The good news – all of our fantastic contributions will remain here on the blog for the next 6 months, giving you plenty of time to search, peruse and re-read your favourite posts.

On behalf of Kluwer we would like to extend a huge thank you to all involved, especially Sarah Thomas, Pinsent Masons (editor), and our much valued team of regular contributors. But, we would also like to thank all of you out there who have been following the blog over the last 14 months.

Should you wish to stay abreast of developments in the international arbitration world, we would be delighted if you would sign up for our Arbitration Blog at www.kluwerarbitrationblog.com. The blog works in the same way, by entering your email address posts will be delivered straight to your inbox as they go live.

Equally if you would like to keep abreast of developments in construction law or trends in international construction, please feel free to sign up to receive Pinsent Mason’s e-newsletter. You can do this by clicking the link: www.pinsentmasons.com/myprofile then clicking the ‘create new profile link’. If you have any queries regarding this facility please feel free to contact Sarah Thomas of Pinsent Masons at sarah.thomas@pinsentmasons.com.

It just remains for us to thank you for following the blog over the past few months: thank you.

Kluwer Law International

As noted in my July 2010 blog ‘A return to Arbitration?’, Australia’s domestic arbitration regime is currently the subject of legislative reform with each state and territory agreeing to adopt the Model Law. 

This raises the questions:

• will adoption of the Model Law improve the effectiveness of arbitration as an ADR process and make it a more attractive ADR option, or
• will its success depend on arbitrators taking full advantage of the new legislative framework in managing the process.

Declining popularity of arbitration

In the 1970s and 1980s construction disputes were commonly resolved by arbitration.  Increasingly, arbitral awards were challenged on the basis of ‘technical misconduct’.  The technical misconduct umbrella opened to include requiring arbitrators to write detailed decisions to a standard similar to a judge’s judgment.

The arbitration process became more cumbersome and time consuming as arbitrators managed the process more cautiously, mirroring procedures used in civil litigation (although ironically not the fast tracking procedures adopted in case management regimes in commercial lists) in order to avoid challenge on the basis of technical misconduct. 

New Law – New opportunities

In May 2010, the states and territories agreed to overhaul the current domestic arbitration regime and adopt the Model Law.  New South Wales has lead the way with its Commercial Arbitration Act 2010 (NSW) (NSW Act) commencing operation on 1 October 2010.  

The new legislative framework, which is expected to be adopted by the remaining states and territories, enhances the arbitrator’s role as the master of the process.  It opens up an opportunity for arbitrators to restore arbitration to its former glory as a efficient, informal and cost effective ADR process.

Examples of amendments that should instil confidence in arbitrators to manage the process effectively include:

• clarification that the parties are to be given a ‘reasonable’ opportunity to state their case; including power to order a stop clock arbitration;
• imposing a direct obligation on the parties to do all things necessary for the proper and expeditions conduct of the proceedings;
• the power to dismiss proceedings in the face of inexcusable delay
• powers to grant interim measures such as disclosure, security of costs, costs and damages and preservation orders; and
• most significantly the removal of the court’s power to set aside an award for technical misconduct and the provision of limited appeal rights. 

End result?

Changing the domestic arbitration procedural rules alone may not be enough to make arbitration a more attractive ADR option.  The onus is on parties, their advisors and ultimately arbitrators to utilise the tools provided by the Model Law.  Whether the Model Law delivers on its promise to provide a fast, fair, cost-effective and less formal option for resolving disputes remains to be seen. 

Perhaps Australia should draw on other nation’s experiences in the application of the Model Law?

However, a project for the construction of a 400 MW gas-fired combined cycle plant on the site of an existing plant in the alpine canton of Wallis has taken a large step forward. The plans to offset the 600,000 to 700,000 tons of CO2 expected to be emitted by the Chavalon plant once completed (which will represent roughly 2 to 3 per cent of total Swiss emissions) have been found to be financially feasible.

The offsetting measures, which have been the subject of studies and will soon be submitted for the approval of the Swiss Federal Ministry of Environment, include advances such as the use of heat pumps and improved energy use of sewage and water infrastructure. The projected measures will allow for the plant’s emissions to be offset in their entirety.

In addition, the Chavalon project was made possible by a recent ordinance of the Swiss government exempting new fossil-fuel power plants built on the site of an existing plant from the requirement of waste heat recovery. Such waste heat recovery would not have been feasible for the Chavalon project given the projected plant’s isolated location high above the Rhone valley.

While the waste heat recovery exception carved out by the Swiss Government for the Chavalon plant was controversial given Switzerland’s energy policy, which is focused on nuclear and hydro-electric power, the Government adopted the exception in order to keep the option of building gas-fired plants open, and because of the advanced nature of the Chavalon project’s carbon-offsetting plans. Electricity companies have been pushing for the right to build such plants since the middle of the decade in order to satisfy demand until new nuclear power plants, which would have higher production capacities of up to 1600 MW, become operational.

The Chavalon plant, which could be operational by 2016, will give a significant boost to Swiss electricity production in the coming years.

The electricity generated in Chavalon will not only compete with relatively low cost hydro-electrical and nuclear power, but also with the more expensive imported power produced with gas-fired combined cycle plants. The higher prices for such imported power will be decisive to the profitability of the Chavalon plant, and the development of a Europe-wide offsetting system will further enhance the plant’s cost-effectiveness.

The event is co-chaired by David Robertson of Fenwick Elliott LLP in London and Cecilia Vidigal Monteiro de Barros of Xavier Bernardes Bragança in São Paulo, and like earlier editions, it will take place in Brussels.

Speakers from different jurisdictions will cover topics on recent developments in construction industry dispute resolution, procurement rules, anti-corruption measures, financing models, practical tips for implementing the ICC’s ADR rules and the impact of the global economic downturn on the construction industry.

A panel led by Pierrick Le Goff of Alstom will begin the first day of the Conference by tackling anti-corruption measures and procurement rules (the panel will be composed of Jeremy Glover, Fenwick Elliott; Sara Hannaford, Keating Chambers, and Wanda Ternau, AGIP). Thereafter, a panel chaired by Tim Reynolds of TLT in London, and consisting of Doug Jones of Clayton Utz in Sydney and Marc Frilet of Frilet in Paris, will address financing models in the context of motorway, powerplant and hospital construction projects.

Jaya Sharma and her panelists Habib Al Mulla of Habib Al Mulla & Co in Dubai and Young Seok Lee of Yulchon in Seoul will analyse the effect of the economic crisis on the construction industry. Another panel of speakers, chaired by Mark Lane of Pinsent Masons in London, will end the day by presenting a session focusing on the construction of sports facilities and stadiums, including strategies for avoiding delay, contract structuring and securing financing.

The second day of the Conference will be devoted to two panels dealing with construction disputes. The first will be chaired by Tom Wilson (Kilpatrick Stockton, Dubai) and will make suggestions as to how construction disputes could be streamlined and made more efficient (the panel will consist of Mona Dragan of Costin Soimulescu Dragan-Costin & Partners in Bucharest, Nicholas Gould of Fenwick Elliott in London, and Hanna Tuempel of the ICC in Paris). In the second panel, ICC Secretary General Jason Fry and his panelists (Steve Stein of Stein, Ray & Harris in Chicago, Sean Brannigan of 4 Pump Court in London, and Matthias Scherer of Lalive in Geneva) will discuss arbitration of construction disputes, focusing on time and cost efficiency, construction arbitration under bilateral investment treaties, and how to deal with evidence.

The conference reception and dinner, which is usually one of the highlights of this biennial event, will take place on Friday 17 September 2010.

Information on registration and a full programme can be found on the IBA website.

Since 2002, France has been developing a well-thought-out national strategy on sustainable development that gathers the State, local representatives, eco-defending associations, private companies and civil society. In 2007, the “Grenelle de l’Environnement” project was launched in order to fight against climate changes by putting energy needs under control, protecting biodiversity and natural resources, creating a health-friendly environment, setting up sustainable production and consumption habits, and promoting ecological development strategies that foster both employment and competitiveness. It is a two-step program that, in 2009, led to the adoption of the first law commonly referred to as “Grenelle I” that delineates the leading areas submitted to new regulations. The second law (“Grenelle II”) that was voted on May 11, 2010 will carry out the implementation of the “Grenelle” project and the “Grenelle I” law.

The “Grenelle” project’s main goal is to reduce energy consumption through the regulation of key areas such as the construction area. For instance, by 2020, the State wants to favour the development of the “positive energy building”, a building that produces at least as much energy as it consumes. It is to be noted that the construction area is responsible for 40 % of the final energy consumption and approximately one fourth of greenhouse gas emissions.

According to the “Grenelle I” law, constructors of new buildings have to comply with a thermal regulation that relies on technological and industrial updates so as to decrease greenhouse gas emissions. In this perspective, some changes have to be made regarding both the design of the buildings and their weatherstripping.

All new private buildings subjected to a building license request presented as of end 2012 will be expected to have an average primary consumption below 50 kilowatt-hour per square metre per year (KW/H/m²/year). This requirement can be adapted to specific cases where the energies used in the construction do not go beyond the greenhouse gas emissions legal threshold. Therefore, the building location, characteristics and purpose will also be taken into consideration. These criteria will also apply to adapt the buildings maximum heating threshold instated by the law. Moreover, the process described above is binding as regards to public and service sector buildings that are subjected to a building license requested as of end 2010.

All new buildings subject to a building license which has been submitted as of end 2020 will be required to show a primary consumption rate lower than the quantity of renewable energy produced by these buildings, in particular wood energy.

Since the implementation of the law, State property buildings have been undergoing auditing in order to treat their non-sustainable areas by 2012. This measure is intended to lower energy consumptions by 40% and greenhouse gas emissions by 50% in these buildings within an 8 year delay.

Indeed, the existing buildings use on average 250 KW/H/m²/year in a city like Paris and the objective is to lower the consumption by 38% until 2020. The State will therefore be completely renovating 400,000 dwellings every year as of 2013.

Moreover, up to 50 millions m² of State property buildings and 70 millions m² of public companies need refurbishment so as to comply with the “Grenelle I” rules. Article 5 allows for private-public partnerships as a mean to achieve the necessary renovation work. The State takes into account the reduction of energy consumption requirements mentioned in the paragraph above and is therefore entailed to impose a contract based on energetic performance that encompasses conception, execution and exploitation or maintenance services where the energetic efficiency provision is contractually guaranteed. In fact, imposing an energetic performance test at every stage of the project increases chances of meeting the standards established by the “Grenelle I” law.

As to the social aspect of the law, 800,000 social dwellings will be refurbished before the end of 2020 in order to reach a primary energy consumption inferior to 150 KW/H/m²/year. Nowadays, the primary energy consumption of these buildings is superior to 230 KW/H/m²/year.

The French government plans on providing green constructors with advantageous financial measures. It aims at helping them making deals with banks and insurance companies in order to foster investments financing. It will also supervise the drafting of simplified contract templates on energetic performance adapted to the different concerned areas (residential, services, industrial) so as to make them easily accessible. It will support the insurance companies in providing an appropriate coverage for refurbishment works in residential areas.

Finally, the French government will promote the research linked to the construction of new generation low-consumption buildings. This initiative will be accompanied by training sessions dedicated to professionals, which will be held several times a year. These trainings will mainly focus on refurbishment, thermal and energetic performances, noise and quality of the air inside.

As a conclusion, we can say that France is going through a green revolution that is opening a brand new flourishing market for constructors who want to build tomorrow’s eco-focused future. Between refurbishment and new buildings construction, “Grenelle I” has fairly high expectations. More is to come with “Grenelle II”, the second law of the project which will be analyzed in a next article.

Gauthier Vannieuwenhuyse and Victoria Schulsinger

The reason why the use of letters of intent within the construction industry gives rise to such concern is because, despite the fact that they often look like a piece of official contractual documentation, the very nature of these letters is such that they can easily be perceived as merely a part of the negotiation which took place between the parties prior to the conclusion of a contract, rather than as a contract in their own right. A contractor may, therefore, commence works, believing that a letter of intent somehow guarantees a particular entitlement to payment, when, in fact, it provides no additional legal rights at all.

It might seem crazy for a contractor to expose its business to such a needless risk. However, the crux of the issue is that the risk is not ‘needless’. Construction contracts often contain a great deal of technical detail which can take time to finalize; yet neither contractor, nor employer, wants to wait around for every last calculation to be checked or specification to be agreed before they can commence with preparatory activities such as mobilization and material procurement. Indeed, it may seem to contractors trying to win work in the marketplace that lawyers are crazy for advising against entering into the letters of intent.

The fact that letters of intent present a ‘risk’ is not a problem in itself. Risk is an intrinsic part of all construction projects. Problems arise when there is no assessment or management of this risk. The questions set out below are some of the questions that a contractor might want to consider before commencing work on the basis of a letter of intent.

Is it really necessary?

Although letters of intent are often a necessity within the construction industry for reasons set out above, it is useful for contractors to look at the real reason why a letter of intent is being proposed. If the failure to conclude negotiations of the contract is down to a lack of diligence or commitment from one or both of the parties this is the issue that needs to be addressed. If a contract can be concluded in time for works to commence, it should be.

Does this letter actually provide my company with any legal rights at all?

A letter of intent needs to be a binding contract if it is going to provide a contractor with any rights in addition to those it would have had if it had just commenced work without it. It is beyond the scope of this blog to explore the various legal requirements for an enforceable contract in the UAE and in other GCC jurisdictions and any contractor considering entering into a letter of intent should take legal advice on these issues. However, the issue of intention to create legal relations is of central importance and care will have to be taken in the drafting of such a letter if it is to stand as a contract in its own right not simply as a non-binding record of the parties’ intentions during negotiations.

Is my company clear about its rights and obligations under this letter?

In practice many letters of intent do not tend to stipulate lengthy terms and conditions for the performance of the works being undertaken pursuant to them. This is usually because the parties intend to agree detailed termed and conditions as part of the contract. However, it is important that the letter of intent is sufficiently detailed to allow the contractor to understand the nature and scope of the work that it is being required to do, how it will be expected to perform this work (including any requirements in respect of the timescale of the works), what it will be paid for doing this work and how such payment will be made.

What happens if a contract is not concluded?

Ultimately a contractor that proceeds with a construction project without a detailed contract in place is in the same position as someone who is playing a card game where he is not sure of the rules. He might get lucky, but, ultimately, the chances of him losing are higher than they would otherwise have been.

A contractor may be prepared to take this risk while the contract is being negotiated. However, the risk that the contract will not be finalized and the contractor will never be certain of the rules of the game must be addressed by making provision within the letter of intent to allow both parties to terminate before the full scope of work on the project is completed.

Some letters of intent will stipulate an expiry date (and, if one does, in the vast majority of cases, the contractor should not work past it). Where there is no expiry date in the letter of intent and there is a genuine stalemate in contractual negotiations, then the contractor will have to make a judgment call between whether to cut his losses and terminate the letter of intent or risk suffering losses as a result of performing a contract where the rules of the game are unclear. However, where the contract has not been concluded simply because the contractor has been happy to continue to proceed on the basis of the letter of intent and has allowed the contractual negotiations to fall by the wayside, then this is an instance where the contractor is risking proving the doom-mongering lawyers right.

Co-authored by Rachel Larkin, a solicitor in Pinsent Masons’ Dubai office

Last year, my observation on investment in the wind power industry was that the timing might be right, but investors should be patient and be prepared for challenges.

In fact, some international wind farm developers have pulled out under the pressure of continuing low returns on investment.

Some of the major causes of low returns are as follows:

(a) difficult grid connection – the grid enterprises managing the state monopoly business have no financial incentives to provide timely grid connection to renewable energy power plants, and there is no effective mechanism to compel them to connect new producers, nor any unified technical standards for connection.

(b) unfavorable pricing – the local stated-owned power plants have no pressure to make profits, and they won many wind projects by tendering below-cost output prices; also the formulas and processes for tariff setting are still being worked out, and remain unpredictable (especially for independent producers).

(c) inexperience – foreign investors may lack the local connections and know how of both incumbent power companies and new independent local competitors, and as a result face higher costs and more obstacles across the board.

The central government has been aware of these problems and in response recently promulgated amendments to the 2006 Renewable Energy Law taking effect on April 1, 2010 (the “2010 Amendments”). The 2010 Amendments aim to clarify some statutory ambiguities and solve some policy problems, but still provide only fairly general guidance. More detailed implementing regulations are expected to be issued in the coming months.

Perhaps the single most important innovation in the 2010 Amendments is a new focus on renewables outtake. In particular, there is now a further requirement that the state energy authority and power administration take responsibility to supervise the implementation of the requirement, provided for in the 2006 Renewable Energy Law, that all power generated by renewable energy shall be purchased by the grid operators so long as the renewable power generation facilities and connection to the grid satisfy relevant technical criteria. To help ensure this outcome, the state energy authority and power administration, together with the state financial department, are mandated to jointly determine a minimum ratio of renewable energy to total power to be purchased by grid enterprises, based on the total generated power volume.

Although technical criteria for network connection have not yet been published, drafting and internal discussions are underway at the power administrations. Balance will be important, since there will be serious downsides to technical requirements that are either too low (hazardous for the network as a whole) or too high (unnecessarily raising costs for renewable power producers).

It is also worth mentioning the 2010 Amendments’ mandate for the state treasury to establish a renewable energy development fund. This fund will be sourced from ad hoc funds in the annual budget and from renewable energy surcharges, and might be used to compensate grid enterprises for their increased costs of purchasing renewable power.

Certainly, the 2010 Amendments reiterate the central government’s commitment to facilitating investments in wind and other renewable power projects. However, in the absence of rational and transparent sales, tariff and technical interconnect regimes, the investment environment will continue to be challenging and risky, and the current distortions in the market will persist.

Neil MacBride, the U.S. Attorney leading the prosecution team, noted, “Bribery isn’t just a cost of doing business overseas. Today’s sentence makes clear that this is a serious crime that the U.S. government is intent on enforcing.” This statement succinctly illustrate the US DOJ’s commitment to prosecute individuals who violate the FCPA.

Assistant Attorney General Lanny Breuer has made no secret that the “prosecution of individuals is a cornerstone of [the DOJ’s FCPA] enforcement strategy.” “Put simply,” Breuer said in a November speech, “the prospect of significant prison sentences for individuals should make clear to every corporate executive, every board member, and every sales agent that we will seek to hold you personally accountable for FCPA violations.” Thus, the FCPA poses a hazard not just for corporate reputations and profits but also for the individual executive. Companies can be fined, but only individuals can be put in prison, and DOJ well knows that the prospect of a stretch in the Federal pen can have considerably greater deterrent effect than the possibility of your employer having to pay a fine. Look for more such announcements in the months and years to come, as FCPA enforcement efforts continue to escalate.

Fiona Philip
Andrew Ness

In connection with the constantly increasing volume of construction in Russia, one of the main issues that developers and construction companies encounter is the problem of managing the waste that results from wrecking or construction works, as well as “abandoned” waste located at the land plot under development.

“Ownership of and responsibility for waste” provisions of Russian law and construction work contracts or waste removal and disposal contracts in Russia are very important and should not be ignored by the parties.

The key legal issue that arises in connection with construction waste with regard to the general contractor, subcontractors, and the customer is: to whom does the waste belong and who will be responsible for it? The answer to that question is particularly important, since it is the owner’s responsibility to make the payments for disposal of industrial and consumer waste, which is considered a negative impact on the surrounding environment. Along with the ecological payments, the owner’s responsibility for waste includes the obligation to clear the land plot of waste, to remove and site (store and bury) the waste, and the obligation to perform actions towards the recultivation and renewal of the land, which differs depending on the hazard class of the waste. All of these incurs additional and in some cases very significant expenses for the waste’s owner.

The main regulatory act in the sphere of waste management in Russia is the Federal Law “On industrial and consumer waste” dated 24 June 1998, No. 89 FZ (“Law on Waste”). The Law on Waste establishes two basic situations in which ownership rights to waste arise:

(i) Construction waste. Generally, waste is the property of the entity that owns the raw materials, materials, semi-processed items, and other articles or products, as well as the goods (products) whose use resulted in the creation of such waste. Usually, disposal of waste produced during demolition work will therefore rest with the owner of the building. And the contractor will bear responsibility for the waste created in its activities as a result of using its materials.

Thus, unless the contractor’s agreement or an agreement on waste removal expressly stipulates transfer of the rights to the waste to the contractor, or to the party performing the removal of waste, the customer that ordered the work makes ecological payments and is responsible for waste disposal, waste removal, and clearing the land. However, the transfer of responsibility for waste to contractors is common in Russian practice. Thus it is very important for contractor to have all agreements reviewed by legal and ecological experts to avoid subsequent confusion as to responsibility for waste and properly manage the contractor’s risks and expenses arose from such ownership to waste.

(ii) “Abandoned” waste. The lack of specially-equipped facilities for disposal of the waste (landfills, slurry pits, etc.) has led to the creation of a number of unsanctioned landfills in most regions in Russia. As a result, large areas have been polluted. Historically, all land in Russia was owned by the state, and the state still remains a major land owner and actively grants the state land for development purposes. It is not uncommon for plots of land granted by the state for construction to turn out to be a former landfill site, perhaps containing industrial waste, resulting in significant soil contamination. It also worth mentioning that ecological regulations on maximum permitted emissions (MPE) and maximum permitted concentrations (MPC) in Russia are often stricter than in other parts of Europe, which can lead a foreign investor inadvertently to expose itself to administrative or even criminal liability.

In practice, determining the original owner of the waste – the person who illegally dumped the waste on the empty land plot – is often impossible. Under the Law on Waste such waste is called “abandoned” waste. The state has released itself from liability for abandoned waste by setting forth in the Law that the entity in possession (whether in ownership or lease) of the plot on which the abandoned waste is found may acquire it through the use of such waste or by performing some other action that bears witness to its having been taken into possession in accordance with then Russian сivil law. Thus the owner of abandoned waste becomes the person or entity that has begun to use it. It means in practice that a contractor that begins preparatory work usually bears responsibility for abandoned waste and payment of the ecological fees.

Frequently, in order to speed up the development project, clients will push contractors to start the work before the ecological investigation of the plot has been completed. The contractor, not having full information on the extent of the plot’s contamination when beginning work, takes on all risks connected with hidden waste “buried” on the plot.

We recommend that contractors, when entering into an agreement on performing land works or works for the preparation/clearing of the territory for construction, including removal of the soil, request detailed information from the customer with regard to the condition of the plot’s soil, thoroughly assess the risks connected with this and set out in works contracts legal mechanisms to protect their interests. In this context, it is very important that works contracts contain a provision delimiting responsibility of the parties for waste, both visible and hidden.

* * *

These problems are of course not the only issues. In Russia, one often encounters plots that contain abandoned military dumping (graves, articles, ammunition), or archeologically valuable items. This of course also creates a number of problems for the owners and possessors of land plots, as well as for their contractors. However, this will be the topic of a separate post.

English lawyers turn towards liquidated damages for delay. These involve the pre-determination, at the time the contract is entered into, of the loss which a delay would cause. However, these ascertained damages must be based on a genuine estimate of the likely loss and not amount to a penalty.

French lawyers rely upon “clauses pénales”, which also involve a pre-determined amount to be paid out in the event of delay but which, as their name suggests, are punitive in nature.

In this post, we consider the distinction between “clauses pénales” and liquidated damages and whether they are reconcilable.

Conceptual distinction

Under English law, for a liquidated damages clause to be enforceable, its purpose must be to compensate the innocent party for breach of the contract, not to deter the other party from breaching it. The amount in question should be a genuine pre-estimate of loss as perceived at the time the contract was entered into. A clause whose purpose is to deter, or which sets an extravagant or unconscionable level of damages in comparison with the greatest loss which could be proved to have followed the occurrence of a particular breach, is likely to be struck out by an English judge on the basis that it amounts to a penalty. In this case, the party attempting to rely upon such provision would have to prove its loss.

The French Civil Code defines a “clause pénale” as “… a clause by which a person, in order to ensure performance of an agreement, binds himself to something in case of non-performance” (Article 1226) and “… a compensation for the damages which the creditor suffers from the non-performance of the principal obligation” (Article 1229). A provision classified as a “clause pénale” explicitly encompasses a combination of both coercive and compensatory elements. Therefore, the mere punitive nature of such a clause will not make it unenforceable.

In France, the philosophical considerations behind the 1804 Civil Code, in particular the belief in freedom of contract, meant that the “clause pénale” remained outside the control of French judges until 1975. By that date, however, tension raised by parties’ differing bargaining powers and contract disequilibrium necessitated a change in the law. Since then, the “clause pénale” has been subject to the possible control of French judges under Article 1152 of the Code. If the amount in a “clause pénale” is “obviously excessive” or “ridiculously low”, the judge may decide to adjust it, in line with certain guidelines. Unlike in England, however, an excessively onerous “clause pénale” will not be struck out.

Notwithstanding their common compensatory and pre-determined nature, liquidated damages and “clauses pénales” thus appear incompatible, since the hybrid character of the latter conflicts with the “no penalty” approach of the former.

Practical implications

Even though English law does not allow a liquidated damages clause if it is in fact a “penalty” clause, in practice there have only been a handful of English cases striking out liquidated damages as penalties. English courts are unwilling to interfere with the parties’ bargain in this respect, especially in a commercial context, when it is clear that the clause was freely negotiated.

Whilst “clauses pénales” are binding and enforceable in France, the risk of abuse is limited by the possible intervention of the judiciary to reduce or increase the amount in question.

Just as in England, a French judge must consider the existence or otherwise of a coercive (deterrent) element by looking at the intention of the parties when the contract was concluded. However, the French judge will do it not to determine whether the clause should be struck out but to establish whether it amounts to a “clause pénale” and, as such, falls under his control. If the clause lacks either the compensatory or the coercive element, the French judge will not have discretion to reduce or increase the amount in question.

Both French and English judges and arbitrators are cautious about interfering with liquidated damages and “clauses pénales” but the guidelines and criteria they have adopted differ in significant ways.

In particular, French judges may take into account the difference between the amount fixed in the clause and the actual loss suffered, a difference which is not directly relevant in England. In fact, English courts have consistently held that the comparison should be between the amount fixed in the provision and the loss as could reasonably be anticipated at the time the contract was entered into.

Conclusion

Although in principle the prohibition of penalty clauses under English law appears irreconcilable with the enforceability of “clause pénales” under French law, judges and arbitrators face similar tensions both in England and France between the risk of abuse and necessary judicial intervention on one hand and freedom of contract and legal certainty on the other.

By Joanne Clarke and Gauthier Vannieuwenhuyse for Salans and Cecile Tangy for Pinsent Masons