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Clifford Chance

Clifford Chance

Construction Insights

3 recent developments on delay liquidated damages (and one ongoing principle that you ignore at your peril)

The common law is well-known for its difficult relationship with liquidated damages ('LDs'), with its complicated set of rules which may be beloved by construction lawyers, but considered arcane by any other standards. In spite of this, parties to construction contracts have a deep and understandable attachment to LDs

For the Employer, they provide certainty, partly protecting against delay and performance losses (in the case of power and process plants) and avoiding the need to prove causation or amount of loss as with general damages. For the Contractor, they again provide certainty of liability for budgeting purposes and a capping of liability, usually well below the Employer’s full losses.

It is therefore welcome news that English law is continuing to modernise in this area, recognising the commercial bargains made by parties to construction contracts and overturning some of the more rigid features of previous century judgments.

Here are some changes you may have missed and a reminder of an enduring critical rule.

If an LD rate is not a genuine pre-estimate of loss, this does not mean it is automatically unenforceable

Whilst not quite consigned to the dustbin of history, the phrase "genuine pre-estimate of loss" no longer needs to be uttered with the shrill insistence of past generations. In a landmark case [1], the Supreme Court held that what really matters is that the obligation to pay LDs does not impose a detriment on the Contractor "out of all proportion to any legitimate interest of the Employer". So a rate of LDs which was not ‘genuinely pre-estimated' will still be enforceable unless it is actually a penalty by that measure.

What does this mean in practice?

We can shelve concerns over the common practice of calculating LDs on an ongoing costs basis (including scheduled costs such as debt service which are not the result of the delay), rather than by referencing the lost revenue that would have covered those costs. A calculation based on costs is, by definition, unlikely to be penal in nature under the new test. There should also be greatly reduced concern over LD rates which are expressed as percentages of the contract price rather than in monetary figures (unless the rate chosen is actually penal).

Parties are able to make their own contractual bargain on concurrent delay

Without exploring the many intricacies of concurrent delay, the question here is whether an English law contract can deny extensions of time for cases of concurrent delay. The concern was that contracts apportioning responsibility to the Contractor for cases of concurrent delay could fall foul of the infamous prevention principle (which, in short, would mean the loss of the delay LD remedy and in some cases no remedy at all for delay – more on this below). We now have a judgment [2] supporting the parties' right to make this bargain without risking their Delay LD remedy. It is only a first instance case but helpful nonetheless.

What does this mean in practice?

We can expect to see more contracts providing for situations of concurrent delay to be resolved without extensions of time. This is likely to spin off into debates as to the fairness of such risk allocation and whether it should be limited to cases of 'true' or 'full' concurrency.

Liquidated Damages should only be applied to an obligation that is clear and certain

For delay liquidated damages to be enforceable, there must be a clear obligation to complete by a date that is certain. This point has been reinforced in a recent judgment[3]. Here, the obligation was to use "fullest endeavours" to complete by the specified date, which the Court held was not an absolute obligation and therefore could not support the imposition of liquidated damages for a failure to complete by such date.

What does this mean in practice?

Employers need to be aware not to agree to water down obligations to which delay LDs are linked. Modifications to these obligations should be left to extension of time mechanisms and not to the completion obligation itself.

However, in case you thought this progression indicates the death-rattle of the common law's idiosyncrasies in relation to liquidated damages, please remember...

The Prevention Principle remains alive and well

It is an absolute and standard principle of law in probably all legal jurisdictions that a party to a contract cannot enforce a remedy for the counter-party's default if it has caused that default to occur. This means that it is vital for common law-governed contracts to contain a clear mechanism to extend time for Employer impediments - its acts of prevention. If not, the Court will have no choice but to set time for completion "at large" – which means no delay LDs and potentially no delay damages remedy at all.

Whilst this principle seems straightforward, it can, in practice, be much more complex to identify a prevention problem hiding in the long grass of an extension of time clause. We reckon that as many as one-third of all construction contracts we review have the potential to fall foul of the rules on prevention, with the period after the target completion date has passed being particularly prone to issues. Sometimes this is down to aggressive attempts by Employers to appropriate the 'float', but more often than not it is just down to a lack of understanding of the application of common law rules in this arena. As this is the kind of mistake that can be extremely and unnecessarily costly for Employers, they must be extra careful not to be caught out.

Note: this article contains only a brief overview of certain developments on liquidated damages and does not purport to cover all aspects on this subject or its treatment in all legal jurisdictions. It is not designed to provide legal or other advice.

[1] Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67

[2North Midland Building Limited v Cyden Homes Limited [2017] EWHC 2414 (TCC)

[3] HSM Offshore BV v Aker Offshore Partner Ltd [2017] EWHC 2979 (TCC)