A recent decision in the TCC has provided guidance as to whether a liquidated damages clause which has been found to be invalid and unenforceable can operate as a cap on a contractor's liability for general delay damages. 

What was the legal background?

Liquidated damages provisions are common in construction contracts. The Supreme Court (Triple Point 2021) recently confirmed that the courts will try to give effect to such clauses. Liquidated damages provisions provide certainty to both employers and contractors since they fix in advance the damages payable for delay and limit the contractor's exposure to unknown and open-ended liability. The Triple Point decision also made it clear that in the absence of clear express wording to the contrary, an employer's accrued entitlement to liquidated damages survives the termination of the contract.

However, there are circumstances where liquidated damages provisions are unenforceable such as where "the provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation…." (Cavendish Square v Makdessi 2015) and is construed as a penalty, or where the provision is void for uncertainty. In those circumstances, employers will instead have a right to claim general delay damages. The TCC in the recent decision of Eco World – Ballymore Embassy Gardens v Dobler UK (2021) has suggested that in those circumstances, the level of general delay damages recoverable will be capped at the level of the (unenforceable) liquidated damages. 

What were the facts of Eco World – Ballymore Embassy Gardens v Dobler UK (2021)?

The dispute concerned the design, supply and installation of façade and glazing works for a building forming part of a development in Nine Elms, London, under an amended JCT 2011 Construction Management Trade Contract. The contract provided that liquidated damages were to be paid (1) at a rate of £nil per week for the first 4 weeks; and (2) thereafter, at £25,000 per week up to an aggregate maximum of 7% of the final trade contract sum.

Following a series of adjudications, the employer, Eco World, brought proceedings seeking a declaration as to the proper construction and effect of the liquidated damages clause. Eco World claimed that since there were no contractual provisions to reduce the level of liquidated damages to reflect early possession of the premises, the liquidated damages clause was void and/or unenforceable. As a result, Eco World claimed that they were entitled to recover general delay damages and that these were not limited by the void or unenforceable liquidated damages cap. 

What did the court decide?

The Court held that the liquidated damages provision was valid and enforceable; the clause was fully operable and continued to apply to the reduced scope of the outstanding works.  The Court then went on to consider the question of whether the employer's entitlement to general delay damages would be capped by the level of the liquidated damages had the clause been found to be void or unenforceable. In this case, O’Farrell J concluded that the "objective understanding of the parties in the commercial context … 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 [the contractor's] overall liability for late completion to a specific percentage of the final contract sum".  While a literal reading of the 7% cap suggested that the cap would apply only to the liquidated damages and not general delay damages, the Court was satisfied  that the clear intention of the parties was to limit the contractor's overall liability for delay damages; thus, a cap would exist even if the clause had been void or unenforceable as a penalty.  

The commercial context 

As in the Triple Point case, the courts continue to look to the commercial context to construe contractual provisions. While each case will depend on the particular facts and circumstances, and the specific bargain struck between the parties, the Court was satisfied in Eco World that, commercially, both parties had understood that there was a limitation on the contractor's liability for delay.