The Law According to Honey Bees: NZ Takes Stance on Penalty Doctrine Law
Frank Brown and Iain Stephenson
Honey Bees Preschool Limited v 127 Hobson Street Limited [2018] NZHC 32
The recent High Court case of Honey Bees Preschool Limited v 127 Hobson Street Limited provides insight into ‘so-called’ penalty clauses – an accepted minefield to draft or enforce in the construction sector. The case gives recognition to contractual provisions which, while outwardly punitive, protect legitimate commercial interests. The case also gives rise to the question – if equality of bargaining power is an important factor when assessing the legitimacy of a penalty provision – how does one overcome the perception that in the construction sector the contractor has less bargaining power? The case shows: - The Court in New Zealand favours the UK position on penalty doctrine – an approach which allows less interference by the Court in the contractual terms negotiated between parties. - Liquidated damages clauses will not be penalty clauses if they protect “legitimate interests” and legitimate interests can include attracting and retaining customers, suggesting that provided the liquidated damages clause is directly linked to the business interests of the party seeking to rely on it, the Court is likely to take the view that it reflects the “legitimate interests” of that party. - A party who wishes to rely on the liquidated damages clause ought to keep a paper trail which evidences what those “legitimate interests” are because the Court may be willing to look at pre-contract correspondence between the parties in its assessment of whether a clause is a penalty. A Lease and a Lift In short, Honey Bees Preschool (Honey Bees) had a lease with 127 Hobson Street (127) as well as a contract which stated that 127 Hobson was to install a lift on the premises. If 127 Hobson did not install the lift on time, it had to indemnify Honey Bees for all obligations under the Lease (Clause). This indemnity had the effect of allowing Honey Bees to continue to occupy the premises for free (for approximately 2 years). 127 failed to install the lift and Honey Bees relied on the Clause; 127 argued that it was a penalty clause and therefore unenforceable. The court