Liquidated (or delay) damages are pre-set damages (listed in the contract) which make it simpler and quicker to recover compensation when the other party to the contract defaults or commits a breach.
One such example is the notice from a hotel chain to charge £100 if a guest smokes in its bedrooms. Does it really cost that much to throw open the windows? If not, can they really recover £100?
A recent court case, Makdessi v Cavendish, considered the role of fixed (or agreed) damages in detail. In part, it seems to be attempting a return to the technical defences of the bad old days!
Although the case sets out more guiding principles than I have had cakes (today at least), there are two elements of the judgment worth focusing on. The first is the confirmation of the principle set out in Dunlop that the courts should uphold fixed damages. Clarke LJ said the court:
“recognises the utility of liquidated damages clauses and that to hold them to be penal is an interference with freedom of contract. It is, therefore, predisposed to uphold clauses which fix the damages for breach.”
In other words, despite having set out seven guidelines with five qualifications and many paragraphs of explanation (a plethora even for a judge), he said the court would support fixed damages over the uncertainty of suing.
There may be a temptation for lawyers to seize on his guidelines for determining whether fixed damages are extravagant, or unconscionable, or unreasonable. But, I prefer to focus on this point:
“A pre-estimate does not have to be right to be reasonable.”
So do guess, do fix damages and do choose your partners carefully. You don’t always have to get it right.
Although the courts will normally uphold any damages, however unreasonable, it is easier to get them agreed and into the contract if you’re reasonable.