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

Index

From: Liquidated Damages and Penalty Clauses

Roger Halson

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(p. 207) Index

acceleration clauses
avoidance technique, as 5.52–5.53
case law 5.38–5.40
meaning of 5.37
analogous provision, as 5.37–5.40
acceleration principle 5.52–5.53
advance payments
avoidance techniques 5.48–5.49
express forfeiture, subject to 5.14–5.17
express/implied provision for forfeiture, absence of 5.09–5.13
penalty rule after Cavendish 5.18–5.20
stipulated damages clause, analogous to 5.02
‘alternative stipulations’
unauthorised borrowing 2.35, 2.37
Andrews case
breach requirement 1.01, 2.10, 2.21, 2.35, 4.66, 5.55
Cavendish/ParkingEye compared 1.01–1.02, 1.24
certainty, value of 4.70
criticism of 2.21
departure from previous law 1.01
historical analysis vii, 1.24, 2.21, 4.62, 4.73
justification for expansion of common law rule 4.72
transfer of property 2.72
anti-technicality clauses 5.32
assets at undervalue 2.09
assumpsit 1.04–1.05, 1.11, 1.20, 3.23, 4.61
Australian law
acceleration principle 5.53
Andrews case, see Andrews case
breach requirement 1.01, 2.10, 2.21, 2.35, 4.66, 5.55
cost savings 4.17
‘engaging’ penalty rule vii, 2.21–2.22
freedom of contract concept 2.21, 4.08
laissez-faire notions 2.21
penalty jurisdiction extensions not recognised in UK law 2.34–2.37
proportionality 2.48
punishment 4.56
non-monetary transfers 2.70
transfer of property 2.72
unconscionability 4.27
UK law and 1.01–1.02
unconscionability 4.27
‘availability heuristic’ 3.04, 4.43, 4.45–4.46
Averaging
magnitudes of damages 1.35
avoidance techniques
acceleration clauses 5.52–5.53
advance payments subject to forfeiture clauses 5.48–5.49
commercial contracts vii
condition precedent clauses 5.72
deposits 5.48–5.49
introduction to 5.47
payments conditional on events other than breach of contract 5.54–5.71
termination provisions 5.50–5.51
‘back end’ costs 5.48
‘bad leaver’ clauses
case law 6.04–6.10
employment contracts and 6.03–6.10
fraud and 2.47
‘good leaver’ compared 6.03
meaning of 2.58, 6.03
penalty jurisdiction and 2.19, 2.58, 6.08
primary/secondary obligation 2.19, 6.09–6.10
transfer of shareholding 2.19, 2.47, 2.58, 5.59, 6.04–6.07
behavioural decision theory 3.04, 4.42–4.48, 4.68
breach and non-breach events, payments conditional on
penalty jurisdiction and 5.45–5.46
breach of contract
Australian/English law distinction 1.01, 2.21
Canada requirement for 2.22
‘clever drafting’ to avoid 2.10
‘engaged’/‘trigger’ for penalty rule 2.10
extensions recognised in English law 2.26–2.33
facilitating the efficient 4.38–4.41
payments conditional on events other than 5.54–5.71
Canadian law
breach of contract requirement 2.22
efficient breach of contract 4.38–4.39
exemplary/punitive damages 4.55
penalty clause upper limit on recovery 3.27
‘signalling functions’ 4.22–4.23
unconscionability 4.66, 4.70
Cavendish case (2015)
abolition of penalty rule 4.02
(p. 208) appropriate test 2.42–2.43
advance payments after 5.18–5.20
breach of contract requirement 2.11, 2.21, 2.23, 2.26, 5.54–5.71
certainty, value of 4.69–4.70
comparative perspective 4.63–4.67, 4.74
‘complex’ cases, new test applicable to 1.27
deposits 5.49
Dunlop case ‘considered’ 1.27
forfeiture 1.19, 2.75, 5.31
freedom of contract 1.24–1.25, 2.11
