Judges have recently decided two key cases concerning liquidated damages, one regarding liquidated damages where a contract has been terminated prior to the works being completed, and the other regarding liquidated damages where the employer has taken partial possession. These cases provide timely clarity to the construction industry at a time when increased delays and contract terminations are being seen following the impact of Covid-19.
Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29
The Supreme Court decision in Triple Point Technology Inc v PTT Public Company Ltd (Triple Point v PTT), finally decided the manner in which liquidated damages (LD) can be applied when a contract is terminated. The judgment affirms that if a contract is terminated before practical completion, the contractual claim for LDs is not lost. The termination date becomes the end date for which LDs can be claimed up to and following the date of termination the employer can instead bring a claim for general damages.
While the case revolves around a bespoke contract in the IT sector, the legal principles transfer to the use of LD clauses in construction contracts and the case is one of the most significant cases for the construction industry in recent years.
Background
PTT and Triple Point entered into a bespoke contract for Triple Point to design, install, maintain and license software for PTT. The works were delayed and disputes arose as to payments due. Subsequently, Triple Point refused to perform, and PTT terminated the contract and sought numerous damages including LDs.
The Supreme Court Decision
At the date of termination, the contractual completion date had already passed, and Triple Point had accrued liability for LDs pre-termination.
The Supreme Court held that Triple Point was liable to pay LDs for the period of delay up to termination with accrued rights to LDs surviving termination. Triple Point’s liability to pay LDs then ceases from the date of the termination, as Triple Point’s obligation to deliver the works also ceased on this date.
Eco World - Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd [2021] EWHC 2207 (TCC)
The Supreme Court Judgment of Triple Point was quickly followed by the TCC decision in Eco World – Ballymore Embassy Gardens Company Limited -v- Dobler UK Ltd (EWB v Dobler). Concerning a different aspect of liquidated damages, this case focuses on the application of an LD clause where partial possession has been taken. The judgment also opines on whether a LD clause would limit the contractor’s liability for delay damages, even if the LD clause is unenforceable.
Background
EWB appointed Dobler under an amended JCT 2011 Trade Contract to carry out façade and glazing works to three residential blocks. The contract did not provide for sectional completion, rather it contained only a single completion date for the whole of the works, providing for Dobler to pay £25,000 per week LDs (capped at 7% of the contract sum) in the event of late completion of the works as a whole.
The contract also included a clause allowing EWB to take over part of the works prior to practical completion, but did not contain a clause that would reduce the level of LDs that would be payable if EWB did so.
EWB took over possession of two of the three blocks in June 2018, with practical completion of the whole of the works occurring in December 2018.
A dispute arose, including financial claims for delay damages, and whether or not Dobler was liable for LDs on the two blocks that EWB took possession of in June 2018 for the period between the date of partial possession and practical completion of the whole works in December 2018.
After multiple adjudications, this issue was heard by the High Court. Unusually, and contrary to the position taken in the adjudication, it was the employer, EWB, who argued that the LD clause was unenforceable as a penalty on the grounds that the contract did not provide for the level of LDs to be reduced if the employer took early possession. EWB sought recovery of the higher uncapped losses that it had suffered rather than being limited to the capped LDs that would be recoverable if the LD clause was enforceable.
Was the Liquidated Damages clause enforceable?
The Court rejected EWB’s arguments and decided that the LD clause was not an unenforceable penalty as:
• Both parties negotiated the LD provision through external lawyers.
• It did not matter that the contract did not provide a method for reducing the level of LDs where partial possession had occurred.
• EWB had a legitimate interest in requiring completion of the whole of the works by the completion date. Late completion of any part of the works was likely to have an adverse impact on the work of following trade contractors.
• Quantifying EWB’s general damages would be difficult and applying the LD rate avoided such difficulty.
• Neither party argued that the LD rate was unreasonable, or disproportionate and the Court decided that the level of LDs and maximum cap was not unreasonable or disproportionate in any event, thus did not represent a penalty in circumstances where partial possession had taken place.
What was the liability for the period between partial possession and practical completion?
Having found the LD clause was enforceable, the Court held Doppler liable for LDs on the whole of the works until practical completion in December 2018, notwithstanding that EWB had taken possession of two of the three blocks several months earlier.
What if the Liquidated Damages clause was unenforceable?
While the Court's comments on this point are not a binding part of the Judgment, the Court opined on whether the cap written into the LD clause would still apply to general damages for delay if the LD clause had been found to be unenforceable.
The contract clause provided that LDs applied at the rate of £25,000 per week up to an aggregate maximum of 7% of the final Trade Contract Sum. Thus, it would appear that the cap is solely upon the level of LDs recoverable and would fall away if the clause was unenforceable.
The Court however suggested this approach to be too literal and that clear intention of the parties in the commercial context of the contract was to limit Dobler’s overall liability for late completion. Therefore, the Court’s opinion was that if the LD clause had been unenforceable, then EWB would be entitled to claim general damages, but that claim would have been subject to the same overall cap on liability to an aggregate maximum of 7% of the final Trade Contract Sum.
Summary
While future cases will turn on their facts, the decision clarifies that LDs continue to apply notwithstanding partial possession and If parties intend to reduce the contractors’ liabilities for LDs following partial possession, then clear express contractual terms are required for this purpose. The decision also highlights the benefit to contractors of negotiating clear caps on liability.
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