Azimut-Benetti Spa (Benetti Division) v Healey

A contractual provision is not a penalty merely because the stipulated payment may exceed the loss ultimately proved. The question is whether, viewed at the time of contracting and in the context of the whole agreement, its predominant function was deterrence or compensation. A commercially justified allocation of risk may be enforceable, particularly in a substantial commercial contract freely negotiated by parties with expert representation. A guarantee of the principal debtor’s obligations does not ordinarily make a guarantor liable for a penalty which is unenforceable against the debtor. Termination for breach does not extinguish accrued rights unless the contract clearly provides otherwise.

The claimant yacht builder sought summary judgment against the defendant under a personal guarantee given in connection with a yacht construction contract. The buyer failed to pay the first instalment, and the claimant terminated the contract and claimed 20 per cent of the contract price under a liquidated damages clause, less the deposit already paid.

The defendant argued that the clause was an unenforceable penalty and that the guarantee could not support recovery of the stipulated sum. He also argued that, by electing to terminate and claim liquidated damages, the claimant had lost its alternative claim for the unpaid instalment. The principal issues were whether the penalty defence had a real prospect of success and whether the accrued instalment remained recoverable.

1. Summary judgment. The claimant was entitled to summary judgment for €7.1 million, representing 20 per cent of the €38 million contract price less the €500,000 deposit. The evidence showed no real prospect that clause 16.3 would be held to be a penalty.
2. Penalty. The question was one of construction, assessed at the time of contracting by reference to the terms and inherent circumstances of the particular contract. The court considered whether the predominant function was deterrence or compensation, while recognising that a clause may be commercially justifiable without fitting neatly into either category. A disparity between the stipulated sum and possible loss did not itself establish a penalty. The clause had to be read as a whole. It required payment of 20 per cent but also required the builder promptly to return the balance of instalments and the buyer’s supplies. Its commercial purpose was to balance the parties’ interests following termination, including the buyer’s interest in immediate repayment rather than waiting for resale and accounting.
3. The clause was agreed in a substantial commercial transaction between parties advised by experts. The court rejected the submission that extensive disclosure and expert evidence concerning the maximum possible loss were necessary before the penalty issue could be determined. The parties’ freely negotiated commercial allocation should normally be upheld.
4. Guarantee. Clause 2(f) of the guarantee did not impose liability for a penalty which was irrecoverable against the principal debtor. The guarantee covered the buyer’s obligations, and an unenforceable penalty created no relevant obligation to which the protective wording could apply. Indirect enforcement of a penalty through the guarantee would also offend the public policy underlying the rule against penalties.
5. Accrued instalment. Although unnecessary to the result, the court held that the claimant’s alternative claim would have succeeded if the penalty defence had succeeded. The buyer’s failure to pay the first instalment was a repudiatory breach, and termination did not extinguish the accrued right to payment. The claimant was not adopting contradictory positions by claiming the instalment in the alternative.