Liquidated Damages: A sole remedy for delay?
Apr 2014 |In the first of the March 2014 editions of Constructive Notes, the writer observed that oftentimes exclusion of liability clauses and liability caps are mechanisms which operate in tandem with provisions in relation to Liquidated Damages (which are not considered to be exclusory, operating in theory for the benefit of both parties to the contract) to create a finely balanced risk regime.
It was further noted that other than in respect of a provision for Liquidated Damages (which was likely to be capped as a percentage of the Contract Sum), the contractor may insist upon a complete exclusion of damages for loss of profit, loss or use or business interruption, or alternatively seek to cap any such exposure to the limit of any applicable insurances.
A question can then arise as to whether the remedy of Liquidated Damages is the Principal's sole remedy for delay, however caused, or whether there is scope to argue for an entitlement to further damages (leaving to one side the efficacy of the consequential loss exclusion) on the basis that defective design (where this is the responsibility of the contractor) or workmanship which caused or contributed to the delay constitute a separate and discrete breach of contract.
The English case of Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH.50 [Biffa Waste Services Ltd v Maschinenfabrik Ernst Hese GmbH [2008] EWHC 6 (TCC)] is relevant in this regard. This decision by the Honourable Justice Ramsey of the High Court of Justice (Queens Bench Division, Technology and Construction Court) went to the Court of Appeal, but it is only the part of the judgment dealing with vicarious liability that was reversed on appeal.
In this case, Biffa sought to argue that a valid and enforceable liquidated damages clause was an exclusive remedy for breach only of the obligation to complete on time. It was argued that it was not applicable to breach of other obligations, which whilst causing delay, were not obligations dealing with the need to complete on time. It was argued that such breaches allow an entitlement to unliquidated damages.
Biffa submitted that the wording of the contract ['…shall not relieve the Contractor from its obligation to complete the works or from any other of its obligations and liabilities under the contract and shall be without prejudice to any other right or remedy of the Employer'] opened up a claim by Biffa against WEH for damages for delay where that delay was not simply a breach which it referred to as 'simple' delay.
This was however rejected by the Judge who accepted the defendant's submission that the distinction between a 'simple delay' and breaches of other terms of the contract leading to delay was not one which was properly made.
The Judge considered that if liquidated damages were the only monies payable for failure to complete, that must exclude other remedies for payment of damages.
At paragraph 114, the Judge said:
'I do not consider that it is possible to draw a distinction between a 'simple' failure to complete and a failure to complete caused by breach of another obligation. If there is a failure to complete then liquidated damages are 'the only monies' due for such default. If there is a breach of another obligation and that breach causes a failure to complete then liquidated damages are still the only monies due for that default, that is a breach of contract causing a failure to complete on time'.
And then, [at 115]:
'Secondly, I do not accept that a liquidated damages clause which only applied to a case where there was simply a failure to complete on time without a breach of any other provision would make commercial sense. The purpose of the liquidated damages clause is, as Lord Upjohn said in the Suisse Atlantique case, for the benefit of both parties: 'the party establishing breach by the other need prove no damage in fact; the other must pay that, no less and no more.'…. A party wishing to avoid liquidated damages and argue for no loss or a smaller sum would attempt to find some other breach of an implied or express term to hang the delay on. A party seeking to uphold the clause would be trying to disprove that another breach was the cause of the delay'.
And then, [at 117]:
'I consider that my view is consistent with the decision of His Honour Judge Gilliland QC in Piggott Foundations Ltd v. Shepherd Construction Ltd [1993] 67 BLR 48 at 68 where he held that there was a liquidated damages provision and that this provision 'prevents the defendant from seeking to avoid the overall limitation of damages to £40,000 by claiming as a head of general damages for the breach of any other provisions or obligation under the contract such damages which have resulted from the failure of the plaintiff to complete the piling work within the period of 10 weeks.' The same consistency is implicit in the decision of His Honour Judge Fox-Andrews QC in Surrey Health Borough Council v. Lovell Construction Ltd (1988) 42 BLR 25 where at 37 he found that the liquidated damages were an exhaustive remedy for delay where a building had been damaged by a fire'.
It has been written that the 'irresistible conclusion' is that a valid enforceable liquidated delay damages clause presents an exclusive or exhaustive remedy for delay, regardless of what breach of what obligation has caused (partly or wholly) the delay.1
This 'complete remedy' analysis [so described] is summarised in Keating on Construction Contracts (8th Edition at paragraph 9-006) which was referred by The Judge [at 118]:
'It is suggested that the solution is primarily a question of the construction of the contract in question. If, as in most (if not all) cases, the clause is clearly expressed to be or, as a matter of proper construction appears to be, a complete remedy for delayed completion then it matters not why the contractor failed to complete by the due date. . . The fact that the delay is due to a breach of contract by the contractor as opposed to merely going slow, cannot affect the nature or quality of the loss which the liquidated damages is intended to compensate. In reality, in such situations, there are two breaches: the carrying out of the defective work. . . and the failure to complete by the due date. Neither the employer nor the contractor can avoid liquidated damages by simply relying on the first breach.' 2
The writer believes that this decision and these comments have to be understood in the context of an attempt to recover damages outside of the Liquidated Damages regime on the basis of a breach unrelated to time, but still referable to the period of delay. It seems clear that damages for breach of warranties or failure to achieve performance guarantees may still be otherwise recoverable, subject to whatever remedies might be specifically provided for in the Contract.
Further, under a D & C Contract where co-extensive tortious duties may arise, a clear intent that Liquidated Damages are to operate as a sole remedy to the exclusion of general law damages may be necessary to confine recovery in the manner suggested in the Biffa case.
It also seems unlikely in this country that a Liquidated Damages clause of itself would be effective to limit damages in circumstances where the proscribed conduct is found to be in breach of Schedule 2 of s 18 of the Australian Corporations Act 2001 (Cth) or associated provisions of the Competition and Consumer Act 2010 (Cth).
Interestingly, in the Biffa case, the Judge went on to consider whether the recovery of Liquidated Damages precluded the recovery of costs incurred in reasonable mitigation of the delay.
The Judge noted [at 121] that the cost of taking reasonable mitigating steps is generally recoverable as part of the damages for the breach (citing The World Beauty [1970] 144 at 156 per Winn L J).
The Judge went on to say:
'As stated above, Liquidated Damages are an exhaustive remedy for delay. That exhaustive remedy therefore includes any damages which could be recovered damages for failure to complete.'
A further aspect - Insurance Policy Exclusions
Insurance policies sometimes contain an exclusion of loss said to be referable to the imposition of Liquidated Damages. If however, the cause of the delay that gives rise to the Principal's entitlement to levy Liquidated Damages is otherwise indemnifiable, this might be seen to operate harshly on an Insured.
If in fact such a provision is penal in nature, it is likely to be struck down on the basis that it does not reflect a genuine pre-estimate of damage. If on the other hand, it is upheld and found to be enforceable as a remedy, then it arguably has the potential to operate not just for the benefit of both parties to the contract, but also for the benefit of insured and insurer, operating as a cap on recoverable loss (often as a percentage of the contract sum) and further in certain circumstances as a sole remedy in the event of delay occasioned by the insured's breach.
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(1) Dr Hamish Lal in his article 'Liquidated Damages' (2009) 25 Const. L.J. 567 - 690 [586].
(2) Keating on Construction Contracts, 2006, [9-006].
