Liquidated damages and partial completion
Ballymore v Dobler (High Court) [2021]
It is now relatively rare for liquidated damages provisions in contracts between commercial organisations to be declared by the courts to be a penalty and therefore unenforceable. However, it does still happen occasionally, and this case might have been considered to be a possible candidate. In the long run, however, this case may be more significant for what the court also said about an LDs clause operating as a cap on liability.
Facts:
This was a case involving a liquidated damages (LDs) clause for delay in connection with a sub-contract under which Dobler was responsible for certain façade and glazing works at 3 blocks of a residential development. As the work progressed, Ballymore took over part of the works as completed as it was contractually entitled to do. However, the LDs clause made no provision for a reduction in the sums payable to reflect partial possession. Interestingly, this was a case where it was the client who was claiming the LDs were void and unenforceable as a penalty as they wished to claim general damages for delay from its sub-contractor.
The contract contained the following provision “If the Contractor fails to complete the Works by the relevant Date for Completion the Employer may give notice that he requires the Trade Contractor to pay liquidated damages at the rate stated in the Trade Contract Particulars, or lesser rate stated in the notice”.
The Trade Contract Particulars stated that no LDs were payable for the first 4 weeks of delays and thereafter the rate was £25,000 per week up to an aggregate maximum of 7% of the total Contract Sum. The Contract specifically allowed for possession to be taken of part of the development prior to completion of the whole of the works.
The contractual Completion Date was 30th April 2018. The Contract did not specify separate completion dates for each block. Ballymore took over possession of two out of three blocks on the 15th June 2018. Completion of the final block was achieved in December 2018.
Decision:
The first question asked was whether the liquidated damages provision was a penalty and therefore unenforceable having regard to the provisions for partial take-over of the Works in the absence of any mechanism for reducing the level of liquidated damages to reflect such take-over?
The court said that as a matter of construction, the provisions of the contract were reasonably clear and certain. There was one completion date for the whole of the Works. Liquidated damages were payable at the rate set out in the Trade Contract Particulars for failure to complete the whole of the Works by the completion date. There was no reduction in the rate of liquidated damages where partial completion is achieved or the employer takes over part of the Works prior to practical completion.
The fact that the same rate of LDs applied irrespective of what combination of blocks were late being completed (and therefore different levels of loss would be incurred) “is certainly a factor that the court must consider”. However, the liquidated damages provision was held not to be unconscionable or extravagant so as to amount to a penalty. Firstly, the liquidated damages provision was negotiated by the parties, who both had the benefit of advice from external lawyers. Secondly, quantification of the damages that would be suffered would be difficult, particularly if part of the Works were completed on time. Different combinations of incomplete blocks could result in a wide range of loss. By fixing in advance the liquidated damages payable for late completion of the whole Works, the parties avoided the difficulty of calculating and proving such loss. Thirdly, it was not suggested by either party, that the level of LDs was unreasonable or disproportionate to the likely losses in the event of late completion of the work in any one or more of the blocks. In those circumstances, the liquidated damages provision was not found to be extravagant, exorbitant or unconscionable.
The second question arose out of the apparent discretion seemingly granted to Ballymore in relation to the serving of a notice claiming LDs. The court held that there were no grounds for an implied term requiring a discretion to be operated rationally. As a matter of construction, the clause in question was found to give Ballymore an absolute contractual right to deduct liquidated damages at the rate set out in the Trade Contract Particulars despite the use of the word ‘may’ and the fact that the clause appeared to give Ballymore the option to levy LDs at a lower rate.
The final question asked was whether, if the LDs clause was penal and therefore unenforceable, are general damages "capped" at the level of liquidated damages stated? The court did not actually need to determine this question as it had already said that the LDs clause was not penal. However, the court went on to give an opinion anyway. It said that “the objective understanding of the parties in the commercial context of the Contract would be that the provision served two purposes: first, to provide for, and quantify, automatic liability for damages in the event of delay; second, to limit Dobler's overall liability for late completion to a specific percentage of the final contract sum. The clear intention of the parties was that Dobler's liability for delay damages would be so limited”. Therefore, the clause in question “would operate as a limitation of liability provision, even if the liquidated damages were void or a penalty”.
Points to Note:
- The primary finding is consistent with a number of recent cases where the courts have regularly declined to find LD provisions as being penal.
- The finding that the cap on LDs would also act as a cap on liability is, to say the least, ‘surprising’ and there seems little in the drafting to justify the conclusion that was reached by the court. Be very careful to make sure that the drafting makes the intention clear. If a cap on LDs is not to operate as a cap on general damages, this should be clearly stated in exactly the same way that it should be made clear whether an LDs provision is an exclusive or non-exclusive remedy.