The High Court, in Azimut-Benetti SpA (Benetti Division) v Healey [2010] EWHC 2234 (Comm), has granted summary judgment in favour of a shipbuilder seeking to enforce a liquidated damages clause.

Some contractual clauses fall somewhere between a penalty clause and a liquidated damages clause. In such cases, while the figure fixed as compensation may not wholly reflect the loss likely to be suffered by the innocent party, there is some commercial justification to the figure and it is not merely a deterrent. The courts have, over the years, suggested that such clauses may be enforceable, as they are not penalties.  

In this case, an Isle of Man company (the Buyer) engaged a yacht builder to build a vessel for the Defendant. The Buyer was wholly owned by the Defendant. The contract provided that, in the event of late payment by the Buyer, the builder could end the contract and either retain or recover 20% of the contract price by way of liquidated damages. The Buyer defaulted on an instalment, and the builder sought to exercise these rights under the contract. The builder subsequently applied for summary judgment against the Defendant, who resisted the application and argued that this provision in the contract amounted to a penalty, and not a genuine preestimate of loss. The Defendant further submitted that, because it had raised this argument, the court was required to hear evidence from both sides at a full trial in order to determine whether 20% was indeed a genuine pre-estimate of loss.  

Summary judgment was given, with the judge holding that it was not even arguable that the clause was a penalty. Rather than investigate the likely loss to the builder and compare this with the figure fixed in the contract, the judge considered whether there was a clear commercial and compensatory justification for the clause. He found that the Buyer’s interest in avoiding the delay that might be involved in a recovery-based loss, and in getting an immediate refund of any excess payments, could be classed as such a justification.

This decision shows the courts’ willingness to uphold liquidated damages clauses in contracts negotiated between parties of equal bargaining power. It also provides an example of the courts explicitly deciding a penalty clause issue by reference to the “commercial justification” test.