New rules on Liquidated Damages Clauses under English Law – could they be useful in your Brand Licence Agreement?

What is a Liquidated Damages Clause?

This is a clause in an agreement which obliges one party (in a trade mark licence highly likely to be the licensee) to pay the other party (the brand owner) a specified sum of money if the licensee breaches certain obligation(s) in the agreement.

The 'old' rule was that a clause of this type would only be enforceable if the specified sum was a 'genuine pre-estimate of loss', i.e. based on the losses that the brand owner genuinely expected to suffer if the licensee breached the clause in question. In theory, the purpose of liquidated damages clauses is to increase certainty, deal with breaches swiftly and efficiently and avoid litigation. In fact, in reality the opposite has often been the case. It can be very difficult to estimate what losses a brand owner will suffer if and when a licensee they are entering into a relationship with today breaches certain obligations in the future. However, what the brand owner does know is that a breach of certain obligations will damage their business.

The Cavendish Judgment

In Cavendish the Supreme Court held that liquidated damages clauses can be used to protect one party's 'legitimate interests' provided that the 'penalty' being paid is not exorbitant or out of all proportion to what the party is trying to protect. Examples of 'legitimate interests' which a brand owner might want to protect are intangibles like goodwill, brand reputation, confidential information, trade secrets, customer loyalty and employee and licensee relationships.

The contract in the Cavendish case was a large business sale transaction between sophisticated and well advised entities. The Supreme Court acknowledged that where a contract is negotiated between 'properly advised parties' of 'comparable bargaining power' there is a strong presumption that the parties are the best judges of what should be in the contract and the courts should not interfere. However, in situations where the contract is standard form and not negotiable, the licensee is inexperienced or not taking legal advice, or the brand owner is very much the dominant party in the relationship, a liquidated damages clause may not be so easy to enforce.

Opportunities for brand owners

Whilst the full implications of the Cavendish judgment are yet to emerge, this shift in the law does provide brand owners greater scope for specifying liquidated damages for breaches of certain clauses in their licence agreements. It can be very difficult for a brand owner to quantify the damages suffered following misuse of one of its intangible interests, making liquidated damages clauses particularly useful in a brand licensing context.

This article is part of our BrandWrites May 2016 edition.