Yacht Construction Contract - Liquidated damages

In a recent case [1], the High Court held that a liquidated damages clause in a yacht construction contract was not a penalty and therefore enforceable. In so doing, the Court granted summary judgement in favour of the claimant. Azimut-Benetti SpA, a luxury yacht builder in Italy (claimant) had contracted to construct a 60 metre yacht for Shoreacres Ltd, (buyer) an Isle of Man special purpose company wholly owned by the defendant at a contract price of €38 million, payable by instalments. Scheduled delivery date was 30 November 2011. A personal guarantee was issued by the defendant.

Clause 16 of the Yacht Construction Contract dated 25 September 2008 and in particular clause 16.3, provided as follows:

16.1 In addition to such rights as it may have at general law the Builder may suspend construction of the Yacht and/or terminate this Contract at any time by written notice to the Buyer: (a) if the Buyer fails to pay any sum due and owing under this Contract within forty-five days after the due date;

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16.3 Upon lawful termination of this Contract by the Builder it will be entitled to retain out of the payments made by the Buyer and/or recover from the Buyer an amount equal to 20% of the Contract Price by way of liquidated damages as compensation for its estimated losses (including agreed loss of profit) and subject to that retention the Builder will promptly return the balance of sums received from the Buyer together with the Buyer’s Supplies if not yet installed in the Yacht.”        

The first instalment, 10% of the contract price was not paid and it was some time later on 22 January 2010 that claimant terminated the contract, and demanded payment of €7.1 million being 20% of the contract price of €38 million less €0.5 million paid by way of deposit. A letter of demand for similar sum was also issued against the defendant under his guarantee. The claimant applied for summary judgement against the defendant.

The defendant resists this claim for summary judgment under the guarantee on the basis that the liquidated damages clause upon which the claimant sues in the contract with Shoreacres was a penalty, so that there is no liability on which the guarantee can fasten. The claimant maintains that the defendant does not have an arguable case in that regard; alternatively it argues that by the terms of the guarantee the guarantor is liable even if the clause is unenforceable, and the principal debtor is not, or that an estoppel arises.  That is the first issue which I have to decide. The claimant has an alternative claim for the first instalment of the price which had fallen due under the contract at the time of termination. The defendant contends that having elected to sue on the liquidated damages clause, the claimant should not be entitled to summary judgment for the first instalment. That is the second, and only other, issue raised by the defendant by way of defence. [Per Justice Blair at paragraph 1 lines 4-8]

Counsel for the defendant argued that the liquidated damage clause inter alia was a deterrent and as such should be treated as a penalty on ordinary principle.  He replied  on” the presumption referred to by Lord Dunedin that it is a penalty where a single lump sum is payable by way of compensation on the occurrence of one or more of several events, some of which may occasion serious and others trifling damage.  He does however recognise that this is not a “powerful presumption” (as Lord Dunedin makes plain in the passage cited). [In Dunlop Pneumatic Tyre at p. 87]

However, the Judge agreed with claimant’s counsel contention that defendant’s counsel submissions did not take account of the provisions of clause 16.3 as a whole as it places an obligation on the buyer, but it also places an obligation on the claimant, namely an obligation promptly [to] return the balance of sums received from the Buyer together with the Buyer’s supplies if not yet installed in the Yacht. 

The claimant relies on in Cine Bes Filmcilik, ibid, at [15].  Citing Lordsvale, Mance LJ pointed out that a dichotomy between a genuine pre-estimate of damages and a penalty does not necessarily cover all possibilities. There are clauses, he says, which may operate on breach, but which fall into neither category, and they may be commercially perfectly justifiable. As Clarke LJ put it in Murray v Leisureplay at [106], a particular clause may be commercially justifiable, provided that its dominant purpose is not to deter the other party from breach.

The claimant submitted that the evidence shows that clause 16.3 had a clear commercial and compensatory justification, and was not merely a liquidated damages clause, but provided for payments to the buyer also, was not a deterrent, and falls within these principles. The claimant also relied on the exchanges between the parties to the contracts where an alternative clause based on actual loss, but with the attendant possibility of considerable delay in reimbursement were proposed to the buyer. However, the buyer in this case agreed to clause 16.3 as proposed by the builder. 

The Judge held that the purpose of the clause was not deterrent and that it was commercially justifiable as providing a balance between the parties upon lawful termination by the builder.

He added that “This was a contract for the construction and sale of a very expensive yacht, aptly described in the evidence as a “super-yacht”.  Both parties had the benefit of expert representation in the conclusion of the contract. The terms, including the liquidated damages clause, were freely entered into.  As the authorities referred to above show, in a commercial contract of this kind, what the parties have agreed should normally be upheld.  In my view, the clause in question is not even arguably a penalty, and is enforceable in its terms.  It follows that the claimant is entitled to summary judgment for €7.1 million being 20% of the contract price of €38 million less €0.5 million paid by way of deposit

On the claimant’s alternative case for payment of the first instalment, he held that in view of his decision on the penalty point, this alternative case for payment of the first instalment due under the contract does not arise. He noted in passing that if he had held that clause 16.3 was unenforceable, the claimant should be able to claim for the first instalment citing the decision in Hyundai Heavy Industries Co Ltd v Papadopoulos [1980] 1 WLR 1129, HL where on this question, a majority of the House of Lords held that the builder’s right to the instalment was not affected by the termination of the shipbuilding contract. [other decisions referred to by the Judge included McDonald v. Dennys Lascelles Ltd (1933) 48 C.L.R. 457, 476-477, Johnson v. Agnew [1980] A.C. 367, HL, at p.396].

Source:

Azimut-Benetti SpA (Benetti Division) v Darrell Marcus Healey

[2010] EWHC 2234 (Comm)

http://www.bailii.org/ew/cases/EWHC/Comm/2010/2234.html