As a general rule, the amount recoverable as damages for breach of contract is the sum, so far as money can do, that will place the innocent party in the position as if the breach had not occurred. Proving the amount of loss in the event of a breach can sometimes be difficult and time consuming.
The law allows the parties to fix the sum payable for specified breaches at the time of contracting. This is often the case for delay in completion under construction contracts. The sum so specified is known as liquidated damages. The benefit of having liquidated damages is that that innocent party does not have to prove the amount of the loss. It will generally require the application of a formula, for example $2000 per day for 68 days.
In fixing that sum, the law is not prepared to allow an unmerited windfall:
Up until the Ringrow case, the focus on parties challenging the application of liquidated damages tended to be based on the specified liquidated damages not being a genuine pre-estimate of the loss likely to be suffered for breach – so that a comparison would take place between that which would likely be payable and the amount specified as liquidated damages. If the specified liquidated damages was more, the offending party would argue that it was a penalty. That derives from a passage in the judgment in Dunlop Pneumatic Tyre Company v New Garage  AC 79 that ‘the essence of liquidated damages is a genuine covenanted pre-estimate of damage’.
That often led to the offending party embarking upon a minute examination of the circumstances upon which the figure was derived. A good example of this was in Leighton Contractors v State of Tasmania where the relevant facts were:
the calculation made by the State at the time of contracting of $7,985/day made excessive allowances for the cost of its site representatives in the event of delay (which worked out at $330,000 to $430,000 a year) and that some of the figures were speculative; and
The Tasmanian Court of Appeal overturned the trial judge’s decision (just after the Ringrow decision was handed down) on the basis that Leightons had elevated material obtained through discovery and cross examination as to a calculation of the $8000/day into the central issue and diverted the trial judge from the proper application of principle. In particular:
The focus on ‘genuine pre-estimate’ was seemingly put to bed by the decision in Ringrow v BP Australia (2005) 224 CLR 656 where the High Court made it clear that:
It appeared to follow from the Ringrow v BP decision that it is not worthwhile challenging liquidated damages as being a penalty except in the most extreme cases.
The decision by the Western Australian Court of Appeal last week in Speirs Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd [No2]  WASCA 53 has breathed life into liquidated damages challenges.
In that case the majority of the Supreme Court was prepared to find a liquidated damages clause unenforceable as a penalty, after examining the developer’s conduct subsequent to entering into the contract. One of the three justices disagreed and his reasons are quite compelling. The relevant facts in that case were as follows:
32 lots, subject to either upgrading a road into the sub-division or providing a bond to the Shire for the upgrade. No lots could be sold until the Shire issued a clearance certificate to the effect that both the lots had been created and the road upgraded.
McLure P, with whom Newnes JA agreed, examined the evidence and in particular found:
The majority of the Court were of the view that the inference was there to be drawn that as at the date of the first contract the developer had no intention of attempting to achieve compliance with or deferral of
the relevant Shire condition as to the road upgrade, in fact had only intended to have that work done some time later. As a result the delay in performance of the first contract was incapable of causing any relevant financial loss to the developer and therefore the liquidated damages were extravagant in amount in comparison with the greatest loss that could potentially be suffered by delaying practical completion under the first contract.
Murphy JA dissented, his reasoning being in my opinion compelling, relevantly that:
A point accepted by the whole of the Court of Appeal was that the determination as to whether the sum is extravagant or unconscionable is to be made at the time of entry into the contract. As at the date of entry into the contract, matters relating to potential breach involve a prospective assessment necessarily speculative in nature.
In my view, the majority of the Court of Appeal was unduly influenced by events subsequent to the entry into of the contract and had too much regard to the developer’s subjective intent. Objectively, what developer would willingly delay carrying out a road upgrade when it was always going to cost him some
$13,846 per week during the period of delay? I struggle to see how such sum was more than ‘the greatest loss’ that could conceivably be proved to have followed from the breach. Unfortunately for the developer, its principal was somewhat clumsy in his evidence as to when he was intending to carry out the road upgrade, a matter his counsel could not get him to cure in re-examination.
The principle as to liquidated damages illustrated in BP v Ringrow is that, mere difference between the amount that would be recoverable as liquidated damages (ie the genuine pre-estimate) and the amount of liquidated damages specified is not enough, let alone a suspicion of a difference. The comparison calls for something extravagant and unconscionable. It calls for a degree of disproportion sufficient to point to oppressiveness.
The point to be taken from the Speirs case is that in preparing the genuine pre-estimate, it must be more likely than not, or at least a distinct possibility, that the events upon which it is based, will come about.