Legal Q&A: Liquidated damages
Sophie Malley, Associate, CMS Cameron McKenna Nabarro Olswang
PARTIES commonly agree a pre-determined rate of liquidated damages (LDs) that will apply in the event of specific breaches occurring, most commonly delay in achieving completion of a project by the contractual completion date agreed by the parties. But what happens if an LDs clause is found to be unenforceable? Can the agreed rate of LDs act as a cap for general damages?
This has recently been considered by the Technology and Construction Court (TCC) in Eco World – Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd and Buckingham Group Contracting Ltd v Peel L&P Investments and Property Ltd.
The decision in Eco World
Eco World contracted with Dobler to design, supply and install the façade and glazing works on three parts of a residential development in London. The contract did not provide for sectional completion but it did allow the employer to take over parts of the works prior to practical completion. The contractual date for completion was in April 2018. Eco World took over two blocks in June 2018, however, practical completion was not certified until later that year. Following completion, a dispute arose regarding the level of LDs Eco World was entitled to for Dobler’s delay. The contract specified that LDs would apply at a single weekly rate of £25,000 ‘up to an aggregate maximum of 7% of the final trade contract sum’.
What happens if a liquidated damages clause is found to be unenforceable? Can the agreed rate of liquidated damages act as a cap for general damages?
Following a number of adjudications, Eco World raised part 8 proceedings in the TCC seeking declarations on (i) the validity and/or enforceability of the LDs clause in circumstances of partial possession where no mechanism existed for a proportionate reduction in the amount of damages; and (ii) if the clause was void, whether it imposed a cap on the level of general damages Eco World was entitled to.
The TCC decided that the LDs clause was valid and enforceable in this instance. While the clause did not provide for a reduction in the LDs on partial possession, it was clear and certain on the amount of LDs payable by Dobler. The full amount of LDs was found to be due for each week of delay, as stated in the contract, regardless of any partial possession by Eco World.
Although it did not need to give a view on the second question (because the clause was found to be valid) the court said that, even if the clause had been void, the rate of LDs agreed between the parties could still operate as a limitation on the contractor’s liability for general damages.
When read in the commercial context, the court concluded that the LDs clause was clearly intended by the parties to serve two purposes (i) to quantify and limit the damages payable in the event of delay; and (ii) to limit Dobler’s overall liability for late completion to a specific percentage of the final contract sum.
The decision in Buckingham Group
The full amount of LDs was found to be due for each week of delay, as stated in the contract, regardless of any partial possession by Eco World.Buckingham was engaged by Peel to design and build parts of a manufacturing plant. The parties entered into an amended JCT Design and Build Contract 2016 which included a bespoke schedule setting out the LDs due in the event of certain milestone dates being missed and an overall cap on LDs.
This schedule was not drafted specifically for the contract, resulting in several ambiguities arising when Peel claimed LDs after the works were significantly delayed. The ambiguities included (i) different rates for LDs being incorporated into the schedule with no indication of which was to apply; (ii) the date for practical completion differing from that stated in the contract particulars by approximately two months; and (iii) the contract sum being different to that specified in the articles of agreement which impacted how the LDs regime was to be calculated.
Buckingham relied on these ambiguities to argue in part 8 proceedings that the LDs clauses were void for uncertainty and that the LDs cap limited its liability for general damages. The court noted that Buckingham had not met the high bar which exists to strike down contractual provisions for uncertainty. Despite the ambiguities, the court was able to determine the clear contractual intentions of the parties and therefore decided that the LDs clauses were enforceable.
Although unnecessary (given its conclusion that the LDs schedule was valid), the court, taking a different view to the judge in Eco World, rejected Buckingham’s assertion that the LDs cap would have limited any claim for general damages had the LDs clauses been unenforceable.
The court looked to the language used in the LDs clause which expressed the cap as being ‘on maximum liquidated ascertained damages’ and concluded that this could not be read in such a way to cover general delay damages. This position was supported by the fact that the cap was referenced in a schedule to the contract dealing exclusively with the topic of LDs.
Conclusions
Despite the ambiguities, the court was able to determine the clear contractual intentions of the parties and therefore decided that the LDs clauses were enforceable.In both cases the courts were reluctant to find LDs clauses unenforceable where it is possible to interpret them in a clear and sensible way. However, obiter comments from the judges suggest potentially conflicting positions on whether unenforceable LDs clauses cap general damages.
The divergent approach appears to primarily arise out of different contractual interpretations and whether a more literal approach or one taking into account the wider commercial context (i.e. bearing in mind that the parties sought to limit the contractor’s liability for delay in some way) should prevail.
To avoid such scrutiny, parties should pay close attention to any caps placed on LDs and the wording that surrounds these to make clear whether they would apply to general damages.
Similarly, parties should also ensure that the contract makes express provision on how LDs should be reduced in the event of sectional completion or partial possession by the employer.
Sophie Malley, Associate, CMS Cameron McKenna Nabarro Olswang