The law does not actually require that any calculation of likely losses be conducted when entering into a contract. Non-monetary factors can inform the amount payable as liquidated damages for breach of contract, but where this is done those factors should be identified, whether during contract negotiations or even in the contract itself. that the agreement was wrongfully terminated; that it is entitled to its loss of profits for the wrongful termination under the governing law of the agreement; the wrongful termination is proved through documents and other evidence (including witness evidence). Dispute Resolution - Commercial Litigation, Dispute Resolution - International Arbitration. If the amount is not a genuine pre-estimate of the loss that would be suffered, but is intended instead to penalize a party, then it will be considered a penalty clause, which is not valid, and the award of damages will then need to be determined by the ordinary principles of contract law. In the highly anticipated S… to two to three years' lost profits, or a specific sum), and the risks, time and costs of having to prove a claim for lost profits, is it worth including a liquidated damages clause? whether the stipulated sum is extravagant and unconscionable in comparison to the greatest loss that could conceivably be proved to have followed from the breach; whether the breach consists only of not paying a sum of money, and the sum stipulated is a sum greater than the sum which ought to have been paid; and. To determine whether there was a breach of a "primary obligation", the Court looked at the substance, not the form, of the provision in question. The common law will respect the parties' agreed-risk allocation, and generally seek to uphold rather than strike down liquidated damages clauses. While the case raised several issues, an argument was raised as to whether clause 3(c) of the Settlement Agreement was an unenforceable penalty, insofar as it purported to forfeit the unexercised Share Options that had vested in Mr Leiman. Ensuring that he was a "good leaver" was regarded by the Court as a legitimate commercial purpose. General Ingredients of a Loss of Profits Claim. This publication is provided for your convenience and does not constitute legal advice. A liquidated damages clause specifies a predetermined amount of money that must be paid as damages for failure to perform under a contract. In this context, the court also considered whether the party seeking to enforce it would, by doing so, be given effect to a "legitimate commercial interest", as opposed simply to punishing the party in default in a heavy-handed and indiscriminate way. There was another question, which arose in Leiman, of whether the rule against penalties could apply even if there was not a "breach of contract" (i.e. Liquidated damages (“LD”) clauses are a common measure for an employer to mitigate against delays caused by the main contractor. The past few years have seen subtle but important shifts in how the concept of a penalty is defined. A liquidated damages clause specifies an amount that will be payable as compensation in case of certain breaches of the contract. Although it offers some benefits, a liquidated damages clause is not always valid in the eyes of the law. In considering this particular issue, the Singapore Court of Appeal affirmed that the Singaporean position concerning penalty clauses and liquidated damages is embodied in the principles set out in the House of Lords decision of Dunlop Pneumatic Tyre Ltd v New Garage & Motor Co Ltd [1915] AC 79. Leiman v Noble Resources Ltd [2020] SGCA 52 (28 May 2020) concerned the terms on which a senior executive (Mr Leiman) left his former employer (Noble). Attorney Advertising. Amongst other issues, the court there was asked to decide whether a provision used in three similar power purchase agreements to impose liquidated damages on termination was an unenforceable penalty. by the contract stipulating that a fixed sum payable for breach of contract is not a penalty) to avoid the application of the penalties doctrine. This same clause is often featured in subcontracts – they minimize the main contractor’s exposure to liability for delays caused by the subcontractor, and pass down the liability for LDs to the subcontractor. Singapore. The essence of a penalty is a payment of money stipulated as to strike fear into the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. LDCs can pose concerns to employees who wish to quit their job before their employment term is up. Liquidated damages clauses provide an element of certainty for both parties, but that certainty can come at a cost. The parties had entered into a Settlement Agreement to address the terms of Mr Leiman's departure from the Noble group. Recent Developments In The Law On Liquidated Damages in Malaysia Legal Era | September 2019 The operative paragraph of section 75 of the Malaysian Contracts Act, 1950, is identical to section 74 of the Indian Contract Act, 1872…. Various factors may be relevant in determining whether a clause is a penalty, including: A century later, the UK Supreme Court finessed this test in the case of Cavendish