A recent UK Court of Appeal case serves as a reminder that liquidated damages drafted in relation to a specific breach only will not operate to deny a party his common law remedies for other breaches of the contract such as further delay or other non-performance and to recover ‘loss of bargain’ damages in such circumstances.
Stocznia contracted with Gearbulk to build six vessels for which Gearbulk would pay by way of instalments. The terms of the contract stipulated that Stocznia would not only provide Gearbulk with the vessels but that it would be liable to Gearbulk in liquidated damages if there was a delay between the time agreed for delivery of the vessels and the actual delivery date, and further, that in the event of a significant delay Gearbulk was entitled to terminate the contract. Gearbulk terminated the contract and brought an action to recover instalments paid for three undelivered vessels, liquidated damages for the delay as agreed in the contract, as well as loss of bargain damages (the difference in the price paid and the current market price of the goods).
The Court of Appeal provided that clear language would have to be used to satisfy the court that a party to a contract intended to abandon a valuable right, and stated that ‘[t]he more valuable the right the clearer the language will need to be.’ The court also accepted that pre-agreed liquidated damages clauses, provided that they were drafted in relation to a specific issue in a contract, did not operate to displace the rights a party may have to damages at common law for other breaches or non-performance. The Court provided that the wording of the relevant clause, and the events to which the clause referred, made it clear that liquidated damages were only payable in respect of a delay in delivery. This was evidenced by the fact that the liquidated damages would be payable by way of a reduction on the instalments payable for the vessels under the contract.
The court held that the right to recover the price paid by way of instalments was a distinct right from the right to recover ‘loss of bargain’ damages at common law and that there was ‘no doubt’ that the parties intended the clause dealing with liquidated damages ‘to provide a remedy additional to those that would ordinarily be available to Gearbulk on termination of the contract’. To construe the contested clause otherwise, the Court said, would be ‘to take away by the back door rights of potentially considerable value.’ Gearbulk was therefore entitled to recover not only liquidated damages for breach of the specific clause against which it was drafted but also the pre-paid instalments and ‘loss of bargain’ damages as a result of Stocznia’s failure to perform it’s contractual obligations.
To assist with contractual certainty, clients might consider when drafting liquidated damages clauses that they are expressed to be in addition to the rights afforded to the parties at common law; and, that in communicating its intention to sue on foot of a liquidated damages clause or a clause entitling a refund, that it expressly reserves its right to recover under the common law.