A Common Law Perspective of Liquidated Damages

A Common Law Perspective of Liquidated Damages Presented by: Prof. Gould Date: 18 November 2022 The Classic LD "Rules" - Dunlop Pneumatic Tire Company v New Garage & Motor Co [1915] AC 79 House of Lords, page 86: • "1. Though the parties to a contract who use the words "penalty" or "liquidated damages" may prima facie be supposed to mean what they say, yet the expression used is not conclusive. The Court must find out whether the payment stipulated is in truth a penalty or liquidated damages. This doctrine may be said to be found passim in nearly every case; • 2. The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage; • 3. The question whether a sum stipulated is penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged of as at the time of the making of the contract, not as at the time of the breach; and • 4. To assist this task of construction various tests have been suggested, which if applied to the case under consideration, may prove helpful, or even conclusive." - Dunlop Pneumatic Tire Company v New Garage & Motor Co [1915] AC 79 House of Lords, page 87: • '...extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have been followed from the breach.' • '... if the breach consists only in not paying a sum of money, and the sum stipulated is a greater sum than the sum which ought to have been paid." • 'There is a presumption (but no more) that it is a penalty when " a single lump sum is made payable by way of compensation...'for one or more events, some serious other trifling. - On the other hand • 'It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequence of the breach are such as to make the precise preestimation almost impossible." The Classic Test - Bramall & Ogden Ltd v Sheffield City Council (1983) 29 BLR 73. LDs 'at the rate of £20 per week for each uncompleted dwelling' but no sectional completion. - Philips Hong Kong v ATT Gen of Hong Kong (1993) 61 BLR 41. Equitable origins. A court should be slow to adopt an approach to an LD clause that could defeats their purpose (Lord Woolf). - Jean charm Ltd v Barnett Football Club Ltd [2003] EWHC 281 (TCC). Barnet to pay 5% interest per week in the event of late payment, so 260% per annum. The Court of Appeal decided that the magnitude of the interest rate far exceeded any loss that could be said to be a genuine pre- estimate of loss and was therefore unenforceable. - Alfred McAlpine Capital Projects Ltd v Tile box Ltd [2005] EWHC 281 (TCC). A classic statement of the law relied upon for 90 years. Only for cases cited resulted in the finding of a penalty. Secondary Obligation - Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 - Concerned parking fee of £85 for exceeding the two hour maximum stay. Parking Eye was not liable for any loss, but justifiable to manage efficient use of parking space. - New test: LDs that are out of all proportion to any legitimate interest in achieving completion. Is the sum 'extravagant, exorbitant or unconscionable'. - If there is a termination during a period of culpable delay, liquidated damages will accrue up to termination. After termination, any damages flowing from additional delays can be claimed as general damages arising pursuant to that termination. - 'The true test is whether the impugned provision is a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation' [para 32]. Do LDs Survive Termination? - PBS Energo AS v Bester Generacion UK Ltd & Anor [2020] EWHC 223 (TCC) - The application of a liquidated damages clause would turn on the wording of the particular clause in each case. This was the approach of Triple Point Technology Inc v PTT Public Company Ltd [2019]. (Note the 2021 case). - 'That case (which is under appeal) is authority for the proposition that when considering damages for delay which are included in contracts it is necessary to consider the drafting of the contract carefully to assess whether the clause allows that any Liquidated Damages will survive termination and particularly whether they will survive termination in circumstances where the contract is terminated with the works incomplete.' [Cotterill J] Partial Possession - Eco World v Ballymore Embassy Gardens Company Limited v Dobler UK Limited [2021] EWHC 2207 (TCC) - EWB took over Blocks B and C on 15 June 2018 (partial possession) with practical completion of the remainder of the works being certified on 20 December 2018. - EWB levied liquidated damages from 30 April 2018 to 20 December 2018. It applied the full rate (being the only rate provided for within the Contract) despite having taken possession of some of the works prior to practical completion. - The Judge concluded that the natural and ordinary meaning of the "works" was that Dobler was obliged to complete all the works (Blocks A, B and C) by the completion date. The words were 'reasonably clear and certain Further, the 'liquidated damages provision in this case is unconscionable or extravagant.' The LDs were not a penalty. Proportionate Reduction? - Mansion Place Limited v Fox Industrial Services Limited [2021] EWHC 2972 (TCC) - Eyre J found that the parties reached an oral agreement to forego LDs for delay in exchange for the building contractor abandoning its loss and expense claim. - The LDs mechanism was 'somewhat cumbersome', However, it was capable of operating in a situation that required a proportionate reduction in the rate of LDs upon partial possession. - The judge referred to O'Farrell J's judgment in Eco World v Ballymore pointing out that there is no automatic presumption that LDs are unenforceable because they provide a single rate of LDs in a situation where there is sectional completion or partial possession. After Termination & Caps - Triple Point Technology, Inc v PPT Public Company Ltd [2021] UKSC 29 - Concerned liquidated damages on termination. Split 3/2 decision. - Bespoke software contract (not a standard form). - If applied to a typical construction contract: • Where there is a termination during a period of culpable delay liquidated damages will accrue up to termination. After the termination, any damages • flowing from additional delays may be claimed as general damages arising pursuant to that termination. - Negligence could be excluded from a cap on LDs, all depends on the drafting. - A cap could include LDs such that the LDs counted towards the maximum recoverable Void for Uncertainty is Unlikely - Buckingham Group Contracting Ltd v Peel L&P Investments and Property Ltd [2022] EWHC 1842 (TCC) - The contractor argued that the LDs provisions in a contract based on the JCT D&B 2016 were void for uncertainty, on the bases that: • There were drafting errors in respect of the completion date, rates for LDs and/or the Contract Sum which was the basis for calculating LDs; and • The LDs provisions failed to provide a workable scheme in respect of partial possession. - The court found that it was possible to reach an interpretation of the relevant provisions that gave effect to the parties' intentions and allowed the LDs clauses to operate. - It reiterated that courts are unlikely to hold that a contractual provision void for uncertainty. Conclusion - Penalty Rule; regulates remedies for primary obligations, not the primary obligations themselves. - Only applies to secondary obligations. - Out of all proportion to a legitimate interest of the other party? - Was the term negotiated? - Balance of power and legal representation? - How difficult is it to calculate the loss suffered due to a breach of the primary obligation? - Are the LDs 'extravagant, exorbitant or unconscionable' (Makdessi)? - Clear drafting; being void for uncertainty is unlikely. - Waiver? - Cap?