RECENT OBSERVATIONS ON LIQUIDATED DAMAGES
In the recent England and Wales Technology and Construction Court (“TCC”) decision of Mansion Place Ltd v Fox Industrial Services Ltd [2021] EWHC 2972 (TCC) (“Mansion v Fox”), the TCC made some observations concerning liquidated damages.
Summary. In Mansion v Fox, the main issue in dispute (in gist) was whether the Claimant property developer was precluded from seeking liquidated damages against the Defendant contractor pursuant to a conversation between the claimant’s agent and the defendant’s managing director. The TCC found that there was such an agreement made in the conversation and decided Mansion v Fox on this basis.
Nonetheless, the TCC also addressed some other arguments as they were fully argued, including the issues of whether the relevant liquidated damages provision was unenforceable for being a penalty and whether it was unenforceable on the ground of uncertainty and/or by application of the principle in Bramall & Ogden v Sheffield City Council (1983) 29 BLR 73 (“Bramall & Ogden”).
Relevant clauses. Clause 2.29 sets out the rate for liquidated damages in the Contract Particulars. In particular, Sub-clause 2.29.2.3 sets out the following:
“If the Employer fixes a later Completion Date for the Works or a Section, the Employer shall pay or repaid to the Contractor any amounts recovered, allowed or paid under clause 2.29 for the period up to that later Completion Date.”
In the Contract Particulars, four sections of Works are identified, and the sums for the purposes of Clause 2.29 are set out below:
"Section 1:
For the first week, £1;
For each week thereafter, £100 per bed per day for bedrooms apartment corridors and associated living / kitchen areas within a student apartment.
Section 2:
At a rate of £100 per bed per day for bedrooms apartment corridors and associated living /kitchen areas within a student apartment.
Section 3:
At a rate of £100 per bed per day for bedrooms apartment corridors and associated living /kitchen areas within a student apartment.
Section 4:
£1,000 per week for all external areas."
And in Clause 2.30, the Contract had also provided for the Claimant to take partial possession of a part of the Works or a Section of the Works in question.
Penalty? It was argued by the Defendant that the liquidated damages provision was penal because “it was not the result of a bespoke assessment of the loss which might be suffered by reason of a breach of the Contract. Rather the figures were standard figures which other Mansion companies had used on different projects; there was no bespoke negotiation with the figures being imposed on the Defendant; the same sum was payable regardless of room type even though different rooms would be let at different rates; and the figures did not reflect the actual loss which would be suffered by the Claimant” ([88] Mansion v Fox).
However, the TCC found that (as argued by the Claimant) there was in fact negotiation about the figures and the Defendant had in fact obtained a modest revision of the sum ([89] Mansion v Fox).
Further, the TCC accepted the Claimant’s arguments that the sums are not disproportionate. If there was a delay, the Claimant would not only lose rental, but would also incur the costs of providing alternative accommodation to the students who would have been accommodated in the units had the units been completed on time; further, the TCC accepted that “If a room was not available at the start of the academic year then the Claimant would be at risk of being unable to let it at all during that year.”
Applying the test in Cavendish Square Holding v Makdessi [2015] UKSC 67; [2016] AC 1172, the TCC was satisfied that the Claimant had a significant interest in having the units completed on time and that “It is also of note that the Defendant was in a sufficiently strong negotiating position to obtain a variation in the terms initially proposed by the Claimant. The rates which finally remained were accepted by the Defendant at the outset as being appropriate and assessing the position as at the making of the Contract. In those circumstances the effect of the liquidated damages provision cannot be said to have been wholly disproportionate.” ([91] Mansion v Fox).
Uncertainty? The Defendant also argued that Clause 2.29 was inoperable for want of certainty. The Defendant submitted that there was “… an alleged incompatibility between, on the one hand, the provision for the taking of partial possession in clause 2.30 combined with the mechanism in clause 2.34 for reducing liquidated damages and, on the other, the provisions of clause 2.29 and the Contract Particulars. In essence the contention was that it was not possible to apply a proportionate reduction to the figures in the Contract Particulars because a Relevant Part may contain areas other than bedrooms.” ([92] Mansion v Fox).
Referring [68] of Eco World-Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd [2021] EWHC 2207 (TCC), which stated that the position in law is not that “liquidated damages provisions will never be enforceable where sectional completion or partial possession is used without any related reduction in the liquidated damages payable”, the TCC accepted that as set out in Taylor Woodrow Holdings Ltd v Barnes & Elliot Ltd [2004] EWHC 3319 (TCC), “… the courts did not reject, as automatically fatal, the concept of one rate of liquidated damages for late completion of the works where there is sectional completion or partial possession; rather, the express provisions in each case simply did not work because of errors in drafting.” ([94] – [95] Mansion v Fox).
On the facts of the case, the Parties had provided in Clause 2.34 as follows:
"As from the Relevant Date, the rate of liquidated damages stated in the Contract Particulars in respect of the Works or Section containing the Relevant Part shall reduce by the same proportion as the value of the Relevant Part bears to the Contract Sum or to the relevant Section Sum, as shown in the Contract Particulars."
The TCC held that the Contract had therefore set out a mechanism that can be operated.
“97 … The Contract Particulars set out a value to be attributed to each Section. The liquidated damages are to be paid at a rate calculated by reference to the number of bedrooms and so forth but that is not a rate per unoccupied bedroom but per bedroom, kitchen and so forth in each section. That is a matter which is capable of being determined. Clause 2.34 provides a mechanism for calculating the reduction to be applied to that rate and that reduction can then be calculated and applied. The position stated shortly is that clause 2.29.2.1 provides for liquidated damages at the rate set out in the Contract Particulars and clause 2.34 in turn provides for a proportionate reduction in that rate together with a means of calculating that proportion. At worst the mechanism might be thought somewhat cumbersome but it is capable of being operated.”
Conclusion. If the parties negotiated the rate for liquidated damages, and the rate changed due to negotiation, in our view, it would be difficult to convince a court that the liquidated damages provision in question is penal. As Mansion v Fox has shown, the fact of the rate of liquidated damages being changed due to negotiation is a significant factor militating against a finding that the liquidated damages provision in question is penal.
Further, as Mansion v Fox also illustrates, it is also not so easy to strike down a liquidated damages provision as being uncertain and inoperative. Even if the contractual mechanism in question is cumbersome to operate, so long as it is capable of being operated, the court would not strike it down.
Having said so, if the mechanism for determining liquidated damages in the contract in question is extremely cumbersome, the parties may wish to consider if such a mechanism is ideal when negotiating the terms of the contract. After all, at the end of the day, the parties would have to operate the contractual mechanism, and a contractual mechanism that is too cumbersome may not be ideal from a contract management and project management perspective.
Lastly, it is important to remember that had there not been a mechanism to adjust for partial possession in Mansion v Fox that is sufficiently certain and operable, the liquidated damages provision could have been struck down pursuant to the principle as laid down in Bramall & Ogden. Therefore, if you intend to (or may intend to) take partial possession of the works, make sure that your contract’s liquidated damages provision / mechanism caters for this contingency.
This publication is not intended to be, nor should it be taken as, legal advice; it is not a substitute for specific legal advice for specific circumstances. You should not take, nor refrain from taking, actions based on this publication. Chancery Law Corporation is not responsible for, and does not accept any responsibility for, any loss or damage that may arise from any reliance based on this publication.