Court upholds onerous liquidated damages clause triggered by termination of a yacht building contract.

Buyer beware – on the facts, a clause entitling a yacht builder to liquidated damages of 20 per cent of the contract price in the event of termination of the contract was "not even arguably" a penalty clause.1

The claimant, Azimut-Benetti SpA ("Azimut"), was commissioned by Shoreacres Ltd ("Shoreacres") to construct a 60-metre motor yacht. The contract price – EUR 38 million – was payable in instalments, and Shoreacres' obligation to pay was personally guaranteed by its owner, Mr Darrell Healey.

Clause 16 of the contract gave Azimut a right to terminate in the event that Shoreacres failed to pay "any sum due and owing ... within 45 days after the due date". Clause 16 further provided that, in the event of lawful termination, Azimut would be entitled to retain and/or recover an amount equal to 20 per cent of the contract price "by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) [subject to which, Azimut] will promptly return the balance of sums received ... together with [Shoreacres'] Supplies, if not yet installed in the Yacht".

When Shoreacres failed to pay the first instalment, Azimut terminated the contract, and sought summary judgment for EUR 7.1 million i.e. 20 per cent of the contract price, less the EUR 500,000 deposit already paid. Mr Healey, as guarantor, opposed the application, arguing that Clause 16 was a penalty clause, and thus unenforceable.

Under English law, "penalty clauses" (characterised as being clauses intended merely to punish or deter a party's breach of contract) are not generally enforceable. Liquidated damages clauses, on the other hand, are generally recognised – provided they represent a genuine pre-estimate of the loss the wronged party will suffer in the event of breach.

The court held that Clause 16 was "not even arguably" a penalty clause: on the facts, and read as a whole, it represented a commercially justifiable balance between the parties' interests. The 20 per cent figure – while substantial – could not be read in isolation from the rest of Clause 16 – which also provided that Azimut would return any unused supplies to Shoreacres. Further, the courts seem to have recognised that the 20 per cent figure would not increase with the amount of work Azimut actually carried out under the three-year term of the contract – and that Clause 16 was intended as clean-break provision in the event of termination.

The line between a liquidated damages clause and a penalty can be unclear: in this case, Azimut prevailed because it could show that Clause 16 represented a reasoned balance between the parties' interests.

Footnote

1. Azimut-Benetti SpA v Darrell Marcus Healey (2010)

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