Does a liquidated damages clause which has been found to be void and / or unenforceable nevertheless operate to limit a contractor's liability for general damages for delay? This issue was decided in two recent cases – one from England, the other from Singapore – with opposing conclusions reached.
Introduction
Although the UK Supreme Court has recently reaffirmed that the English courts will seek to uphold agreements between parties to pre-determine damages in their contracts (see here), there are circumstances where a contractual liquidated damages ("LDs") clause will be found void and / or unenforceable, for example:
- where an LDs clause is construed as a penalty; or
- where an employer has committed acts of prevention, setting time 'at large'.
In the latter situation, an employer will typically seek to recover general damages for any delays that have occurred for which the contractor is responsible.
The question of whether such general damages will be capped at the level of LDs in the contract has, until now, received relatively little judicial consideration by the common law courts.
This issue has now come under scrutiny in two judgments handed down this month, as discussed below, in which the English Technology and Construction Court ("TCC") and the High Court of Singapore have taken diametrically opposing views.
Eco World – Ballymore Embassy Gardens Company Limited v Dobler UK Limited [2021] EWHC 2207 (TCC) (3 August 2021)
The dispute arose out of a contract between EWB, the employer, and Dobler, its contractor. Dobler had been engaged to design, supply and install 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 included an LDs clause which provided that the contractor was to pay LDs of £25,000 per week, capped at 7% of the final contract sum.
Following a series of adjudications, EWB commenced Part 8 proceedings before the TCC, seeking declarations that:
- The contractual LDs provisions were void and / or unenforceable, since EWB had exercised a contractual right to take early partial possession of the works, but the contract contained no mechanism for reducing the level of LDs to reflect this;
- EWB was therefore entitled to claim general damages for delay; and
- The recoverable general damages should not be limited by reference to the contractual cap on LDs.
Dobler contended that the LDs clause was valid and operable and that there was an effective mechanism for reducing LDs in the event of partial possession. In the alternative, Dobler submitted that if the LDs provision were held to be unenforceable, it should nevertheless act as a cap on general damages.
On the first issue, O'Farrell J ruled that the LDs provision remained valid and enforceable.
On the second issue she concluded that even if the LDs clause had been found to be void and / or unenforceable, it would nevertheless operate as a cap on the general damages that EWB could recover. She observed that on its true construction, an LDs clause may also operate as a limitation of liability provision. When the clause in question, together with the Trade Contract Particulars, was construed in accordance with established principles of contractual interpretation, she held that it would operate as a limitation of liability provision, even if the LDs were void and / or a penalty. This was on the basis that the "objective understanding of the parties in the commercial context" was that the LDs provision "served two purposes", and thus that the 7% cap would represent an overall liability cap for late completion.
Crescendas Bionics Pte Ltd v Jurong Primewide Pte Ltd [2021] SGHC 189 (10 August 2021)
In this case the High Court of Singapore took a conflicting position, ruling that a contractual LDs cap would not constrain the recovery of general damages for delay. Prior High Court and Court of Appeal judgments on liability had found that:
- The completion of Biopolis 3, a seven storey multi-tenanted biomedical sciences business park development, had been delayed by a total of 334 days.
- Crescendas, the employer, had committed several acts of prevention and was responsible for 173 days of delay.
- As a result, the LDs provisions had been rendered inoperable; Crescendas was not entitled to claim LDs in circumstances where its own acts of prevention had made it impossible for Jurong, the contractor, to complete on time.
- Jurong was responsible for the remaining 161 days of delay and was liable to Crescendas for general damages in respect thereof.
The current proceedings related to the assessment of such general damages. The first issue to be determined was: what was the effect of the LDs cap on the claim for general damages?
Jurong contended that any general damages payable for delay could not exceed the LDs that Crescendas could have obtained under the contractual LDs provisions, had it not committed the acts of prevention. The parties' "fixation" on the LD rates during negotiations was evidence that they contemplated these would act as a cap on the total amount of general delay damages. In the alternative, it submitted that the contractual LDs provision ought to act as a cap on its liability as a matter of law.
Crescendas, on the other hand, contended that it was entitled to the full extent of general damages that it was able to prove to the court, on the basis that there were no expressed exclusions or caps in the contract or otherwise.
The court agreed with Crescendas. It held that general damages and LDs are "underpinned by different considerations": whilst general damages are intended to compensate an innocent party for actual losses suffered as a result of a breach; LDs are intended to be a genuine pre-estimate of the likely losses that would be suffered in the event of a breach.
It rejected Jurong's argument that allowing Crescendas to recover general damages in excess of the cap would allow Crescendas to benefit from its own breach of contract which rendered the LDs provision unenforceable. Instead, it found that the consequence of the breach was that Jurong had been given a reasonable time to complete his works: having failed to do so, it would not be inequitable to allow Crescendas to recover general damages for its proven actual losses.
Commercial Implications
The two judgments expose a tension in the common law approach to an employer's recovery of general damages for delay:
- On the one hand, the TCC in Eco World gave effect to the role of an LDs clause as reflecting the agreed allocation of risk between the parties for the recovery of damages for delay, including (by extension) for general damages.
- On the other hand, the High Court of Singapore noted that there was no binding authority which would require it to find that general damages should be capped at the level of the LDs that would otherwise have been recoverable.
The underlying reason for this tension is that construction contracts rarely address the question of whether general damages for delay will be capped in the event that LDs are irrecoverable. This is understandable, because parties who enter into construction and engineering contracts generally presume that an LDs provision will be enforced as the employer's remedy (perhaps even as a "sole remedy") for contractor delay.
However, in light of the possibility of LDs being irrecoverable, it is prudent for construction and engineering contracts to be drafted to expressly contemplate general delay damages being recoverable, and make provision for whether such damages are to be limited to any pre-agreed caps.
Finally, as a stark contrast with common law jurisdictions, we observe that there may be a difference in those civil law countries where the applicable legal codes permit a court to adjust LDs down or up to reflect the actual loss of the party claiming LDs. Where (as is usual) such code provisions are mandatory in their operation they will override any contractual caps on the recovery of damages for delay.
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