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01/11/2014
Liquidated and ascertained damages (LADs) clauses are sometimes challenged by those who have to pay them on the grounds that they are penalty clauses rather than genuine pre-estimates of damage. If a LADs clause is deemed to be a penalty, then it will be unenforceable.
The dispute in Unaoil Limited -v- Leighton Offshore PTE Limited [2014] EWHC 2965 (Comm) arose out of the presence of a LADs clause and whether it was enforceable. Leighton were to bid for a contract from the South Oil Company (SOC). In discussions between Leighton and Unaoil it was agreed that, should Leighton be appointed the main contractor it would appoint Unaoil as its subcontractor to carry out the onshore works (Leighton would carry out the offshore works). It was very much expected that Leighton would be successful in its bid. A memorandum of understanding (the MOU1) was signed between the parties whereby Leighton would pay Unaoil an all-inclusive fee of $75 million for the works (Leighton itself were expecting to be paid at least $500 million). Clause 8.1 of the MOU1 was what is known as a liquidated and ascertained damages clause (LADs). Clause 8.1 of the MOU provided that if Leighton failed to appoint Unaoil as its subcontractor then Unaoil would be entitled to LADs of $40 million.
Some time later, in a bid to make Leighton's bid to the SOC more attractive, both parties agreed to reduce their respective fees and in this regard Unaoil reduced its fee of $75 million to $55 million (the MOU2). In due course, Leighton won the bid and was appointed main contractor. For reasons which are unclear (either because the SOC did not approve of Unaoil as a subcontractor or because of personality clashes between members of Unaoil and Leighton) Leighton did not appoint Unaoil as its subcontractor. Unaoil brought an action for, inter alia, LADs of $40 million pursuant to clause 8.1 of the MOU2. Mr Justice Eder said that the LAD clause would be looked at as at the date of the contract and for these purposes the date of the contract was the date of the MOU2 in which the fee payable to Unaoil was agreed as $55 million. As the parties had failed to amend the LADs fee of $40 million in the MOU2 it could not be reasonable that, if $40 million was a genuine pre-estimate of loss on a fee of $75 million, it was also a genuine pre-estimate of loss when that fee was reduced to $55 million. It was therefore decided that the $40 million LAD claim was unconscionable and extravagant and therefore amounted to a penalty clause. It was thus unenforceable. Where a relevant and material term in a contract is amended or varied, care must be given to amend or vary the LAD clause accordingly to ensure its validity. It is of note that if the LAD clause had been amended in line with the contract fee in this case, the LAD clause could have stated a value of up to $29 million with a far reduced risk of it being held unenforceable. Fisher Scoggins Waters is a leading construction, engineering and manufacturing litigation firm, specialising in disputes and disasters. For further information on this article or any of our litigation services, please contact us on: +44 (0) 207 993 6960.
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27 November 2019 | Bloomsbury, 50 Bedford Square, London, WC1B 3DP
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