Liquidated damages – Still payable despite practical completion of a Relevant Part

Much has been written about the liquidated damages provisions in construction contracts over the years, centring on whether they act as genuine pre-estimates of loss, or should be deemed void and unenforceable as a penalty. But what is the position where an employer takes early possession and yet the contract provides for one Date for Completion and a single rate of liquidated damages?

This was the position considered by the courts in the recent case of Eco World – Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd.

The facts

Here, the Claimant (EWB) engaged the Defendant (Dobler) as trade contractor under an amended JCT Trade Management Contract to carry out the design, supply and installation of the façade and glazing works for Building A04, part of a development of apartments known as Embassy Gardens Phase 2, Nine Elms, London SW8 5BA. Building A04 comprised three separate residential blocks – A, B and C – which were to be arranged around a single courtyard.

The contract did not provide for the Works to be completed in Sections. Instead, the original completion date for the whole of the Works was 21 August 2017. However, the project was delayed and so the parties postponed the Date for Completion to 30 April 2018 (the New Completion Date) pursuant to a deed of variation. Unfortunately Dobler did not meet this deadline either. EWB took over possession of part of the Works, being Blocks B and C, on 15 June 2018, with practical completion of the whole of the Works not certified until 20 December 2018.

Following practical completion disputes arose between the parties as to the final account valuation, including claims for extensions of time and, principally, whether Dobler was liable for liquidated damages in respect of Blocks B and C for the period between partial possession on 15 June and practical completion on 20 December 2018.

These disputes were referred to adjudication, with the second adjudicator deciding that:

1. EWB was entitled to deduct liquidated damages for the period from the New Completion Date, until the date of practical completion;
2. Dobler was entitled to an extension of time to the Date for Completion, until 25 June 2018, meaning no liquidated damages were payable for that period; and
3. EWBs take-over of Blocks B and C in June 2018 amounted to practical completion of those parts of the Works, with the effect that Dobler was not liable for liquidated damages after that date.

The third adjudicator held that he was bound by the decision of David White in the second adjudication, and so EWB issued Part 8 proceedings seeking declaratory relief that that decision was wrong and not binding on the parties, with the effect that EWB was entitled to recover liquidated damages from Dobler.

Held

Mrs Justice O’Farrell DBE disagreed with the decisions of the two adjudicators and held that Dobler was liable for liquidated damages for the whole of the Works until practical completion in December 2018, notwithstanding that EWB had taken over possession of Blocks B and C some months earlier.

In reaching her decision, Mrs Justice O’Farrell DBE considered clause 2.32 of the contract which provided that:

“2.32.1 If the Trade Contractor fails to complete the Works or works in a Section by the relevant Date for Completion of a Section or the Works, the Employer may … give notice to the Trade Contractor which shall state that for the period between the relevant Date for Completion of a Section or the Works and the date of practical completion of the Works or Section that:

2.32.1.1 he requires the Trade Contractor to pay liquidated damages at the rate stated in the Trade Contract Particulars, or lesser rate stated in the notice, in which event the Employer may recover the same as a debt; and/or

2.32.1.2 that he will withhold or deduct liquidated damages at the rate stated in the Trade Contract Particulars, or at such lesser stated rate, from sums due to the Trade Contractor …”

The rate of liquidated damages, as set out in the Trade Contract Particulars was:

“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 fact that the liquidated damages provisions did not provide a method for reducing the amount of LDs payable where partial possession had taken place mattered not. This omission did not render clause 2.32 void for uncertainty, since the parties had clearly agreed a sum of liquidated damages which would apply in the event that Dobler failed to comply with its contractual obligation to complete the whole of the Works by the New Completion Date.

Similarly, this rate of liquidated damages did not represent a penalty in circumstances where partial possession had taken place, since “[the] court should be cautious about any interference in the freedom of the parties to agree commercial terms and allocation of risk in their business dealings”, particularly where they have had legal representation in negotiating the contract.

Mrs Justice O’Farrell DBE noted that it was clearly in the best interests of the parties to agree a rate of liquidated damages applicable to late completion; since it would allow them to best manage this risk in the contract. Similarly, there was no evidence to suggest that the rate of damages at £25,000 per week with four week grace period and cap of 7% of the contract sum was unreasonable or disproportionate.

Takeaway

Employers should take comfort from this decision, in that it clarifies liquidated damages will continue to apply notwithstanding they may have taken partial possession. Conversely, if contractors wish for their liability for liquidated damages to be reduced, it acts as a reminder that clear amendments are required to ensure appropriate deductions can be made where practical completion of a Relevant Part is deemed to have been achieved.

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