Legal

Liquidated damages: cloudy picture in solar case

5 March 2019 | By Assad Maqbool

Assad Maqbool examines the arguments over liquidated damages in a case where the contractor missed the commissioning deadline for five solar plants.

Assad Maqbool

Delay damages provisions are common in UK construction contacts but the required parameters of those “liquidated damages” clauses remain a shifting picture. The case of GPP Big Field LLP v Solar EPC Solutions, decided in November 2018, suggests that the practicalities of agreeing these clauses are still uncertain.

It is generally acknowledged that there will be some loss suffered by a client if a construction project is not completed by a certain date. The actual loss will differ depending on the circumstances.

Clients often consider costs of supervising a prolonged project, costs of renting buildings in lieu of a new building being complete, and more notional losses such as interest on capital that has been invested for which no benefit has been received, or loss of profits that would have been received had a building been open to customers.

It is worth remembering that it is not necessary for a construction contract to include express damages provisions. Instead, the starting point should be that the delay would be a simple breach of contract which would give rise to a right of the client to claim general damages for breach.

Often this is not considered to be an acceptable position because the necessity to prove actual losses when claiming general damages is more onerous for the client and more likely to be litigious than a clear obligation for the contractor to pay defined liquidated damages. Sometimes clients will define an easily claimable amount of liquidated damages to incentivise the contractor to complete on time and therefore penalise the contractor in the event of a delay.

For almost 300 years, it has been established that a clause which is a pure penalty – intended only to secure money without any reference to the primary purpose of a contract – is unenforceable in English law. But the parameters of this doctrine have been murky when applied to liquidated damages in construction.

The case of GPP Big Field LLP v Solar EPC Solutions related to a number of engineering, procurement, and construction contracts for solar generation plants in the UK. When Solar EPC’s subsidiary contractor Prosolia (now insolvent) failed to achieve the specified commissioning date, GPP Big Field claimed liquidated damages.

However, the delay damages specified in the contracts did not refer to the output of the plants and prevailing electricity prices and therefore did not attempt to estimate the actual loss suffered, leading to an argument that these should be considered voidable penalty clauses.

In deciding that the delay damages clauses were acceptable, the court referred to the recent cases of Makdessi and Parking Eye. These limit the circumstances where courts will consider a liquidated damages provision to be an unenforceable penalty to cases where the liquidated damages amount is “out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation” – the primary obligation being execution of the works.

The upshot of Makdessi and Parking Eye, as supported by GPP Big Field, is that where a liquidated damages amount is agreed, particularly between sophisticated commercial parties, and the amount is not “exorbitant or unconscionable”, the court should support the principle in English law of the freedom of parties to contract on terms they agree and therefore uphold the validity of the liquidated damages clause.

What is disappointing about the GPP Big Field judgement is it suggests that, to establish whether the amount is “out of all proportion” or “unconscionable”, the court would need to consider if the amount agreed was less than a “genuine pre-estimate of the losses likely to be suffered”. This again takes us away from the certainty and freedom to agree a liquidated damages amount as part of commercial contract negotiations in the knowledge that it will be enforceable.

Assad Maqbool is a partner at Trowers & Hamlins

Comments

How will anyone compute losses where a school or hospital or road complete in time?

Gursharan Singh, 12 March 2019

I have a contract with the following clause referring to removal of "Key Personnel"

"Contractor shall pay Company One Hundred and Fifty Thousand United States Dollars (US$150,000) for each individual Designated Key Personnel that are removed by Contractor or whose responsibilities are substantially reduced or changed without Company approval".

I believe this would be a penalty as the impact of the completion dates are unlikely to be know and indeed there is no "loss" to company except perhaps issuance of late information.

How would the courts view this in the event of a dispute?

LEONARD ANDREW HARVEY, 13 March 2019

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