Does a contractual right to liquidated damages give rise to a debt or (merely) damages?
The answer, it seems, depends on the terms of the contract. In particular, it may depend on whether it was the intention of the parties, as revealed by those terms, that a sum owing following a breach could be calculated without resort to an assessment of that sum by a court.
The case of Re Emerging Energy Solutions Group Pty Ltd (No 2) involved an application to set aside a statutory demand.[1] The company the target of the demand claimed that the amounts sought in the demand were not debts and instead were unliquidated damages, and therefore not properly the subject of a statutory demand. If that were true, there might have been a grounds to have the demand set aside based on there being a genuine dispute.[2]
Terms of the contract
The statutory demand was issued following the company’s default on a contract for the forward sale of carbon credits. Among the terms in the contract was a clause specifying part of the total amount which would be payable upon default, which part was described as the ‘Settlement Amount’ and defined as:
‘[A]n amount that the non-Defaulting Party in good faith and in a commercially reasonable manner determines to be its resulting loss and costs … including its loss of bargain …, cost of funding … or, without duplication, loss or cost incurred as a result of its terminating, liquidating, obtaining or re-establishing any related trading position …’
According to the contract, the total amount payable as at a so-called ‘Termination Date’ following a default was to include such Settlement Amount, adjusted ‘by any unpaid amounts due and payable under the Contract’.
The parties’ arguments
The company, in seeking to have the demand set aside, argued that the claim was unliquidated because the process for determining the amount due required the application of uncertain components or standards, such as ‘good faith’ and ‘commercial reasonableness’ and that, in order for the amount to be a debt, it would need to be supported by a court order quantifying and fixing the amount of the claim.
The defendant, in response, submitted that the amount claimed was for liquidated damages, and was therefore a debt, because it was calculated in accordance with the mandatory mechanism set out in the contract. The defendant also argued that, by the terms of the contract, the parties did not have the option of obtaining damages upon any breach according to general principles and instead were obliged to follow the procedure specified in the contract for calculating loss.
The Court’s analysis
Associate Justice Barrett articulated the issue as follows:
'The question is how may the amount owing for breach be determined? If the amount owing may only be determined by the Court assessing damages in accordance with general principles, then the claim will not be a debt. However, if a liquidated sum may be determined by a mechanism set out in the contract, then the claim will properly be characterised as a debt if that mechanism is employed and the amount owing is determined.’[3]
His Honour held that, because the contract ‘articulate[d] a mechanism for determination of the amount owing, and [because] that mechanism ha[d] been employed, and the figure reached and stated in the statutory demand’, the amount claimed under the contract was a debt.[4]
The following factors were relevant to his Honour’s conclusion:
Language of the contract. The contract used the word ‘shall’ to impose on a non-defaulting party the obligation to calculate loss according to a specific mechanism. This pointed to ‘a compelling indication’ that the parties had intended that loss be calculated under the terms of the contract rather than be calculated — that is, assessed as damages — by a court.[5]
A simple calculation. The calculation of loss, according to the formula set out in the contract, was ‘fairly simple’ and it ‘essentially require[d] consideration of the contract price and market price’.[6] Moreover, the allowance for a discount as part of a calculation was something ‘fall[ing] comfortably within the direction to act in good faith and in a commercially reasonable manner’,[7] such being the language employed in the contract. It also was relevant, in his Honour’s view, that the discount to the amount owing was something which accrued for the benefit of the defaulting party.
Ability for non-defaulting party to determine matters. His Honour noted, ‘[t]he fact that there are matters to be determined by the non-defaulting party, such as the termination date, does not mean that those matters can only be determined by the Court.’[8]
No mischief. His Honour rejected the plaintiff’s characterisation of the mechanism as one whereby the non-defaulting party could simply incur and specify items of loss and thereby convert an unliquidated claim into a liquidated claim.[9] In doing so, his Honour appears to have relied on the decision in Re Ahern; Ex Parte Palmer,[10] referred to earlier in his Honour’s reasons, where it was said:
‘There is no special virtue in having the amount assessed by a Court or domestic tribunal, for an assessment between the parties is equally efficacious for the purposes of constituting the amount a liquidated sum.’[11]
The characterisation of the statutory demand as a claim for damages having failed, there was no genuine dispute about the statutory demand and the application to have it set aside failed.
[1]: [2024] VSC 393.
[2]: See Corporations Act 2001 (Cth) s 459H(1)(a).
[3]: Re Emerging Energy Solutions Group Pty Ltd (No 2) [2024] VSC 393, [28].
[4]: Ibid [30].
[5]: Ibid [31].
[6]: Ibid [32].
[7]: Ibid.
[8]: Ibid.
[9]: Ibid [33].
[10]: (1906) 6 SR (NSW) 576.
[11]: Ibid 577.