Liquidated damages and partial possession in construction contracts

In the Olympic spirit, the TCC dives head first into the proper construction and effect of liquidated damages provisions and partial possession in Eco World Ballymore Embassy Gardens Company Limited v Dobler UK Limited.

The judgment handed down this week by Mrs Justice O’Farrell DBE concerned a Part 8 claim for declarations as to the proper construction and effect of the liquidated damages provisions and associated liability caps where the Employer had taken partial possession of the works.

Fladgate acted for the successful Defendant (Dobler), instructing James Bowling of 4 Pump Court as counsel.

The facts

The Claimant (EWB) engaged Dobler to carry out the design, supply and installation of the façade and glazing works for three residential blocks as part of a prestigious development known as Embassy Gardens Phase 2 in Nine Elms, Vauxhall.

Under the contract:

liquidated damages were payable in respect of late completion of the works at a weekly rate up to a maximum of 7% of the final contract sum; and
EWB was entitled to take over part of the works prior to practical completion.

The Completion Date was extended to 25 June 2018. On 15 June 2018, EWB took over two of the three blocks and the final block was completed on 20 December 2018.

Disputes arose between the parties in relation to Dobler’s final account, including the amount of liquidated damages that were payable. Following three adjudications, EWB brought a Part 8 claim seeking a determination of the following questions:

Whether the liquidated damages provisions were void and/or unenforceable; and
If so, whether EWB was entitled to claim general damages for delay without reference to the cap contained in the liquidated damages provisions.

EWB argued that the liquidated damages clause was void and/or unenforceable because there was not a contractual mechanism to reduce the level of liquidated damages once EWB had taken partial possession of the works. Accordingly, EWB considered that it was entitled to claim general damages for delay, and that those damages were not limited by the liquidated damages cap.

Dobler argued that the liquidated damages clause was valid and enforceable. As EWB was able to levy liquidated damages at the specified level “or any such lesser rate”, there was an effective mechanism for reducing liquidated damages. Alternatively, if the liquidated damages was found to be void and/or unenforceable, general damages would be limited in accordance with the liquidated damages cap.

The judgment

The Judge held that the liquidated damages clause was valid and enforceable. Applying the established test in Makdessi [1]:

The liquidated damages provision was negotiated by the parties and the Court should be slow to interfere in the commercial bargain agreed between the parties;
EWB had a legitimate interest in enforcing the obligation of Dobler to complete the works on time. Late completion was likely to have an adverse impact including potentially causing delay and disruption to the project as a whole;
By fixing liquidated damages in advance the parties avoid the difficulty of calculating and proving such loss, particularly in circumstances where only part of the works were completed on time; and
There was no suggestion that the liquidated damages were unreasonable or disproportionate to EWB’s anticipated losses.

Interestingly, the Judge held that even if the liquidated damages provision was deemed to be void and unenforceable, the cap of 7% of the overall contract sum would still apply to any entitlement to general damages for delay. The purpose of the liquidated damages provision in the commercial context was twofold – firstly to quantify automatic liability for delay damages, and secondly to limit Dobler’s overall liability for late completion to 7% of the final contract sum. Therefore, “the clear intention of the parties was that Dobler’s liability for delay damages would be so limited.”

Comment

It is extremely unusual for an employer to challenge its own entitlement to liquidated damages. This welcome judgment confirms that the Court will give effect to liquidated damages and liability caps which have been carefully negotiated by the parties, save in exceptional circumstances.

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