Square Holdings BV v Makdessi [2015] UKSC 47. The clause gave Mr Leiman "enhanced rights" if he was a "good leaver", but did not seek to penalise him (such as by requiring him to pay a sum of money) if he was not a "good leaver". The Singapore Court of Appeal, in Xia Zhengyan v Geng Changqing 3 SLR 732, shortly before the decision in Cavendish was issued, endorsed again (at) the test set out in Dunlop for whether a … If yes, then the clause is likely worth including; if no, then: When balancing the value of limiting the operator's potential damages (eg. © 2020 White & Case LLP, Liquidated damages and penalties in Singapore. (c) [Mr Leiman] shall be entitled to exercise the outstanding 7,727,272 options he holds in the Noble Group Limited Share Option Schedule 2004 vesting on 2nd April 2012 as well as all options vested to date but unexercised, in each case provided he does so exercise on or prior to 2nd April 2013 and provided that prior to exercise he has not acted in any way to the detriment of Noble and the [R&O Committee] of Noble shall make a final determination in the event of any dispute. Currently, the law on liquidated damages in Singapore is that as stated in Dunlop. Under Dutch law, there is no distinction between a liquidated damages clause and a penalty clause. If a management agreement is wrongfully terminated by a property owner—an event which occurs with increasing frequency in developing jurisdictions—the operator's usual remedy will be to sue the owner for wrongful termination. Some examples of liquidated damages clauses in management agreements are: In the event that owner seeks to improperly terminate or is deemed to have improperly terminated this agreement, then the owner must pay to the operator immediately upon demand, by way of liquidated damages, in compensation for loss of future management fees, a "termination fee" in an amount equal to (the number of remaining months in the operating term) times (the total management fees earned by the operator in the last 12 calendar months divided by 12). The contract contained a liquidated damages clause, which provided that Triple Point shall pay “ 0.1% of undelivered work per day of delay from the due … Courts are generally reluctant to find that agreed damages amount to a penalty clause in a commercial contract where the parties have equal bargaining power. Liquidated damages provisions in contracts are unenforceable if they constitute a "penalty". If the Project SPV fails to achieve the Project COD by the Project SCOD for reasons other than those set out in Clauses 10.5, 17 and 19, it shall pay liquidated damages to the Authority at the rate provided in Schedule 6 (Delay Liquidated Damages). This article by Sapna Jhangiani, an attorney with Clyde & Co, provides an analysis of liquidated damages clauses, seeking to address these issues, and includes points to consider based on our experience of drafting such clauses. The court considered six recent cases where the High Court in Singapor… This indicates that there is no bulletproof way (e.g. Make sure you take advice when looking to include a liquidated damages clause in your hotel management agreement, particularly to check whether it is enforceable under the governing law of the agreement. Four of these contracts included guarantees by Solar EPC Solutions SL, Prosolia’s Spanish parent company. The amount of the liquidated damages is supposed to be the parties’ best estimate at the time they sign the contract of … As prescribed in 11.503(a), insert the following clause in solicitations and contracts:. The approach varies from jurisdiction to jurisdiction, but in our experience, liquidated damages clauses are less likely to be upheld in civil law jurisdictions. The principal challenges with liquidated damages clauses are that, in many instances, unless the clause seeks to compensate the operator for its lost profits for the remainder of the operating term of the agreement, the operator will be limiting the damages to which it is entitled. A recent decision from the Singapore Court of Appeal gives insight into the approach taken in that country. In each case, enforcing a liquidated damages clause and factors specific to the project may lead to nuances in the drafting of the liquidated damages clause. The compensation claimed for the wrongful termination will be the operator's lost profits for the operating term of the agreement, in addition to any sums outstanding to the operator. Solar argued t… GPP engaged Prosolia to construct five solar power plants across the UK under five separate EPC contracts. There, the Supreme Court said that the question of whether a contractual provision operated as a penalty was to be considered by asking "whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation". Will the clause be enforceable under the governing law of the hotel management agreement? Noble's position was that Mr Leiman had, subsequent to leaving Noble, acted "to the detriment of Noble", meaning that his share options were forfeited. ". Accordingly, the clause could not be struck down as a penalty. The key to drafting a liquidated damages provision is to ensure, as far as possible, that the amounts payable as liquidated damages constitute a "reasonable estimate" of the loss likely to flow from a breach of contract. Upon termination due to the owner's breach, the owner shall pay to the operator the sum of USD $500,000 which shall be liquidated damages and not a penalty. Introduction . The clause provided as follows: 3. When will the clause be engaged? The examination reveals that there is little difference because the courts in each jurisdiction have drawn on common precedents. A sub-contractor can be made liable for liquidated damages that the contractor is made to pay the employer in certain circumstances: L&M Airconditioning (Pte) Ltd v SA Shee & Co (Pte) Ltd [1993] 3 SLR 483. