LIQUIDATED AND ASCERTAINED DAMAGES
An update on liquidated and ascertained damages in 2025
Liquidated and ascertained damages (LADs) should be a pre-determined sum of money agreed between the parties to a contract to cover specific contract breaches and culpable delay. LADs provide certainty as to the consequences of the specified breaches, generally serving as an agreement to limit liability to a reasonable genuine pre-estimate of losses that might be incurred. The purpose of LAD clauses is to ensure parties avoid costly debates about how much the defaulter should pay for a breach.
In July 2021, the Supreme Court handed down its judgment for Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29 and it remains a foundational point of law.
The Triple Point case raised the question of whether or not liquidated damages could be levied by PTT post-termination of Triple Point Technology Inc.
Triple Point clarified the accrual of LADs comes to an end upon termination of a contract, unless there are express contractual provisions to the contrary. After termination, the aggrieved party must seek damages for breach of contract under the common law or tort law.
The decision restored commercial certainty and rejected approaches that were ‘inconsistent with commercial reality’ but it also acts as another reminder of the importance of precise contract drafting.
LADs should be a genuine pre-estimate of loss; they are not intended to be a penalty.
The latest revision of the JCT Design & Build Contract 2024 codifies the now settled position reached in Triple Point. Clause 2.29.5 provides that:
- LADs run from the completion date to the date of termination, with the practical completion of the works or section being deemed to be a reference to the date of termination.
- No LADs are deductible after termination, without prejudice to general damages. Parties should be careful, however, in negotiating these or any construction contract terms; consideration should be given to sectional completion, partial possession and proportional LAD rates to avoid disputes and enforceability challenges. Clear drafting with a common-sense approach is crucial.
As mentioned above, it has been held that LADs should be a genuine pre-estimate of loss; they are not intended to be a penalty. However, the penalty rule was clarified in the case of Cavendish Square v El Makdessi and ParkingEye Ltd v Beavis [2015] UKSC 6. Cavendish remains the relevant authority for distinguishing between penalty clauses and LADs.
The judges held that: “The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation. The innocent party can have no proper interest in simply punishing the defaulter. His interest is in performance or in some appropriate alternative to performance.”
So, the relevant clause must impose an obligation on the defaulting party which reflects the legitimate interests of the innocent party, rather than the clause purporting to simply penalise and punish the defaulting party. The court recognised that the innocent party’s interest will rarely extend beyond compensation for the breach in the case of a straightforward damages clause, but compensation is not the only form of legitimate interest. The issue of liquidated damages clauses post-termination was also considered in the recent decision in FW Aviation (Holdings) 1 Ltd v Vietjet Aviation Joint Stock Company [2025] EWHC 928 (Comm).
The FWA v Vietjet case concerned the purchase and lease of four Airbus A321 passenger aircraff. The appellant, VietJet, is a Vietnamese airline. The Respondent, FWA, is a Jersey-registered company headquartered in the UK. The decision explored the validity of a damages clause and whether it amounted to an unenforceable and void penalty clause. Vietjet leased aircraft through a Japanese operating lease with call option (JOLCO) which uses Japanese tax provisions to generate financial benefits shared between the Japanese investors and the airline. Vietjet defaulted on the leases in October 2021 and the leases were terminated. FWA acquired rights under the leases through assignments and sought to enforce payment of the termination sums and a declaration of possession. A dispute arose over whether termination sums payable under Clause 19.3 of the sub-leases were penal in nature.
Clause 19.3 provided for termination sums (essentially LADs) to be paid by VietJet in the event that the leases of aircraft were terminated prematurely. Vietjet argued the termination sums amounted to a penalty, resulting in over-compensation for the lessors and a windfall for FWA since the aircraft had already been repossessed and could be resold. The court had to consider whether termination sums provisions were penal and unenforceable. Applying the test set out in Cavendish Square, it found clause 19.3 was not extravagant, exorbitant, unconscionable to amount to a penalty, nor was it wholly disproportionate to the interests sought to be protected. The court gave the following reasons:
i) VietJet’s general commercial sophistication. The court noted that its 2018 annual report recorded that VietJet occupied a leading position in the Vietnamese domestic market with a 46% market share, a market capitalisation equivalent to $3bn. Its 2019 annual report also indicated that key personnel had extensive experience in the aircraft industry, including with respect to financing arrangements.
ii) VietJet’s specific awareness of JOLCO arrangements. VietJet was also aware of the nature and rationale behind JOLCO arrangements; JOLCO agreements are structured to incentivise certain behaviours by the lessee parties and VietJet and had entered into other JOCLO arrangements in the past. This contract also mirrored the JOCLO norm.