general historical origins 1.01–1.03
historical perspective 4.60–4.62, 4.73
‘just compensation’ 4.53–4.55
language of clause 2.63, 5.06, 5.42
legitimate interest 2.47, 3.25, 4.11, 4.27, 4.54, 5.21, 5.77–5.78, 6.17, 6.27
multifactorial approach 4.75
obiter dicta 2.47, 2.68, 2.73, 5.18, 5.27
primary/secondary obligations 2.20, 2.52–2.62
proportionality 2.48–2.51
punishment 4.56–4.59
timing of the test 2.44–2.46, 3.03, 4.53
unconscionability/oppressive bargains 4.32–4.33, 4.70
withholding payments 2.67–2.69
charterparty
demurrage clause 2.77, 6.24–6.27
different rates of payment 6.28
early cases 6.22
‘laytime’ 6.24
time charter 6.24, 6.27
voyage charter 6.23–6.26
collateral obligation
penalty rule and 2.35
commercial contracts
Cavendish case, involvement in 2.02, 4.71
drafted to avoid penalty jurisdiction vii
disinclination of courts to strike down damage clauses 2.39, 2.50
equality of bargaining power 4.32
stipulatio poenae, concept of 1.06
condition precedent clauses
avoidance technique, as 5.72
construction contracts
‘cascading’ problems 6.36
Joint Contracts Tribunal 6.31
liquidated damage clauses 6.30
liquidated damages for delayed completion 6.33–6.37
liquidated damages for reasons other than delayed completion 6.38
New Engineering Contract 6.31
penalty jurisdiction 6.32
standard form contracts 6.31, 6.35, 6.37
consumer credit
unfair terms, statutory provisions 3.15–3.17, 5.25–5.26
container demurrage 2.77, 3.09, 6.29
contractual vitiating factors 4.10
demurrage
charterparty and 2.77, 6.24–6.27
container 2.77, 3.09, 6.29
liquidated damages for delay 3.06, 3.14, 4.18
meaning of 1.23
standard provision 6.25–6.26
deposit
advance payment subject to express forfeiture 5.14–5.17
advantages for recipient 5.48–5.49
avoidance technique and 5.48–5.50
construction contracts 6.37
definition of 5.05–5.06
forfeiture 5.06–5.08, 5.17
penalty jurisdiction/deposits, assimilation of 5.21–5.22
penalty rule after Cavendish 5.18–5.20
reasonableness of 2.46, 5.15–5.17
return of deposit 2.75, 5.29
right accrued before termination 5.07
sale of land 5.05, 5.49
security deposit, forfeiture of 2.65
statutory relief 5.23
stipulated damages clause, analogous to 5.02
United States provisions 4.52
detriments
‘extravagant and unconscionable’ 3.01
not proportionate 3.01
disproportion principle
consumer contracts 2.33
Dunedin rules 1.32–1.33
timing and 2.44
drafting of clause
language of clause 5.79
specifying legitimate interest in stipulated damage clause 5.74–5.75
point in time, validity referenced to particular 5.76
proportionality 5.77–5.78
Dunedin rules 1.27–1.36, 3.25
Dunlop case
averaging magnitudes of damages 1.35
disproportion principle 2.44
Dunedin rules 1.28–1.34
facts of 1.26, 2.31
genuine pre-estimate of loss 1.31, 2.09, 2.28, 2.31, 2.40, 2.44, 3.25, 4.27, 5.76, 5.78, 6.13, 6.17, 6.42
language of clause 2.63
legitimate interest 2.47
not overruled in Cavendish v, 1.27, 2.07, 2.38, 2.76
(p. 209) payments other than for ‘breach of contract’ 1.36, 2.10
payments other than money 1.36
penalty acting in terrorem 1.07, 2.59
residual role for 2.09, 2.38, 2.76, 3.01, 4.21, 5.76, 6.13
economic analysis of law 4.09, 4.13, 4.37, 4.39, 4.42, 4.68
economic efficiency
breach inducements, avoidance of 4.35, 4.37
‘efficient breach’ of contract concept 4.38–4.41
