The thorny issue of Liquidated damages being void for uncertainty

Liquidated and ascertained damage (LAD) clauses are a standard feature of published forms of construction contracts. LAD’s are pre-determined damages established at the formation of the contract, based on a calculation of the actual loss that is likely to be suffered if a party breaches a specified term of the contract, usually a failure to achieve practical completion by the completion date set out in the contract.

Parties obtain the benefit of certainty from the stipulated damages payable should there be a breach of contract. In Cavendish Square Holding BV v El Makdessi and Parking Eye Ltd v Beavis[1], the Supreme Court stated: "In a negotiated contract between properly advised parties of comparable bargaining power, the strong initial presumption must be that the parties themselves are the best judges of what is legitimate in a provision dealing with the consequences of breach."[2]

However certainty not rigidity is the goal therefore If construction is hindered or delayed by a 'relevant event' such as a client variation or adverse weather that impacts on the Practical Completion date, an extension of time may be granted, allowing the contractor to make a claim for loss and expense.

LAD’s should be an identifiable and genuine pre-estimate of the loss that would be suffered in the event of a delay, therefore the presumption is that liquidated and ascertained damages are not enforceable if they constitute a penalty[3]. Liquidated damages might include rental charges for temporary accommodation or prolonged storage costs. They are usually set as an ascertained daily or weekly amount with more complicated formulae where works are phased, or there will be partial possession.

In the case of Cavendish Square Holding BV v El Makdessi and Parking Eye Ltd v Beavis [2015][4] the Supreme Court held that the test is not just whether the amount is a genuine pre-estimate of loss or that the clause is a deterrent, as this can be a legitimate clause intended to influence a party’s performance. The test is based on whether a clause is “unconscionable or extravagant”[5], does it have a legitimate commercial purpose to protect against a demonstrable consequences that would flow from breach.

Where a damages clause is disputed there is often a dual attack on the grounds that an LAD clause is 

1. A penalty and therefore unenforceable, and

2. That it is too uncertain and inoperable in its meaning and effect, to be applied.

In these circumstances, depending on the facts presented the courts may find that the clause is not enforceable.

Taylor Woodrow Holdings v Barnes & Elliott Ltd[6]

By an agreement of 4 August 2000, executed as a deed, Taylor Woodrow Holdings and George Wimpey (Southern) Limited employed Barnes & Elliott to carry out complete design, refurbishment and conversion works. The project was to create 64 duplexes out of a former psychiatric hospital, and to provide new ancillary amenities such as parking spaces for both visitors and residents, bin stores, footpaths, garages and safe vehicular and pedestrian access.

The contract was a JCT Standard Form of Building Contract with Contractors Design (1998 edition), subject to amendments made by the parties. The planned completion date for the project was on or about 3 December 2001 however delays occurred and the works were not completed until June 2002.

The agreed preliminary issues that were raised for determination by the arbitrator were:

(1) Is the liquidated damages provision valid or is it void for uncertainty or inoperable?

(2) Is the liquidated damages provision a genuine pre-estimate of the loss and enforceable or a penalty and unenforceable?

The arbitrator determined that the liquidated damage provision was not valid and that it was void for uncertainty and was inoperable. He also concluded that the liquidated damages provision was not a genuine pre-estimate of loss, but a penalty and therefore unenforceable.

What did the court decide?

The appeal was heard by Judge Wilcox Queens Bench Division (Technology and Construction Court). It was established that the project works were divided into six sections and the contract provided for sectional completion. Judge Wilcox held that Clause 24 which governed liquidated damages, was void for uncertainty; and “incapable of operation”. “The contents of any section and the mechanism for ascertaining a section was not contained in the contract, there was therefore no basis for triggering the operation of cl 24 since it would be uncertain what had remained not done and when”.[7]

Upon reviewing Clause 17.1.4 of the contract, it was also found to be inoperable as where partial possession was given, the proportionate relief from LADs was incapable of calculation. Any LAD’s, referred to living units, however comprised, and would not bear a proper relationship to the extent of the section not taken into possession.