iii) Clause 19.3 was negotiated and expressly agreed. The parties expressly negotiated and agreed clause 19.3, in particular the default purchase option in a default scenario. The court gave weight to the commercial context as it was clear the parties’ saw some value in what was agreed at the time. The court was of the view that the lenders and the Japanese (equity) investors would have been unlikely to accept the risks inherent in these JOLCOs or would not be willing to do so other than at a significantly higher cost to VietJet but for the inclusion of clause 19.3.
i) The JOLCO structure. Under a JOLCO structure, the purchase of the aircraft is not financed using the airline’s own capital but by money provided by Japanese investors. The scheme established by clause 19.3 reflected the parties’ (including VietJet’s ) expectation that there should be protection for the parties whose capital was at risk in the transaction (namely the lenders and the Japanese investors) whilst allowing VietJet to fund the acquisition of the aircraft without the use of its own capital and at a significantly lower cost than other forms of commercial financing.
Under a JOLCO structure, the purchase of the aircraft is not financed using the airline’s own capital.
ii) Legitimate interest. The clause did not create a ‘windfall’ for FWA but rather reflected the ‘very damaging’ effects of early termination to the economic benefits expected by the investors. Hence, the termination sum payable upon termination will include a sum compensating those investors for the loss of the reduced tax benefit and also a sum to reflect the expected return on the equity investment for the investors. The court rejected VietJet’s argument that the clause did not protect any interest other than pecuniary compensation and thus must be penal. The court stated, ‘it is obviously appropriate, when considering the legitimate interest issue, to take into account other [wider legitimate] interests.’
iii) Rental payments. The lessors depended on these to make their loan payments. Accordingly, their interest was not merely payment of the rentals but prompt payment of the rentals, and the entire viability of the JOLCO structures depended on such prompt payment because of the way that the payments flowed up the structure. If VietJet defaulted in relation to its rental obligations, the lessors would, in turn, default in their obligations under their loans. That would lead to their acceleration and enforcement against the aircraft which would, in turn, collapse the whole structure leading to the loss of the tax benefits, as well as immediate cash flow problems, for the investors.
i) Tax advantages. These are fundamental to the JOCLO structure. The majority of the investor’s return was not to be recovered from payments made by VietJet, but from the tax advantages that the equity investors would have received had the transaction run to term. It follows that, if the JOLCO was to be terminated early, not only do those investors lose the return that they had expected, but their tax liability may be increased/brought forward through the loss of the accelerated depreciation that the investors would otherwise have enjoyed under the JOLCO. Thus, both the A line termination value and the termination value were not disproportionate against this background; they compensated the investors for the loss of their bargained-for return and the loss of the tax advantages.
The termination sum payable upon termination will include a sum compensating those investors for the loss of the reduced tax benefit and also a sum to reflect the expected return on the equity investment for the investors.
ii) Non-enforcement would be unjust. Enforcement against the aircraft would be insufficient in and of itself to protect the interests of the lenders and investors. In the absence of termination sums, recovery by way of either a sale or a re-leasing of the aircraft was likely to involve a substantial additional capital commitment which, if not recoverable from VietJet, would need to be provided by the lessors, thereby reducing the funds available to the lenders and investors. There was also no certainty in the value of a sale/release and it was held unlikely the investors would recover their initial investment.
In these circumstances, the contractual provisions were not found to be penalty clauses, or extravagant, exorbitant or unconscionable. The court found there was in this case a legitimate interest and that the clause did not impose a detriment on VietJet that is out of all proportion to that interest.
FWA v VietJet reinforces the modern test for enforceability under Cavendish Square, clarifying that legitimate interests can extend beyond direct financial loss – such as tax advantages and investor expectations. Despite FWA repossessing and reselling the aircrafts, the termination sums were upheld because they addressed broader losses tied to the JOCLO financing model. This case highlights that contextual commercial justification is a critical consideration when assessing enforceability; clause 19.3 was enforceable because it was negotiated between experienced professionals and aligned with the risks inherent in the transaction. When drafting LAD clauses in similar contexts, drafters should ensure provisions are proportionate, clearly linked to specific structural or financial risks, and reflect the legitimate interests of all the parties involved.
Triple Point provided much-needed certainty to contracting parties regarding when LADs accrual begins and ends and the JCT Design & Build Contract 2024 reinforces such.
Moreover, FWA v Vietjet reflects that the function of the court is not to relieve a party from a bad bargain. The decision provides a tale of caution that highlights the reluctance of courts to go behind the allocation of risk negotiated by the contracting parties, especially when the parties enjoy similar bargaining power and have the benefit of expert legal advice throughout the negotiations of the commercial terms of the contract.