PARTIAL POSSESSION AND LIQUIDATED DAMAGES
In Eco World – Ballymore Embassy Gardens Company Ltd v Dobler UK Ltd [2021] EWHC 2207 (TCC) (“Eco World v Dobler”), the English Technology and Construction Court dealt with the issue of whether the liquidated damages provision in question is void and/or unenforceable because it does not contain any mechanism for reducing the amount of liquidated damages in the event of partial possession in advance of practical completion.
Background. The Claimant (“EWB”) engaged the Defendant (“Dobler”) as its trade contractor to carry out the design, supply and installation of façade and glazing works for the Building (the “Contract”) ([5] – [6] Eco World v Dobler).
The Building comprises of three residential blocks ([10] Eco World v Dobler).
No provision for sectional completion. There was no provision in the Contract for the Contract Works to be carried out or completed in sections ([14] Eco World v Dobler). However, the Contract provided for EWB to take over part of the relevant Works prior to practical completion ([26] Eco World v Dobler).
"If at any time or times prior to the date of issue by the Construction Manager of the certificate of practical completion for the Works or such works in a Section that the Employer wishes to take over any part or parts of the Works or such works in a Section, then, notwithstanding anything expressed or implied elsewhere in this Trade Contract, the Employer may take over such part or parts. ..."
The Liquidated Damages provision. The liquidated damages provision in dispute is set out below ([18] Eco World v Dobler):
"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, not later than 5 days before the final date for payment of the amount payable under clause 4.16, 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 the liquidated damages in dispute is set out below([19] Eco World v Dobler):
"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 key facts. The original completion date of 21 August 2017 was extended via a Deed of Variation entered into by the Parties ([28] Eco World v Dobler). This Deed provided, among others, that liquidated damages may only be imposed from the new completion date of 30 April 2018 ([28] – [29] Eco World v Dobler).
However, the Works were not completed by 30 April 2018 ([30] Eco World v Dobler). EWB took over 2 of the 3 blocks during the week ending 15 June 2018 ([31] Eco World v Dobler), and the Works were only certified as achieving practical completion on 20 December 2018 ([32] Eco World v Dobler).
It suffices to say that disputes arose between the Parties (see [33] – [41] Eco World v Dobler), and on 28 October 2018, EWB commenced proceedings seeking the court’s determination on whether ([42] Eco World v Dobler):
The liquidated damages provision in Clause 2.32.1 is void and/or enforceable; and
If so, whether EWB is entitled to claim for general damages; and
If so, whether any recoverable damages are limited by reference to the provisions of Clause 2.32.1.
Whether Liquidated Damages provision are void and/or unenforceable. Referring to Cavendish Square Holding BV v Makdessi [2015] UKSC 67 (“Cavendish Square”) ([50] – [52] Eco World v Dobler) as well as Triple Point Technology, Inc v PTT Public Company Ltd [2021] UKSC 29 ([53] Eco World v Dobler), the court held that the case is distinguishable from the cases of Bramall & Ogden v Sheffield City Council (1983) 29 BLR 73 (“Bramall & Ogden”) and Taylor Woodrow Holdings Limited v Barnes & Elliott Limited [2004] EWHC 3319 (TCC) (“Barnes & Elliott”). See [74] – [75] Eco World v Dobler as set out below.
“74. Thus, in the cases above [including Bramall & Ogden and Barnes & Elliott], 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.
75. As a matter of construction, the provisions in this case are reasonably clear and certain. There is one completion date for the whole of the Works. Liquidated damages are payable at the rate set out in the Trade Contract Particulars for failure to complete the whole of the Works by the completion date. There is no reduction in the rate of liquidated damages where partial completion is achieved or the employer takes over part of the Works prior to practical completion. Such provisions are capable of being operated. The Contract in this case does not give rise to the difficulties found in Brammell v Ogden or Barnes & Elliott that rendered the provisions void and unenforceable.”
The court held that applying the test Cavendish Square, the liquidated damages provision are “… not unconscionable or extravagant so as to amount to a penalty” ([78] Eco World v Dobler) because:
The liquidated damages provision was negotiated by the parties, who had the benefit of legal counsel ([79] Eco World v Dobler).
EWB had a “legitimate interest in enforcing the primary obligation of Dobler to complete the Works as a whole by the New Completion Date. Late completion of any part of the Works was likely to have an adverse impact on the work of the following trade contractors carrying out fit out and other finishing works, causing not just delay but also disruption to the project as a whole. Late completion of Blocks B and/or C would expose EWB to liability for liquidated damages to the local authority. Late completion of Block A would expose EWB to the risk of losing purchasers for the apartments.” ([80] Eco World v Dobler) (emphasis added).
