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As seen in Practice Note: Contract interpretation—distinguishing between liquidated damages and penalty clauses, the task of determining whether or not a liquidated damages clause may be held to be unenforceable as a penalty is not always an easy one.

While it will be a matter of construction for the courts in each case, there are a number of factors to consider when analysing the scope of an alleged liquidated damages clause and whether or not it may be susceptible to challenge as a penalty. If drafting a liquidated damages clause, it is essential that you keep these factors in mind in drafting the clause (and its relationship with related clauses). See:

1. •

   Drafting and negotiating a liquidated damages clause—checklist

2. •

   Precedent: Liquidated damages clause

For specific consideration of how clauses in commercial contracts which provide for ‘default interest’ have been considered in the authorities, see:

1. •

   Penalty interest rates in commercial contracts

2. •

   Contract interpretation—distinguishing between liquidated damages and penalty clauses—When might default interest be a penalty?

For specific considerations for those advising in the construction industry, see:

1. •

   Practice