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Mon August 08 2022

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Liquidated damages clause was not a penalty

10 Sep 10 The claimant was a builder of luxury yachts. Under a Yacht Construction Contract dated 25 September 2008, the claimant agreed to construct a yacht for a special purpose company called Shoreacres Ltd for 38 million (Euros) which was payable in instalments.

The scheduled delivery date was 30 November 2011. The defendant gave a personal guarantee for the sum. The first instalment of the contract price was not paid, and the claimant treated this as a repudiatory breach, terminating the contract.

The claimant now sought summary judgment under the guarantee. The defendant resisted the summary judgment claim, arguing that the liquidated damages clause in the parties’ contract was a penalty and, consequently, there could be no liability upon which the guarantee could fasten. The claimant submitted that the defendant did not have an arguable case, or, alternatively, that even if the clause were unenforceable and the principal debtor was not liable, the guarantor was still liable under the terms of the guarantee, or that an estoppel arose. The claimant had an alternative claim for the first instalment of the price which had fallen due under the contract at the time of termination. The defendant argued that having elected to sue on the liquidated damages clause, the claimant should not be entitled to summary judgment for the first instalment.

The contract’s termination clause entitled the claimant to terminate the contract if the buyer failed to pay any sum within 45 days of it becoming due. Clause 16.3 continued:

 “16.3 Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the Builder will promptly return the balance of sums received from the Buyer together with the Buyer’s Supplies if not yet installed in the Yacht.”

When the buyers’ lawyers challenged the level of 20% as being too high, the claimant insisted that it was a genuine pre-estimate of its loss, but offered to revert to a more conventional provision under which it would complete the yacht and sell it to someone else, claiming any loss incurred from the buyer. However, the claimant pointed out that this would mean it retaining the buyer’s deposit for a very long time, particularly if the matter resulted in an arbitration.

Between March and June 2008, there was a great deal of discussion between the claimant and the buyer about whether the level of liquidated damages should be 10% or 20%. The defendant maintained that the 20% level was not a genuine pre-estimate of damage, and it was a penalty because, at the time of entering into the contract, the parties would never have considered that a loss approaching 20% would be incurred if the contract were terminated. Just before the hearing, the defendant produced a letter from a company describing itself as “The Large Luxury Yacht Experts”, which supported his argument that the figure of 20% was excessive. However, the letter did not comply with the Civil Procedure Rules requirements relating to expert evidence; nor did it explain upon what basis this conclusion was arrived at or any reasons for it.

The defendant’s submissions that the clause was a penalty clause did not take account of the provisions of clause 16.3 in its entirety. The clause placed an obligation on the builder, namely an obligation to “promptly, [to] return the balance of sums received from the Buyer together with the Buyer’s supplies if not yet installed in the Yacht”. The contract was a construction contract with scheduled delivery some three years after the contract date. Over that period of time, the price became payable by instalments. The purpose of the clause was to strike, or seek to strike, a balance between the interests of the parties should the builder lawfully terminate upon the buyer’s breach. The buyer had agreed to this clause. The evidence showed that the clause’s purpose was not a deterrent but it fell within the principles cited in Murray v Leisureplay, [2005] EWCA Civ 963, i.e. that a particular clause may be commercially justifiable, provided that its dominant purpose is not to deter the other party from breach. The claimant submitted that the evidence showed that clause 16.3 had a clear commercial and compensatory justification, and was not merely a liquidated damages clause. It also provided for payments to the buyer and was not a deterrent. As such, it fell within these principles.

The evidence clearly showed that the purpose of the clause was not deterrent, and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder. The court rejected the defendant’s submission that it had to form a view as to the maximum possible loss that the parties would have expected to flow from any determination of the contract and the extent to which the stipulated figure for liquidated damages exceeded that maximum possible loss. Since the court could not do so without extensive disclosure, and factual and expert evidence, the defendant submitted that it must be permitted to defend the claim. The court rejected this. This was a contract for the construction and sale of a very expensive yacht, described as a “super-yacht”. Both parties had had the benefit of expert representation when concluding the contract, and its terms, including the liquidated damages clause, had been freely entered into. What contracting parties agreed should normally be upheld. In the judge’s view, the clause was not even arguably a penalty and was enforceable. 

Azimut Bennetti Spa V Darrell Marcus Healey, [2010] EWHC 2234 (Comm)

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