In Lasmos Ltd v. Southwest Pacific Bauxite (HK) Ltd (02/03/2018, HCCW 277/2017), [2018] HKCFI 426 (Lasmos), the Court of First Instance held that a winding-up petition based on a disputed debt may be dismissed if there was an arbitration clause in the underlying agreement, upon which arbitration has commenced.

The High Court and the Supreme Court recently confirmed a Scheme of Arrangement for SIAC Construction Limited (SCL) and certain related companies despite objections from a number of creditors. The creditors claimed that the exclusion of claims for penalties, interest and, in particular, damages not awarded by a certain date and the imposed waiver of subrogated claims was unfairly prejudicial.

Initial Confirmation Hearing

Over the last few years, the courts have shown themselves to be increasingly unwilling to interfere in the level of liquidated damages set in building contracts. The courts have taken this position predominantly because the agreed level of liquidated damages forms part of the commercial bargain reached between the parties at the outset of the contract. However, employers should still carefully calculate the level of liquidated damages inserted into the contract for the following reasons:

In its judgment of 11 October 2011, the English Court of Appeal analysed the terms of an aircraft purchase agreement (the “Agreement”) entered into by Gesner and the aircraft manufacturer Bombardier.  The Agreement was in Bombardier’s standard terms.  Gesner, the purchaser, sought to terminate the agreement on the grounds that Bombardier had delayed in fulfilling its contractual obligations.  Thereafter, Bombardier sought to retain certain monies as liquidated damages upon termination of the Agreement.  Gesner challenged this retention.

What happens if one party to a contract fails to perform? Can the innocent party get all of its losses back? What happens if the losses are difficult to prove?

Here, we look at what you can claim and how to protect your position.

The general rule

Damages for breach of contract are usually intended to compensate the injured party for its losses arising naturally from the breach or which were within the parties' contemplation when the contract was made.

On March 18, 2019, Judge Stuart M. Bernstein of the United States Bankruptcy Court for the Southern District of New York issued a decision enforcing a mortgage lender’s claim for a prepayment premium (a/k/a make-whole or yield maintenance premium) notwithstanding the lender’s prepetition acceleration of the loan due to the debtor’s default.

In a recent decision arising out of the Republic Airways bankruptcy, Judge Sean Lane of the United States Bankruptcy Court for the Southern District of New York held that the liquidated damages provisions of certain aircraft leases were improper penalties and, thus, “unenforceable as against public policy” under Article 2A the New York Uniform Commercial Code. In re Republic Airways Holdings Inc., 2019 WL 630336 (Bankr. S.D.N.Y. Feb. 14, 2019).

In a decision with sweeping consequences for equipment lessors, the bankruptcy court (SDNY) in Republic Airways held that a liquidated damages provision in a true lease is an unenforceable penalty if it provides for the unconditional transfer of residual value risk or market risk only upon default, without a cognizable connection to any anticipated harm caused by the default itself. Importantly for lessors and lenders alike, the bankruptcy court held that the unconditional guaranties of such obligations in favor of the lessor violated public policy and were unenforceable.

On February 14, 2019, Judge Lane of the Bankruptcy Court for the SDNY issued an opinion in Republic Airways Holdings Inc. addressing whether the liquidated damages provisions in certain aircraft “true leases” under Article 2A of the New York UCC were enforceable and, if not, whether they would still be enforceable against the debtor-guarantor of the leases.

Fifth Circuit Holds that Disallowance of Claim Pursuant to the Bankruptcy Code Does Not Render Such Claim Impaired and Casts Doubt on Creditors’ Ability to Recover Make-Whole Amounts or Post-Petition Interest at the Default Contract Rate

Executive Summary