Legal Updates

Liquidated damages in an agreement that represents the risk in the transaction will not be reduced even if are an exceptional amount

March 1, 2022

A company entered into a financing and credit agreement in millions of shekels for a project to build a stadium in the city of Bat Yam. A few months later, the company ran into difficulties and was required to repay the original debt in addition to other charges in millions of shekels, which constitute about 120% of the original debt.

The Supreme Court held that the additional amounts should not be reduced as they serve a clear business rationale that show the division of risks and chances between the parties. The Court may reduce an agreed liquidated damages amount stipulated in the agreement if it is determined to be without any reasonable relation to the damage that could have been foreseen at the time the contract was executed as a probable result of the breach. Interest may, in some cases, be considered as liquidated damages that may be reduced. Here, about three months after the financing agreement was signed, the company got into insolvency proceedings and the loan payments accelerated. As a result, the amount of the original debt increased by an additional ILS 7 million (an increase of about 120% of the original debt). The additional charges imposed are not "disguised interest", but various liquidated damages clauses with clear business rationale that represents the division of risks and chances between the parties at the time of entering into the agreement and were set for cases where the loan will be accelerated and for non-utilization of credit. Although the amount of damages is high and exceptional, it is a financing agreement signed between experienced and sophisticated parties who entered into the transaction "with open eyes" and were fully aware of the payments they would be charged if the agreement did not go as planned. Therefore, there is no place to cancel the charges.