Make your mind up! Liquidated Damages clause upheld despite Employer’s challenge

Applying the penalty clause test as set out in Cavendish Square Holdings v Makdessi[2] , the TCC judge upheld the LDs clause in a judgment which demonstrates the Court’s reluctance to intervene in carefully negotiated commercial bargains.

Background

EWB engaged Dobler to carry out façade and glazing works at three residential blocks at the Embassy Gardens site in Nine Elms. The contract contained a provision which entitled EWB to LDs of £25,000 per week in the event of late completion, capped at 7% of the final contract sum. Whilst sectional completion did not apply, the contract provided that EWB could take early possession prior to practical completion, which it did in respect of two blocks.

After the works were certified as complete, disputes arose between the parties regarding the final account valuation. The key part of these disputes related to the extent and validity of LDs payable following delays to the final stages of the works. Over the course of three adjudications, EWB and Dobler switched positions as to the validity of the LDs clause, with each party taking turns to argue that the liquidated damages regime was void and unenforceable for uncertainty or because it operated as a penalty.

At the TCC, EWB asked the court for declarations as to the proper construction and effect of the LDs provisions. By this stage, EWB claimed that the LDs regime was void or unenforceable as a penalty because it did not take into account their early possession, and sought general damages for delay which they claimed would not be subject to the 7% cap. Dobler argued that the LDs regime allowed for a lower rate of LDs to be levied, which avoided turning the clause into penalty in the event that parts of the work were taken over. It also argued that there was an implied requirement for EWB to act reasonably when deciding whether to levy a lower rate.

Judgment

Applying the test set out in the Makdessi case the Court decided that the LDs clause was valid and enforceable. This was because:

• The provisions were reasonably clear and certain and capable of being operated.
• The LDs were not a penalty because:
• They had been negotiated by the parties with professional input;
• EWB had a legitimate interest in making sure Dobler completed the works as a whole by the agreed date;
• By fixing the rate of damages, the parties avoided the difficulty of calculating and proving any loss suffered by EWB; and
• There was no evidence to suggest that the level of damages was unreasonable or disproportionate to EWB’s likely losses in the event of late completion of any one of the blocks.

As part of her reasoning, Mrs Justice O’Farrell also stressed that “[t]he court should be cautious about any interference in the freedom of the parties to agree commercial terms”, especially where they have benefited from legal advice.

Though ultimately moot given the conclusion reached above, the Court disagreed with Dobler’s argument that there was an implied term that the discretion to set the rate of LDs must be exercised reasonably: there was no need for such a term to make the provision work. As such, if the LDs provision had been found to be unenforceable, an implied term would not have saved it.

The court also considered whether general damages would have been subject to the 7% cap. Interestingly, it was held that they would, as in the court’s view the commercial purpose of the provision had been twofold: (i) to provide for automatic liability for damages in the event of delay; and (ii) to limit Dobler’s overall liability for late completion to a specific percentage of the contract sum.

Comment

EWB v Dobler is unusual in that an Employer challenged its own entitlement to LDs. The parties’ changing positions over the course of the dispute was playfully described as a “volte-face” by the judge. However, there was almost certainly a commercial tipping point during the dispute which explains EWB’s decision to seek to recover its actual losses as general damages, as opposed to the lesser sums it was entitled to under the LD regime.

For Employers on construction projects, there are two key lessons to be learned from this case:

Clearly drafted, commercially agreed LDs clauses represent the most cost effective and certain means of recovering damages for delays even where the Employer has taken partial possession of the site; and
Limits on a Contractor’s liability should allow enough scope for the full recovery of the Employer’s losses in the event of likely breaches, especially as courts may interpret such caps – even those contained in an otherwise unenforceable penalty clause – as being a general limitation of liability.

Clare Mendelle is a Professional Support Lawyer and James Goldthorpe a Paralegal at Sharpe Pritchard LLP.

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

[2] [2015] UKSC 67

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