Liquidated Damages in an International Context

In the professional contracting world, we all agree that under English law 'penalties' are a bad thing, while 'liquidated damages' can be a fair and reasonable way to pre-estimate the losses that will flow from a particular breach.

Last week I spent two days at a Falconbury training event, looking at damages and liabilities in international commercial agreements. This time I was being trained, rather than delivering the training (yes, we need CPD too!), and found the session an interesting update. As you'd expect, the penalties vs. liquidated damages discussion was lively and challenging.

The many lawyers present from civil law jurisdictions (who outnumbered those of us from England by about 3:1) couldn't see the problem with penalties agreed between parties of equal bargaining power. The drafting gymnastics required to ensure your LDs were not interpreted as penalties seemed to them to be a bit unnecessary. I can see their point: after all, one of the most useful applications of LDs is when we really don't know what the potential damages flowing from a breach might be, and when we expect them to be really difficult to prove in any event. They can be very useful to the party giving the LDs though - although the likelihood of having to pay out is higher with LDs than with having to seek damages through the Courts, the overall amount of damages could be considerably lower. So don't necessarily push back too hard if you're asked for LDs in a negotiation.

Today, I encountered an interesting response from a US lawyer during a negotiation about a clause in which I'd specified some liquidated damages for a particular breach. This lawyer argued that in his organisation, there was a huge prejudice against LDs, and that certain jurisdictions in the US considered them to be punative damages and would not enforce them. My understanding had been that the US was the home of the punative damage - and that penalties were widely accepted there. This just serves to emphasise that when considering foreign jurisdictions which follow a state-based legal system (including Switzerland) we really have to look not just at the federal law but at the local specifics too.

No more mister nice guy?

Tough economic times affect different businesses in different ways. Much like people, businesses under stress either embrace collaboration and adopt a 'we're all in it together' mentality to ensure they and their clients and suppliers all make it through - or they retrench along 'every man for himself' lines.

Our new poll is aimed at getting a view on how the current climate is affecting your negotiating outlook. Are you fighting harder before giving up any concessions, making payment terms shorter and penalties bigger? After all, cash flow really matters right now, more than ever before.

Or do you take the approach that companies that support their clients/suppliers during the downturn will be best placed to take advantage of the upturn when it (eventually) arrives?

Click your choice in the poll, and we'll revisit this topic in a few weeks to see what impact the recession is having on our negotiating styles.