Penalties in construction - Revision history

Designing Buildings at 07:58, 23 October 2020

2020-10-23T07:58:48Z

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	* The distinction between liquidated damages clauses and penalty clauses.		* The distinction between liquidated damages clauses and penalty clauses.

−	[[Category:Client_procedures]] [[Category:Contracts_/_payment]]	+	[[Category:DCN_Case_Law]] [[Category:DCN_Definition]] [[Category:DCN_Guidance]] [[Category:Client_procedures]] [[Category:Contracts_/_payment]]

Editor at 16:31, 1 March 2019

2019-03-01T16:31:05Z

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−	[[File:Club-~~2492011 640~~.jpg]]	+	[[File:Club-2492011_640.jpg\|link=File:Club-2492011_640.jpg]]

	In construction, the term 'penalty' typically refers to a financial payment imposed in the event of a breach of contract.		In construction, the term 'penalty' typically refers to a financial payment imposed in the event of a breach of contract.
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	* Compensation event.		* Compensation event.
		+	* Contractual obligation.
	* Damages in construction contracts.		* Damages in construction contracts.
	* Delay damages.		* Delay damages.

Designing Buildings: moved Penalty to Penalties in construction

2018-12-20T10:07:34Z

moved Penalty to Penalties in construction

← Older revision

Revision as of 10:07, 20 December 2018

Designing Buildings at 10:07, 20 December 2018

2018-12-20T10:07:11Z

← Older revision		Revision as of 10:07, 20 December 2018
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−	In construction, the term 'penalty' typically refers to financial payment imposed in the event of a breach of contract.	+	[[File:Club-2492011 640.jpg]]
		+
		+	In construction, the term 'penalty' typically refers to a financial payment imposed in the event of a breach of contract.

	In 'Legione v Hateley' [1983], Mason and Deane JJ defined a penalty as follows:		In 'Legione v Hateley' [1983], Mason and Deane JJ defined a penalty as follows:
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	“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”		“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”

−	However, 'penal' clauses, ie those that impose a punishment may not enforceable. Until recently, it was considered that they must be based on a genuine calculation of actual damages incurred. In effect therefore 'penalties' were not allowed, albeit the phrase was still commonly used to refer to the payment of damages or some other liability imposed upon breach of ~~the~~ contractual stipulation.	+	However, 'penal' clauses, ie those that impose a punishment may not enforceable. Until recently, it was considered that they must be based on a genuine calculation of actual damages incurred. In effect therefore 'penalties' were not allowed, albeit the phrase was still commonly used to refer to the payment of damages or some other liability imposed upon breach of a contractual stipulation.

	For example, liquidated and ascertained damages (LADs) are common in construction contracts, generally relating to the failure of the contractor to complete the construction works before the date required by the contract. However, they are generally based on a genuine calculation of damages, and if they are not, or if they are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable.		For example, liquidated and ascertained damages (LADs) are common in construction contracts, generally relating to the failure of the contractor to complete the construction works before the date required by the contract. However, they are generally based on a genuine calculation of damages, and if they are not, or if they are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable.
		+
		+	For more information see: Liquidated and ascertained damages.

	This precedent was set by [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]], in which a contractual provision was considered to be a penalty if it was penal rather than a pre-estimate of loss. This determination is often made based on the terms and inherent circumstances of each particular contract, judged at the time of making the contract, not at the time of the breach.		This precedent was set by [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]], in which a contractual provision was considered to be a penalty if it was penal rather than a pre-estimate of loss. This determination is often made based on the terms and inherent circumstances of each particular contract, judged at the time of making the contract, not at the time of the breach.

Designing Buildings at 10:02, 20 December 2018

2018-12-20T10:02:49Z

← Older revision		Revision as of 10:02, 20 December 2018
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	“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”		“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”

−	However, 'penal' clauses, ie those that impose a punishment ~~are~~ not enforceable, ~~instead,~~ they must be based on a genuine calculation of actual damages incurred. In effect therefore 'penalties' ~~are~~ not allowed, albeit the phrase is still commonly used to refer to the payment of damages or some other liability imposed upon breach of the contractual stipulation.	+	However, 'penal' clauses, ie those that impose a punishment may not enforceable. Until recently, it was considered that they must be based on a genuine calculation of actual damages incurred. In effect therefore 'penalties' were not allowed, albeit the phrase was still commonly used to refer to the payment of damages or some other liability imposed upon breach of the contractual stipulation.

