Claiming liquidated damages – Enforceable? Or a penalty?

Barry Riley

Azimut-Benetti SpA v Darren Marcus Healey

THE FACTS

The Claimant was a builder of luxury yachts who, under a yacht construction contract dated 25 September 2008, had been commissioned to construct a yacht for Shoreacres Limited. The contract price was €38 million, payable in instalments over the course of three years, the scheduled delivery date being 30 November 2011. Mr Darren Marcus Healey guaranteed the performance of the contract by Shoreacres personally.

The contract provided that, in the event of a late payment, the builder could end the contract and retain (or recover) 20% of the price of the contract, which equated in this instance to a sum in the region of €7.1 million, by way of liquidated damages.

The builder was obliged to return any part of the remaining 80% of the price he had already received. The buyer defaulted on an instalment, and the builder sought to exercise his rights under the contract. The buyer defended the claim on the basis that the liquidated damages clause in the contract was not a genuine pre-estimate of loss and was therefore a penalty clause.

VERDICT

It was held that Azimut was entitled to a summary judgment for €7.1 million, being 20% of the contract price, less the €0.5 million paid as a deposit at the outset. It was considered not arguable that the clause was a penalty and a summary judgment was given for the amount claimed.

The judge considered that there was a clear commercial and compensatory justification for the clause and that there was no scope to suggest the clause was merely being used as a deterrent for breach of contract.

COMMENT

When parties freely enter into commercial contracts, with professional advice, it is difficult to argue that a liquidated damages clause is a penalty (and therefore unenforceable). Provided that the amount specified as payable as liquidated damages is a genuine pre-estimate of damage. When including a provision for liquidated damages, it is most important therefore to make sure that the figure that is proposed can be justified on commercial and compensatory grounds.

Barry Riley
briley@metcalfes.co.uk
DDI – 0117 9453 042

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