externalities 4.36–4.37
‘freedom of contract’ and 4.06–4.12
‘efficient breach’ of contract, concept of 4.38–4.41
employment contracts
‘bad leaver’ clauses, see ‘bad leaver’ clauses
‘good leaver’ 6.03, 6.05, 6.06
no notice clause 6.15
‘no show’ clause 3.05, 6.16
penalties and 1.23
termination provision 2.13
training costs/materials, repayment of 6.11–6.14
‘work out’ notice clause, failure to 6.17
engineering contracts, see construction contracts
equal bargaining power
penalty rule and 2.04, 2.39, 4.02, 4.26, 4.32, 6.32
equity of redemption 1.19
events other than breach, payments conditional upon
avoidance technique, as 5.54, 5.61–5.65, 5.68–5.70
breach of undertaking not to compete 5.59
discount technique 5.68–5.71
stipulated damages clause, analogous to 5.42
‘unauthorised borrowing’ 5.56–5.58
exculpatory clauses 4.11
exemption clauses
consumer protection 3.14
great leniency for 4.55
‘penalty clauses in reverse’ 4.11
primary/secondary obligations used in 2.20
usurping role of the court 4.59
force majeure clauses 4.59
forfeiture
advance payments subject to express forfeiture and deposits 5.14–5.17
advance payments subject to express forfeiture and penalty rule after Cavendish 5.18–5.20
advance payments with no express/implied provision for 5.09–5.13
avoidance technique 5.47–5.49
bonds and 1.16
Cavendish and 1.19, 2.67, 5.18–5.20, 5.31
disclosure obligation 4.62
express forfeiture clauses 5.04–5.05, 5.08
jurisdiction to control, common origin with penalty clauses 4.60
Law Commission and 2.11, 2.29, 2.36–2.37, 6.02
non-monetary transfers 2.70–2.74, 3.24
oppression and 4.33
penalty principle close alignment with 5.21–5.22
penalty rule and 1.19, 1.21, 1.24, 2.71, 2.45
penalty rule/relief against, relationship between 2.75
proprietary interests/possessory rights 1.19, 5.27–31
proprietary interests/possessory rights, after Cavendish 5.31
security deposit, of 2.65
timing of test for enforceability 2.45
‘freedom of contract’
Australia and 2.21, 4.08
behavioural decision theory and 3.04, 4.42
concept of 1.21, 4.03, 4.06–4.08
contract drafters 2.37
court’s power to set aside vii, 1.22–1.23
economic analysis of law 4.09, 4.42
exculpatory clauses 4.11
interference with 5.46
laissez-faire notions 1.22, 2.11, 2.21, 4.05
parties’ intention, relevance of 1.25
penalty jurisdiction and 1.24–1.25, 2.11, 4.04–4.12, 6.32
remedial terms and 4.25
rights of self-determination enshrined in 1.21–1.23, 3.17, 4.05–4.06
unconscionability and 4.08, 4.27
untrammelled 2.21, 4.11, 4.72
genuine pre-estimate of loss
hire-purchase agreements 5.33, 5.45
interest clauses
penalty rule and 6.42–6.43
‘invoicing back’ clauses 5.41
‘just compensation’
assessment of damages for breach 4.51
stipulated damage provision 4.53–4.55
United Kingdom/United States distinction 4.52–4.53
laissez-faire, principle of 1.22, 2.11, 2.21, 4.05
language of clause
element of test for enforceability 2.63, 5.79
‘laytime’
case law 3.14
definition of 3.06
voyage charters and 4.18, 6.24–6.25
(p. 210) legal effect of classification
penalty clause, as 3.22–3.27
valid liquidated damage clause, as 3.03–3.21
legitimate interest
Cavendish case 1.27, 2.43, 2.45, 2.49, 2.51, 4.21, 4.27, 4.54
Dunlop case 2.76
element of test for enforceability v, 2.47
illustrations of 2.47
proportionate protection of 4.11, 5.21, 5.77–5.78, 6.17, 6.27
