A ruling by the UK’s top court on damages provisions in major contracts will impact on the energy and construction industries, says an Aberdeen legal expert.
In a landmark ruling, the Supreme Court has “shaken off the dust from 100 years of case law” regarding contract compensation clauses, said Scott Johnston of legal firm Pinsent Masons.
Mr Johnston said: “Many business and consumer services contracts contain what is commonly known as a “liquidated damages” clause and the energy and the energy and infrastructure sectors in particular are very familiar with these terms, which can have big financial implications.
“It was accepted that if services or goods are delivered late, or something else goes wrong with contract performance, the “innocent party” will often claim a pre-determined amount of compensation – in other words, there is no need to argue about what its loss actually is, or have a court resolve that, with the amount fixed up front, at the time of entering the contract.”
However, in two cases involving Cavendish Square Holding BV/Beavis v Makdessi/Parking Eye Limited, the Supreme Court this week ruled that compensation should be in “the legitimate interest” of a party, and not just whether it directly links to likely losses in the event of poor performance, as it has in the past.
Mr Johnston, a contract dispute resolution specialist, added: “For businesses operating such compensation clauses in their contracts, this case will provide significant comfort, as they will probably now be easier to justify and enforce.
“This will allow wider commercial concerns to be brought into play when these clauses are scrutinised, and might now encourage business to be bolder in setting compensation amounts, and in the current climate of tight cash flows this could be an area of concern for some players.”
However, the ruling also contained a warning by the Court against creating financial remedies in contracts which are obviously disproportionate and extreme.
“The decision has ramifications for both business and consumer contracts, particularly the energy and infrastructure sectors. It would appear to add strength to the positon of parties which argue a contract has not been properly fulfilled, while guarding against outrageous compensations claims which are disproportionate to the loss experienced.”
Recommended for you