−	For example, liquidated and ascertained damages (LADs) ~~and~~ are common in construction contracts, generally relating to the failure of the contractor to complete the construction works before the date required by the contract. ~~LADs are not a penalty. If~~ they are ~~not~~ based on a genuine calculation of damages, or if they are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable (see [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]] - which set the rule that a contractual provision is considered to be a penalty if it is penal rather than a pre-estimate of loss.	+	For example, liquidated and ascertained damages (LADs) are common in construction contracts, generally relating to the failure of the contractor to complete the construction works before the date required by the contract. However, they are generally based on a genuine calculation of damages, and if they are not, or if they are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable.

−	This is often ~~decided upon by~~ the terms and inherent circumstances of each particular contract, judged at the time of ~~the~~ making of the contract, not as at the time of the breach.	+	This precedent was set by [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]], in which a contractual provision was considered to be a penalty if it was penal rather than a pre-estimate of loss. This determination is often made based on the terms and inherent circumstances of each particular contract, judged at the time of making the contract, not at the time of the breach.

	However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court re-considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.		However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court re-considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.
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	Lord Hodge stated that the "correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract".		Lord Hodge stated that the "correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract".

−	The new test set out by the Supreme Court recognises that the contractual party may ~~often~~ have a legitimate interest which can be protected by a contractual penalty, and this interest need not be a genuine pre-estimate of loss. If that party is able to demonstrate that the penalty clause is being used to protect that legitimate interest, and it is not 'exorbitant or unconscionable', then they do not have to suffer a loss, and the predominant purpose of such a clause can be deter the other party from a certain breach of contract.	+	The new test set out by the Supreme Court recognises that the contractual party may have a legitimate interest which can be protected by a contractual penalty, and this interest need not be a genuine pre-estimate of loss. If that party is able to demonstrate that the penalty clause is being used to protect that legitimate interest, and it is not 'exorbitant or unconscionable', then they do not have to suffer a loss, and the predominant purpose of such a clause can be deter the other party from a certain breach of contract.

	Examples of other penalties relevant to construction, not strictly related to breaches of contract, include:		Examples of other penalties relevant to construction, not strictly related to breaches of contract, include:

Designing Buildings at 09:57, 20 December 2018

2018-12-20T09:57:53Z

← Older revision		Revision as of 09:57, 20 December 2018
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	This is often decided upon by the terms and inherent circumstances of each particular contract, judged at the time of the making of the contract, not as at the time of the breach.		This is often decided upon by the terms and inherent circumstances of each particular contract, judged at the time of the making of the contract, not as at the time of the breach.

−	However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.	+	However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court re-considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.

	Lord Hodge stated that the "correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract".		Lord Hodge stated that the "correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract".

Designing Buildings at 09:56, 20 December 2018

2018-12-20T09:56:33Z

← Older revision		Revision as of 09:56, 20 December 2018
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	“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”		“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”

−	~~The parties to~~ a ~~contract may agree on the amount to~~ be ~~awarded in the event of~~ a ~~breach~~ of ~~contract. Such payments may be referred to as liquidated and ascertained~~ damages ~~(LADs) and~~ are ~~commonplace in construction contracts~~, ~~usually related~~ to ~~failure~~ to ~~complete~~ the ~~construction works before the date required by~~ the ~~contract~~.	+	However, 'penal' clauses, ie those that impose a punishment are not enforceable, instead, they must be based on a genuine calculation of actual damages incurred. In effect therefore 'penalties' are not allowed, albeit the phrase is still commonly used to refer to the payment of damages or some other liability imposed upon breach of the contractual stipulation.