liquidated damage clauses
actual loss greater than sum stipulated 3.05–3.09
actual loss less than sum stipulated 3.18–3.21
construction contracts, delayed completion of 6.33–6.37
construction contracts, for reasons other than delay 6.38
demurrage clause 1.23, 3.06, 3.14
Dunlop case, see Dunlop case
‘freedom of contract’ principle 1.21, 1.25
genuine pre-estimate of loss 1.28–1.29, 1.31, 2.09, 2.28, 2.31, 2.40, 2.44, 3.25, 4.27, 5.76, 5.78, 6.13, 6.17, 6.42
legal effect of valid 3.03–3.04
meaning of ‘liquidate’ 3.03
promotion of efficiency 4.17
non-conclusive expression 1.02, 1.25, 1.28, 2.63
saving of parties’ and court’s time 4.14–4.16
stipulated damages, see stipulated damages clause
underliquidated damages 3.10–3.17
unliquidated damages 1.08, 3.06, 3.22, 4.06, 4.19, 4.59, 5.33
‘mixed clause’
penalty jurisdiction and 5.45–5.46
moment of contracting
stipulated damages clause and 3.03, 3.25, 4.46, 4.58
mortgages
equity of redemption 1.19
‘freedom of contract’ 1.23
no notice clause 6.15
‘no show’ clause 6.16
non est factum, plea of 1.14
non-monetary transfers
application of penalty rule to 2.70–2.74
Australian recognition 2.70
oppressive bargains
commercial parties and 2.39
rationale for penalty jurisdiction, as 4.29–4.33
option, payments for exercise of an
stipulated damages clause, analogous to 5.43
ParkingEye case
conjoined appeal 1.01
contractual position held to be valid 3.22
laissez-faire, derogation from 1.22
legitimate interest 2.47
making of a payment 2.64
penalty rule/deposits relationship addressed 5.18–5.20
primary/secondary obligations 2.53–2.55, 6.09
Supreme Court decision 2.08–2.09
penal bonds
common law/equity, tensions between 1.18–1.19
defences to 1.14
definition of 1.05, 4.60
enforcement of 1.12–1.15
equitable relief from 1.12, 1.16–1.17, 5.02
penalty clauses
actual loss greater than sum stipulated 3.25–3.27
charterparty and 6.22–6.28
exculpatory clauses and 4.11
legal effect of 3.22–3.24
proportionality 2.43, 2.45, 2.48–2.51
Roman law and 1.08
penalty jurisdiction, modern
‘bad leaver’ clause and 2.19
comparative rationale for 4.63–4.68
construction contracts 6.32
extensions not recognised in English law 2.34–2.37
freedom of contract conflict 1.24–1.25, 2.11, 4.04–4.12, 6.32
historical rationale for 4.60–4.63
Supreme Court and 2.08–2.09
United States, comparison with UK 2.46
penalty jurisdiction, rationale for
behavioural decision theory 4.42–4.48
comparative perspective 4.63–4.68, 4.74
economic efficiency 4.34–4.41
freedom of contract 4.03–4.12
historical perspective r 4.60–4.63, 4.73
‘just compensation’, provision of 4.49–4.50
multifactorial approach 4.75
oppressive bargains 4.29–4.33
‘punishment’ prevention of 4.56–4.58
saving of parties’/court’s time 4.14–4.18
‘secrecy interests’, protection of 4.49–4.50
‘signalling’ functions 4.22–4.25
unconscionability 4.26–4.28
unrecoverable loss, recovery of damages for 4.19–4.21
usurping the role of the court 4.59
penalty rule, decision in Dunlop
averaging magnitudes of damages 1.35
Dunedin rules 1.28–1.34
leading authority 1.26–1.27
payments other than money 1.36
payments other than on ‘breach of contract’ 1.36
penalty rule, ‘engaging’
Australian law 2.21–2.22
(p. 211) breach of contract requirement 2.10–2.11
breach of contract requirement, refinement of 2.23–2.25, 2.57
