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Liquidated Damages and Penalty Clauses by Halson, Roger (8th March 2018)

3 The Legal Effect of Classification as a ‘Penalty’ or a Valid Liquidated Damages Clause

From: Liquidated Damages and Penalty Clauses

Roger Halson

Subject(s):
Damages and contract — Liquidated or agreed damages — Penalty clauses and damages

The previous chapter described the test laid down in the Cavendish case that determines the validity of any stipulated damages clause. In summary, a clause will be unenforceable which seeks to impose upon a party in breach of contract: a detriment which is not proportionate to any legitimate interest of the other party to the contract; or in ‘straightforward’ cases (still governed by the older Dunlop test): a detriment which is ‘extravagant and unconscionable’ in comparison with a ‘genuine pre-estimate’ of the loss that would result from the payer’s breach of contract. This chapter discusses the legal effect of contractual provisions which stipulate for a detriment which first satisfy whichever of the tests above is applicable to it (legal effect: liquidated damages clause) and then the legal effect, if any, of a contractual clause that fails to satisfy the applicable test (legal effect: penalty clause).

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