[2010] EWHC 2234 (Comm)

Azimut build luxury yachts. On 25 September 2008, Azimut and Shoreacres Ltd (a company wholly owned by Mr Healey) entered into a contract whereby Azimut agreed to construct a 60 metre yacht for €38 million payable in instalments. The delivery date was 30 November 2011. Mr Healey provided a personal guarantee. Shoreacres paid a deposit of €0.5 million but failed to pay the first instalment of 10% of the price, which was due on 17 October 2008. Azimut eventually terminated the contract on 22 January 2010.

Clause 16.3 provided that if Azimut lawfully terminated the contract, it would be entitled to retain or recover 20% of the price by way of liquidated damages as compensation for its estimated losses. This clause also required Azimut to refund the balance of instalments over and above the 20% amount. Azimut sought summary judgment against Mr Healey. Mr Healey argued that the liquidated damages clause in the contract with Shoreacres was not a genuine pre-estimate of loss but a penalty, so that there was no liability on which the guarantee could fasten.

Whilst negotiations took place for yacht in question, the advisors retained for Shoreacres were independently retained for the purchaser of a similar yacht. In the context of that yacht, there was evidence before the Court of discussions regarding the commercial reasoning for clause 16.3. There was no evidence of discussions regarding this clause in relation to Mr Healey’s yacht, but his/Shoreacres’ advisors would have been aware of the discussions in relation to the other contract. And so, the parties accepted before the court that this evidence was admissible so far as it went to the reasons the parties had for agreeing the clause in question.

Mr Justice Blair held that Azimut was entitled to summary judgment for €7.1 million, being 20% of the contract price less €0.5 million paid by way of deposit, on the basis that it was not arguable that clause 16.3 was a penalty. At the time the contract was entered into the dominant purpose of clause 16.3 was not to deter Shoreacres from breach. The clause was commercially justifiable as providing a balance between the parties upon lawful termination by Azimut. Even though the Judge did not have to decide the issue given his conclusion that clause 16.3 was not a penalty, in an obiter comment he rejected Azimut’s alternative argument that Mr Healey would have been liable under the guarantee even if the liquidated damages clause had been held to be a penalty. Such an outcome would be against public policy and in any event, since the guarantee was limited to the obligations of Shoreacres, if Shoreacres had no obligation under the contract,

Mr Healey would have no obligation under the guarantee. Clause 16.3 was more than just a bare liquidated damages clause as it served the further commercial purpose of returning the balance of instalments paid by Shoreacres upon termination. The balancing of commercial considerations for Shoreacres when entering into the contract was that upon termination it would have the advantage of an immediate refund of the balance of instalments already paid which totalled more than 20% of the price. The Judge concluded that both parties had the benefit of expert representation in the conclusion of the contract. The terms, including the liquidated damages clause, were freely entered into:

"As the authorities referred to...show, in a commercial contract of this kind, what the parties have agreed should normally be upheld."