The question of damages continues to occupy the English courts this year, following the Supreme Court ruling in Triple point. The High Court held that the damages (“LDWill continue to apply despite partial possession of the works by an employer. In addition, and obiter, if the LOs were inapplicable, Justice O’Farrell found that the LOI cap could extend to general damages.
Key points to remember
- Depending on the correct interpretation of the contract, a single rate of LD may be valid and enforceable in cases where an employer has taken partial possession of the work, unless the contract provides otherwise;
- In obiter, depending on the precise wording of the contract, a ceiling on DL may extend to general damages where the LD clause is inapplicable; and
- Entrepreneurs must therefore consider whether they wish to reflect partial possession of works in the GL provision through a proportional reduction of the applicable GLs.
Background
Eco World – Ballymore Embassy Gardens Company Limited (“ISF“) engaged Dobler UK Limited (“Doblerâ€) To carry out the design, supply and installation of façade and glazing works for a three-block residential project in Nine Elms, London. Blocks B and C were taken over by the employer shortly after the contractual completion date, with the completion of work on Block A subsequently taking place.
The contract, a modified JCT 2011 construction management form, provided for LDs of £ 25,000 per week, capped at a maximum of 7% of the final contract amount. The contract allowed ISF to take early possession of part of the works, but it did not provide for a corresponding reduction mechanism for LOs in the event of partial possession.
As a result of several decisions, ISF initiated Part 8 proceedings in the Technology and Construction Tribunal seeking statements that:
- the LD clause was null and unenforceable in the event that it did not take into account a reduction in the LD exigible in the event of partial recovery;
- that ISF was therefore entitled to claim general damages for delay; and
- recoverable general damages should not be limited by the ceiling of 7% on LOs.
Decision
The contract provided that partial takeover did not equate to practical completion. Therefore, the LDs could be recovered until all the work is completed, as the practical completion could only be achieved upon the completion of the three blocks.
As to whether the clause was unenforceable or void as a penalty because the contract did not reduce the level of LOs following a partial takeover, O’Farrell J. applied the test stated in Cavendish Square Holding BV v Makdessi [2015] UKSC 67, that is, whether an LD clause is enforceable, depends on whether it is so abusive or extravagant as to constitute a sanction. Justice O’Farrell ruled that this was not a penalty for the following four reasons:
- The DL provision was negotiated by the parties, both of whom benefited from the advice of outside lawyers;
- ISF had a legitimate interest in enforcing Dobler’s primary obligation: to complete all work by the agreed completion date;
- By fixing the DL rate for late completion of all the works, the parties have avoided the difficulty of calculating and proving the losses suffered by ISF when only part of the work has been completed; and
- The level of LDs of £ 25,000 per week after a grace period of 4 weeks and up to a maximum of 7% of the contract amount was reasonable and proportionate.
The LD provision was therefore not null and / or inapplicable simply because it did not provide for a reduction in LD in the event of partial takeover by the employer. Justice O’Farrell said the following:
From an interpretive point of view, the provisions in this case are reasonably clear and certain. There is a completion date for all of the Works. Damages are payable at the rate stated in the details of the commercial contract for failure to complete all of the work by the completion date. There is no reduction in the rate of damages in the event of partial completion or if the employer takes over part of the work before practical completion. Such provisions can be exploited. (I underline)
In addition, and obiter, it was held that even if the LD clause were null or unenforceable, the contractual ceiling on LD would have the effect of limiting the general damages that ISF sought to recover. Although not required to address this issue, given that the LD clause was valid, the Court considered that limiting the application of the cap to only LDs would be too literal. The parties’ clear intention was that Dobler’s liability for damages for delay be limited to a specific percentage of the final contract amount, whether under DLs or general damages. In any event, the Court’s comments on this point remain convincing and it remains to be seen how this line of jurisdiction will develop in the future. Ultimately, parties should pay close attention to LD clauses and consider their broader implications.
