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The Effect of Sectional Completion on Liquidated Damages

The Technology and Construction Court (TCC) have, in Eco World - Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd, recently held that a liquidated damages clause was neither void nor unenforceable as a result of a contract permitting the partial take over by the employer without a mechanism for reducing the level of liquidated damages payable by the contractor.

What are liquidated damages?

Essentially, liquidated damages are a pre-estimate of the loss which the employer (i.e. the party contracting with the contractor) might incur should the contractual completion date be delayed without the contractor having a relevant excuse. Liquidated damages must, however, be a genuine estimate of the loss that the employer will suffer as a result of such a delay; clauses may be found by a Court to be a penalty clause and thus unenforceable if they are not a genuine estimate of loss.

As the employer is not required to prove any loss, it is commonly believed that liquidated damages clauses solely benefit the employer. However, such clauses do provide a degree of certainty for the contractor as they will be aware of their potential liability from the onset of the relationship. Additionally, the sum which the employer can recover is capped to that stated within the contract. As such, if the employer's losses for the delay are greater than the liquidated damages stated within the contract the employer cannot seek to recover the additional sum.

What is a takeover?

In most construction contracts, a takeover by the employer occurs when the contractor has completed the relevant works. However, in circumstances such as the current matter (where the contractor was working on three properties under one contract), sectional completion may take place. This is where the employer takes over portions of the work as they are completed by the contractor.

Judgment

The question considered by the TCC was whether the liquidated damages clause was void or unenforceable as a penalty because the contract permitted partial take over without a mechanism for reducing the level of liquidated damages payable in the event of a delay to the latter sections.

The TTC found that the clause was neither unconscionable nor extravagant. Moreover, while it was wildly believed that where contracts allow for sectional completion liquidated damages claims would fail it was held that the provision in question was "reasonably clear and certain" and was "capable of being operated". As such, the clause was deemed to be valid and enforceable.

Forbes' Comment

Liquidate damages clauses form a fundamental part of both the JCT and NEC suites of construction contracts and they are also becoming more common in other forms of contracts involving the supply of services.

What the TCC's position clarifies is the position where sectional completion is provided for within the contract. As such, where the contractor's potential liability is appropriate, a lack of a mechanism to reduce liquidated damages in the event of partial takeover would not affect the overall provision and the employer can claim the entire sum should the contractor be delayed in the latter sections.

The Commercial department at Forbes Solicitors can assist you in navigating liquidated damages. If you have any questions regarding the status of a contract or require assistance with drafting an agreement please contact John Pickervance in our Commercial department via email at John Pickervance or phone on 0333 207 1134.

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