breach requirement extensions recognised in English law 2.26–2.33
case law illustrations 2.12–2.19
penalty jurisdiction extensions not recognised in English law 2.34–2.37
power to set aside vii, 1.22
penalty rule, history between 1600–1915
assumpsit 1.20
case law 1.23
common law/chancery court tensions 1.18
convergence of law and equity 1.19–1.21
enforcement at common law 1.13–1.15
‘freedom of contract’/laissez-faire approach, variance with 1.21–1.24
parties’ intention, relevance of 1.25
penal bonds, equitable relief from 1.12, 1.16–1.17
maxims of equity 1.16
non est factum, plea of 1.14
penalty rule, history prior to 1600
acting in terrorem 1.07
assumpsit, writ of 1.04
‘penal bonds’ 1.05–1.06
Roman law, rediscovery of 1.08–1.11
stipulatio poenae, concept of a 1.06
penalty rule, modern
breach of contract requirement 2.38
case law, introduction to 2.01–2.09
Cavendish case, see Cavendish case
forfeiture, relationship with 2.75
need to limit 2.11
non-monetary transfers, application to 2.70–2.74
ParkingEye case, see ParkingEye case
residual role for Dunlop case 2.76
unconscionability 4.27
withholding payments, application to 2.65–2.69
penalty rule, test for
application of 2.38–2.43
breach of contract 2.38
language of the clause 2.63
legitimate interest, illustrations of 2.47
primary/secondary obligations 2.52–2.62
proportionality requirement 2.43, 2.45, 2.48–2.51
timing of the test 2.44–2.46
primary obligations
‘bad leaver’ clause 2.19, 6.07–6.10
Cavendish and 2.20, 2.52–2.62, 5.59–5.60
option to acquire shares 5.59
exemption clauses 2.20
penalty rule in Australia 2.35
secondary obligations distinguished 2.20, 2.52–2.62, 5.59
procedural unconscionability 2.11, 4.10
proportionality
drafting clauses 5.77–5.78
element of test as to enforceability 2.43, 2.45, 2.48–2.51, 4.54
‘punishment’ prevention of
rationale for penalty jurisdiction, as 4.56–4.58
Roman law
penalty acting in terrorem 1.07
rediscovery of 1.08–1.11
stipulatio poenae, concept of a 1.06
sale of land, contracts for
deposit provisions 5.21, 5.24, 5.49
forfeiture of deposit 5.05–5.06, 5.17
reasonableness of deposit 5.15, 5.17
repayment of deposit, statutory provision 5.24
saving of parties’/court’s time
rationale for penalty jurisdiction, as 4.14–4.18
secondary obligations
‘bad leaver’ provision 2.19, 6.07–6.10
Cavendish and 2.20, 2.43, 2.52–2.62
engaging penalty rule 5.60
exemption clauses 2.20
‘exorbitant and unconscionable’ 4.27
penalty rule in Australia 2.35
primary obligations distinguished 2.20, 2.52–2.62, 5.59
‘secrecy interest’, protection of
rationale for penalty jurisdiction, as 4.49–4.50
shipbuilding contracts
definition of 6.19
liquidated damages for delay 6.19, 6.21
luxury ‘superyacht’ 6.20
repairs 6.21
shipping contracts
charterparty, see charterparty
container demurrage 6.29
shipbuilding, see shipbuilding contracts
‘signalling’ functions 4.22–4.25
‘specific performance’ clause 4.24–4.25
‘status quo’ bias 4.43
stipulated damages clauses
action in debt 1.09
acceleration clause distinguished 5.37
advance payments analogous to 5.09–5.20
behavioural decision theory and 4.46
classic form 2.64
construction, see construction contracts
deposits analogous to 2.75, 5.05–5.08
detriments rendering clause unenforceable 3.01
drafting of 5.74
‘Dunedin rules’ regulating 1.28–1.36, 4.28