−	As LADs are not a penalty, they ~~must have been~~ based on a genuine calculation of damages ~~when they were set. If they are not genuine~~, or are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable (see [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]]).	+	For example, liquidated and ascertained damages (LADs) and are common in construction contracts, generally relating to the failure of the contractor to complete the construction works before the date required by the contract. LADs are not a penalty. If they are not based on a genuine calculation of damages, or if they are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable (see [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]] - which set the rule that a contractual provision is considered to be a penalty if it is penal rather than a pre-estimate of loss.

−	The rule set out in 'Dunlop' was that a contractual provision is considered to be a penalty if it is penal rather than a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged ~~of as~~ at the time of the making of the contract, not as at the time of the breach.	+	This is often decided upon by the terms and inherent circumstances of each particular contract, judged at the time of the making of the contract, not as at the time of the breach.

	However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.		However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.

Editor at 13:23, 10 October 2018

2018-10-10T13:23:05Z

← Older revision		Revision as of 13:23, 10 October 2018
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	In construction, the term 'penalty' typically refers to financial payment imposed in the event of a breach of contract.		In construction, the term 'penalty' typically refers to financial payment imposed in the event of a breach of contract.

−	In Legione v Hateley (1983), Mason and Deane JJ defined a penalty as follows:	+	In 'Legione v Hateley' [1983], Mason and Deane JJ defined a penalty as follows:

	“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”		“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”

−	The parties to a contract may agree on the amount to be awarded in the event of a breach of contract. Such payments may be referred to as liquidated and ascertained damages and are commonplace in construction contracts, usually related to failure to complete the construction works before the date required by the contract.	+	The parties to a contract may agree on the amount to be awarded in the event of a breach of contract. Such payments may be referred to as liquidated and ascertained damages (LADs) and are commonplace in construction contracts, usually related to failure to complete the construction works before the date required by the contract.

−	As ~~liquidated damages~~ are not a penalty, they must have been based on a genuine calculation of damages when they were set. If they are not genuine, they may be considered a penalty by the courts and so may be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).	+	As LADs are not a penalty, they must have been based on a genuine calculation of damages when they were set. If they are not genuine, or are exorbitant, they may be considered a penalty by the courts and therefore may be unenforceable (see [[Dunlop_Pneumatic_Tyre_Co_Ltd_v_New_Garage_and_Motor_Co_Ltd\|Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd]]).

−	The ~~real question of when~~ a contractual provision is ~~challenged as~~ a penalty ~~is whether~~ it is penal~~, not whether it is~~ a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.	+	The rule set out in 'Dunlop' was that a contractual provision is considered to be a penalty if it is penal rather than a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.
		+
		+	However, in the case of 'Cavendish Square Holding BV v Talal El Makdessi (El Makdessi) and ParkingEye Ltd v Beavis' [2015], the Supreme Court considered the long-established principles underlying contractual penalty clauses. It held that the 'Dunlop rule' had been too rigidly applied, particularly where the inclusion of a penalty clause may have some clear justification, commercial or otherwise.
		+
		+	Lord Hodge stated that the "correct test for a penalty is whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party's interest in the performance of the contract".
		+
		+	The new test set out by the Supreme Court recognises that the contractual party may often have a legitimate interest which can be protected by a contractual penalty, and this interest need not be a genuine pre-estimate of loss. If that party is able to demonstrate that the penalty clause is being used to protect that legitimate interest, and it is not 'exorbitant or unconscionable', then they do not have to suffer a loss, and the predominant purpose of such a clause can be deter the other party from a certain breach of contract.

	Examples of other penalties relevant to construction, not strictly related to breaches of contract, include:		Examples of other penalties relevant to construction, not strictly related to breaches of contract, include:

Editor at 13:23, 8 October 2018

2018-10-08T13:23:23Z

← Older revision		Revision as of 13:23, 8 October 2018
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−	In construction, the term 'penalty' ~~typically~~ typically refers to financial payment imposed in the event of a breach of contract.	+	In construction, the term 'penalty' typically refers to financial payment imposed in the event of a breach of contract.

