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Recent Decision By The English High Court Is Significant As It Did Not Apply The Traditional Test Fo

DATE: 21.06.2011

 

The English High Court (the “HC”) in Azimut-Benetti SpA v. Darrell Marcus Healey[1] upheld a liquidated damages type of clause by granting a summary judgment in favour of a shipbuilder (the “claimant”). The defendant in this case had entered into a contract for the purchase and delivery of a “super yacht” to be manufactured by the claimant, for €38 million payable in instalments. The contract contained a pre-agreed compensation clause which provided for the payment of 20% of the contract price in the event the contract was terminated by the claimant for non-payment of “any sum due and owing”. A deposit of €500,000 was paid by the defendant however, none of the agreed instalments were ever paid. The defendant gave his personal guarantee in relation to the payments to be made under the contract and when it became clear that no further money was forthcoming the claimant decided to seek summary judgment under the guarantee for 20% of the contract price (pursuant to the compensation clause).

The HC rejected the defendant’s submission that the compensation clause amounted to a penalty and that accordingly, there was no liability on which the guarantee could attach. In his judgment in favour of the claimant, Blair J applied the “commercial justification test”, i.e. a particular clause may be justified commercially if its main purpose is not to deter the other party from breach, essentially holding that the compensation charge was valid as liquidated damages.

It is important to note that in his judgment Blair J highlighted the following: (1) the parties had discussed the compensation clause on a number of occasions, (2) the compensation clause placed an obligation on the claimant to immediately return all monies held by it over 20% of the contract price, (3) the compensation clause had a clear commercial and compensatory justification and (4) the parties had expert representation in negotiations.

Comment:

This case is somewhat significant because the traditional test for liquidated damages was not applied in the usual way but rather a looser “commercial justification test” was applied.

As a decision of the English High Court, the decision does not change the laws of Ireland and is not binding on Irish courts. However, it would be of persuasive effect before an Irish Court.

[1]. [2010] EWHC 2234 (Comm)

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