Further advice from the court on the applicability of damages | King and Spalding

Shortly after the long-awaited Supreme Court ruling on how termination damages works, the English courts delivered another important judgment on how damages work, this time in a takeover case. or early possession of the work by the employer.

Early take-over or possession provisions are common in construction contracts, providing flexibility to employers by allowing early use of a portion of completed work. However, the interplay between repossession clauses and damages (“DL”) clauses is often overlooked when drafting construction contracts, resulting in disputes over what happens to the agreed rate of LDs. when part of the work is taken care of in advance and is therefore deemed to be completed. Do GLs become a penalty, which is null and unenforceable? If they become a penalty, does the limit on the maximum level of LD payable also drop, exposing the entrepreneur to much higher, if not potentially unlimited, liability in the event of delay?

The position of English law on these questions has been examined in detail by the Technology and Construction Court in Eco World – Ballymore Embassy Gardens Company Limited (“EWB”) v Dobler UK Limited (“Dobler”) [2021] EWHC 2207 (TCC). In its decision, the Technology and Construction Court held that there was no general principle in English law that the LD provisions automatically became inapplicable when part of the work is taken over by the employer and there is no There is no corresponding reduction in the level of payable LDs. The applicability of the LD provisions depends on the correct interpretation of the terms of each contract; and in the case of the contract between EWB and Dobler, the LD provisions were not a sanction and were enforceable even after an early takeover.

While the court stressed that its ruling was based on the particular wording of the contract between ISF and Dobler, it nonetheless serves as a broader reminder that English courts will not easily find LD provisions null and unenforceable. It also highlights the will of the English courts to give effect to the parties’ bargain and not to hinder their freedom to agree on commercial terms.

Background

The underlying litigation concerned the delay in the design, supply and installation of facade and glazing work on an apartment building in London.

Under the contract (which was based on the JCT 2011 Construction Management Trade Contract form) and a subsequent amendment act, Dobler was required to complete substantially all of the work by April 30, 2018. If not not, he would be liable for LD of £ zero per week for the first 4 weeks of delay, then £ 25,000 for each additional week of delay, up to a maximum of 7% of the final contract price. The contract also enabled ISF to take over part of the works before their practical completion.

The works were delayed and on June 15, 2018, ISF took over the apartment blocks that had been completed, in order to mitigate its losses. The practical completion of all the works was finally completed on December 20, 2018.

After completion of the work, the parties went through three adjudications for amounts owed to or from Dobler, including Dobler’s liability for LDs. During the auctions, it became evident that ISF might be able to recover much higher damages for delay if the LD provisions of the contract (including the upper limit of these LDs) were unenforceable. ISF therefore initiated proceedings before the Technology and Construction Tribunal, arguing that:

  1. LD provisions are null and / or inapplicable, because the contract did not provide for a reduction in LD following the partial resumption of work by ISF and LD therefore became a penalty; and
  2. ISF is entitled to general damages for delay and these damages are not limited to a maximum of 7% of the final contract price, as the ceiling only applies to contractual LDs.

The court’s decision

Are the LDs null and void when the employer takes over part of the work?

The court said there was no “Inflexible rule of law” in English law that the LD provisions will never be applicable when part of the work is taken over by the employer without a corresponding reduction in the LD to be paid. The validity of LD provisions after partial possession or repossession by the employer depends on the precise wording of the contract.

The court ruled that the LD provisions of the contract between ISF and Dobler were clear, certain and applicable even after the partial takeover by ISF, and were not extravagant, exorbitant or unreasonable to the point of making them null or unenforceable, for the following reasons:

  1. The LD provisions were negotiated by the parties with the assistance of outside counsel.
  2. ISF had a legitimate interest in enforcing Dobler’s obligation to complete all work on time, as the delay would likely affect fit-up and finishing work by other contractors, ISF would expose to the liability of the LDs towards the local authority acquiring some of the apartments and would result in loss of buyers for the other apartments.
  3. Quantifying the damage suffered by ISF would have been difficult, a difficulty which was avoided by the parties by fixing the rate of LD in the contract.
  4. The level of LD agreed in the contract was neither unreasonable nor disproportionate to the probable losses suffered by ISF due to the late completion of blocks which were not taken care of in advance.

In his judgment, O’Farrell J also said that although the terms of the contract gave ISF the discretion to collect LDs at a rate of less than £ 25,000 per week, there was no need to imply a condition. that ISF should exercise this discretion. “In a rational or reasonable manner”. EWB had an express absolute contractual right to receive LDs at the rate of £ 25,000 per week and was entitled to exercise that right as it saw fit.

Does the DL limit apply to general damages for delay?

The court recognized that it did not need to consider whether general damages would be capped at 7% of the final contract price, since it held that damages (rather than general damages ) were due. However, O’Farrell J still decided to offer some perspectives on this frequently contested issue.

Once again, the court emphasized that, in accordance with general principles of interpretation of English law, each clause fixing the maximum level of LD payable should be interpreted as such. Whether such a limit would also apply to general damages for delay would depend on the correct interpretation of each particular contract.

In this case, the court ruled that the cap would apply to general damages if the provisions of the CA were void or inapplicable because it was a penalty. Indeed, based on an objective understanding of the parties’ trade agreement, the LD provisions of the contract between ISF and Dobler served two purposes: to quantify automatic liability for damages in the event of delay and to limit Dobler’s overall liability. in case of delay. If the first part of the LD provisions were null or inapplicable, the second part containing an express limitation of liability to 7% of the contract price would remain valid and would continue to apply.

Discussion and key takeaways

There is no doubt that the judgment of Eco World – Ballymore Embassy Gardens Company Limited v Dobler UK Limited is important because it addresses two issues over which the English courts have limited authority despite the fact that they arise quite frequently in litigation. Although the court stressed that its ruling was based on the particular wording of the contract between ISF and Dobler, it is likely that it will have a broader impact and influence on employers and contractors.

It serves as a useful reminder of the attitude of the courts towards LD provisions, confirming that it is difficult to argue in English law that LDs are a penalty and therefore void and unenforceable. It also highlights the willingness of the courts to give effect to the parties’ agreement and not to hinder their freedom to agree on commercial terms and to spread the risks in their commercial transactions, especially when the terms have been negotiated and agreed with. the assistance of external lawyers.

In addition, and together with the previous Supreme Court ruling in Triple point, the decision recognizes the importance of certainty when addressing the risk and consequences of project delay. By applying the LD provisions, the courts provide an employer with certainty of how much he will recover (without having to spend time and money proving his losses) and the entrepreneur with certainty of his exposure to harm. damages in the event of project delay.

In addition, the judgment serves as an important reminder that the parties must, at all times, draft their contract in a way that clearly corresponds to their intentions. In the context of a project delay, it makes sense to pay particular attention to the level of LDs, the limits of their recovery, the requirement or preference for partial completion, the need for possession or early assumption of responsibility and the impact of this assumption of the obligations of the contractor and the applicability of the LD provisions.

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