In Eco World – Ballymore Embassy Gardens Company Limited v Dobler UK Ltd [2021] EWHC 2207 (TCC) the court was asked to make declarations as to the proper construction and effect of the liquidated damages provisions in a construction contract between the Claimant ("EWB") and the Defendant ("Dobler"), in circumstances where EWB had taken over part of the works as complete.

Facts

Dobler was engaged by EWB to carry out the design, supply and installation of the façade and glazing works for three of the apartment blocks at the development known as Embassy Gardens, Nine Elms, London. The contract was in the form of a JCT 2011 Construction Management Trade Contract, with amendments.

Dobler started work on 8 August 2016. The original completion date was 21 August 2017, but, by a Deed of Variation the parties agreed an extended New Completion Date of 30 April 2018.

The Works were not completed by the New Completion Date of 30 April 2018. During the week ending 15 June 2018, EWB took over Blocks B and C, but EWB did not issue a practical completion certificate in respect of these parts of the Works. Then on 20 December 2018 the Works were certified as having achieved practical completion.

The issue of and applicability of liquidated damages arose during a dispute over the value of the final account.

The Contract

The contract provided that liquidated damages were payable in respect of late completion of the Works at the following rate:

"The following rates of liquidated damages will apply for the first 4 weeks (inclusive) of delay in completion of the Works beyond the Date for Completion:

  • £nil per week or pro rata for part of a week.

Liquidated damages will apply thereafter at the rate of £25,000 per week (or pro rata for part of a week) up to an aggregate maximum of 7% of the final Trade Contract Sum…"

The Contract did not contain any provision for sectional completion or specify separate completion dates for each block, but it did allow EWB to take early possession of part of the works,.

The issue for the court was whether, on a true construction, the clause providing that liquidated damages were payable on late completion, was penal and/or unenforceable, having regard to the provisions for partial take-over of the Works and any mechanism (or lack thereof) for reducing the level of liquidated damages to reflect such take-over.

EWB's position was that the liquidated damages clause is void and/or unenforceable. The contract permitted EWB to take partial possession of the works in advance of practical completion, but it did not contain any mechanism for reducing the level of liquidated damages to reflect such early possession. In those circumstances, EWB is entitled to claim general damages for delay, including any substantiated damages in excess of the cap on liquidated damages that the parties had agreed in the contract.

Dobler's position was that the liquidated damages clause is valid and operable. They claimed there was an effective mechanism in the contract for reducing liquidated damages when partial occupation is taken. If the court did find the liquidated damages clause was penal and void, then Dobler claimed that general damages were nevertheless capped at the level of liquidated damages in the contract

The Decision

The Court found that the liquidated damages provision was not unconscionable or extravagant so as to amount to a penalty and was therefore valid and enforceable for the following reasons:

  1. The LADs provision was negotiated by parties who had taken legal advice. The court would be cautious about any interference in the freedom of the parties to agree commercial terms and allocate risk in their business dealings.
  2. EWB had a legitimate interest in enforcing the primary obligation of Dobler to complete the Works as a whole by the New Completion Date. Late completion of any part of the Works was likely to have an adverse impact on the work of following trade contractors carrying out fit out and other finishing works, causing not just delay but also disruption to the project as a whole. Late completion of Blocks B and/or C would expose EWB to liability for liquidated damages to the local authority. Late completion of Block A would expose EWB to the risk of losing purchasers for the apartments.
  3. Quantification of the damages that would be suffered by EWB would be difficult, particularly if part, but not all, of the Works were completed on time. Different combinations of partially incomplete blocks could result in a wide range of the categories 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.
  4. There was no evidence before the court that the level of damages 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 forming part of the Works.

Comment

The case provides a helpful and in depth analysis on the interpretation of liquidated damages clauses and whether they are penal and/or unenforceable.

The take home point is that the court will be slow to find that a liquidated damages clause is a penalty clause.

The judgment also reviews similar cases dealing with the enforceability of liquidated damages provisions in partial possession scenarios which had decided differently. The key difference in those causes was the relevant clause was found to be void for uncertainty. This reiterates the importance of clearly reflecting the parties’ intentions when drafting. If the contract allows for partial possession and the parties intend for liquidated damages to be reduced accordingly, the contract must state that and provide a mechanism for reducing the damages.