Liquidated Damages: A Round Up

• Published date: 22 November 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Real Estate and Construction, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation, Construction & Planning
• Law Firm: Fenwick Elliott LLP
• Author: Ms Claire King and Laura Bowler

The recent TCC case of Eco World - Ballymore Embassy Gardens Company Limited v Dobler UK Limited¹ and the Supreme Court case of Triple Point Technology, Inc v PTT Public Company Ltd² provide much food for thought for those in the construction industry negotiating and interpreting liquidated damages provisions.

In this Insight, we go "back to basics" on liquidated damages provisions, ask what lessons can be drawn from this recent case law, and highlight the points that those negotiating liquidated damages provisions may want to consider going forwards in light of these cases.

So, what are liquidated damages?

As explained by Lord Leggatt in Triple Point:

"A liquidated damages clause is a clause in a contract which stipulates what amount of money will be payable as damages for loss caused by a breach of contract irrespective of what loss may actually be suffered if a breach of the relevant kind (typically, delay in performance of the contract) occurs. Liquidated damages clauses are a standard feature of major construction and engineering contracts and commonly provide for damages to be payable at a specified rate for each week or day of delay in the completion of work by the contractor after the contractual completion date has passed." [Emphasis added]

Liquidated damages are most commonly levied in construction projects in relation to delays to the completion of the works. However, liquidated damages are also levied in projects such as process engineering and power projects where, for example, performance specifications aren't met.³

The benefits of a liquidated damages provision for both parties to construction contracts are well known and acknowledged by the Courts, including in the Supreme Court decision of Triple Point. They include:

1. Avoiding the need for an employer to quantify its losses which may be difficult, time consuming and costly to do;⁴
2. Allowing both parties to properly manage the financial consequences of the risk. Liquidated damages achieve this by limiting a contractor's exposure to liability of an otherwise unknown and open-ended risk, whilst also allowing an employer to ascertain in advance what they would receive in such circumstances.⁵

As such, these clauses can provide reassurance to contractor and employer alike that they both know the consequences of delaying the project or not hitting a particular performance specification.

Liquidated damages or a penalty?

If liquidated damages provisions are held to be a penalty, then, prima facie, they are void and unenforceable. However, the test as to what constitutes as a penalty has moved away from the famous Dunlop Tyre⁶ case in recent years. In particular, the Supreme Court case of Makdessi⁷ placed more emphasis on the freedom of commercial parties in deciding what to sign up to in their contracts than the traditional Dunlop tests.

The position as outlined in Cavendish Square Holding BV v Makdessi

The 2015 Supreme Court case of Cavendish Square Holding BV v Makdessi⁸ provides a comprehensive review of the law governing the circumstances in which a liquidated damages provision will be struck down for being a penalty. In providing that review, Lords Neuberger and Sumption drew attention to what they saw as an "artificial categorisation" between penalties and genuine pre-estimates of loss which had grown out of the Dunlop Tyre case from the early twentieth century.

Instead, they emphasised that: "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...