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Liquidated damages, commercially justified

24 September 2010

Liquidated damages clauses have traditionally been assessed on the basis of whether the clause in question represents a genuine pre-estimate of the loss suffered as a result of the breach. If not, the clause was held to be a penalty and therefore unenforceable.

In a recent case, the High Court allowed a liquidated damages clause which, although not a genuine pre-estimate of loss, was justified on commercial grounds.

This “commercial justification test” is a flexible and pragmatic approach and few can argue with the court’s willingness to uphold a commercial agreement negotiated between equals. However, some may be surprised to read that the damages in this case (EUR 7.6 million) for late payment amounted to 20% of the total price!

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