Loose talk costs money: Oral agreement to forego liquidated damages was valid

In declaratory proceedings, the court held that parties, through a telephone conversation, came to a binding agreement to forego liquidated damages. The court also provided some helpful discussion of some of the key considerations on the enforceability of liquidated damages.
The facts

Mansion Place Ltd (the Employer), a property developer, contracted with Fox Industrial Services Ltd (the Contractor) to build student accommodation under an amended form of the JCT Design and Build 2016. The performance of the Contract was delayed. The Contractor argued this was largely a result of COVID-19, but the Employer blamed the Contractor’s failure to use sufficient labour and resources.

Both parties’ managing directors discussed the dispute on a phone call, held while both were driving. The Contractor claimed this conversation resulted in a binding agreement that the Employer would forego liquidated damages in return for the Contractor not pursuing a loss and expense claim.

The Employer disagreed and levied liquidated damages. In the resultant adjudication it was held that the conversation did result in a binding agreement and, therefore, the Employer had no right to levy liquidated damages. The Employer sought a declaration that this was incorrect.

Aside from the oral agreement, the Contractor also argued that the liquidated damages claim failed because:

• Its notice of delay precluded the Employer from issuing a non-completion notice;
• The liquidated damages were a penalty. They were not result of a bespoke assessment of the loss suffered; and
• The mechanism for liquidated damages (partially calculated on bedrooms available), when applied in the context of partial possession, was inoperable.

The judgment

The court had to determine which account was a true reflection of the conversation based on “external or objective factors” such as contemporaneous documents, internal correspondence, and follow-up exchanges between the parties. The court found the Contractor’s account more convincing. Its director honestly believed a binding agreement had been made, had relayed the same to colleagues, and the court held that this was not a result of misinterpretation or wishful thinking.

The court held it reflected an exchange that included offer, acceptance and an intention to create legal relations; it was a binding agreement. The court also believed the agreement was a final abandonment of the Employer’s liquidated damages claim. It was not a waiver that could be rescinded at a later date.

However, in obiter, the Contractor’s other arguments were dismissed:

• The notice of delay did not, as a matter of course, preclude the issue of a non-completion notice;
• The liquidated damages were not wholly disproportionate. While substantial, the Employer had a legitimate interest in using them to incentivise completion of the units on time – student accommodation needs to be ready in time for term; and
• The liquidated damages were still operable. Though cumbersome, there was provision for calculating a proportionate reduction in liquidated damages.

Analysis

Much of this case concerned an assessment of facts concerning the oral agreement. It nonetheless demonstrates that conversations, even informal and off-hand ones, can be capable of forming binding agreements which can come back to bite. If it hadn’t been for the oral agreement, the Employer would have been entitled to liquidated damages amounting to nearly £370k. An expensive chat.

The enforceability of liquidated damages can also be difficult to grasp but this judgment helps as it made some interesting observations on the (often misunderstood) idea of liquidated damages as penalty clauses. Even substantial sums, and indeed potentially disproportionate ones, can be upheld provided that the Employer is pursuing a legitimate interest. This case provides a neat example.

Michael Comba is a Solicitor at Sharpe Pritchard LLP.

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