Liquidated damages, force majeure and ‘guarantees’
GPP Big Field v Solar EPC Solutions (High Court) [2018]
This case involved a number of topical issues including whether a ‘guarantee’ clause was, in reality, an indemnity and therefore subject to different legal principles.
Facts:
This case concerned five contracts relating to the building of solar power generation plants in the UK. GPP's primary claim under each of the contracts was for liquidated damages for the contractor's failure to commission the plant by the date specified in the relevant contract. The contractor became insolvent. As a result, GPP claimed against Solar’s parent company for damages as guarantor and/or indemnifier under four of the contracts. There were a number of different questions that fell to be decided
- Was the LDs provision in each contract an unenforceable penalty? The sum payable was explicitly described as a "penalty". Each of the contracts provided for exactly the same delay payment of £500 per day per MWp, even though each of the plants had a different output capacity and different prices payable for any electricity generated. It was therefore argued that the penalty payable could not be a genuine pre-estimate of loss.
- Did LDs continue to be payable even after the termination of a contract?
- Was the contractor delayed by an event of force majeure and, if so, did it comply with the contractual requirements for giving notice? Force majeure was defined narrowly. It comprised:
- Adverse weather if this meant that it would be impossible or substantially dangerous for the contractor to carry out the works.
- Mutiny, disturbance, commotion or civil disorder.
- Natural catastrophes.
- Acts of terrorism or sabotage.
- Solar claimed that the contractor was prevented from trenching and cable laying along the route originally specified for the permanent connection to the national grid because of vigorous opposition by local residents. It said the consequent public demonstrations and "human barriers" meant the contractor had to abandon this route in favour of a different and more difficult route, which delayed it by six months.
- Was the parent company liable as an indemnifier or as a guarantor and, in either case, was that liability discharged by:
- GPP's failure to disclose certain "unusual features" of the contract; and/or
- a significant change to the scope of work under a contract?
- Solar’s parent company was party to four of the contracts under which it guaranteed due and punctual performance of the contract and gave a commitment that “If the Contractor fails to observe and perform any of its duties or obligations … [Solar] (as a separate and independent obligation) shall indemnify [GPP] against all loss, debt, damage, interest, cost and expense incurred by reason of such failure."
Decision:
The court held that:
- The LDs provision was not a penalty and was enforceable. The court said
- Provisions of this kind are common. GPP and the contractor were experienced and sophisticated commercial parties of equal bargaining power who were well able to assess the commercial implications of the clause.
- The sum specified was not in any way extravagant or unconscionable in comparison with the legitimate interest of GPP in ensuring timely performance.
- The figure of £500 per day per MWp was not an exorbitant or unconscionable estimate of the likely loss caused by any delay in commissioning a plant. The daily payment was not extravagant and unconscionable in comparison with the greatest loss that might have been expected when the contract was made to be likely to follow from the breach.
- It is in the nature of LD clauses that they are often used in cases where precise prediction of the likely loss is difficult.
- The fact that the clause in question referred to a "penalty" was only "an equivocal indication". It was the substance of the provision that was important not its label.
- LDs continued to be payable in respect of the period after termination of the contract.
- The contractor was not delayed by a force majeure event and, in any event, did not give valid notice of force majeure. The court concluded that "…the evidence does not establish that the cause of that delay was 'disturbance, commotion or civil disorder' or 'acts of… sabotage' within the meaning of [the contract]. Instead, the delay was caused by the contractor's assessment that, given the strength of the local opposition, it was unlikely to get the necessary planning permissions for its original intended route. Under the terms of [the] contract it was the contractor's responsibility to obtain these."
- The court also concluded that, in any event, the contractor did not give sufficient notice to entitle it to rely on the force majeure provision. The contract required a party relying on force majeure to notify the other party of the force majeure event "without unjustified delays". The general clause governing the giving and receiving of notices under the contract also had to be complied with. On the evidence, the contractor did not give sufficient notice of the circumstances of the alleged event of force majeure and, in any event, did not give notice without delay. The judge said that the period of delay began at the start of August 2012 but notices were only given by e-mail on the 28th November.
- The parent company was liable for LDs because it gave an indemnity not a guarantee. As a result, doctrines applicable to the law of guarantees did not apply. The court concluded that the contract created an indemnity rather than a guarantee because:
- It was described as "a separate and independent obligation and liability".
- It was expressed as a promise to "indemnify" and was written in language characteristic of indemnities.
- It did not include any of the "boilerplate" wording that would normally be found as part of a guarantee clause in a formal contract. The equitable protections relied on by Solar apply only to contracts that are properly characterised as contracts of guarantee, and do not apply to contracts of indemnity. These equitable protections are:-
- A duty to disclose to the guarantor any contract or other dealing between creditor and debtor which changes the position of the debtor from what the guarantor might naturally have expected;
- the rule in Holme v Brunskill by virtue of which any variation of the underlying contract (made without the consent of the guarantor) which is not insubstantial or incapable of prejudicing the guarantor will discharge the guarantee.
- It is now very rare for LDs provisions in commercial contracts to be struck out. In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption is that the parties themselves are the best judges of a provision dealing with the consequences of breach.
- The orthodox view remains that LDs would not be payable after termination because, at this point, the contractor loses control of the time for completion, especially if another contractor is employed to complete the works. General damages in respect of the period after termination would, however, be recoverable.
- It seems to make good sense that contractual "notice" provisions apply equally to the notification requirement of force majeure provisions. Parties to a commercial contract must make sure that they understand, and comply strictly with, its notice requirements. In extreme cases, a failure to do so can deprive a party of a remedy or defence to which it would otherwise be entitled.
- Whether a particular contractual promise is to be classified as a guarantee (secondary obligation) or an indemnity (primary obligation) depends upon the nature of the obligations created by it. This depends to at least some degree upon the particular words used although use of ‘indemnity’ language by itself should not be determinative.