Lecture 6
• Plaintiff recovery sums of money
• Two categories: liquidated damages and fixed sums relate to action of debts.
Liquidated Damages
Clause that stipulates the sum of money to be paid by the contract breaker to the other party as compensation for the breach of contract. In Environmental Systems v Peerless Holdings”
the ordinary meaning of liquidated damages is a sum fixed by the parties to a contract as a genuine pre-estimate of damage in the event of breach, whether as a pre-determined lump sum, or by means of a specified calculation or scale of charges or other positive data’.
The advantage of such a clause is that, subject to the power of the court in appropriate cases to grant relief against forfeiture, the plaintiff does not have to prove any loss or damage in relation to the breach of contract, as to the obligation case upon the defendant is enforceable against the defendant upon the plaintiff’s termination of the contract for the defendant’s breach.
Andrews v ANZ: in general terms a stipulation prima facie imposes a penalty on a party, if as a matter of substance it is collateral to a primary stipulation in favour of a second party and this collateral stipulation, upon the failure of the primary stipulation, imposes upon the first party an additional detriment, the penalty to the benefit of the second party. In that sense, the collateral or accessory is described as being in the nature of a security for and in terrorem of the satisfaction of the primary stipulation.
AMEV-UDC Finance Ltd v Austin: In the case of provisions for agreed compensation and, perhaps, provisions limiting liability, that latitude is mutually beneficial to the parties. It makes for greater certainty by allowing the parties to determine more precisely their rights and liabilities consequent upon breach or termination, and thus enables them to provide for compensation in situations where loss may be difficult or impossible to quantify or, if quantifiable, may not be recoverable at common law. And they may do so in a way that avoids costly and time-consuming litigation. The test to be applied in drawing that distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature fo the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct in seeking to enforce the term.
if A claims that he or she is owed $X by B and the claim is settled out of court on the basis that B will pay, by agreed instalments, the lesser sum of $Y, if the settlement agreement also stipulates that a breach by B in paying any of the instalments will mean that B must pay the full amount claimed ($X), such a stipulation will be viewed as a penalty. This is so because the settlement out of court means that A’s claim for $X was never established as a presently existing debt; it was merely an amount claimed.
In Ringrow Pty Ltd v BP Australia Pty Ltd a unanimous High Court observed that the ‘law of contract normally upholds the freedom of parties, with no relevant disability, to agree upon the terms of their future relationships’, and that the law on penalties was an exception to that principle that
‘require[d] good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed’.
Paciocco v Australia and New Zealand Banking Group Limited Keane J said: Given the
importance of the values of commercial certainty and freedom of contract in the law, the courts will not lightly invalidate a contractual provision for an agreed payment on the ground that it has the character of a
punishment. The existence of legislation such as that invoked to support the statutory claims made by the appellants means that it cannot be said that ‘an untrammelled “freedom of contract” provide[s] a universal legal value’. But in the application of common law rules, the maintenance of freedom of contract is of abiding importance, subject, of course, to statute
It has traditionally been accepted that the law on penalties is confined to clauses stipulating the payment of money in relation to a breach of contract, and that it does not apply to clauses in a contract relating to the payment of money on the occurrence of an event other than a breach of contract. For example, if a contract between X and Y states that ti can be terminated in the case of Y’s breach of bankruptcy, the loss to X is the same in both cases. There seems to be no reason why a liquidated damages clause in the contract is capable of being classified as a penalty in the first case but not in the second.
In rejecting the argument for abolishing the law on penalties Lord Hodge gave the following reasons: First, there remain significant imbalances in negotiating power in the commercial world. Small businesses often contract with large commercial entities and have little say as to the terms of their contracts … Secondly, abolition of the rule against penalties would go against A the flow of legal developments both nationally and internationally … Thirdly, I am not persuaded that the rule against penalties prevents parties from reaching sensible arrangements to fix the consequences of a breach of contract and thus avoid expensive disputes. The criterion of exorbitance or unconscionableness should prevent the enforcement of only egregious contractual provisions.
Critics of the law against penalties argue that the enforceability of agreed damages clauses should not be determined by the principles relating to penalties. Rather, these clauses should be upheld subject to relief being granted pursuant to principles related to vitiating factors under the general law, especially duress and unconscionability, as well as related legislative provisions.
Establishing the existence of penalty
The critical feature that distinguishes an enforceable liquidated damages clause from a penalty was described in Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd[1] where Lord Dunedin said: The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage.
Paciocco v ANZ Kiefel J described the policy that underpinned the lawn penalties as being that ‘a sum may not be stipulated for payment on default if it is stipulated as a threat over the person obliged to perform; it may not be stipulated where the purpose and effect of requiring payment is to punish the defaulting party’.
In Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd Lord Dunedin summarised the basic principles governing the distinction between liquidated damages clauses and penalties. In Ringrow Pty Ltd v BP Australia Pty Ltd the High Court, although reaffirming Lord Dunedin’s statement of principles hinted that perhaps they may need to be reformulated in the light of either some