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. In Singapore, however, this is a critical difference: a penalty clause is unenforceable while a liquidated damages provision is enforceable if it meets the conditions set forth in Dunlop. If it will be engaged upon the wrongful termination of the agreement by the owner, how will this be proved? The most common clauses provide for liquidated damages which are equivalent to two or three years' lost profits (based on previous profits, or including a formula for estimating future profits, such as relying on the annual budget). A liquidated damages clause is a provision that serves as a remedy for breach of contract. a breach of a 'primary obligation') that gives rise to a 'secondary obligation' to pay damages. Secondly, the Court gave close attention to the nature of the transaction, the background as known to the parties when they entered into the contract, and in light of that whether there was an "independent commercial purpose" to the provision in question. Approaches to liquidated damages in Singapore and the UK following Seraya v. Denka 1 and Triple Point v. Ptt 2. © Conventus Law 2020 All Rights Reserved. The penalty rule only applies to a liquidated damages clause as such a clause is compensatory and remedial in the sense that it seeks to predetermine the damages to be paid in the event of breach. Generally, at common law, a liquidated damages clause will not be enforced if its purpose is to punish the party in breach rather than to compensate the injured party (in which case it is referred to as a penal or penalty clause). One reason for this is that the enforcement of the term would, in effect, require an equitable order of specific performance. A recent decision of the Singapore High Court in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd & Ors [2020] SGHC 165 has confirmed that a contractor need not demonstrate actual loss to exercise a contractual right to recover liquidated damages.. Background.The plaintiff, Comfort Management Pte Ltd (“Comfort”), was a sub-contractor on a construction project in Jurong, Singapore … Liquidated damages provisions in contracts are unenforceable if they constitute a "penalty". This is likely to be reasonably straightforward for simple liquidated damages clauses. Kelvin Teo 3 and David Johnson 4. Companies from civil law jurisdictions may make little distinction between liquidated damages clauses and penalty clauses in their contracts. If this agreement is terminated without proper cause by the owner, the owner shall pay to the operator in full and final settlement of all future obligations a fee equal to the amount earned by the manager in the last 24 months (or if 24 months has not elapsed then based on approved annual budget for that current year times two) or the number of months remaining in the then current term, whichever is less. whether a single lump sum is made payable by way of compensation, on the occurrence of one or more events, some of which may occasion serious and others but trifling damage. The benefit of a liquidated damages clause is that, in any wrongful termination claim, the operator does not need to prove either its entitlement to loss of profits, or the value of its loss of profits claim. Delay Liquidated Damages. To ascertain whether the sum stipulated is a penalty, a court will consider the terms and the circumstances of each contract at the time it was entered into. An operator may be able to gauge this when agreeing to the "Term Sheet" with the owner. There is a question (ultimately undecided in Leiman) as to whether this test, which takes account of the "legitimate interests" of the person seeking to rely upon a clause, applies in Singapore. Although the case does not reformulate the test in Singapore for penalties, two aspects of the Court's approach are significant. The entitlement to and value of the operator's compensation (points 2 and 3 above) are crystallized, and the parties, therefore, do not need to invest significant time and money arguing about these issues. Owners can use their bargaining power to limit the amount of damages payable to the operator to one or more years of lost profits. A Lack of Agreement? The amount is supposed to reflect the best estimate of actual damages when the parties sign the contract. The owner shall pay to the operator as liquidated damages (and not as a penalty) an amount equal to the operator's monthly fee due and payable under this agreement for