Cases - Philips Hong Kong v The Attoney General of Hong Kong
Record details
- Name
- Philips Hong Kong v The Attoney General of Hong Kong
- Date
- [1993]
- Citation
- 61 BLR 41
- Keywords
- Contract - measure of damages – liquidated damages – penalty – provision in case of hypothetical situations
- Summary
-
This is one of many cases in which the courts have approved the above statement of Lord Dunedin as accurately representing the law in Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd.
While this case is a Privy Council decision and thus not binding on the English courts, the eminence of the judges (who also preside over the English courts) in deciding the case makes it highly persuasive.
In this case, Lord Wolf stated:
‘Whatever the degree of care exercised by the draftsman it will still be almost inevitable that an ingenious argument can be developed for saying that in a particular hypothetical situation a substantially higher sum will be recovered than would be recoverable if the plaintiff was required to prove his actual loss in that situation.
Such a result would undermine the whole purpose of parties to a contract being able to agree beforehand what damages are to be recoverable in the event of a breach of contract. This would not be in the interest of either of the parties to the contract since it is to their advantage that they should be able to know with a reasonable degree of certainty the extent of their liability and the risks which they run as a result of entering into the contract.
This is particularly true in the case of building and engineering contracts. In the case of those contracts provision for liquidated damages should enable the employer to know the extent to which he is protected in the event of the contractor failing to perform his obligations.’
This particular project was for approach roads and road tunnels in Hong Kong. The total value of the works was in excess of HK$649m. Rather than let the whole project to a single contractor, the government of Hong Kong split the project into seven packages, of which one was awarded to the claimants. The value of that package was approximately HK$51m.
The contract provided for liquidated damages to be paid if various key dates were missed (with the key dates required because of the interface between the various contractors), as well as if the package of works as a whole was completed late. It was not denied that Philips had completed its package of works very late, nor that it had delayed the project as a whole.
The Privy Council dismissed the claimant's case, stating that:
- The test for deciding whether a liquidated damages clause is penal is to consider whether or not it is a genuine pre-estimate of what the loss is likely to be. Arguments based on hypothetical situations, where it is said that the loss might be less than the sum specified as payable as liquidated damages, should not be allowed to divert attention away from the correct test. Accordingly, the Privy Council upheld the validity of the liquidated damages clause.
- A liquidated damages clause will not be penal simply because there may be situations in which the clause's application might result in recovery over and above actual loss suffered:
'...it will normally be insufficient to establish that a provision is objectionably penal to identify situations where the application of the provision could result in a larger sum being recovered by the injured party than his actual loss. Even in such situations so long as the sum payable in the event of non-compliance with the contract is not extravagant, having regard to the range of losses that it could reasonable by anticipated it would have to cover at the time the contract was made, it can still be a genuine pre-estimate of the loss that would be suffered and so a perfectly valid liquidated damages provision.' Per Lord Woolf at 58-59. - An employer, in pre-estimating liquidated damages, should carefully consider the types of losses which might arise and factor these into any formula it uses.
- A minimum payment provision is not penal if it can be reasonably assumed that a delay in completion will inevitably continue to incur expenses irrespective of the scale of work.