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Penalty or compensation.


Some recent case law gives useful guidance about the words to use – and what words should be avoided – in supply contracts.

Letters were exchanged with the paragraph “ The Lessor warrants that Coles Myer will be the anchor tenant (a Coles Supermarket) in the new development no later than 31st December 2006.  Penalty payable by the Lessor to the Lessee shall be an amount of $250,000 including GST.“

A formal deed was subsequently signed.  It was expressed to “supercede any prior agreement or understanding … between the parties”. It provided that “Provided Mason vacates the current premises by 1 November 2005, Diakos agrees to pay to Mason the sum of $250,000.00 (including GST) if the Coles Supermarket planned for the Centre does not commence trading by 31 December 2006”.

Mr Diakos said the letter proved the payment was really a penalty, ad terrorem, unrelated to any damages that Mr Mason could have estimated in advance.  He argued that the penalty should not be enforced.  The appeal court instead approved the conclusion that “The clause does not impose contractual terms on the defendant or indeed the plaintiff.  Rather, it specifies the payment of an amount on the happening of the two events referred to above.  It is not a question of penalty or liquidated damages for breach of a contractual obligation”.

The case also illustrates another salient issue.   The lessor claimed that it was unconscionable for the tenant to exploit his contractual rights.  The Court approved the observation that the lessor suffered a “situational disadvantage rather than a constitutional disadvantage.  …  There must however be something more than commercial vulnerability, no matter how extreme, to elevate disadvantage into special disadvantage attracting the intervention of the courts.” .

Read the full text of the decision.


One Comment leave one →
  1. 04/12/2010 4:13 pm

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