NSV carried out work on the instructions of Consafe on heating, ventilation and air-conditioning equipment at a plutonium chemical waste plant at Drigg, in Cumberia. Consafe counter-claimed for liquidated damages. NSV said that liquidated damages could not be levied because they were a penalty. As the judge said, if the relevant clause was a penalty, Consafe would not be able to enforce it. However, the onus was on NSV to prove that it was a penalty.
Were the liquidated damages a penalty?
The judge said that a penalty was an extravagant and unconscionable clause in comparison to the greatest loss that would result from a breach, whereas a liquidated damages clause was a genuine pre-estimate of loss. He further quoted from the comment of Lord Woolf in the Phillips Hong Kong Ltd vs AG of Hong Kong (1993), case that striking down a penalty clause was a blatant interference with freedom of contract and could only be justified where there was oppression. On balance, he decided that the liquidated damages clause was not a penalty.
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Here, the judge was satisfied that there was no oppression. This was not a case of a big contractor strong-arming a small contractor. On the evidence, there was an equality of arms between the parties. They had a 20-year trading relationship. Further, the liquidated damages clause provided for graduated sums increasing in proportion to the seriousness of the breach, something the judge described as being commonplace in commercial contracts.