The quantification of damages would be difficult if only part of the Works were completed on time ([81] Eco World v Dobler).
There was no evidence before the Court nor was it suggested to the Court that the amount of damages “… was unreasonable or disproportionate to the likely losses in the event of late completion of the work in any one or more of the blocks forming part of Building A04” (emphasis added) ([82] Eco World v Dobler).
As such, the court held that “… the liquidated damages provision is not extravagant, exorbitant or unconscionable. It is a secondary obligation which imposes a detriment on Dobler which is proportionate to the legitimate interest of EWB in the enforcement of the primary obligation of completion of the Works in accordance with the terms of the Contract. In conclusion, the liquidated damages provision is valid and enforceable.” ([83] Eco World v Dobler).
Alternative argument. The court also considered the alternative argument that clause 2.32.1 contains a mechanism for reducing liquidated damages that would “save” the provision ([85] Eco World v Dobler). This argument hinged on the basis that clause 2.32 contains the following phrase “liquidated damages at the rate stated in the Trade Contract Particulars, or lesser rate stated in the notice” ([85] Eco World v Dobler).
The court rejected that this argument because:
There was no room for any implied term, as “clause 2.32 expressly gives EWB a contractual right to deduct liquidated damages at the rate set out in the Trade Contract Particulars. … The court would be reluctant to go behind the allocation of risk negotiated by the parties… There is no need to imply any term that such contractual right must be exercised in a rational or reasonable manner in order to make that provision work.” ([93] Eco World v Dobler).
In any event, any implied term that EWB must not act in an “arbitrary, capricious or irrational manner when levying liquidated damages” would only be “limited to the circumstances in which EWB could operate the provision, namely, whether there was any logical connection between late completion of any part of the Works and the ostensible reasons given by EWB for the decision to deduct liquidated damages” ([94] Eco World v Dobler).
Lastly, even if a term of reasonableness was to be implied, the Contract simply does not contain any mechanism to determine the “reasonable level of reduced damages, or the factors that should be taken into account when fixing such “lesser amount”.” ([95] Eco Wordl v Dobler).
Hence, the court found that the alternative argument based on an implied term would not have saved the liquidated damages provision if the provision was otherwise void for uncertainty or as a penalty.
Obiter observation. Given the court’s findings above, it was not strictly necessary for the court to address what happens if the liquidated damages provision was unenforceable. Nonetheless, the court made some observations. ([97] – [98] Eco World v Doblier).
In summary, the court stated that given the clauses in question, the court would have found that EWB would have been entitled to claim general damages, but subject to the overall cap on liability of 7%, because “… clause 2.32.1 and the Trade Contract Particulars would operate as a limitation of liability provision, even if the liquidated damages were void or a penalty.” (see p116) – [117] Eco World v Dobler).
Conclusion. While Singapore has declined to follow the approach taken in Cavendish Square (see our earlier blog here), it is important to note that certain of the findings made by the court in Eco World v Dobler to uphold the liquidated damages provision may still apply even if we use the test set out in Dunlop Pneumatic Tyre Company, Limited v New Garage and Motor Company, Limited [1915] AC 79 (“Dunlop Pneumatic Tyre”)
The fact that the court in Eco World v Dobler emphasized at [82] Eco World v Dolber that there was no evidence before the court that the rate of liquidated damages would have been “… unreasonable or disproportionate to the likely losses in the event of late completion of the work in any one or more of the blocks forming part of Building A04” when combined with the finding at [80] Eco World v Dobler that late completion of any part of the Works would impact the project as a whole would likely mean that (paraphrasing the Court of Appeal at [66] Denka Advantech Pte Ltd and another v Seraya Energy Pte Ltd and another and other appeals [2020] SGCA 119) the test in Dunlop Pneumatic Tyre may still be satisfied as:
The provision is not penal, as the sum stipulated is not extravagant or unconscionable in comparison with the greatest loss that could conceivably be proved to have followed from the breach; and
The rebuttable presumption that the provision would be penal if the sum stipulated for was payable on a number of events of varying gravity would not apply, given that the events may in fact have been of equal gravity.
Nonetheless, Eco World v Dobler is an important reminder to contracting parties that there is a need to carefully review your liquidated damages provision if your contract provides for sectional completion / partial possession before practical / substantial completion of the whole of the works.
You should ensure that language of your liquidated damages provision caters for such partial taking over. Otherwise, the provision may be held to be void and/or unenforceable, and you will have to prove your claim in general damages, which can be much more difficult and time-consuming.
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.