Four months into to the contract Brisbane Marine informed Sydney that it would not be able to complete the project on time without payment of an additional $85,000. Brisbane Marine indicated they would use the money to engage additional contractors to work on the catamaran. In a brief face-to-face meeting, Sydney initially informed representatives of Brisbane Marine that it had a binding contract and would claim liquidated damages if the catamaran was not delivered on the specified date.
Three days after that meeting with Sydney representatives, Brisbane Marine informed Sydney in writing that no further work on the catamaran will be undertaken until the $85,000 is paid. Reluctantly, Sydney pays the additional money, to ensure delivery of the catamaran by 30 June 2014 and to meet its contractual obligations with the NSW Government.
After delivery of the catamaran, Sydney found that it proved quite unsuitable for harbour patrol and rescue use. The new catamaran was very unstable in bad weather: it was slow and couldn’t exceed 30 knots, fuel consumption was excessive, and the engine broke down several times requiring expensive repairs of $30,000. After just five months use, Sydney had little option but to withdraw it from service. The catamaran was sold for just $200,000.
To avoid the risk of breaching its demanding harbour patrol and rescue contract, Sydney then bought a larger, more capable $1.3 million patrol boat from TasKat, a Tasmanian boat manufacturer.
a. Is the liquidated damages clause in the contract with Brisbane Marine valid?
b. Could Sydney claim economic duress in relation to the additional payment? If not, would the additional payment be recoverable for lack of consideration?
c. Sydney seeks your advice as to whether it can sue Brisbane Marine for damages under Australian common law contract rules?
2. (a) The Liquidated damages clause in the contract with Brisbane Marine is valid or not:
Liquidity damage refers to a compensation which is paid by one party to another. If there is a contract between them in which the former party could not complete the work within a stipulated period, then it has to pay to the later party a particular amount as compensation which is termed as liquidated damages. . (Cruise, 2013)
However, liquidated damages do not come into the scenario when the party is intending to penalize the other party for any malpractice that would be Penalty and not liquidated damages. This was held in the case of Dunlop Pneumatic Tyre Co. Ltd. v New Garage & Motor Co. Ltd. (1915).
The liquidity damages clause would specifically indicate the loss (the details of loss, head of accounts) that the company has to bear if the other company does not complete the contract within the time specified, and also would provide that it is not a penalty but only a compensation as without completion of the task within the stipulated time would affect the company. (Rogers, 2012)
In this case, Sydney Harbour Rescue Pty Ltd has only provided in the contract with Brisbane Marine that if the later company could not finish the job and deliver the same by 30th June 2014, a liquidated damage of $80,000 per day up to the date of delivery. The clause did not include what loss and in what head it would incur. The significance of providing the amount $80,000 is not mentioned, for which the liquidity damage clause did not hold good.
2. (b) Economic Duress in relation to additional payment
Economic duress is threatening the party involved in a contract to do something as per demand of the other party who are in the contract with them. In an economic duress, unless the demand of the party is fulfilled, they threat to cancel the agreement. (Ohrenstein)
The background of the case explains that Brisbane Marine (Brisbane) claimed $85,000 from Sydney saying they would need such amount for completion of the project to engage additional labour. Later Sydney informed Brisbane to deliver the same within stipulated period. After 3 days Brisbane informed in writing to Sydney that until $85,000 is paid to them, they will not work further in that project. Sydney paid such amount to them unwillingly, but later after delivery of the Catamaran, it was found that it is quality wise very low and is unable to perform well, engine broke down and $30,000 expended; later it was sold for $2, 00,000.
In this case, there was a continuing contract between the parties; Brisbane has informed Sydney that they need the amount so that they can complete the catamaran within fixed time. It was not an act of coercion, but they said they would stop their work if the amount was not paid. Sydney, if did not pay the amount, the contract could not have been completed and delivered within 30th June 2014. The intention of Brisbane to do harm to Sydney was not evident from this case as the employment of labourers to complete the contract could have been necessary. But Sydney had no option as it would have otherwise subjected to contractual obligation of government. (Tan, 2002)