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This article appears as originally published in Construction Law on 1 December 2015 and is not maintained.
James Shackleton of Eversheds examines one of the key court decisions of the year, when the Supreme Court revisited the law on penalties. Liquidated damages need no longer solely reflect genuine pre-estimates of loss, he reports.
A hundred years after the House of Lords’ decision of Dunlop Ltd v New Garage Co Ltd the Supreme Court revisits the law on penalties
The Supreme Court refuses to abolish the doctrine that a penalty is unenforceable
The test as to whether a sum is a penalty is no longer the genuine pre-estimate of loss for so long regarded as good law but rather whether the ‘… provision imposes a detriment on the contract breaker out of all proportion to any legitimate interest of the innocent party …’
Liquidated damages need no longer be solely a reflection of a genuine pre-estimate of loss but can reflect the wider commercial context of a transaction and seek to protect legitimate commercial interests provided always that the amount of the liquidated damages is not extravagant, exorbitant or unconscionable
It is arguable that the protection of a legitimate commercial interest is limited to ‘commercial cases’ or where the parties are ‘bargaining on equal terms’ or represented by lawyers. This is a point
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