Singapore: The Benefits And Drawbacks Of Liquidated Damages Clauses

Last Updated: 5 December 2016
Article by Sapna Jhangiani

If a management agreement is wrongfully terminated by a property owner—an event which occurs with increasing frequency in developing jurisdictions—the operator's usual remedy will be to sue the owner for wrongful termination. The compensation claimed for the wrongful termination will be the operator's lost profits for the operating term of the agreement, in addition to any sums outstanding to the operator.

However, a number of operators include in their management agreements a clause providing for liquidated damages in the event of termination of the agreement, in an effort to remove the uncertainties in proving a loss-of-profits claim. Why do some operators include liquidated damages clauses in their agreements, and others prefer not to? Are liquidated damages clauses always to the benefit of operators, or can owners also benefit from them? This article by Sapna Jhangiani, an attorney with Clyde & Co, provides an analysis of liquidated damages clauses, seeking to address these issues, and includes points to consider based on our experience of drafting such clauses.

General Ingredients of a Loss of Profits Claim

In general, if there is no liquidated damages clause in a hotel management agreement, then in order to prove a loss of profits claim for wrongful termination, the operator will need to prove the following elements:

  1. that the agreement was wrongfully terminated;
  2. that it is entitled to its loss of profits for the wrongful termination under the governing law of the agreement;
  3. the value of its loss of profits claim.

The method of proving each of the above is usually as follows:

  1. the wrongful termination is proved through documents and other evidence (including witness evidence). Usually, the operator must prove that any breaches alleged against it by the owner to justify the termination are not proved;
  2. the entitlement to loss of profits must be proved as a question of law;
  3. the value of the loss of profits claim is usually proved by a third-party expert report, valuing the operator's estimated profits from the hotel. 

Liquidated Damages Clauses

The benefit of a liquidated damages clause is that, in any wrongful termination claim, the operator does not need to prove either its entitlement to loss of profits, or the value of its loss of profits claim. The entitlement to and value of the operator's compensation (points 2 and 3 above) are crystallized, and the parties, therefore, do not need to invest significant time and money arguing about these issues. 

Whether or not the operator needs to prove that it was wrongfully terminated (point 1 above) will depend on the wording in the liquidated damages clause. If wrongful termination is a prerequisite to the clause being engaged, then issue 1 above must still be proved.

Examples of Liquidated Damages Clauses

Some examples of liquidated damages clauses in management agreements are:

  1. In the event that owner seeks to improperly terminate or is deemed to have improperly terminated this agreement, then the owner must pay to the operator immediately upon demand, by way of liquidated damages, in compensation for loss of future management fees, a "termination fee" in an amount equal to (the number of remaining months in the operating term) times (the total management fees earned by the operator in the last 12 calendar months divided by 12).
  2. If this agreement is terminated without proper cause by the owner, the owner shall pay to the operator in full and final settlement of all future obligations a fee equal to the amount earned by the manager in the last 24 months (or if 24 months has not elapsed then based on approved annual budget for that current year times two) or the number of months remaining in the then current term, whichever is less.
  3. Upon termination due to the owner's breach, the owner shall pay to the operator the sum of USD $500,000 which shall be liquidated damages and not a penalty.
  4. Reasonable Estimate of Damages: The parties recognize the difficulty in ascertaining damages resulting from premature termination of this agreement, and agree to liquidated damages which represent their reasonable estimate of the damage from the loss of revenue which will result from premature termination. The owner shall pay to the operator as liquidated damages (and not as a penalty) an amount equal to the operator's monthly fee due and payable under this agreement for the last full 12 calendar months of the hotel's operation, multiplied by 12.

Most liquidated damages clauses provide that the clause will apply where the agreement is wrongfully (or "prematurely" terminated), and therefore the wrongful termination will need to be proved.

How can Liquidated Damages Clauses Benefit Owners?

Liquidated damages clauses may benefit owners as well as operators. By curtailing the amount of damages that an operator may claim, such clauses enable owners to delineate their risks and avoid the time, costs and risk of litigating issues relating to the operator's entitlement to, and value of, its claim for lost profits. Owners can use their bargaining power to limit the amount of damages payable to the operator to one or more years of lost profits.

Disadvantages of Liquidated Damages Clauses

The principal challenges with liquidated damages clauses are that, in many instances, unless the clause seeks to compensate the operator for its lost profits for the remainder of the operating term of the agreement, the operator will be limiting the damages to which it is entitled.

The most common clauses provide for liquidated damages which are equivalent to two or three years' lost profits (based on previous profits, or including a formula for estimating future profits, such as relying on the annual budget). A clause providing for two to three years' lost profits will be providing a far lower amount of compensation to an operator than a successful claim for lost profits for a 15 to 25 year operating term of an agreement.

In some jurisdictions, particularly civil law jurisdictions, actual loss must be proved to the satisfaction of a court. Therefore, it must be proved to the court that any penalty pre-agreed by the parties in a liquidated damages clause is a reasonable amount. The court will have discretion to adjust the amount of compensation downwards if they consider the amount of liquidated damages to be excessive. Examples of jurisdictions where we have seen this approach broadly adopted are China, Thailand and the UAE.   

The approach in common law jurisdictions tends to be that a liquidated damages clause will be enforced where the amount of damages represents a genuine attempt to work out what the loss would be in the event of a breach. If the amount is not a genuine pre-estimate of the loss that would be suffered, but is intended instead to penalize a party, then it will be considered a penalty clause, which is not valid, and the award of damages will then need to be determined by the ordinary principles of contract law. Courts are generally reluctant to find that agreed damages amount to a penalty clause in a commercial contract where the parties have equal bargaining power. Clauses 3 and 4 in the examples above are drafted to minimize the risk of those clauses being deemed to be "penalty clauses".

The approach varies from jurisdiction to jurisdiction, but in our experience, liquidated damages clauses are less likely to be upheld in civil law jurisdictions.

Should Operators Include Liquidated Damages Clauses in their Agreements?

Some key factors when considering a liquidated damages clause are:

  1. Will the clause be enforceable under the governing law of the hotel management agreement? If yes, then:
  2. Will it be possible to persuade the owner to agree to a clause awarding as liquidated damages the operator's profits for the remainder of the operating term (whether based on past performance, or a draft annual budget)? An operator may be able to gauge this when agreeing to the "Term Sheet" with the owner. If yes, then the clause is likely worth including; if no, then:
  3.  When balancing the value of limiting the operator's potential damages (eg. to two to three years' lost profits, or a specific sum), and the risks, time and costs of having to prove a claim for lost profits, is it worth including a liquidated damages clause?

An assessment of the value of the hotel project to the operator (both financially and in terms of its prestige) will likely need to be carried out to assist in answering the above question.

In each case, enforcing a liquidated damages clause and factors specific to the project may lead to nuances in the drafting of the liquidated damages clause. We are often asked to advise on these drafting nuances, bearing in mind that a liquidated damages clause will not necessarily be a "one size fits all" boilerplate clause.

Points to consider in addition to those outlined above include:

  • When will the clause be engaged? If it will be engaged upon the wrongful termination of the agreement by the owner, how will this be proved?
  • What should the amount or value set out in the liquidated damages clause be? Is it a reasonable pre-estimate of the loss to be suffered?  


Liquidated damages clauses provide an element of certainty for both parties, but that certainty can come at a cost. Make sure you take advice when looking to include a liquidated damages clause in your hotel management agreement, particularly to check whether it is enforceable under the governing law of the agreement.

The benefits and drawbacks of liquidated damages clauses

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions