REASONABLE PRE-ESTIMATES, LIQUIDATED DAMAGES AND PENALTIES

Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC), 25 February 2005

In Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC), 25 February 2005, Mr Justice Jackson held that a term in a construction contract was not a penalty clause but a valid liquidated damages clause. In concluding that the term was a valid liquidated damages clause, Mr Justice Jackson emphasised the exceptional nature of the penalty clause rule and also stated that there must be a substantial discrepancy between the level of damages stipulated in the contract and the level of damages which is likely to be suffered before it can be said that the agreed pre-estimate is unreasonable and hence a penalty. A pre-estimate of damages does not have to be right in order to be reasonable. The emphasis in the judgment on the ‘reasonableness’ of the pre-estimate as opposed to the ‘genuineness’ of the pre-estimate does, however, appear to depart from the approach taken in previous cases and, to this extent, it may be open to question in the future.