May I claim Liquidated Damages? - The impact of new case law

Liquidated damages provisions in a construction contract act as a safety net for an employer, allowing it to recover a pre-determined amount of financial compensation, without the need for it to prove actual loss, when a project is delayed, and the contractor has no entitlement to an extension of time in respect of the delay.

However, the drafting of a liquidated damages clause is not always as straightforward and clear cut as one would hope, and this can be a very contentious area as is demonstrated by the recent cases of Triple Point Technology Inc v PTT Public Company [2021] UKSC 29, Eco World Ballymore Embassy Gardens Company Ltd v Dobler UK Limited [2021] EWHC 2207 (TCC) and Mansion Place Limited v Fox Industrial Services Limited [2021] EWHC 2972 (TCC).

Indeed, Clyde & Co is frequently asked by clients to advise on the correct interpretation and enforceability of liquidated damages provisions, both in terms of whether an entitlement to claim liquidated damages by an employer arises under them and, if so, whether a claim for the specified rate of liquidated damages will be upheld. These types of dispute are commonplace in the construction industry and three recent decisions from the Supreme Court and the Technology and Construction Court (TCC) will have an important bearing on the advice which will be given.  This article focuses on these three judgments.

Triple Point Technology Inc v PTT Public Company [2021] UKSC 29

In the Triple Point case the contract stated that the period for claiming liquidated damages was “from the due date for delivery up to the date PTT accepts such work”.  On the facts, Triple Point’s employment had been terminated before the works were completed, which meant that there was no point at which PTT “accept[ed] such work”. A dispute arose as to whether PTT was entitled to claim liquidated damages in such circumstances.

The Court of Appeal had held that any entitlement to claim liquidated damages did not survive the termination of the contract, because, as a result of it, PTT would never be in a position of accepting the works. However, the Supreme Court reversed the Court of Appeal’s decision and found that PTT was not prevented from claiming liquidated damages because of the termination of the contract. The Supreme Court’s decision meant that PTT could either claim liquidated damages up to the point it accepted the work or, more critically, the point at which Triple Point was terminated. In so deciding, the Supreme Court interpreted the liquidated damages provisions and decided that the parties would have intended them to operate in a situation where the contractor’s works were in delay before the contract in question was terminated, and acceptance of the works by the employer, PTT, would not be achieved.

Although it could be argued that the Supreme Court’s decision in Triple Point turned upon the wording of the particular liquidated damages provisions in the contract which the Supreme Court construed, some commentators believe the Triple Point judgment shows that the UK courts will tend to seek to uphold liquidated damages provisions, rather than strike them down as being unenforceable.

Eco World Ballymore Embassy Gardens Company Ltd v Dobler UK Limited [2021] EWHC 2207 (TCC)

The Eco World case involved a dispute over the enforceability of a liquidated damages clause in circumstances where the contract did not contain sectional completion provisions or provide rates of liquidated damages for late completion of sections of the works. The works were therefore not sub-divided into sections and there was only one rate of liquidated damages expressed to cover the whole of the works. However, the employer had taken partial possession of two out of the three blocks comprising the works, before the liquidated damages could be claimed. Should the employer be entitled to the full rate of liquidated damages applicable to the whole of the works, even though two of the three blocks had been handed over to it, without delay?  Or should the liquidated damages provisions be struck down as being extravagant in amount and thus an unenforceable penalty in such circumstances?

The TCC found that the liquidated damages clause was enforceable at the full rate, even though the employer had taken partial possessions of two of the three blocks. It considered that it was dealing with two sophisticated, commercial parties who had negotiated the liquidated damages clause with the benefit of legal advice and that the employer had a legitimate interest in ensuring that the whole of the works was completed on time.

No evidence was put before the TCC to suggest that the rate of liquidated damages was unreasonable or disproportionate, although this was probably because – unusually in this case - it was the employer challenging the enforceability of its own liquidated damages claim, so that it could pursue a considerably larger claim for unliquidated/general delay damages instead.

The point to be derived from the Eco World case however is that contractors should be mindful that by agreeing to one rate of liquidated damages for late completion of the whole of the works it could become liable for the full amount of such damages, even though the employer has taken possession or possessions of parts of the works, depending on how the contract’s relevant terms are drafted. 

Mansion Place Limited v Fox Industrial Services Limited [2021] EWHC 2972 (TCC)

The TCC was equally reticent to hold a liquidated damages clause to be a penalty and/or unenforceable in the Mansion Place case.

The defendant contractor sought to argue in the TCC that a liquidated damages clause was a penalty and thus unenforceable, because the rate of liquidated damages had not been the subject of a “bespoke assessment” as to the level of losses that could be incurred, nor was there any negotiation over the rate. Instead, it argued, the rate was simply taken from contracts for other projects. 

The defendant also argued that the liquidated damages clause was a penalty because same rate applied to each bedroom in the development, despite the fact that different rooms could be rented out at different rates. It followed, according to the defendant, that the rate of liquidated damages did not reflect the actual level of the claimant employer’s loss.

The TCC rejected both arguments and found, on the facts, that the parties had negotiated the liquidated damages rate - indeed the TCC held that the defendant had even achieved a revision to the drafting of the liquidated damages provisions as part of those negotiations. The rate of liquidated damages was “accepted by the Defendant at the outset as being appropriate…” and therefore the rate could not be “wholly disproportionate”.

The TCC was also invited by the defendant to find that the liquidated damages mechanism was inoperable. It argued that, if the employer took partial possession of some part or parts of the works, applying a proportionate reduction to the rate of liquidated damages did not work because the rate was expressed on a per room basis, but the relevant part or parts taken over could consist of areas which were not bedrooms. The TCC noted that whilst the calculation of an appropriately scaled down rate might be considered “cumbersome”, it was still capable of being carried out and that the clause therefore remained valid and enforceable. 

The Court’s approach of upholding liquidated damages clauses

It is always worth considering the drafting of liquidated damages clauses carefully, because occasionally errors are made in such drafting, which mean that an appropriate calculation of liquidated damages is not capable of being performed and that the clause is thus argued to be enforceable. Any impairment on an employer’s ability to claim liquidated damages from a contractor can have a significant impact on the profitability of a project for an employer.

Despite the need to check such drafting, the general trend from recent case law from the Supreme Court and the TCC is that the Court is now less likely to entertain technical legal arguments over liquidated damages provisions, crafted by parties or their lawyers, and to find that a liquidated damages clause is unenforceable. This is particularly the case where the clause has been negotiated and agreed by sophisticated, commercial parties, with assistance from their respective lawyers.