Liquidated Damages: An Update


Author: Christian Charles


Christian Charles, Senior Associate, Fladgate LLP (ccharles@fladgate.com)


 

Liquidated damages clauses are commonly used in construction contracts to provide the employer with a ready-made remedy for delay. These provisions allow the employer to claim or deduct a specified sum of money without having to prove its actual loss in a claim for damages.  In two recent cases[1], the English courts have considered two important issues in relation to the enforceability and availability of liquidated damages, namely:

  1. The circumstances in which a liquidated damages clause will be struck down as a “penalty”; and
  2. The circumstances in which liquidated damages can be claimed after termination of the contract.

The rule against penalties

For many years, it was well established that liquidated damages for delay had to be a “genuine pre‑estimate” of the loss that the employer would suffer if the contractor did not achieve practical completion by the date set in the contract.

However, a number of recent cases have reformulated the test for deciding whether a liquidated damages clause is a penalty. In Cavendish Square[2], the Supreme Court held that whilst the “genuine pre-estimate” test is instructive, the correct test is whether the liquidated damages are “out of all proportion to any legitimate interest of the innocent party”.

In the recent case of GPP Big Field, the liquidated damages were actually described in the contract as a penalty.  This case concerned the construction of arrays of solar panels, and there were five similar contracts where the same issue arose.

The liquidated damages figure was stated to be £500 per day per MWp (Mega Watt peak, a solar power measure to describe a unit’s nominal power). This figure was the same for each of the five contracts even though the arrays being constructed under each of those contracts had a different output and were constructed at different times of the year, output obviously being affected by the weather.  There was a difference of over 30% in the expected electricity prices across the various contracts.

Despite all of this, the Commercial Court held that the figure was not a penalty. The Judge pointed out that both parties to the contract were of equal bargaining power, experienced and sophisticated commercial parties, well able to assess the commercial implications of the delay damages clauses.

Citing the Supreme Court’s decision in Cavendish Square, the Judge held that whilst the sums were clearly not a genuine pre-estimate of loss, they were not unconscionable or without any commercial justification.  Moreover, the fact that £500 was a round sum rather than a carefully calculated pre-estimate in each contract was of no assistance to the contractor.  The clause was therefore enforceable.

Liquidated damages following termination

In the GPP Big Field case, a second issue arose as to whether the contractor was liable for liquidated damages for delay after the contract was terminated.

The courts have grappled with this issue on a number of occasions. The conventional position, derived from earlier cases, is that an employer will usually be entitled to claim liquidated damages for delay up to the point of termination, but must bring a general damages claim for any delays which accrue after that date.  The logic is that, following termination, the contractor has no control over the time it takes to complete the works and is therefore at the mercy of the employer and any replacement contractor.

The position is far from clear, however, and the courts have signalled that the outcome of each case will depend on the particular wording of the contract. In GPP Big Field, the Judge rejected the conventional position, on the basis that if liquidated damages were not payable for delay after termination, the contractor would effectively be rewarded for his own default.  The employer was therefore entitled to claim liquidated damages for the entire period of delay, including delays which extended beyond the date of termination.

It is important to note that this decision was based on the actual wording of the contract. In most standard form construction contracts, there are specific provisions which deal with losses suffered by the employer on termination for the contractor’s default.  For instance, in the JCT 2016 Design and Build contract, the consequences of termination for contractor’s default include the extra over cost incurred by the employer in completing the works and also “any direct loss and/or damage caused to the Employer and for which the Contractor is liable, whether arising as a result of the termination or otherwise”.  Similarly, the FIDIC 2017 suite of contracts provide that the employer shall be entitled (amongst other things) to claim liquidated damages for any delay which accrued prior to the date of termination.

The Court of Appeal’s recent decision in Triple Point Technology serves to complicate matters further, as it appears to contradict both the conventional position and the approach adopted by the Commercial Court in GPP Big Field.  The case itself concerned an IT contract which provided for completion and handover of the work in stages.  The employer terminated the contract following a series of substantial delays to the work.  At the time of termination, the contractor had only completed one stage of the works.  The employer claimed liquidated damages for the delays to the completed and uncompleted works.

In reaching its decision, the Court of Appeal emphasised that the answer will depend on the wording of the contract and there was no blanket rule that applied by default. On the facts of the case, the Court of Appeal held that the employer could only claim liquidated damages for work which had actually been completed prior to termination, and that the employer would have to bring a claim for general damages in respect of delays to the uncompleted works.

Comment

These recent cases illustrate that the law in relation to liquidated damages is far from settled. Whilst the test in respect of penalties is now well established, in some cases it can be difficult to say with certainty where the boundary lies between a penalty and a clause with a genuine commercial purpose.  Accordingly, the “genuine pre-estimate of loss” remains a useful test and a clause is unlikely to be struck down as long as it does not stray too far from that estimate.

The availability of liquidated damages following termination is even less clear. It is difficult to reconcile the GPP Big Field and Triple Point Technology cases without a detailed examination of the contract terms.  Even then, the cases do not sit easily together.  What is clear is that there is no longer a “conventional” or “default” position which will apply on termination.  In the circumstances, parties should consider dealing with these issues in their contracts in order to spell out the employer’s entitlement to liquidated damages following termination of the contract.


[1] GPP Big Field LLP & Anor v Solar EPC Solutions SL [2018] EWHC 2866 (Comm) and Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230.

[2] Cavendish Square Holding BV v Makdessi [2015] UKSC 67


 

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