Liquidated damages and partial possession
TCC considers if a liquidated and ascertained damages clause, which did not provide for a rate reduction, constituted a penalty clause.
In the case of Eco World — Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd the Technology and Construction Court considered whether a Liquidated and Ascertained Damages (“LAD”) clause, which did not provide for a reduction of the rate for LAD upon partial possession by the employer, constituted a penalty clause.
In this case, Dobler UK was employed by Eco World — Ballymore Embassy Gardens Company Limited (“EWB”) to carry out façade and glazing works to three residential blocks (Blocks A, B and C). The parties based the contract on the terms of the JCT 2011 Construction Management Trade Contract. EWB took over Blocks B and C in June 2018 with works on the remaining block (Block A) in delay. Practical completion was ultimately certified late, in December 2018.
Clause 2.32 of the Contract contained provisions for liquidated damages payable in respect of late completion of the works. It provided:
'The following rates of liquidated damages will apply for the first 4 weeks (inclusive) of delay in completion to the Works beyond the Date for Completion — £nil per week or pro rata for part of a week — 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…’
Importantly, there was no provision in the Contract allowing for the reduction of LADs to account for the fact that Blocks B and C had been taken over by EWB. However, at the same time, this clause operated to provide Dobler with some certainty as to what its total liability for delay damages would be.
A dispute arose between the parties in relation to the final account valuation, including any LADs payable and the parties conducted a series of adjudications. Looking at the facts of the case, it seems that at some point during the adjudication process, EWB realised that its entitlement to LADs would be far greater if the LAD clause did not apply and if the cap could be avoided. Accordingly, EWB then issued Part 8 court proceedings seeking relief.
EWB argued that it was entitled to general damages for delay, on the basis that, because the LAD damages clause did not contain a provision for reducing the rate of damages payable where it took partial possession, the clause was void and unenforceable.
The court considered
- whether LADs could be reduced to reflect partial possession
- if it could not, whether the LAD clause amounted to a penalty clause and was therefore unenforceable
- if the LAD clause was unenforceable, whether the cap in the Contract could apply to general damages.
Mrs Justice O’Farrell held that based on the “natural and ordinary meaning of the words used”, the rate of LADs applied until the whole of the works were complete. There was no provision in the contract that allowed that rate to be reduced in the event that EWB took partial possession.
Mrs Justice O’Farrell then considered whether this meant that the LAD clause amounted to a penalty. In doing so, the court applied the test established in the Cavendish Square case, namely, whether the LADs provision was “unconscionable or extravagant so as to amount to a penalty”. Mrs Justice O’Farrell found that the rate of LADs was not so extravagant, exorbitant or unconscionable so as to amount to an unenforceable penalty for the following reasons:
- the LAD clause had been negotiated by the parties with the benefit of legal advice
- EWB had a legitimate interest in enforcing Dobler’s obligation to complete all the blocks by the completion date
- agreeing on the rate of LADs in advance avoided the difficulty of quantifying EWB’s actual losses if the works were only partially complete by the completion date
- the agreed rate of LADs was not disproportionate to EWB’s potential losses in the event that the project was late on any one or more of the blocks.
Mrs Justice O’Farrell held that the clause was clear and certain and so there was no need to imply any term that the clause must be exercised in a rational or reasonable manner. EWB had an absolute right to claim the full rate of liquidated damages.
Although, as a result of its findings, the court did not need to consider whether the contractual cap in the LAD clause could apply to general damages, the court nonetheless considered Dobler’s argument on this point. Dobler, in this case, argued that the 7% cap in the LAD clause would apply even if LADs were found not to apply and general damages were sought instead. Mrs Justice O’Farrell agreed with this agreement and found that Dobler’s liability was effectively limited, whether in the form of liquidated or general damages.
Dobler was, therefore, liable to pay LADs, as set out in the Contract, up to the date of practical completion.
This case illustrates that a LAD clause will not fail merely on the basis that there has been sectional completion without a corresponding reduction to the rate of LADs. Where the contract provisions are clear and reasonable and are capable of operating, then they are likely to be found to be valid and enforceable. Here, it was important to EWB that the whole of the works was complete on time and so the lack of reduction in LADs for partial possession reflected that. Likewise, the LAD clause provided Dobler with the certainty of a cap and the knowledge that if there was a delay (even in one part of the works), there would be significant cost implications.
Mrs Justice O’Farrell’s findings are also an example of how the courts are understandable and how they seek to take a commercial approach when interpreting a contract. It is well established that, when interpreting a contract, the court strives to ascertain the intention of the parties by reference to what a reasonable person, having all the background knowledge, would have understood the parties to mean.
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