The recent TCC case of
In this Insight, we go "back to basics" on liquidated damages provisions, ask what lessons can be drawn from this recent case law, and highlight the points that those negotiating liquidated damages provisions may want to consider going forwards in light of these cases.
So, what are liquidated damages?
As explained by
"A liquidated damages clause is a clause in a contract which stipulates what amount of money will be payable as damages for loss caused by a breach of contract irrespective of what loss may actually be suffered if a breach of the relevant kind (typically, delay in performance of the contract) occurs. Liquidated damages clauses are a standard feature of major construction and engineering contracts and commonly provide for damages to be payable at a specified rate for each week or day of delay in the completion of work by the contractor after the contractual completion date has passed." [Emphasis added]
Liquidated damages are most commonly levied in construction projects in relation to delays to the completion of the works. However, liquidated damages are also levied in projects such as process engineering and power projects where, for example, performance specifications aren't met.3
The benefits of a liquidated damages provision for both parties to construction contracts are well known and acknowledged by the Courts, including in the
- Avoiding the need for an employer to quantify its losses which may be difficult, time consuming and costly to do;4
- Allowing both parties to properly manage the financial consequences of the risk. Liquidated damages achieve this by limiting a contractor's exposure to liability of an otherwise unknown and open-ended risk, whilst also allowing an employer to ascertain in advance what they would receive in such circumstances.5
As such, these clauses can provide reassurance to contractor and employer alike that they both know the consequences of delaying the project or not hitting a particular performance specification.
Liquidated damages or a penalty?
If liquidated damages provisions are held to be a penalty, then, prima facie, they are void and unenforceable. However, the test as to what constitutes as a penalty has moved away from the famous
The position as outlined in
The 2015
Instead, they emphasised that: "The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation ..."9 [Emphasis added]
The
- Though the parties to a contract who use the words "penalty" or "liquidated damages" may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case;
- The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage;
- The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach; and
- To assist this task of construction various tests have been suggested, which if applicable to the case under consideration, may prove helpful, or even conclusive." [Emphasis added]
In other words, if you observe the
So what does Eco World v Dobler add to the mix?
The facts
The brief facts of
EWB took over Blocks B and C on
One of the questions for Mrs
The analysis
The Judge analysed the Makdessi test as to what constitutes a penalty as well as acknowledging the commercial purpose to both parties of liquidated damages provisions (quoting from Triple Point in the process). She then emphasised that the starting point was to construe the relevant provisions noting that:
"It is now well-established that, when interpreting a written contract, the court is concerned to ascertain the intention of the parties by reference to what a reasonable person, having all the background knowledge which would have been available to the parties, would have understood them to be using the language in the contract. It does so by focusing on the meaning of the relevant words in their documentary, factual and commercial context. That meaning has to be assessed in the light of (i) the natural and ordinary meaning of the clause, (ii) any other relevant provisions of the contract, (iii) the overall purpose of the clause and the contract, (iv) the facts and circumstances known or assumed by the parties at the time that the document was executed, and (v) commercial common sense, but (vi) disregarding subjective evidence of any party's intentions."12 [Emphasis added]
After consideration of case law, the Judge concluded that the natural and ordinary meaning of the "works" was that Dobler was obliged to complete all the works (i.e., Blocks A, B and C) by the completion date. The words were "reasonably clear and certain".13 Further, the "liquidated damages provision in this case is not unconscionable or extravagant."14 Accordingly, the liquidated damages were not a penalty, and the provisions should be upheld.
In reaching her conclusion, Mrs
She also held, on an obiter basis, that even if the liquidated damages provision itself had been held to be void (which it was not), the Court would have upheld the overall cap on delay damages contained within the same provision.15 Again, the theme of party autonomy and freedom of contract is seen clearly in her decision.
What happens to liquidated damages on termination?
The
As eloquently stated by
That said, it will be interesting to see if any cases emerge in the future as to how contracts, which inserted bespoke wording in relation to the consequences of termination on liquidated damages in light of the
Things to think about going forwards
In summary then, the Makdessi test, as applied in
That said, if you are the party likely to be receiving payments of liquidated damages for delay, it is always going to be sensible to ensure you have contemporaneous calculations (i.e., from the time before you entered into the contract) showing your pre-estimates of loss saved in case you need them in the future. These can then be used to justify your liquidated damages rate. As emphasised in the Makdessi case, if you pass the
Given the difficulty in successfully arguing a liquidated damages provision is penal and void, any paying party needs to take care that they fully understand the potential implications of the mechanisms they are signing up to. For developments where it is possible that partial possession or sectional completion may take place, then it is important to ensure (if you are the paying party) that there is some way of reducing the value of liquidated damages imposed in those circumstances.
Otherwise, if there are clearly drafted provisions imposing one rate of liquidated damages regardless of partial possession, it may be difficult to challenge them if the circumstances are similar to those in
The good news is that the one thing parties do not expressly need to consider following the Supreme Court Triple Point decision is what the consequences of termination are on their liquidated damages provisions. As
Footnotes
1 [2021] EWHC 2207 (TCC).
2 [2021] UKSC 29.
3 See Construction Law, 3rd Edition by
4 See Triple Point, as per
5 Ibid as per
6
7
8 [2015] UKSC 67.
9 Ibid at para 32.
10 [2015] UKSC 67 at para 35.
11 [2021] EWHC 2207 (TCC).
12 See
13 See
14 See
15 See
16 Triple point Technology v
17 See Triple Point [2021] UKSC 29 at para 48.
18 See NEC4 amendments - https://www.neccontract.com/About-NEC/News-and-Media/NEC4-October-2020-A...
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