In this article, Karishma explores a key case that contains guidance on the topic of provisions for liquidated damages in construction contracts.
Introduction
The case of Eco World – Ballymore Gardens Company V Dobler UK Ltd [2021] EWHC 2207 (TCC) contains guidance on the topic of liquidated damage provisions in construction contracts.
The question in EWB -v- Dobler was whether a liquidated damages (LDs) provision which stipulated a rate for the whole of the works with no reduction in the event that the employer took possession of part of the works, was valid and enforceable.
Case Facts
- The claimant EWB was the employer and the defendant Dobler, the trade contractor under an amended JCT Construction Management Trade Contract, 2011 Edition for a residential development in London. The works consisted of three blocks (A, B and C).
- The parties were in dispute about the final contract sum and the amount of LDs payable. The dispute was referred to adjudication in which Dobler sought a net payment based on an increased contract sum. EWB sought a net payment based on its lower valuation of the works and its claim for liquidated damages for Dobler’s delay.
- Dobler was successful in obtaining an increased payment for its works and limiting its liability for delay damages to nil by limiting the application of LDs to the takeover of Blocks B and C and getting an extension of time up to that date.
- The Claimant was dissatisfied with this outcome and sought a declaration under Part 8 CPR as to the effect and enforceability of the LDs provision.
What Issues Did the Court Consider
Issue 1: Partial possession and the penalty doctrine:
Dobler argued that where an employer under a construction contract exercised a contractual right to take early partial possession, but the LDs provision did not contain a mechanism for reducing the sums to be paid to reflect such early possession, the provision was “void and/or unenforceable”. It amounted to a penalty since the same rate was payable whether the whole works were late or only a part.
EWB countered that the rate stipulated in the contract was clear and unambiguous: there was one rate for the whole works and unless and until the whole of the works were complete or handed over the full rate was payable. The rate itself was neither extravagant, exorbitant or unconscionable.
The LDs provision also contained a term limiting the liability of Dobler to a particular sum. EWB therefore contended that if they were wrong and the provision was struck down as being penal in nature, then the limitation of liability (“cap”) which was part of the clause, fell with it. That meant that EWB was at liberty to claim general damages for delay and those damages would not be subject to the cap.
Outcome
O’Farrell J held that it was not automatically fatal to the claim for LDs that the same rate applied where there was sectional completion or partial possession. The parties were entitled to contract on the basis of a single rate for failure to complete the whole works or part of the works. Where that was the intention, effect should be given to it. It was not necessary for there to be a mechanism for reducing the rate in the event of partial possession or early use where the intention was that the full rate applied in any case.
The fact that the same rate applied to failure to deliver part of the works, or the whole of the works, did not of itself mean the rate was penal. A term was penalty, if it was “extravagant, exorbitant or unconscionable”. Here the rate was based on inability to use the whole of the completed works and it was not a penalty.
Issue 2 – A cap on the contractor’s liability in general damages
The court considered whether, if the LDs clause had been found to be a penalty and unenforceable, the cap would still apply to general damages for delay. The clause itself provided:
‘Liquidated damages will apply… at the rate of £25,000 per week (or pro rata for a part of a week) up to an aggregate maximum of 7% of the final Trade Contract Sum…’
Outcome
Commercially, both parties had understood there to be a cap on delay damages. The cap was not independent of the LDs provision but part of it. If the LDs provision had been held to be a penalty, then the cap would have fallen with it.
Conclusion
- In the case of construction contracts (as opposed to shipping cases) a provision that clearly provides for payment of LDs for failure to complete the whole of the works on time, can still be operable and valid despite the contract allowing the employer to take partial possession or early use without any reduction in the rate of LDs if that is the clear intention of the provision. There is no need of a mechanism for calculating a reduction in the rate when the intention is that the full rate should still be payable.
- Such a provision will not be struck down as being regarded as penal and unenforceable, unless the amount payable in the event of partial possession or early use being taken is “extravagant, exorbitant or unconscionable”.
- If a provision for LDs is struck down applying the above, it would fall entirely. Thus a limitation of liability which is part of the LDs provision and not independent of it, would not apply to a claim for common law damages for delay based on actual loss.
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