1. www.yachtinvestor.com 49°Family Office & Yacht Management Management Legal Analysis Profile
FamilyOffice&YachtManagement
Liquid
DamagesIn the recent case of Cavendish v Makdessi, the Supreme Court clarified the law relating
towhenaliquidateddamagesclauseshouldbestruckdownasanunenforceablepenaltyclause.
In this update, Adam Ramlugon, Managing Partner at superyacht law firm Bargate Murray,
breaks down how the Court’s findings might have an impact on the superyacht industry.
case law update
THE CONCEPT OF LIQUIDATED DAMAGES
in not a foreign one to those involved with
superyachts.
In brief, the idea is that the parties to, for
example, a yacht construction contract agree on
what sum, or sums, a yacht builder should pay to
the buyer if the finished yacht does not conform to
certain aspects of the yacht’s specification. These
are usually key performance areas such as speed
or vibration, but can also cover other matters such
as unjustified delay in delivery or, when applying to
the buyer, delay in making payment to the yard.
The benefit to the parties in negotiating such a
clause is that they can avoid the expense and delay
that might be incurred if the court is required to
assess the level of damages payable in the event
of the breach. They have already agreed a level of
compensation which, on the face of the contract, is
to be paid to the wronged party upon breach.
For public policy reasons however, it has long
been established that where a liquidated damages
clause strays into the territory of what is termed a
“penalty clause”the courts will hold that it is legally
unenforceable. Parties to commercial contracts
should therefore take care to ensure that any
liquidated damages clause they seek to rely on
does not cross that line. In answering that question,
the courts have often focussed on whether the
particular provision represents a“genuine pre-
estimate of loss”. In short, if it does, then the clause
is not a penalty clause and is therefore enforceable.
The recent Supreme Court judgment in
the case of Cavendish v Makdessi considered
whether posing that test was an end to the matter.
Whilst the Court held that it remains a relevant
consideration (in some cases a conclusive one), it
formulated a new test which asks:
“…whether the impugned provision… imposes
a detriment on the contract breaker out of all
proportion to any legitimate interest in the
enforcement of the… obligation”
(Emphasis added).
The question is what impact, (if any), this
reformulated test will mean for the superyacht
industry - principally yacht owners, buyers,
charterers and shipyards. This article cannot hope
to capture every relevant aspect of the case, but a
summary of the key points might look as follows:
Key points for the superyacht industry
1 The Cavendish case has not“re-invented
the wheel”but it does remind us that there
are other points to consider, other than the
pre-estimate of loss test, when determining
whether or not a liquidated damages clause
should be struck down as an unenforceable
penalty.
2 The pre-estimate of loss test remains good law
but should generally be regarded as part of a
wider set of matters to be considered when
analysing a liquidated damages clause, such as
the tests of“proportionality”and“legitimacy”
referred to above.
3 As is the case with any case of analysing
what a contract means, the context in which
a liquidated damages clause is agreed (by
reference to both the other clauses of
the agreement and the relevant factual
background) is crucial. Careful drafting
consideration should therefore be given to
this point. Ideally, to protect against the risk
of a clause being struck down, the agreement
should include some wording which explains
the basis upon which the parties have agreed
that the clause does no more than protect the
wronged party’s interest on terms consistent
with the reasoning in Cavendish.
4 In a yacht construction context, it is
noteworthy that the court made express
reference to the“uniqueness”of the subject
matter of the transaction as a factor which
would tend to support the conclusion that
the party had a legitimate interest in the
enforceability of a liquidated damages clause.
Accordingly, under an agreement to build a
“one of a kind”superyacht, a buyer’s legitimate
interests in the deal might stretch beyond the
usual commercial considerations.
5 It is questionable, in our view, whether this
point would translate into the context of a
yacht charter where, in a case of delay or
cancellation, a charterer may quite easily be
able to source and charter another yacht of at
least similar quality. Moreover in such a case,
any actual loss would be relatively easy to
calculate. In this regard, liquidated damages
clauses which call for as much as 50% of the
charter fee to be repaid to the charter upon
cancellation remain, in our view, at risk of
being struck down as unenforceable penalty
clauses.
Adam Ramlugon, Managing Partner
Superyacht and Aviation Group, Bargate Murray.
Disclaimer and Copyright© Bargate Murray Limited, 2015. All rights reserved. This article is for information purposes only. The information and
opinion expressed in this document does not constitute legal advice and should not be regarded as a substitute for legal advice.
©ISTOCKPHOTO The benefit to the parties in
negotiating such a clause is that
they can avoid the expense and
delay that might be incurred if
the court is required to assess
the level of damages payable in
the event of the breach