The perils of poor drafting of liquidated damages provisions

Parties to construction contracts frequently use liquidated damages (“LDs”) clauses as a means of pre-determining a remedy for losses which can arise from delays to works.

Historically, LDs clauses could be struck out by the courts as ‘penalty clauses’ unless they represented a “genuine pre-estimate of loss”. However, the 2015 Supreme Court case of Makdessi re-formulated this position; courts can now allow LDs to extend beyond a pre-estimate of loss where they are commercially justifiable for protecting the parties’ interests, provided such clauses do not stray into being unconscionable or extravagant.

The new position means that courts are less likely to interfere with LDs clauses which have been freely negotiated by commercial parties. This increasingly ‘hands-off’ approach has given rise to uncertainty as to whether an unenforceable LDs clause will be struck out in its entirety, or if parts of it can survive to affect the rest of the contract.

The Technology and Construction Court (“TCC”) recently came to conflicting decisions on whether LDs clauses which have been found to be void or unenforceable could still provide an upper limit on the liability for general damages due to delay in a construction contract.

Eco World – Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd [2021]

In Eco World, the employer (Eco World) ran into a dispute with its contractor (Dobler) over delays to façade and glazing works on three residential apartment blocks. The parties had entered into an amended JCT Construction Management Trade Contract under which there was a bespoke LDs clause. There was no provision for completion of the works in sections; in other words, completion of works on two of the three blocks would not lessen Dobler’s rate of LDs. The LDs clause included a four-week grace period, LDs of circa £25,000 per week thereafter and an express cap on liability of 7% of the total contract sum.

Dobler argued that the lack of reduction in LDs for partial possession being taken by Eco World meant that the LDs clause was unenforceable as it was penal in nature rather than protecting a legitimate commercial interest.

The TCC rejected this argument, deciding that Eco World had a legitimate interest in enforcing completion of the whole of the works, since late completion of any part of the works would have an impact on the project as a whole. The clause was sufficiently clear, reasonable in amount, and the inclusion of a grace period and an express cap on liability were taken into account in deciding that the LDs clause was not unreasonable or disproportionate enough for it to be a penalty.

Obiter, the TCC considered whether, if the LDs clause had been unenforceable, the cap on LDs could still act as a cap on general damages under the contract. The court held that the LDs clause in this case would survive as a limitation on liability on the basis that the “objective intention” of the parties was for the cap to apply to all “delay damages”. In the commercial context, the LDs clause was intended to serve two purposes: to help the parties know the level of automatic liability for damages in the event of a delay of the works and, separately, to limit the contractor’s liability to a specific percentage of the contract sum. It was the parties’ “clear intention” that this limitation on liability would exist even had the LDs clause itself been held to be unenforceable.

Buckingham Group Contracting Ltd v Peel L&P Investments and Property Ltd [2022]

The decision in EcoWorld was contrasted with that in Buckingham in respect of non-enforceable LDs provisions capping general damages. Here, the contractor (Buckingham) was engaged by Peel under an amended JCT Design and Build Contract 2016. This contract included a bespoke LDs provision and separate schedule purely for LDs which set weekly lump sums applicable to delay for each section of the works, and included the wording “Cap on Maximum LADs 7.5% £1,928.253.77”.

Following delays and attempts by Peel to enforce the LDs clause, Buckingham commenced proceedings seeking a declaration that the LDs clause was unenforceable and that the cap on LDs should limit the amount of general damages recoverable for delay. Buckingham did not argue that the LDs were a penalty, but instead argued that the LDs provisions were defectively drafted and therefore void for uncertainty, as they included inconsistent dates for practical completion, inconsistent rates of LDs and ambiguity as to the contract sum. These arguments failed in this instance, and the court held that none of these issues were fatal to the LDs clause.

Notwithstanding this decision, the TCC considered, obiter, whether the LDs limitation provisions could still cap contractual damages if the LDs clause had been unenforceable. In this case, the TCC considered that the specific language used to cap LDs was not broad enough to encompass any alternative liability which could arise in general damages. The wording “Cap on Maximum LADs 7.5% £1,928.253.77” could not relate to anything other than LDs. Additionally, the location of this contractual provision, within a schedule specifically dedicated to LDs, was considered an important factor in differentiating the parties’ intentions regarding LDs from general damages. The court relied on Makdessi as authority that if a LDs clause is void, it is wholly unenforceable. Accordingly, there was no restriction on general damages under the contract.

Key take-aways

The judgment in Buckingham did not give negative judicial treatment to the decision in Eco World, despite the seemingly opposite views displayed. This may leave employers and contractors feeling uncertain of the key factors affecting how the courts would view LDs provisions in their own construction contracts.

Whether or not a void LDs clause may act as a limitation on general damages appears to depend on the construction of the clause in question, which will be unique to the circumstances of each case. Courts will in all likelihood infer the “objective understanding” of the parties from the drafting and the commercial context.

Owing to the nuanced and seemingly unpredictable interpretations being applied to LDs clauses by the courts, prudent and specific drafting is the best way to ensure that such clauses have the desired effect. Contractors and employers would be sensible to seek advice when drafting LDs provisions, particularly in respect of any caps or limitations in bespoke LDs provisions, both to avoid disputes and make the parties’ intentions clear at the outset of a project.

Edwin Coe’s Construction team, headed up by Brenna Baye, is experienced in drafting bespoke amendments to construction contracts and handling construction-related contractual disputes, and is on hand to provide advice as required.

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