Liquidated Damages and Building Contracts: An Analysis

Introduction

Liquidated damages is a term commonly found in every standard form of building contract, which requires one party who has been in breach of contract to pay the innocent party of the contract a pre-estimated sum of money. Without the clause of liquidated damages in the contract, it takes much longer time and effort to prove the contractual obligation of the defendant to the plaintiff in the event of breach of contract. This is particularly important to construction industry, where chances of having project delayed are common.

The law until now

For at least a century, the English law has prohibited contracting parties from agreeing terms which are designed to punish a breaching party by imposing a liability for a particular breach

In that case, Dunlop, a tyre manufacturing company, entered into a sales of goods contract with New Garage. The contract expressly stipulated that New Garage would not re-sell the goods below the list price. Clause 5 of the contract further stipulated that, where New Garage was in breach of the contract, it would pay Dunlop £5 for each and every tyre, cover or tube sold below the list price. There was no question that New Garage was in fact in breach of Clause 5. The issue was whether Clause 5 was a penalty clause and thus

This set of rules, however, have been modified in the recent case of Cavendish Square Holding BV v Talal El Makdessi; Parkingeye LTD v Beavis [2015].

Mr. Makdessi agreed to sell his controlling stake in the Middle East’s largest marketing communications group to Cavendish by instalments. The agreement came with restrictive covenants to Mr. Makdessi, in which Mr. Makdessi would need to forfeit the balance of the sale price and would be obligated to sell his remaining shares at a price excluding goodwill value in case of breach of the restrictive covenants. Mr. Makdessi agreed that he had in breach of it but he alleged that the two clauses are penalty clauses and therefore unenforceable. The case was submitted to Supreme Court for final