In a recent English case, Eco World – Valleymore Embassy Gardens Company Limited v Dobler UK Limited, the Court considered the application of liquidated damages under a JCT Construction Management Trade Contract.

In this case, the Court looked at whether a clause which did not provide for reduction of the rate of liquidated damages upon partial possession by the Employer constituted a penalty clause.

1. Factual Background

The case concerned the construction of three residential blocks, two of which (Blocks B and C) the Employer took over in June 2018, with works on the remaining block (Block A) in delay and practical completion then being certified in December 2018.

The liquidated damages clause in the Trade Contract provided that:

The following rates of liquidated damages will apply for the first 4 weeks (inclusive) of delay in completion to the Works beyond the Date for Completion

  • · £nil per week or pro rata for part of a week

Liquidated damages will apply thereafter at the rate of £25,000 per week (or pro rata for part of a week) up to an aggregate maximum of 7% of the final Trade Contract Sum…

Importantly, there was no provision in the Trade Contract allowing for the reduction of liquidated damages to account for the fact that parts of the development had been taken over by the Employer.

2. The Decision

The dispute came before the Court following a number of adjudication decisions. There were three primary questions for the Court to decide:

  1. Whether liquidated damages could be reduced to reflect the fact that the Employer had taken partial possession;
  2. If it could not, whether the liquidated damages provision then amounted to a penalty clause and was therefore unenforceable; and
  3. If the liquidated damages clause was unenforceable, whether the contractual cap in that clause could apply to general damages.

Question 1 – the rate could not be reduced

The Court held that, on the "natural and ordinary meaning of the words used", the rate of liquidated damages stated in the contract would continue to apply until the whole of the works were complete. There was no provision in the contract to allow that rate to be reduced where there was partial possession by the Employer.

Question 2 – the LD provision was not a penalty

In considering whether this meant that the liquidated damages clause amounted to a penalty clause, the Court applied the test established in the Cavendish Square case: namely, whether the liquidated damages provision was "unconscionable or extravagant so as to amount to a penalty".

This test was one which required to be considered in light of the specific circumstances of the case in question.

Here, the Court took into account a number of factors, including the fact that both parties had used lawyers to negotiate the contract and should therefore have entered into it with their eyes open. In light of those factors, the Court concluded that the liquidated damages provision reflected the intent of the parties and did not constitute a penalty clause.

Question 3 – the contractual cap applies to general damages

The Court also considered an argument made by the contractor that the 7% cap in the liquidated damages provision would apply even if liquidated damages were found not to be applicable and general damages were claimed instead.

The Court agreed with this. To hold that the cap only applied to liquidated damages and not general damages would be to take too literal an approach and ignore the commercial motivation of the parties in drafting the clause. The intent was to limit the liability of the contractor under the contract, whether that be in the form of liquidated or general damages.

This argument did not need to be considered by the Court in order to decide the outcome of this case. As a result, the Court's comments on this question will be treated as non-binding, although persuasive, by courts looking at this question in future.

3. Takeaway

This case demonstrates that the courts will take a commercial approach to interpreting a contract, with an eye to the parties' intent when entering into it. In particular, the courts will be slow to diverge from the "natural and ordinary meaning of the words used" if those words are seen to reflect the commercial motivations of the parties. Here, it was commercially important to the Employer that the whole of the Works were completed on time - the lack of a "reduction" in liquidated damages for partial possession reflected that. 

From the contractor's point of view, this case also emphasises the importance of ensuring there is specific provision for a proportional reduction in liquidated damages to account for partial possession. If there is not, a delay to one part of the works could have significant cost implications for a contractor in circumstances where the employer has the benefit of the other parts of the works it has taken partial possession of.


Lucy McCracken