Contract interpretation—distinguishing between liquidated damages and penalty clauses


Published by a ½Û×ÓÊÓƵ Dispute Resolution expert
Practice notes
In-house

Contract interpretation—distinguishing between liquidated damages and penalty clauses


Published by a ½Û×ÓÊÓƵ Dispute Resolution expert

Practice notes
In-house

This Practice Note considers what liquidated damages clauses are and briefly when and how they are used. It then focuses, in particular, on the court's approach when determining whether a purported liquidated damages clause is, in fact, a penalty and therefore unenforceable; tracing the authorities through to how the question should now be approached in light of the 2015 Supreme Court Makdessi/ParkingEye decision and considering, in particular, issues such as when contractual provisions for accelerated receipt, default interest, or positive incentives may be considered as a penalty. Consideration is also given to whether liquidated damages survive termination and their relationship with partial performance.

What is a liquidated damages clause?

A liquidated damages clause is a clause whereby the parties to a contract fix in advance a sum of money to be paid by the defaulting party to the innocent party in the event of a breach. The sum payable represents agreed damages (called liquidated damages) and is recoverable without the innocent party needing to prove the actual loss suffered.

Liquidated damages clauses

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Jurisdiction(s):
United Kingdom
Key definition:
Contract definition
What does Contract mean?

A contract is a legally binding promise (oral or in writing) by one person to fulfil an obligation to another person in return for consideration. A binding contract comprises four elements: offer, acceptance, consideration and intention to create legal relations.

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