Introduction

Mitsui & Co (Australia) Ltd (Supplier) supplied steel to Laurus Group trading as Australian Pipe and Tube (Purchaser) from 2 March 2019 to 26 June 2019 under several supply contracts (Contracts).

The Purchaser owed around $7.4 million in unpaid invoices to the Supplier. Whilst the Purchaser did not dispute the unpaid invoices, it alleged that it had sustained loss and damage arising from a failure by the Supplier to deliver the goods within time. Accordingly, the Purchaser alleged that the Supplier was liable for liquidated damages in the amount of $5.87 million up to 29 April 2022.

The primary matter considered by the Court, among others, was the enforceability of the liquidated damages term under the Contracts.

Liquidated Damages Term

Clause 4.2 of the Contracts required the Supplier do everything necessary to enable APT to take delivery of the products at the time and place agreed, failing which the Supplier would pay liquidated damages to the Purchaser at the rate of $2,000 per day (Liquidated Damages Term).

The Supplier contended that the clause was not a genuine pre-estimate of loss and is therefore penal and unenforceable. The Supplier argued that the main reason that the Court should accept its position was because the Liquidated Damages Term entitled the Purchaser to liquidated damages of $2,000 per day regardless of the quantity or price of steel ordered under the Contract.

Revisiting the Dunlop Case

The Court confirmed that Lord Dunedin’s statement on penalties in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[1] (Dunlop) remained good law in Australia. One of the principles established in Dunlop was that there will be a presumption that a clause will be penal (and accordingly unenforceable) when “a single lump sum is made payable by way of compensation on the occurrence of one or more or all of several events, some of which may occasion serious and others but trifling damage”.[2]

Justice Osborne of the Victorian Supreme Court noted that if there is no evidence, the presumption has some value but when there is evidence, the characterisation of the stipulation will take place by reference to that evidence.[3]

In this case, there was evidence given by the Purchaser’s expert which assessed that the loss and damage suffered by the Purchaser with respect to the breaches of the first to fourth Contract was nil, despite the liquidated damage claimed by the Purchaser being $334,000.00 under those Contracts. The Court held that while the assessment required for the purpose of determining whether a clause is penal is to be made at the time of entering the contract, evidence of later events can be probative of no loss at that time.[4]

The Supreme Court held that the purpose of the Liquidated Damages Term in question was to punish the party in breach and was not a genuine pre-estimate of loss for the following reasons:

1. The presumption of invalidity as outlined in Dunlop;
2. The fact that the Supplier proposed a less objectionable figure, being a rate of $2 per tonne based on the tonnage that was late, instead of a blanket figure of $2,000 per day; and
3. The significant difference between the loss and damage in fact suffered and that which would otherwise be recoverable pursuant to the Liquidated Damages Term.

Conclusion

Liquidated damages are a useful contractual tool that can protect parties in the event of a breach or delay. This decision highlights that the enforceability of liquidated damages terms comes down to appropriate drafting, and the calculation of a reasonable pre-estimate of loss taking into account the surrounding circumstances of a business and the transaction. Failure to formulate a rate of liquidated damages in this way will expose parties to the relevant liquidated damages term being construed as penal and unenforceable.

Further information / assistance regarding the issues raised in this article is available from the author, Bill Papastergiadis - Melbourne Managing Partner, Nathan Cutts - Partner, Phillip Vassiliadis - Partner or your usual contact at Moray & Agnew.

[1] [1915] AC 79, 86-87.

[2] Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 87.

[3] Arab Bank Australia Ltd v Sayde Developments Pty Ltd (2016) 93 NSWLR 231, 248 [100].