	In Legione v Hateley (1983), Mason and Deane JJ defined a penalty as follows:		In Legione v Hateley (1983), Mason and Deane JJ defined a penalty as follows:
Line 5:		Line 5:
	“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”		“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”

−	The parties to a contract may agree on the amount to be awarded in the event of a breach of contract. Such payments may be referred to as liquidated and ascertained damages and are commonplace in construction contracts, usually related to failure to complete the construction works before the date required by the contract. As liquidated damages are not a penalty, they must have been based on a genuine calculation of damages when they were set. If they are not genuine, they may be considered a penalty by the courts and so ~~will~~ be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).	+	The parties to a contract may agree on the amount to be awarded in the event of a breach of contract. Such payments may be referred to as liquidated and ascertained damages and are commonplace in construction contracts, usually related to failure to complete the construction works before the date required by the contract.
		+
		+	As liquidated damages are not a penalty, they must have been based on a genuine calculation of damages when they were set. If they are not genuine, they may be considered a penalty by the courts and so may be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).

	The real question of when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.		The real question of when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.

−	Examples of penalties relevant to construction include:	+	Examples of other penalties relevant to construction, not strictly related to breaches of contract, include:

	* If landlords fail to carry out appropriate checks and rent a property to someone who is not allowed to stay in the UK, they could face a penalty of up to £3,000 per tenant.		* If landlords fail to carry out appropriate checks and rent a property to someone who is not allowed to stay in the UK, they could face a penalty of up to £3,000 per tenant.
−	* Local authorities can serve a legal notice on the person responsible for ~~the~~ noise. If the noise problem persists they may be given a fixed penalty notice or taken to court and fined up to £5,000.	+	* Local authorities can serve a legal notice on the person responsible for noise. If the noise problem persists they may be given a fixed penalty notice or taken to court and fined up to £5,000.
	* Renting out a property that does not comply with the minimum energy efficiency standards might incur a penalty of up to £4,000 for domestic properties and up to £150,000 for non-domestic properties.		* Renting out a property that does not comply with the minimum energy efficiency standards might incur a penalty of up to £4,000 for domestic properties and up to £150,000 for non-domestic properties.

Designing Buildings at 12:54, 2 October 2018

2018-10-02T12:54:37Z

← Older revision		Revision as of 12:54, 2 October 2018
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−	A penalty is typically a financial ~~punishment that is~~ imposed in the event of a breach of contract.	+	In construction, the term 'penalty' typically typically refers to financial payment imposed in the event of a breach of contract.

	In Legione v Hateley (1983), Mason and Deane JJ defined a penalty as follows:		In Legione v Hateley (1983), Mason and Deane JJ defined a penalty as follows:
Line 5:		Line 5:
	“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”		“A penalty, as its name suggests, is in the nature of a punishment for non-observance of a contractual stipulation; it consists of the imposition of an additional or different liability upon breach of the contractual stipulation …”

−	The parties to a contract may agree on the amount ~~of damages~~ to be awarded in the event of a breach of contract. Such ~~damages are known~~ as liquidated and ascertained damages and are commonplace in construction contracts, usually related to the ~~completion obligations of~~ the ~~contractor~~. As liquidated damages are not a penalty, they must have been based on a genuine calculation of damages when they were set. If they are not genuine, they may be considered a penalty by the courts and so will be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).	+	The parties to a contract may agree on the amount to be awarded in the event of a breach of contract. Such payments may be referred to as liquidated and ascertained damages and are commonplace in construction contracts, usually related to failure to complete the construction works before the date required by the contract. As liquidated damages are not a penalty, they must have been based on a genuine calculation of damages when they were set. If they are not genuine, they may be considered a penalty by the courts and so will be unenforceable (see Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd).

	The real question of when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.		The real question of when a contractual provision is challenged as a penalty is whether it is penal, not whether it is a pre-estimate of loss. These are not natural opposites or mutually exclusive categories. A damages clause may be neither or both. It is often decided upon by the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach.