Liquidated Damages: An Empirical Study in the Travel Industry*
| DOI | http://doi.org/10.1111/j.1468-2230.1979.tb01550.x |
| Author | Alan Milner |
| Published date | 01 September 1979 |
| Date | 01 September 1979 |
LIQUIDATED DAMAGES: AN EMPIRICAL
STUDY
IN
THE TRAVEL INDUSTRY
*
A.
INTRODUCTION
IT
is usually supposed, often no doubt with good reason, that one of
the most effective dispute-avoidance mechanisms in the law of
contract is the liquidated damages clause. By specifying
in
advance
the amount of compensation which will be payable by
a
party in
breach, the contract gives him warning of the extent of his potential
liability and enables both sides to contemplate the making of the
contract in full awareness of the risks to which they will be exposed.
If
litigation should ensue, there will be no difficult problems of
remoteness and few of quantification of damages to consider. And
as guarantors of fairness between the parties, the courts have the
power to refuse the enforcement of clauses which are penal rather
than compensatory in nature.
The object of this paper, which is part
of
a larger study in
consumer relations, is to examine how far these simple assumptions
make sense
in
the context of a consumer contract. The particular
contract studied was one for the provision
of
overseas holidays
by Holidays Ltd.,l a leading inclusive tour operator; and the
liquidated damages clause was that in the Company's booking
conditions which specified the charges payable by clients who
cancelled their holiday reservations.
The
Legal
Rules
(a)
Loss
and
mitigation
The rules are straightforward.
If
the client cancels his holiday,
he breaks the contract
*
and the Company is in principle entitled to
sue him for compensation. Damages will be recoverable for loss the
client should,
".
.
.
or
the reasonable man in his position would, have realised
. . .
was sufficiently likely to result from the breach of contract
to make it proper to hold that [it] flowed naturally from the
~.
I
would like to express my thanks
to
Harry Arthurs for asking some acute and
provocative questions while this paper was in preparation and
to
Guenther Trcitcl
for alerting mc to some
of
thc pitfalls
of
the
Inw
of contract.
1
This pseudonym will be used for the Company throughout the paper.
I
am grate
ful
to
the Board and
staff
of
Holidays Ltd. for their constant willingness
to
make
information available to me, to correct my elemcntnry errors
nbout
the functioning
of
the travel industry, and to discuss thc work with me as it has progressed. The
rcsponsibility for the conclusions remains mine.
2
The
alternative intcrpretotion
of
the situation, namely that the clicnt is exercising
a
contractual option
to
cancel, as the price
for
which he must pay the charges speci-
fied,
does
not seem to be supportable in thc circumstances
of
this contract.
See
Bridge
v.
Cmcpbell
Dlucototf
Co.,
I.fd.
[1%2]
A.C.
600;
[1')62]
1
All
E.R.
385,
per
Viscount
Simonds and
Lord
Morton
of
Henryton.
508
Sept.
19793
LIQUIDATED
DAMAGES
:
THE
TRAVEL
INDUSlRY
509
breach or that
loss
of that kind should have been within his
contemplation."
a
The Company should therefore be put,
so
far as damages can do
so,
in the position it would have enjoyed if the cancellation had not
taken place and the holiday had been paid for and taken.4
This proposition has two main consequences. First, it means that
the Company can claim indemnification against all its irrecoverable
expenditure on the cancelled holiday, including not only the
expenses incurred in reserving the flights, accommodation, etc.,5 but
also
those incurred in making the cancellation and putting the
vacancy back
on
sa1e.O
Secondly, the Company will be
as
entitled to recover the profit
component in the total holiday price as if there had been no can-
cellation. The client will be taken to know
"
that damages will vary
according to the state of the market, including questions of supply
and demand"l and since the supply of holidays will normally
exceed the demand for them, the Company will be entitled to claim
the lost profit.* The precise size of the profit component in the total
cost
of
a
holiday will vary according to the load factor achieved
on
the flights,O but whatever its dimensions'O it is a head
of
recoverable
10~s.~~
Procedurally, it would be open to the Company to sue for the
full
contract price by an action for the agreed
sum,
thereby avoiding
the complications
of
remoteness and quantification inherent in an
ordinary action for damages."
Recovery will, however, be subject to the overriding requirement
that the Company should take all the steps it reasonably can to
8
Koufos
V.
C.
Czurnikow Ltd.
119691
1
A.C.
at
p.
385;
sub
riom.
The Heron
II
4
Ibid.
at pp.
414;
710,
per
Lord Pearce.
119671 3
All
E.R. at p.
691,
per
Lord Reid.
It does not matter that the Company had already committed itsclf to contracts
for
accommodation and other services before making the individual contract with
the client, since it must have been reasonably in the contemplation
of
the parties that
such expenditure would be wasted in the event
of
cancellation:
Arrglia Televisiorr Lid.
V.
Reed
119721
1
Q.B.
60; (19711
3
All
E.R.
690;
Ogus,
Law
of
Damages
(1973),
pp.
349-356.
0
The latter are,
of
course, attributable to the
process
of
mitigation but are none-
theless recoverable: see
McGregor
ort
Damages
(13th ed.,
1972),
p.
167,
para.
236.
7
Interofice Telephones Ltd.
V.
Robert Freemarr
Co.
119581
1
Q.B.
at
p.
202; 119571
3
All
D.R. at p.
486,
per
Parker
L.J.
8
Cf.
W.
L.
Thompson Lld.
V.
R. Robinson (Gunmukers)
Ltd.
11955)
Ch.
177;
[I9551
1 All E.R.
154;
Charter
v.
Sullivan
[I9571
2
Q.B.
117; (19571
All E.R.
809;
Interofice Telephones Ltd.
V.
Robert Freeman
Co.
Ltd.,
note
7
above.
9
See below.
10
See
H.
Pursorrs (Livestock) Ltd.
v.
UUky
Ingham
&
Co.
Ltd.
11978)
1
All E.R.
at
p.
541,
per
Scarman
L.J.
quoting
McGregor
on
DumageJL"
[Rlecovery
is
not to
be limited because the degree
of
.
. . damage could not have been anticipated."
11
The situation is unlike those in which the capital outlay and profit income can
be clearly differentiated and the plaintiff put to an election between claiming either
diminished capital value or lost profits:
cf.
Cidlinane
V.
Bdtish
"
Rema
"
Mfg.
Co.
Lid.
(19541
1
Q.B.
292;
(19531
2
All
E.R.
1257.
12 See Treitel,
Law
of
Contract
(4th ed.,
1975),
pp.
672-678.
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