The issue of liquidated damages (LDs) continues to keep the English courts busy this year, following the decision of the Supreme Court in Triple Point. The High Court has held that LDs will continue to apply despite partial possession of works by an employer. Further, and in obiter, were LDs unenforceable, Mrs. Justice O’Farrell opined that the cap on LDs could extend to general damages.

Key takeaways

  • Depending on the proper interpretation of the contract, a single rate of LDs can be valid and enforceable in circumstances where an employer has taken partial possession of the works, save for if the contract provides otherwise;
  • In obiter, depending on the precise contractual wording, a cap on LDs may extend to general damages where the LDs clause is unenforceable; and
  • Contractors should therefore consider whether they wish to reflect partial possession of works in the LDs provision through a proportionate reduction in applicable LDs.

Background

Eco World – Ballymore Embassy Gardens Company Limited (EWB) engaged Dobler UK Limited (Dobler) to carry out the design, supply and installation of the façade and glazing works for a residential project comprising three blocks in Nine Elms, London. Blocks B and C were taken over by the employer shortly after the contractual completion date with the completion of works on Block A occurring thereafter.

The contract, an amended JCT 2011 Construction Management Trade form, provided for LDs of £25,000 per week, capped at a maximum of 7 per cent of the final contract sum. The contract allowed EWB to take possession of part of the works early, but it did not provide a mechanism for a corresponding reduction in LDs in the event of such partial possession.

Following several adjudications, EWB commenced Part 8 proceedings before the Technology and Construction Court seeking declarations that:

  • the LDs clause was void and unenforceable in circumstances where it did not account for a reduction in LDs payable where partial takeover had taken place;
  • that EWB was therefore entitled to recover general damages for delay; and
  • the general damages recoverable should not be limited by the 7 per cent cap on LDs.

Decision

The contract provided that a partial takeover did not amount to practical completion. Therefore, LDs could be recovered until all works were complete, as practical completion could only be achieved upon completion of all three blocks.

Turning to whether the clause was unenforceable or void as a penalty on account of the contract failing to reduce the level of LDs following a partial takeover, Mrs. Justice O’Farrell applied the test set out in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, namely, whether an LDs clause is enforceable depends on whether it is unconscionable or extravagant so as to amount to a penalty. Mrs. Justice O’Farrell decided it did not amount to a penalty for the following four reasons:

  1. The LDs provision was negotiated by the parties, who both had the benefit of advice from external lawyers.
  2. EWB had a legitimate interest in enforcing the primary obligation of Dobler: to complete all of the works by the agreed completion date.
  3. By fixing the rate of LDs for late completion of the works as a whole, the parties avoided the difficulty of calculating and proving losses suffered by EWB where only part of the works were completed.
  4. The level of LDs, ie £25,000 per week, after a four-week grace period and up to a maximum of 7 per cent of the contract sum, was reasonable and proportionate.

The LDs provision was therefore not void and/or unenforceable simply because it did not provide for a reduction of LDs for partial takeover by the employer. Mrs. Justice O’Farrell stated that:

'As a matter of construction, the provisions in this case are reasonably clear and certain. There is one completion date for the whole of the Works. Liquidated damages are payable at the rate set out in the Trade Contract Particulars for failure to complete the whole of the Works by the completion date. There is no reduction in the rate of liquidated damages where partial completion is achieved or the employer takes over part of the Works prior to practical completion. Such provisions are capable of being operated.' [Emphasis added]

Further, and in obiter, it was considered that even if the LDs clause was void or unenforceable, the contractual cap on LDs would operate to limit any general damages EWB sought to recover. While not required to address this question, given the LDs clause was valid, the Court considered that to limit the application of the cap solely to LDs would be too literal. The clear intention of the parties was that Dobler’s liability for delay damages would be limited to a specific percentage of the final contract sum whether pursuant to LDs or general damages. In any event, the Court’s comments on this point remain persuasive and it remains to be seen how this line of authority develops in future. Ultimately, parties need to pay careful attention to LDs clauses and consider their broader implications.