the last full 12 calendar months of the hotel's operation, multiplied by 12. Disadvantages of Liquidated Damages Clauses. A clause providing for two to three years' lost profits will be providing a far lower amount of compensation to an operator than a successful claim for lost profits for a 15 to 25 year operating term of an agreement. According to Singapore law, if one party to a contract does not perform his or her obligations under a contract, the other party may file a civil suit to sue for damages for breach of contract. The balance that the common law seeks to strike is between on the one hand the protection of the parties' agreement and legitimate commercial interests, and on the other hand protection against provisions which are punitive or oppressive in their operation. In contract administration there are certain clauses that consultants, engineers,quantity surveyors,project managers and contractors should know.This doesn’t mean that it is enough knowing the technical term.It is important to understand the how to apply liquidated damages in construction contracts and how to prevent LD imposed on your project. Why do some operators include liquidated damages clauses in their agreements, and others prefer not to? The compensation claimed for the wrongful termination will be the operator's lost profits for the operating … The past few years have seen subtle but important shifts in how the concept of a penalty is defined. Mr Leiman rejected that suggestion, and challenged the enforceability of the forfeiture provision on the basis that it was a penalty. Most liquidated damages clauses provide that the clause will apply where the agreement is wrongfully (or "prematurely" terminated), and therefore the wrongful termination will need to be proved. The traditional test for distinguishing between a liquidated damages clause and a penalty clause was laid down in the seminal House of Lords decision in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (“Dunlop”). If wrongful termination is a prerequisite to the clause being engaged, then issue 1 above must still be proved. If that clause is a secondary obligation which imposes a detriment on the breaching party which is out of all proportion to the non-breaching party's interest in enforcing the primary obligation, then it will be unenforceable as a penalty. A recent decision from the Singapore Court of Appeal gives insight into the approach taken in that country. Liqui… Clauses 3 and 4 in the examples above are drafted to minimize the risk of those clauses being deemed to be "penalty clauses". The Court said that it would be guided by: Applying this approach, the Court concluded that cl 3(c) was a primary obligation, which did not give rise to a secondary obligation if Mr Leiman "acted in any way to the detriment of Noble" once he had left Noble. What should the amount or value set out in the liquidated damages clause be? Clause 3(c), however, did not require a breach of contract to be activated, therefore (Noble argued) the law of penalties did not apply. Make sure you take advice when looking to include a liquidated damages clause in your hotel management agreement, particularly to check whether it is enforceable under the governing law of the agreement. Liquidated damages are … Liquidated Damages: Present in certain legal contracts, this provision allows for the payment of a specified sum should one of the parties be in breach of contract . For all but a very fortunate few, delays are an unfortunate inevitability in construction projects. Some key factors when considering a liquidated damages clause are: An assessment of the value of the hotel project to the operator (both financially and in terms of its prestige) will likely need to be carried out to assist in answering the above question. Points to consider in addition to those outlined above include: Liquidated damages clauses provide an element of certainty for both parties, but that certainty can come at a cost. Common law. GPP claimed against Solar under its guarantees. First, the Court focused on the substance rather than the form of the contractual provision in question. The position adopted by Singapore courts is largely based on the early 20th century authority of Dunlop Pneumatic Tyre Company v New Garage and Motor Company[1915] AC 79 (“Dunlop Tyre”). If a management agreement is wrongfully terminated by a property owner—an event which occurs with increasing frequency in developing jurisdictions—the operator's usual remedy will be to sue the owner for wrongful termination. Is it a reasonable pre-estimate of the loss to be suffered. Leiman provides helpful guidance on whether a clause will be unenforceable under the rule against penalties. The United Kingdom Supreme Court (“UKSC”) has since created a new leading authority to replace Dunlop Tyre. Prior results do not guarantee a similar outcome. A liquidated damages clause will only be enforced if the liquidated damages provided for are genuine pre-estimates of the losses likely to flow from the breach (Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Ltd AC 79 (“ Dunlop Pneumatic ”)). 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