International Construction Law Review
LIQUIDATED DAMAGES AND THE DOCTRINE OF PENALTIES: RETHINKING THE WAR ON TERROREM
MATTHEW BELL
RICHARD J MANLY SC
The University of Melbourne
*
Chancery Chambers and Melbourne TEC Chambers
**
I. INTRODUCTION
It is the underlying premise of this article that, where commercial parties have freely agreed, within a binding contract, to a regime for liquidated damages (“LDs”) which is expressed in terms sufficiently certain to be enforced, the law should uphold its enforcement upon those terms. Such a notion serves a desirable commercial purpose in that it allows parties to anticipate with maximal certainty the remedial consequences where the contract is breached. It is also consistent with the underlying rationale for the enforcement of contracts which seeks to ensure that obligations are undertaken freely and, once such voluntariness is established, allows for minimal interference by the courts.1
English courts have for many years sought to act in a manner consonant with this rationale. As was observed by Lord Woolf, for example, “ … the court has to be careful not to set too stringent a standard and bear in mind that what the parties have agreed should normally be upheld. Any other approach will lead to undesirable uncertainty especially in commercial contracts.”2 In turn, the modern judicial approach to challenges to LDs provisions places a high barrier in the path of a party seeking to overturn a LDs provision on the basis that it is penal. The court looks to whether “the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach”.3
Thus, the purpose of the LDs provision is relevant, and the fact that the clause might de facto act as a deterrent will not make it penal if that was not
* BA (Hons), LLB (Hons), M Constr Law (Melb); Senior Lecturer and Co-Director of Studies for Construction Law, Melbourne Law School, The University of Melbourne; Professional Support Lawyer to the Construction and Major Projects Group, Clayton Utz. This article is based upon a paper by Matthew Bell which was awarded the joint second prize in the Society of Construction Law Hudson Prize essay competition for 2010. The paper was published at <www.scl.org.uk>.
** BA, LLB, LLM (Melb); Member of Chancery Chambers Melbourne and Melbourne TEC Chambers. Doctoral research candidate, Faculty of Law, Monash University.
1 See, generally, Andrew Robertson, “The Limits of Voluntariness in Contract” (2005) 29 Melbourne Univ Law Rev 179, 182.
2 Philips Hong Kong Ltd v. Attorney-General of Hong Kong, 58–59 and (1993) 9 Const LJ 202 (PC).
3 Lordsvale Finance plc v. Bank of Zambia [1996] QB 752, 762G, [1996] 3 WLR 688, cited by Lady Justice Arden in Murray v. Leisureplay [2005] EWCA Civ 963, [106].
Pt 4] Liquidated Damages and the Doctrine of Penalties
387