Most Read Contributor in Australia, September 2016
The recent WA Court of Appeal decision of Active Tree
Services Pty Ltd v Electrical Resource Providers Pty Ltd
 WASCA 6 reminds us that a party seeking to avoid paying
liquidated damages on the basis that it is a "penalty
clause" has the onus to prove that the liquidated damages are
extravagant and unconscionable.
ATS had a contract with WA's Western Power to provide
clearing and removal services for vegetation around power lines.
ATS engaged ERP to assist it in providing the vegetation clearing
The work involved was specialised, difficult and dangerous.
Because the specialist contractors were difficult to re-deploy to
other similar jobs, the contract required ATS to give 2 months
notice of termination and pay an "Early Termination Fee"
equal to 2 months' revenue in the event that notice was not
given. ATS failed to give proper notice and the trial judge in the
WA District Court awarded damages to ERP equal to the 2 months
ATS argued that the Early Termination Fee was a "penalty
clause" and was therefore unenforceable.
As a reminder, a "penalty clause" is a clause of a
contract which provides for the payment of an amount of money (or
money's worth) upon a breach of the contract and the amount
payable is an "extravagant and unconscionable amount in
comparison with the greatest loss that could conceivably be proved
to have followed from the breach of the term giving 60 days
notice". Whether the amount is "extravagant and
unreasonable" is to be judged from the time of entry into the
contract not at the time the breach occurred.
ATS argued that the Early Termination Fee was extravagant and
unconscionable because it was an estimate of revenue that could
have been earned by ERP within the 60 day notice period whereas
ERP's true measure of loss would be its lost profit in that 60
day period; that is, revenue less the costs associated with earning
Unfortunately for ATS, the Court of Appeal found that ATS failed
to show, by way of evidence in the trial and in argument in the
appeal, that an Early Termination Payment set by reference to lost
revenue was extravagant and unconscionable and did not represent a
genuine pre-estimate of ERP's loss.
What ATS should have done was plead and then lead evidence in
the trial that there was no prospect that ERP would have incurred
fixed costs in relation to plant and equipment which would have
made an Early Termination Payment calculated by reference to lost
revenue a genuine pre-estimate of loss.
As a result, the Court of Appeal dismissed the appeal and
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
To print this article, all you need is to be registered on Mondaq.com.
Click to Login as an existing user or Register so you can print this article.
We discuss whether certain clauses commonly found in ordinary commercial contracts could be considered to be penalties.
Some comments from our readers… “The articles are extremely timely and highly applicable” “I often find critical information not available elsewhere” “As in-house counsel, Mondaq’s service is of great value”
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).