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Liquidated damages: are they still payable without contractual apportionment for partial possession?

Gateley Legal

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In the recently decided Eco World – Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd [2021] EWHC 2207 (TCC), O’Farrell J held that a liquidated damages clause was valid and enforceable despite the contract permitting partial takeover of the works by the employer without a mechanism for reducing the level of liquidated damages (LADs) payable by the contractor in the event of delay in such a situation.

Background Facts 

The claimant engaged the defendant under an amended 2011 JCT Construction Management Trade Contract to carry out façade and glazing works to three residential blocks in London in July 2016.

LADs in the event of delay were agreed at £nil per week (or pro rata for part of a week) for the first four weeks of delay, and £25,000 per week (or pro rata for part of a week) thereafter, subject to a cap of seven per cent of the final contract sum.

The contract did not provide sectional completion dates for the three blocks but did permit the claimant to take over possession of the works prior to practical completion. The claimant did so for two of the blocks in June 2018.  Practical completion of the whole works was achieved in December 2018, 16 months after the originally agreed completion date.

The parties subsequently fell into dispute as to the final contract sum and the amount of LADs payable by the defendant for the delay to practical completion. The dispute was first referred to adjudication, before Part 8 proceedings were raised, to determine a point of law.

The Issue

The issue before the Technology and Construction Court (TCC) was whether the liquidated damages clause in the contract was unenforceable because the contract permitted partial takeover of the works prior to practical completion of the whole, without a mechanism for reducing the level of liquidated damages payable in the event of delay in such a situation. Partial possession is different to sectional completion, because partial possession is not envisaged within the contract and there is therefore no pre-agreed apportionment for LADs.

The claimant also sought to argue that the liquidated damages clause in the contract was void and unenforceable as a penalty, as their entitlement to damages would be far less due to the cap of seven per cent of the final contract sum were it to be upheld (estimated to be £574,184.20) than the amount they may be entitled to under general damages (estimated to be £2,228,705.85).

The defendant sought to argue that the liquidated damages clause was enforceable, and thus that their liability under the contract was capped at seven per cent of the final contract sum.

The Decision 

In her judgement, O’Farrell J held that as the contractual provisions entitled the employer to take over the Works prior to practical completion and were “reasonably clear and certain” and “capable of being operated”, then there was practical benefit for both parties in permitting partial possession, as it enabled the employer to progress with follow up trades on those blocks and it reduced the trade contractor’s overall responsibility for LADs proportionately.  Although  a number of textbooks state that a LAD provision will not be enforceable on partial possession unless properly drafted, Farrell stated that it is “important not to elevate statements of general principle into an inflexible rule of law.”  She considered that because the possession of part of the works happened by consent, the sum to be paid for LADs should be proportionately reduced.

She also considered that the liquidated damages clause was not a penalty, as it did not fail for being unconscionable or extravagant upon application of the Cavendish Square test (i.e. that LADs must be commercially justifiable).

Implications

This case highlights the importance of clear drafting of contractual terms.  Those responsible for drafting liquidated damages clauses should consider whether partial possession by an employer should operate to reduce the liability of a contractor for LADs, and should ensure that the contract clearly reflects the intention of the parties.

The decision that LADs will continue to apply in the event of an employer taking partial possession also places an onus on contractors who wish to limit their liability for liquidated damages to ensure that clear amendments to the standard form contracts are undertaken to allow for appropriate deductions to liquidated damages where practical completion of a section of the works is achieved.

Do you require further information regarding LADs?

If you have any queries with regards to LADs in the event of partial possession or any other construction-related questions, please contact one of our construction experts listed below and visit our real estate page for information on all of the services we offer.

Gateley Plc is authorised and regulated by the SRA (Solicitors' Regulation Authority). Please visit the SRA website for details of the professional conduct rules which Gateley Legal must comply with.

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