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Liquidated Damages: Stage Completion

Liquidated damages clauses are a common feature of construction contracts dealing with time and performance. They have been repeated recognised as being a valuable tool in providing parties to contracts with certainty as to the consequences of breach and as a tool in risk management and allocation.

The landmark decision of the English House of Lords in Dunlop PneumaticTyre Company Ltd v New Garage and Motor Company Ltd has been adopted or reflected in most common law jurisdictions. In essence the decision in Dunlop Pneumatic was that there was to be a presumption that liquidated damages clauses in commercial contracts were to be valid. The competing argument was that the liquidated damage provision should be struck down because it was a penalty and therefore not enforceable as a matter of public policy. Judicial thinking has also developed to consider that liquidated damages are to be treated as an "entire remedy': This means that the liquidated damage is to be treated as a comprehensive remedy for the breach to which it relates - for example delay. However, from time to time new points emerge which the courts are required to consider.

In Liberty Mercian Limited v Dean & Dyball Construction Limited, the parties (a developer and a contractor) agreed on a sectional completion schedule for the construction of four retail units in Wales to be separated into five phases and provided a liquidated damage in respect of each of the dates. The Contract was based on the JCT Standard Form of Building Contract (1998 Ed, 2003 Revision). Phased possession was found to be commercially necessary because the retailer (the occupier) wished to continue trading from its old store until the new retail units were ready for fitting out. The sectional completion schedule provided for a fixed date of completion for each phase of the Works, but a variable date of possession which fell on the date of completion of the preceding phase. The Contractor was found by the Architect to have caused four weeks of culpable delay in Phase 1. However, in consequence of this early delay. each of the subsequent four phases was similarly delayed by four weeks. The Developer sought to impose LDs for 20 weeks of delay (Le. four weeks for each phase). The Contractor argued that it ought not to be "penalized" for the same four week delay five times over. This argument was termed the "cascading" argument.

After examining the details of the sectional completion schedule and construing the Contract as a whole, Mr. Justice Coulson found that there was nothing 'unfair' with the Contractor having to pay liquidated damages for a "cascading" delay from Phase 1 to the subsequent four phases of the Works. He reasoned that the Parties would have been aware that a period of culpable delay in Phase 1 would cascade to delay in subsequent phases and this was" the only sensible and the only construction which gives effect to the words used'. He also observed that the different rates for liquidated damages for each phase reflected the fact that different losses may result from delay to the completion of each phase and was "strong support for the proposition that these sums do not represent a penalty, but are instead a genuine pre-estimate of the specific loss that would be suffered in the event that the particular section in question was delayed".

Mr. Justice Coulson also took into consideration a clause in the Contract (common to construction contracts) that the Contractor will not be entitled to an extension of time necessitated by its own default (or its agents), the general principle that a wrongdoer ought not to be able to take advantage of its own wrong, and held that acceptance of the "cascading" argument would breach the spirit of the Contract and the law.

This decision upholding as it does the validity of the liquidated damage clause continues the general trend of giving effect to the liquidated damage provisions and resisting penalty arguments. However, the Liberty Mercain decision is a timely reminder to construction professionals that the interaction between the completion obligations and the liquidated damages clause ought to examined against various possible scenarios. This is particularly so in circumstances where phased completion and handover are contemplated, to avoid any unexpected outcomes either from the perspective of the project proponent or the contractor.