compliance and corporate governance codes for large financial institutions will undoubtedly include provisions to regulate high pay in the future

  • high street 150

    Focus: Alternative business structures - Law and new order

    There’s more to the ABS model than attracting the man in the street and procuring external investment. Partners at the big corporate firms, take note…

Overview

2 Colmore Square
38 Colmore Circus Queensway
Birmingham
B4 6BJ
UK
http://www.shoosmiths.co.uk

Turnover (£m): 87.00
No. of Lawyers: 373