Contract interpretation—distinguishing between liquidated damages and penalty clauses


Published by a UUÂãÁÄÖ±²¥ Dispute Resolution expert
Practice notes
In-house

Contract interpretation—distinguishing between liquidated damages and penalty clauses


Published by a UUÂãÁÄÖ±²¥ Dispute Resolution expert

Practice notes
In-house
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This Practice Note considers what liquidated damages clauses are and briefly when and how they are used. It then focuses, in particular, on the court's approach when determining whether a purported liquidated damages clause is, in fact, a penalty and therefore unenforceable; tracing the authorities through to how the question should now be approached in light of the 2015 Supreme Court Makdessi/ParkingEye decision and considering, in particular, issues such as when contractual provisions for accelerated receipt, default interest, or positive incentives may be considered as a penalty.

What is a liquidated damages clause?

A liquidated damages clause is a clause whereby the parties to a contract fix in advance a sum of money to be paid by the defaulting party to the innocent party in the event of a breach. The sum payable represents agreed damages (called liquidated damages) and is recoverable without the innocent party needing to prove the actual loss suffered.

Liquidated damages clauses can therefore avoid the expense and difficulty of having to prove the actual damage suffered as a result

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Jurisdiction(s):
United Kingdom
Key definition:
Contract definition
What does Contract mean?

A contract is a legally binding promise (oral or in writing) by one person to fulfil an obligation to another person in return for consideration. A binding contract comprises four elements: offer, acceptance, consideration and intention to create legal relations.

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