A recent case Unaoil Ltd v Leighton Offshore Pte Ltd relating to a memorandum of agreement for a potential services contract illustrates that a liquidated damages clause may not be enforceable. It relates to an oil and gas contract for work in Iraq , and the sums at stake were large – many millions.
There had been an amendment to reduce the main contract price from $75M to $55M. The liquidated damages in the memorandum of agreement were originally set at $40M, and not reduced to reflect the reduction in the main contract price. The rationale appears to be that the purpose of the liquidated damages was to encourage Leighton to employ Unaoil as its subcontractor for the main contract. As you will have guessed that did not happen so Unaoil claimed this sum and a lot more.
The interesting point is the Court described the liquidated damages as “extravagant and unconscionable” and refused to award them. The morale is that aside from liquidated damages legally having to be a genuine pre-estimate of loss, they may now be deemed so over the top that they are viewed as exorbitant.