Liquidated and ascertained damages
Laura Campbell, Associate, and Francesca Gallagher, Trainee Solicitor, Sharpe Pritchard
LIQUIDATED and ascertained damages (LADs) provisions are worth spending time negotiating as they do not simply go into the contract never to be referred to again. Employers, particularly those using the JCT form, regularly rely on the same to meet the costs that they would otherwise have incurred as a result of the late completion of a project. Whilst it is a couple of years since the Supreme Court decided the TriplePoint1 case on the application of LADs upon contract termination and despite the familiarity with and regular use of LADs in the industry, they are still a frequent topic in the courts.
History and myths of this repeat offender
Time features in the project management ‘golden triangle’ given its criticality. As such and given the propensity for delays to occur, the inclusion of LADs is advisable in most instances. While the employer could make a claim for general damages for delay, it would need to jump through the usual hoops applicable to a claim for damages, which would include: i) proving that the contractor had breached the contract and ii) that the breach had caused the employer to suffer loss. Furthermore, the employer would need to evidence the quantum of that loss. Depending on the circumstances not all of those steps may prove straightforward and a claim such as this will invariably be costly and time consuming for both parties.
LADs can be met with some resistance from contractors in the negotiation phase.In contrast, LADs are a pre-agreed level of damages to be applied for a specific breach of contract, most commonly, but not exclusively, applying where practical completion is delayed (for reasons that are the contractor’s fault). LADs for delay are generally stated as an amount per week (or part thereof) of delay beyond the contractual completion date but could also be stated as an amount per day. If completion is delayed, the employer may levy LADs against the contractor and, unlike with general damages, there is no need for the employer to prove that it actually suffered the loss specified.
LADs can be met with some resistance from contractors in the negotiation phase. However, as Dunlop2 established in 1915, LADs are not intended to nor do they operate as a penalty, as of course penalties under contracts are not enforceable in English law. Whilst offering certain benefits to an employer, LADs also act as a cap on a contractor’s liability in relation to delay and create certainty because once set that is the maximum that will be levied per day, week, or month against the contractor.
The ill weathered ‘genuine pre-estimate of loss’ test
As referenced above, LADs which act as a penalty will not be enforced by the courts or by an adjudicator. The traditional test for whether LADs were punitive was to assess whether they reflected a ‘genuine pre-estimate of loss’3. In practical terms, this simply meant that the employer would itemise its potential losses for delayed completion on a daily or weekly basis to calculate a rate for the LADs. For example, if a school construction project were not to complete on time for the start of term (and provided that the contract required completion on or before that date), the costs of temporary classrooms for the children would need to be covered plus any other costs.
This would be the basis of the employer’s estimate of LADs – the losses are genuine as those classrooms need to be available and an estimate could be made in advance based on costs obtained. A hundred and one years later, the courts reconsidered the ‘genuine pre-estimate of loss’ test and the Supreme Court concluded that it was ‘an ancient, haphazardly constructed edifice which has not weathered well’4. The test proposed by the Supreme Court was ‘whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any enforcement of the primary obligation’.
In recent years, LADs have featured in the courts again but this time specifically in relation to how they apply upon contract termination.
In the context of construction delays, this means that LADs will generally be enforceable provided that their level is not out of all proportion to the employer’s legitimate interest. The court also clarified that LADs ‘may properly be justified by some other consideration than the desire to recover compensation’.
This means that even if the LADs are greater than the actual loss which may be suffered by the employer, if there is a legitimate reason and if this tallies with the wider commercial context, the level of LADs is unlikely to be challengeable. In the context of delays, using LADs as a deterrent to encourage on-time completion would likely be considered a legitimate interest.
Despite this shift to a wider commercial consideration of LADs, the Supreme Court did not simply cast aside the ill weathered ‘genuine pre-estimate of loss’ test. The Supreme Court held in Cavendish4 that the test still provides a useful guide when assessing whether LADs are enforceable. The old test is a useful and valid ‘rule of thumb’ for employers to adopt when assessing the rate of LADs for a contract. An employer is therefore legally entitled to impose LADs which may or do exceed its genuine pre-estimate. However, in practical terms, this needs to be balanced against the risk premium that this may attract.
TriplePoint: LADs upon termination
In recent years, LADs have featured in the courts again but this time specifically in relation to how they apply upon contract termination. The Supreme Court followed the approach above in applying commercial common sense and decided that LADs would not accrue after a contract terminated unless there was an express contractual provision to the contrary (as this would demonstrate that this was the intention of the parties when they entered into the contract). The Supreme Court held that the employer was entitled to LADs for such work up to the point of termination. It rejected the argument that the employer was only entitled to LADs for late works that had actually been completed before the contract was terminated.
The rationale for this decision was that upon termination the contractor loses control of the time for completion, especially if another contractor is employed to complete the works. Whilst the employer is unable to claim under LADs for delay after the point of termination, there may still be scope for the employer to rely upon general damages for delay after the point of termination unless sole remedy drafting has been included.
Life after TriplePoint
Since TriplePoint, LADs have continued to feature in the courts. One of the recurrent themes has been whether a cap or other limitation on LADs precludes an employer from claiming general damages for delay.
Two highlights in the last year have been:
Energy Works5 – the Technology and Construction Court decided that when a building contract is terminated but the works have not been completed, whilst LADs do not extend beyond termination, a party’s accrued rights on termination are preserved and it would defeat the purpose of LADs if they were void by virtue of the contractor’s failure to complete the building contract
Buckingham Group Contracting Ltd6 – the claimant sought a declaration that a liquidated damages clause was void and unenforceable and that the parties had agreed a cap on the general damages recoverable from the claimant. Mr Alexander Nissen QC, sitting as a deputy High Court judge, disagreed and held that the liquidated damages clause was certain and enforceable: the declaration was not granted. The case illustrates the unwillingness of a court to conclude that a clause in a negotiated contract is so uncertain that it cannot be given effect.
In relation to the submission that the contract contained a cap on general damages for delay, the case confirms the need to draft clearly if the intent is to place a cap on the liability of a contracting party. A cap expressed in terms of the maximum liquidated damages payable will not be extended by the courts to encompass a claim for general damages in the absence of clear words to that effect.
Conclusions
Time spent drafting and negotiating LAD clauses in construction contracts is time well spent. LADs attract court attention far too frequently and often commercial common sense is applied. The key points which surely prevail from the recent cases are to draft and negotiate LAD clauses clearly and unequivocally and to apply common sense in the negotiations because if you do not, those who deal in dispute resolution will.
Laura Campbell, Associate, and Francesca Gallagher, Trainee Solicitor, Sharpe Pritchard
lcampbell@sharpepritchard.co.uk
fgallagher@sharpepritchard.co.uk
www.sharpepritchard.co.uk
@SharpePritchard
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1 Triple Point Technology, Inc v PTT Public Company Ltd (2021) UKSC 29
2 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915)
3 Derived from Lord Dunedin’s four tests in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd (1915)
4 Cavendish Square Holdings BV v El Makdessi (2016) UKSC 67
5 Energy Works (Hull) Ltd V MW High Tech Projects UK Ltd (2022) EWHC 3275
6 Buckingham Group Contracting Ltd v Peel L&P Investments and Property Ltd (2022) EWHC 1842 TCC