When are liquidated damages a penalty?
August 8, 2022
In Laurus Group Pty Ltd v Mitsui & Co (Australia) Ltd  VSC 360 the Victorian Supreme Court considered a broad range of contract issues including the enforceability of a liquidated damages term.
Mitsui & Co (Australia) Ltd (Mitsui) supplied steel to Laurus Group trading as Australian Pipe and Tube (APT), under several supply contracts.
A number of Mitsui’s invoices remained unpaid by APT. APT did not dispute that the amounts remained outstanding, but contended that it had sustained loss and damage as a result of various breaches of the supply contracts by Mitsui, that APT was entitled to set off. This would reduce or extinguish its debt. Amongst other losses and damages, APT alleged it was owed liquidated damages (LDs) in the amount of $5,870,000, which were continuing to accrue.
After determining some of the other matters in dispute between the parties, the Court found it was not necessary to consider the issues relating to APT’s loss and damage. However, Osborne J nevertheless considered the enforceability of the LDs term for completeness.
The LDs term entitled the plaintiff to damages of $2,000 per day, for each day that a delivery was late. The same amount of LDs applied regardless of the size or value of the order. The defendants argued such a clause was not a “genuine pre-estimate of loss” and as such, was penal and unenforceable.
Osborne J emphasised that Lord Dunedin’s statement on penalties in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  AC 79 remains current law in Australia. A principle established in Dunlop is that there will be a presumption that a clause is penal when the same amount is payable on the occurrence of one or more of several different events with different expected impacts.
There was evidence that the actual amount of loss suffered by APT under certain of the supply contracts was nil, as against an accrued LDs amount of $334,000 under those same contracts. Justice Osborne acknowledged that the assessment required for the purpose of determining whether or not a clause is penal is to be made at the time of entering into the contract, but cited Paciocco v Australia and New Zealand Banking Group Ltd (2016) 258 CLR 525 as authority that evidence of later events can be probative.
Osborne J held that the combination of:
- the presumption of invalidity set out in Dunlop;
- the fact of an alternative measure suggested by Mitsui, being a rate based on the tonnage that was late; and
- the significant difference between the loss and damage in fact suffered, and the value of the LDs recoverable,
meant that the $2,000 per day could not be considered a genuine pre-estimate of loss. His Honour held that the purpose of such a term was to punish the party in breach, and was therefore unenforceable.
The full decision can be found here.