The contract was a JCT contract, subject to amendment and it endeavoured to provide for sectional completion. However the sectional completion supplement published by the joint contract tribunal for this purpose was not used. Judge Wilcox stated “The dangers inherent in not using this are exemplified in this case. It is for the court applying business common sense and meaning to the construction of commercial documents to endeavour to avoid frustrating the reasonable expectations of the businessman. But it is not for the court, however, to re-write the contract. The provisions of the contract considered by the arbitrator, in my judgment, cannot be characterised as ambiguous. They were in fact uncertain and inoperable. There is no question, in my judgment, of the contra proferentum rule applying in this case. That applies only where there is a clearly identified ambiguity”[8].

In finding that the contract was void for uncertainty Judge Wilcox held it was not necessary to consider the second matter because “the first matter disposes of this appeal”.

How does this fit with previous and subsequent case law?

Customarily the courts, have not been enthusiastic to determine that a contract is entirely or in part void and inoperable for uncertainty. If the court can sensibly identify the intent of the parties from the contract, or any other admissible evidence, the court will give effect to that intention[9].  For the courts to do this though coherent contract drafting is required, the parties’ intention must be ascertainable and operable. In the case of Arnhold & Co Limited v The Attorney of Hong Kong (1989)[10] the contract provided for minimum and maximum liquidated damages but failed to identify the procedure for determining actual damages. The LAD provisions were therefore inoperable and void for uncertainty.

Where sectional completion is employed upon a project there is a propensity for increased confusion. In the case of Liberty Mercian Ltd v Dean & Dyball Construction Ltd [2008][11] the disputed contract contained provisions for sectional completion. The Contractor argued that the sectional completion schedule in the contract was void for uncertainty because there was no provision in the contract detailing the effect of delayed completion upon the outstanding sections of the works. In such circumstances, the courts may find that the clause is inoperable and void for uncertainty, such a challenge is however difficult to maintain in practice. It was held that although the contract did not state that “a culpable delay under Section 1 would give rise to a culpable delay for Sections 2 to 5”[12], when considering the contract as a whole, this was what the parties intended. The sectional completion schedule was not void for uncertainty and was therefore operable and enforceable. The Court took a purposive approach to interpret a problematic contract clause in a purposive way to ensure that the contract did not fail.

Practical implications when drafting Liquidated damages provisions

There can be prudent commercial reasons for contracts to provide different completion dates for different parts of a project rather than one completion date for the entire project. It is essential to ensure that these dates are clearly expressed in the contract and are not simply dealt with in the specification or employer’s requirements. When drafting provisions it is crucial to comply with the correct contract formalities and make clear express provision for sectional completion dates in the contract. The scope of works of any section must be unmistakably defined or it will be problematic, if not impossible, to ascertain the scope of works of a particular section.

If the scope of works are uncertain, there is a serious risk that the completion dates, and thus liquidated damages provisions, may be void for uncertainty. This will be increasingly important where it could be argued that works are not included within a defined section or alternatively the scope of sections overlay or are interdependent of each other.  To evade any dispute that Liquidated damages are void for uncertainty or amount to a ‘penalty’ Good practice dictates that a record of how Liquidate damages have been calculated is maintained along with the basis for how damages are apportioned between the different sections.

Where a contract allows for sectional completion, liquidated damages provisions must be expressed so as not to represent a global sum for the whole contract, this could constitute an unenforceable penalty. LAD provisions must relate to the late completion of the particular section of the works to which it applies[13]. Where partial possession is planned, the liquidated damages' provision must be reduced pro-rata whenever such possession is taken.

Attention and management of the inherent perils of late changes to the scope of work made after the contract has been agreed, must be carefully reviewed to ensure that the liquidated damages provisions continue to serve the desired purpose.

Sound understanding of the project, scope of works and good old fashion drafting will ensure provisions are clear and a genuine pre estimate of loss. Ensuring that LAD provisions give effect to the parties intention and remain certain and operable. 

As part of our Management Consultancy services Vinco London Consulting help construction businesses and trade subcontractors build and develop systems based on sound business practices. Improving business performance to navigate the tricky commercial issues that can arise.

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