Agreed Damage Clauses
General
The contracting parties may agree what sum shall be payable by way of damages in the event of breach. If the sum so fixed is a genuine pre-estimate of loss, it will be accepted by the court and awarded as "liquidated damages". The plaintiff is entitled to seek the amount specified in the contract irrespective of any loss suffered.
Genuine Pre-estimate v Penalty
If the sum stipulated as payable on breach is a genuine pre estimate of the loss, it will be accepted as the ‘amount payable without proof of actual loss: Dunlop Pneumatic Tyre Company vNew Garage & Motor Company. Where the sum fixed by the contract bears little, if any, relationship to the loss incurred, that clause of the contract may be struck down as being a penalty.
If the clause is struck down as being a penalty, the innocent party will be left to prove their loss in the normal way: W & J Investments v Bunting
Whether a clause is a penalty involves consideration of two broad topics:
- Is the clause of a type to which the rule concerning penalties applies?
- Is the clause classified as a genuine pre-estimate of loss or a penalty?
Does the Rule Apply
Generally, the doctrine of penalties only applies to a clause that requires the payment of money is dependant on a breach of contract: Export Credits Dept v Universal Oil Products.
Genuine Pre-estimate or Penalty
Lord Dunedin in Dunlop Pneumatic Tyre Co v New Garage and Motor Co provided four rules for distinguishing a liquidated damages clause from a penalty.
- It will be a penalty if the sum stipulated is extravagant and unconscionable in amount compared to the greatest possible loss that could have resulted from the breach.
- It will be penalty if the breach consists of a failure to pay money, and the sum stipulated is greater than the sum that should b paid.
- There will be a presumption that it is a penalty when a single sum is payable on the occurrence of one or more or all of several events, some of which might result in serious loss and others only trifling loss.
- It is no obstacle to it being a genuine pre-estimate that the circumstances make precise pre-estimation almost impossible.
Accelerated Clauses
An accelerated clause is one which accelerates the time for payment under the contract, usually in the event of a breach: O’Dea v Allstates Leasing System.
Will the Doctrine of Penalties apply if the debt is expressed as presently owing and upon termination for default must be paid in full?
An accelerated clause will not be a penalty where the agreement provided for all of the moneys to be owing at the time of entry into the agreement, but allowed it to be repaid in installments.
What will be Considered Genuine Pre-estimate of loss under a hire purchase or chattel lease?
An accelerated clause that provides for recovery of the amount of any payments of rent in arrears, together with the total of unpaid future payments appropriately rebated for acceleration of payments, and the expenses associated with termination, is likely to be a genuine pre-estimate of loss.