Problem: I am the managing director of a building contractor that specialises in new build housing for the private sector. In 2010 we won a scheme to build a new apartment block for a client consisting of 18 flats on a podium which housed a car park. The project was administered under a JCT 2005 contract and was scheduled to run for 50 weeks. However, the contract was delayed quite severely, and I put my hand up as the cause was down to my company.
The project is now completed but we are now facing a situation where we are liable for delay damages and it is the extent of the damages which is now an issue. You see, the contract intended for the project to be handed over as a whole, with even sectional completion in the Appendix having been deleted, although the liquidated damages is expressed as ‘per dwelling’. The client insists however that because the sectional completion has been deleted it can still deduct the full liquidated damages and is seeking the rate per dwelling multiplied by the 18 flats – despite the client taking possession of some of the flats and the car park before practical completion. Surely the client is not correct and can only deduct the flats that were not handed over on time. Help!
Mike, Leicester
Response: Hello Mike. From your outline of the problem, you may well be able to successfully argue that the liquidated damages are in fact unenforceable because the damages expressed under the contract are uncertain and / or a penalty.
The main benefit of liquidated damages for an employer is that the damages are fixed and unlike common law damages, there is no need to prove the loss providing the liquidated damages are a genuine pre-estimate of the loss at the time they are fixed. However, interpretation by the courts of the term of the liquidated damages provisions will be construed strictly and in contra proferentum (any ambiguity is against the party seeking to rely). It is therefore crucial that the liquidated damages term is free from any uncertainty. If the term is wanting for any reason, it will fail.
Similarly, where liquidated damages are found not to be a genuine pre-estimate of the loss at the time they are fixed, they will be unenforceable. Under such circumstances, the employer will not be able to rely or deduct the liquidated damages but must prove its losses.
Although your liquidated damages have been expressed as per dwelling, the Contract excludes sectional completion, whilst your client has taken possession of some of the dwellings and the car park. This means that although there is no sectional completion under the Contract, the rate of liquidated damages is actually expressed as if there is sectional completion, demonstrated by the dwellings now in possession of your client. Your client may be argue that by insertion of a rate for an individual dwelling, dwellings that remain incomplete after the Date for Completion, it is a simple pro rata exercise. However, with a single Date for Completion, the rate must reflect the Contract Works which includes infrastructure works such as the podium car park and not just the dwellings, and such areas have not been identified in the liquidated damages.
There is therefore a discrepancy in your client’s calculation of the liquidated damages term, being expressed per dwelling which is impossible to be reconciled with partial possession, as this relates to the Contract Works (i.e. not just the dwellings), and as liquidated damages must be applied in accordance with the Appendix to the whole of the Works, I believe that the liquidated damages provision must fail.
The term has a much wider definition than simply dwellings, so to apply liquidated damages to the dwellings and not the Contract Works has effectively turned the damages into a penalty because they can no longer represent a ‘genuine’ pre-estimate of your client’s loss.
However, where liquidated damages are deemed a penalty, it will be open for your client to either rely on its claim for the penalty and prove its losses, in which case it cannot recover more than the penalty or, ignore the penalty and pursue for unliquidated damages, the effect being the same, although with the latter, it may be entitled to damages if proven in excess of the penalty.
Liquidated and delay damages is a complex area of the law and you would be well advised to obtain expert advice. However, I hope that the above is of assistance to you.
© Michael P. Gerard MSc, PGDipLaw, PGDipBar, FCIOB, MCIArb, MAE
The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.
Author background
Michael is a Barrister, Chartered Builder, Registered Adjudicator & Accredited Expert in quantum and planning matters. He is Managing Director of Michael Gerard & Co www.michael-gerard.co.uk, a company of chartered building consultants and quantity surveyors who provide a specialised service in the areas of construction law, quantum, programming, business recovery and insolvency support to the construction industry. Michael is also a consultant with Silver Shemmings LLP, a London practice of solicitors specialising in construction.