Eco World: Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd ( EWHC 2207 (TCC)) is an interesting case which deals with the interaction between partial possession and liquidated damages, where the underlying contract does not provide for early possession and pro-rata liquidated damages.
The Contractor was six months late in delivery, but the Employer had taken partial possession of two of the three residential blocks. Could liquidated damages be charged at full rate? Or would it become an unenforceable penalty? This case discusses these issues and concludes that in circumstances where a contract does not expressly provide for circumstances for a reduced rate of liquidated damages upon early possession, the Employer shall be entitled to the full rate. Further, had the liquidated damages been unenforceable, that a claim for general damages would still be subject to the cap on damages set out in the contract.
The Employer hired the Contractor to carry out the design, supply and installation of the façade and glazing works for three residential blocks based on the JCT 2011 Construction Management Trade Contract for £8.6m.
The contract provided for liquidated damages at the rate of £25,000 per week, with a grace period of four weeks and an overall cap of £602,336.63, being 7% of the contract sum.
The contract permitted the Employer to take over part of the works prior to practical completion of the whole of the works. The Employer took over two of the three residential blocks before practical completion of the whole works was certified.
A dispute arose between the parties in relation to the final account.
The Employer sought liquidated damages at the full rate, £25,000 per week, for the entire period from the contractual completion date to practical completion, notwithstanding that he had taken possession of two of the three blocks six months before practical completion.
The Contractor said that as the contract did not provide for a reduced rate of liquidated damages in the event of early possession, the liquidated damages provision amounted to a penalty, so was void and unenforceable. The Contractor agreed that if it was unenforceable, the Employer was entitled to recover general damages for delay in completion, meaning that the Employer would have to prove actual loss and damage.
There was a second issue, namely that if the liquidated damages provision was void and unenforceable, would the Employer’s claim for general damages still be subject to a cap on liability of 7%?
The Contractor’s contention that the liquidated damages provision was a penalty (because of the lack of any mechanism for reducing the level of liquidated damages) was rejected. The issue was whether the liquidated damages regime was operable, and it was. It was not unconscionable, exorbitant or extravagant so as to amount to a penalty. It had been negotiated by the parties with the benefit of professional legal advice.
As to the second issue, the Court said that in a claim for general damages for delay, the Employer’s claim would still be subject to the overall cap on liability of 7%.
The decision may seem a little unfair in that the Contractor had completed two thirds of the project. However, the law is not there to rescue a party from a bad bargain or poorly negotiated contractual arrangement. Of course, what a contractor may be able to negotiate also depends on the bargaining power of the parties.
For contract drafting: You really do have to think through every possibility and provide for it. Contractors should seek to negotiate a reduced rate of liquidated damages in the event that the project is likely to be completed and handed over in separate phases. It is also important to negotiate an overall cap on liability for delay, rather than accept unlimited liability.
For final account negotiations and litigation: The court will not rescue a party from what may appear to be an unfair situation or ‘bad bargain’ if the contract terms are clear and, as here, provided for liquidated damages of £25,000 per week regardless of the partial possession provisions.
For sureties: Do your contractor clients routinely seek to agree an overall cap on their liability for delay in the terms of their contracts? Or do they accept unlimited liability? If there is uncapped liability, any subsequent bond claim is in our experience unlikely to require adjustment if the project is substantially in delay.