Liquidated Damages and Partial Possession
Eco World (Eco) employed Dobler (UK) Ltd (Dobler) to design, supply and install façade and glazing works at Nine Elms, London (the Contract). The Contract was based on the JCT 2011 Construction Management Trade Contract (with amendments). Dobler was engaged on three “blocks” of the residential development (Blocks A, B and C), together referred to as Building A04. The revised completion date was 30 April 2018. There was no sectional completion in the Contract, but there was a provision regarding take-over or possession prior to Practical Completion (PC). During the week ending 15 June 2018, Eco took over Blocks B and C, but Block A was outstanding. Eco took over the remainder of the works on 20 December 2018, and PC was certified.
Following PC, a dispute arose as to the level of applicable LDs
The Contract provided for LDs in the event of Dobler’s delay (clause 2.32.1). It allowed an initial grace period of four weeks, and thereafter a weekly sum with a cap: “Liquidated damages will apply thereafter at the rate of £25,000 per week (or pro rata for part of a week) up to an aggregate maximum of 7% of the final Trade Contract Sum…”
The relevant contractual notice to be issued for LDs to be levied was to specify whether LDs were to be paid at the contract rate, or a “lesser rate stated in the notice”.
Technology and Construction Court (TCC) action
Three adjudications took place between the parties. These included arguments over extension of time, valuation and LDs.
Following the third adjudication, Eco commenced Part 8 proceedings in the TCC to determine the following questions:
- Are the LDs provisions void and/or unenforceable?
- If so, is Eco entitled to claim general damages for delay and, if so, are these limited by the LDs cap in the void and/or unenforceable LDs provisions?
- The LDs clause was void and/or unenforceable, as the Contract did not provide for a mechanism to reduce the level of LDs following partial or early possession.
- As a result, Eco was entitled to claim unliquidated damages (general damages), including those above the contractual LDs cap.
- The LDs clause was valid and operable as drafted.
- In the alternative, there was an effective mechanism for reducing LDs (through clause 2.32.1).
- Even if the clause was void and/or unenforceable, the LDs cap should apply equally to any unliquidated damages.
The TCC held:
- In considering whether LDs are penal, one must look to the test in Cavendish Square Holdings BC v Makdessi .
- The starting point for the court is to construe the relevant contractual provisions, as per Arnold v Britton .
- The natural and ordinary meaning of the provisions was that if Dobler failed to complete Blocks A, B and C by the revised completion date, the contractual LDs rate would apply.
- The LDs provision was not penal, “unconscionable” or “extravagant”. Factors to support this included that:
- both sides had legal representation when negotiating the Contract;
- there was a legitimate interest in enforcing the provisions around Dobler completing by the revised completion date;
- the quantification of the damages that would be suffered by Eco would be difficult; and
- the level of damages was not unreasonable or disproportionate.
- The LDs clause was therefore valid and operable.
- Dobler was not entitled to any deduction to the LDs rate.
- Eco was not entitled to levy unliquidated damages, and was bound by the contractual cap on LDs.
Alternative argument re cap
Although not necessary given the finding above, the TCC also considered Dobler’s alternative argument that even if the LDs mechanism was void and/or inoperable, the ‘cap’ in the clause would still apply to any general or unliquidated damages. An important factor to consider in this context would be whether the cap was intended to provide a limitation of liability for any delay costs. In considering the Contract as a whole, the TCC determined that the 7% cap in this case “would operate as a limitation of liability provision, even if the liquidated damages were void or a penalty”.
Therefore, even if Eco had been successful in arguing the LDs clause was void and/or unenforceable, its general damages claim would still have been subject to the 7% cap.
Points to take away
The lessons to learn from this case are:
- Care is needed when drafting LDs provisions in contracts to ensure they are clear, concise and consistent with other contractual provisions (particularly if your contract contains provisions as to sectional completion and/or early possession and take-over).
- Consider the status of any contractual cap on LDs, as even if the clause becomes void and/or unenforceable, the cap may effectively remain in place as a limitation of liability for general damages for delay.