Liquidated Damages - Reasonableness the Key

Where parties to a contract have equal bargaining power, a liquidated damages clause which cannot be shown to be unreasonable can be relied upon.

A liquidated damages clause is a clause which specifies the payment of a sum of money based on the occurrence (or non-occurrence) of an event – for example, late completion of a building project. Indeed, such clauses are common in the building industry and a recent case addressed an attempt by a company (Tilebox) to rely on a liquidated damages clause in a contract with builder McAlpine.

McAlpine opposed Tilebox’s claim on the basis that the clause was not a genuine pre-estimate of Tilebox’s losses but was, in effect, a penalty clause and therefore unenforceable.

The court took the view that for McAlpine to show that the clause was effectively a penalty clause, it was necessary to show that there was an unacceptable difference between the pre-estimate of the damages and the likely actual damages. The test is an objective one. Tilebox could rely on the clause because it was a genuine pre-estimate of loss, not a penalty.