Looking next to civil law jurisdictions, where the penalties doctrine operates significantly differently from common law jurisdictions, Professor Jones points out two key differences. First, that civil law countries presume the enforceability of penalty clauses to compel performance, and second, that the most notable distinction is the Court’s authority to adjust or proportion the amount agreed to as a penalty (a power which falls outside most common law jurisdictions).
In turning to consider New Zealand, Professor Jones notes that Andrews has created divergent lines of authority between Australia and the UK regarding the application of the penalties doctrine. Whether New Zealand will follow Australian or UK authority remains to be seen, as the High Court in ISAC New Zealand Ltd v Managh5 declined to answer the question in 2013.
Following the High Court’s reluctance to address the issue in New Zealand, and in exploring future considerations of the penalties doctrine, Professor Jones notes the importance of recognising freedom of contract – that it is the parties who understand their own interests better than any Court, and who are in the best position to understand, approximate and bargain for the losses a breach may cause. He suggests the Courts might take a broad approach in considering admissible evidence to show the process of how a liquidated damages figure was reached, and whether the clause, when properly interpreted, is a penalty in all the circumstances. Further, that our common law system could learn something from civil law counterparts, particularly the ability to adjust the agreed rate of liquidated damages in line with commercial sensibility, rather than outright rejection of the clause.
Comment
The extent and direction in which the penalties doctrine in construction contracting may develop in New Zealand remains uncertain. Professor Jones’ lecture highlights how different jurisdictions have approached penalties and liquidated damages clauses, and emphasises his desire to see a broader and more commercially sensible approach to upholding liquidated damages clauses, in order to recognise the flexibility and uncertainty inherent to the construction industry.
Endnotes
1. Clydebank Engineering and Shipping Co v Don Jose Ramos Yzquirdo y Castaneda [1905] AC 6. 2. Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Co Ltd [1915] AC 79. 3. Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67. 4. Andrews v Australia and New Zealand Banking Group Ltd [2012] 247 CLR 205. 5. ISAC New Zealand Ltd v Managh [2013] NZHC 3242.