economic efficiency of 4.36
efficient breach and 4.39
elements to identify enforceability 2.41–2.63
employment, see employment contracts
forfeiture clauses analogous to 2.75, 5.04
(p. 212) freedom of contract and 4.07–4.08, 4.11
insights 4.43–4.45
interest, see interest clauses
language of the clause 2.63
legitimate interest 2.47
moment of contracting 3.03, 3.25, 4.46, 4.58
overcompensation of 4.58
penalty clause, practical consequence of 3.22, 4.06
primary/secondary obligations 2.52–2.62
proportionality 2.48–2.51
recovery of damage for unrecoverable loss 4.19–4.21
saving of parties’ and court’s time 4.14–4.18
setting aside 1.22, 4.05
shipping, see shipping contracts
‘signalling’ function 4.22–4.25
statutory regulation of 2.33
‘take or pay’ 6.39–6.41
time of contracting 2.44–2.46, 3.03, 4.06
unconscionability and 4.08, 4.33
unenforceable 3.01
Vienna Convention and 4.65
stipulatio poenae, concept of 1.06
substantive unconscionability 2.11, 4.10
‘take or pay’ provision
case law 6.39–6.41
definition of 6.39
penalty rule and 6.40–6.41
termination provisions
analogous provision, case law 5.33–5.36
‘anti-technicality’ clauses 5.32
avoidance technique, as 5.50–5.51
embedded options for risk management, as 4.07
employment contracts 2.13, 6.04, 6.15
penalty jurisdiction 2.29, 2.45, 5.39
repudiatory breach 4.59
shipbuilding contracts 6.19–6.20
time charter
liquidated damages provisions 6.24, 6.27
timing
element of test for enforceability 2.44–2.46
moment of contracting 3.03, 3.25, 4.46, 4.58
training costs/materials, repayment of
case law 6.11–6.14
‘unauthorised’ borrowing
‘alternative stipulations’ 2.35, 2.37
unconscionability
Cavendish case 4.27–4.29, 4.32–4.33
common law jurisdictions 2.11, 4.10
degree/negation of 5.08
Dunlop case 4.27
equal bargaining power 4.32
freedom of contract and 4.08
oppressiveness 4.29–4.33
overcompensation 4.33
penalty doctrine rooted in 2.46
procedural 2.11, 4.10
statutory 4.72
substantive 2.11, 4.10
‘underliquidated’ damages
case law 3.11–3.13
definition of 3.10
limitation clause distinguished 3.10, 3.14
unliquidated damages 1.08, 3.06, 3.22, 4.06, 4.19, 4.59, 5.33
United States law
breach of contract 2.22
efficient breach of contract 4.39
genuine pre-estimate of loss 1.31
‘just compensation’ 4.52–4.55
reasonableness, time of assessment 2.46, 3.03
signalling function of clauses 4.22–4.23
UK law compared 2.46, 4.66, 6.41
valid liquidated damages clause 4.66
unrecoverable loss
rationale for penalty jurisdiction, as 4.19–4.21
usurping the role of the court 4.59
utility maximisation 4.09
valid liquidated damages clause
actual loss greater than sum stipulated 3.05–3.09
actual loss less than sum stipulated 3.18–3.21
avoidance techniques 5.47
behavioural decision theory 3.04
demurrage 3.06
detriments rendering clauses unenforceable 3.01
Dunedin rules 1.28
genuine pre-estimate of loss 1.28–1.29, 1.31, 2.09, 2.28, 2.31, 2.40, 2.44, 3.25, 4.27, 5.76, 5.78, 6.13, 6.17, 6.42
intention of the parties 1.25
legal effect of 3.03–3.04
liquidate, meaning of 3.03
ParkingEye and 3.22
penalty distinguished 1.28
test in United States 4.66
time of contracting 2.44–2.46, 3.03
underliquidated damages 3.10–3.17
voyage charterparty
demurrage 3.06, 6.23–6.26
withholding payments
application of penalty rule to 2.65–2.69
‘work out’ notice clause 6.17