A liquidated damages clause was important in Buckingham Group Contracting Limited v Peel L&P Investments and Property Limited, where Buckingham Group lost in the Technology and Construction Court. The case was brought over a £26m contract to build a corrugated cardboard plant for Peel L&P Investments. The judge rejected all the claimant’s arguments that there were errors in the contract which were void and unenforceable.
Facts of the case
Peel engaged Buckingham as its contractor to design and construct the production building and certain external works, in accordance with the contract.
The works were significantly delayed and the parties were in dispute as to who was responsible.
A pay less notice was issued to Buckingham, notifying them of Peel’s intention to pay less than originally agreed. The reduction was to be enforced by way of capped liquidated damages. Buckingham contended that the provisions in respect of liquidated damages were void and unenforceable.
What are liquidated damages?
Liquidated damages are a fixed or determined sum agreed by the parties in a contract, to be paid if there is a breach by one of the parties. Liquidated damages define what amount of money will be payable by a breach of contract, irrespective of what loss may actually be suffered if a breach of the relevant kind occurs.
A standard feature of major construction and engineering contracts are a liquidated damages clause. Such clauses usually provide for damages to be payable at a specified rate for each week or day of delay in completion of work by the contractor after the contractual completion date has passed.
A liquidated damages clause limits the contractor’s exposure to liability of an otherwise unknown and open-ended kind. It also gives the employer certainty about the amount that it will be entitled to recover as compensation.
However, if a liquidated damages payment constitutes a penalty it will be unenforceable.
In Buckingham v Peel, Buckingham claimed that the liquidated damages provisions were void and unenforceable, due to alleged errors concerning the following;
- The date of practical completion;
- The rates;
- The contract sum; and
- Partial possession.
Expanding on the alleged errors
Date of practical completion
In clause 1.1 of the contract between the parties, the date for completion of the works was 1 October 2018. According to Schedule 10 of the contract, the seventh milestone date for practical completion was identified as 30 November 2018.
The claimant argued that a clause which provided for liquidated damages to be paid if works were not completed by a specific date, could not be considered as clear and certain. This is because the contract contained two competing dates for completion. There were no other terms to clarify which date applied, thereby forming Buckingham’s proposal that the contract was uncertain.
Although Peel accepted that these terms were inconsistent and vague, the dates could be aligned, as if the claimant failed to achieve the seventh milestone date by 30 November 2018, it would become liable for liquidated damages as shown in Schedule 10.
Whilst Buckingham had an obligation to complete the works by 1 October 2018, no liquidated damages attached to such breach.
The court accepted Peel’s submission and found that the date for completion of the works had had no impact on the liability for liquidated damages set out in Schedule 10. Therefore, the claimant was liable for not achieving completion.
The two rates of rates for liquidated damages
Buckingham also argued that Schedule 10 was not clear as it contained two sets of rates and it was impossible to known which the parties intended should apply.
The claimant also submitted that Schedule 10 identified as a LADs proposal (liquidated and ascertained damages) and that these words indicated that the parties may not have agreed any rates in Schedule 10.
The judge accepted the defendant’s submission that by a process of conventional construction, it was possible to conclude not only that the parties had reached agreement on the content of Schedule 10 but also that their agreement on the content of Schedule 10 but also that their agreement was reflected by the right hand set of columns under the heading ‘BGCL LAD Proposal ref BAO Ltd 13.09.17’. Understanding that at the time of its preparation, the document was a proposal, shed light on which set of columns was to prevail, namely the subsequent offer which was made last in time. The tender schedule, represented by the left hand set of columns, would have come first, followed by the Claimant’s best and final offer dated 13 September 2017.
The contract sum
A further ambiguity in the contract was the contract sum. The contract sum was £26m, but the proposed sum in the table within Schedule 10 was £25m.
The claimant argued that it was unclear whether the liquidated damages should be based on the percentage rates in the daily column applied to the actual contract sum, or based on the lump sum contained in the weekly rate column even though they had been calculated differently to the one ultimately agreed.
The judge accepted Peel’s submission that there was no error to correct here, and that the parties had agreed the weekly lump sums contained within the table of Schedule 10.
Buckingham further alleged that Schedule 10 was unenforceable as it failed to provide a workable scheme in respect of partial possession.
The claimant, Buckingham, submitted that the parties must have intended to allow partial possession to be taken, since that was provided for in clauses 2.30 to 2.34 of the contract. Buckingham contended sectional milestones were intended to equate to ‘sections’, but the parties had failed to provide any means of calculating the value that the relevant part bears to the relevant section sum as shown in the contract particulars.
The judge agreed with the defendant that clauses 2.30 to 2.34 did not refer to milestone dates and did not need to.
The contract did not provide for completion by completion by sections and the parties understood this, on multiple occasions within the contract particular, they stated ‘sections do not apply’.
Moreover, no sections were identified or described in the fifth recital which was key for the application of the defined term of ‘sections’.
What was ruled?
Alexander Nissen QC, sitting as deputy High Court judge, found in his judgment against the grounds the contractor argued. Although Buckingham argued that the liquidated damages were void and enforceable under the contract, because some parts were ambiguous, Nissen ruled that this was not the case and that ‘none of the arguments advanced by Buckingham in respect of the provision for liquidated damages succeed’.
It was therefore concluded that the liquidated damages provisions in the parties’ contract were certain and enforceable, and the cap on them did not extend to general damages for delay.
The judge noted that the courts were reluctant to hold a provision in a contract void for uncertainty, particularly where the contract has already been performed. It is only if the court cannot reach a conclusion as to what was in the minds of the parties or where it is unsafe to prefer one possible meaning to other equally possible meanings that the provision would be void for uncertainty.
The waiver clause
The contract also contained a waiver clause, appearing immediately below the table in Schedule 10 under the heading: ‘genuine pre-estimate of loss’, which provided that the claimant waived absolutely any entitlement to challenge the enforceability of the liquidated damages provisions.
The court did not consider this clause as the claimant did not contend that the provisions were a penalty but rather that they were void for uncertainty. Accordingly, a waiver clause could not rescue that which was too uncertain to have legal effect.
There is currently no English authority on whether a party can waive its right to challenge the validity of a liquidated damages provision but in principle, any right can be waived as long as the waiver is voluntary, informed and unequivocal and does not run counter to some important public interest.
How did the judge reach this conclusion?
The judge applied the classic rule of contract construction. Nissen considered the purposes of liquidated damages and what happens when the contract does not provide for partial possession (Eco World v Dobler UK) or where it does but the LDs reduction formula is ‘cumbersome’ (Mansion Place Ltd v Fox Industrial Services Ltd).
The judge ruled that the alleged errors were certain and enforceable. The conclusion that a contractual provision is so uncertain that it is incapable of being given a meaning of any kind, is one which the courts have always been reluctant to accept. The courts recognise that the very fact it was included demonstrates that the parties intended it to have some effect.
The contract must be construed against the surrounding circumstances, in order to ascertain what a reasonable party would have understood the parties to have meant. The court has regard to commercial common sense and therefore concluded that the provisions were genuinely certain and enforceable.
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