Articles

11 February 2022

In brief

The nature of construction work typically comprise various phases of work, yet more often than not liquidated damages clauses still often only provide for one rate for delays to any phase of work. This could lead to situations where the same liquidated damages rate is applied on later phases of work even where part of the work has been completed. In Eco World – Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd [2021] EWHC 2207 (TCC) ("Eco World"), the Technology and Construction Court ("TCC") in England and Wales ruled that such "one rate" liquidated damages clauses are not void and/or unenforceable even if they do not provide a mechanism for reduced liquidated damages to reflect partial possession of completed works. While there are no reported judgments in Singapore discussing Eco World at the time of writing, it is suggested that this approach is not inconsistent with the freedom of contract principle that is routinely upheld by the Singapore courts.

Notably, the TCC went further, interpreting the liquidated damages clause there to also operate as a cap on the defendant's overall liability arising from delays. A week later, the Singapore High Court in Crescendas Bionics Pte Ltd v Jurong Primewide Pte Ltd [2021] SGHC 189 ("Crescendas Bionics") took the opposite position, ruling instead that a liquidated damages clause does not operate as a cap on general damages.

Background facts

The Claimant ("EWB") had engaged the defendant ("Dobler") to carry out the design, supply and installation of façade and glazing works for 3 residential buildings in London (the "Works") on 11 July 2016 pursuant to the JCT 2011 Construction Management Trade Contract. The Works were not completed by the mutually agreed completion date of 30 April 2018, with EWB taking partial possession of Blocks B and C on 15 June 2018, and certifying practical completion of works on 20 December 2018. Pursuant to the liquidated damages clause ("Clause 2.32.1"), EWB then sought to impose liquidated damages of £574,184.20 – which was disputed by Dobler.

Liquidated damages clause: Clause 2.32.1

"2.32.1 If the Trade Contractor fails to complete the Works or works in a Section by the relevant Date for Completion of a Section or the Works, the Employer may, not later than 5 days before the final date for payment of the amount payable under clause 4.16, give notice to the Trade Contractor which shall state that for the period between the relevant Date for Completion of a Section or the Works and the date of practical completion of the Works or Section that:

2.32.1.1 he requires the Trade Contractor to pay liquidated damages at the rate stated in the Trade Contract Particulars, or lesser rate stated in the notice, in which event the Employer may recover the same as a debt;…"

Trade Contract Particulars

"The following rates of liquidated damages will apply for the first 4 weeks (inclusive) of delay in completion of 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…"

No less than 3 adjudications followed. The first did not result in a decision. In the second adjudication, EWB was held to be entitled to liquidated damages for delay up to 15 June 2018 when EWB took partial possession of Blocks B and C, which amounted to deemed practical completion, following which no liquidated damages were payable. In the third adjudication, EWB then relied on the second adjudication decision to claim general damages to the tune of £2,228,705.85 for delay in respect of Block A, but it was held that Clause 2.32.1 was not a penalty, and it excluded any entitlement to general damages.

Key issues and findings

The central issue for the Court's determination was whether Clause 2.32.1 was void and/or unenforceable. Interestingly, both parties performed a volte-face before the Court, arguing the case which had been taken by the other party throughout the adjudications. In this case, EWB argued that Clause 2.32.1 was void for uncertainty, and/or unenforceable as a penalty, and as such EWB should be entitled to claim general damages. Given the much lower sum potentially payable by Dobler pursuant to Clause 2.32.1 as opposed to general damages, it comes as no surprise that Dobler chose to argue that Clause 2.32.1 should be upheld.

(1) Uncertainty

EWB argued that Clause 2.32.1 was void for uncertainty, on the basis that the contract permits EWB to take partial possession of the works in advance of practical completion, but does not contain any mechanism for reducing the level of liquidated damages to reflect such early possession. The Court disagreed, finding that Clause 2.32.1 was reasonably clear and certain, and was capable of being operated. As a result, Dobler remained liable for the full rate of liquidated damages even to the reduced scope of the outstanding works.

(2) Penalty rule

EWB also argued that Clause 2.32.1 was penal and unenforceable given that the same rate of liquidated damages was applicable for late completion of any combination of Blocks A, B and/or C, despite the fact that different levels of loss would be incurred. The Court also disagreed, holding that Clause 2.32.1 was not so unconscionable, exorbitant or unconscionable as to render it penal and void, and is instead a secondary obligation on Dobler which is proportionate to EWB's legitimate interest in enforcing the primary obligation of completing the Works. The Court noted that any delay of the Works was likely to adversely impact the project as a whole, exposing EWB to liability for liquidated damages under the main contract and/or the risk of losing purchasers. Further, parties had agreed to a liquidated damages clause, which precisely avoided the practical difficulty of calculating and proving losses which could arise from a wide range of different combinations of partially incomplete works. As such, the Court held that Clause 2.32.1 was valid and enforceable.

(3) Implied term

Dobler sought to argue in the alternative that, should Clause 2.32.1 be held to be unenforceable, there was an implied term in Clause 2.32.1 that EWB had to exercise Clause 2.32.1 in a rational or reasonable manner, such that the rate of liquidated damages would  reflect partial possession of completed works. The Court rejected this argument in obiter, observing that there is no room for an implied term here because Clause 2.32.1 was fully operable and provided an absolute contractual right for EWB to levy liquidated damages in the event of delay to the Works caused by Dobler.

Practical implications of Eco World

Eco World is yet another ruling which emphasises the English courts' track record of upholding the freedom of contract. The Court had highlighted, in particular, the fact that Clause 2.32.1 had been negotiated by parties' external lawyers, and that courts "should be cautious about any interference in the freedom of the parties to agree commercial terms and allocation of risk in their business dealings."

While it remains to be seen whether the Singapore courts would adopt the same approach in cases involving partial completion of works and liquidated damages, it is likely that Eco World would at least prove very persuasive in view of the Singapore courts' similar track record in upholding the freedom of contract (see, e.g, the re-statement of this principle by the Singapore Court of Appeal in Denka Advantech Pte Ltd v Seraya Energy Pte Ltd [2021] 1 SLR 631; [2020] SGCA 119 at [82]). This means that should parties wish for the calculation of liquidated damages to vary according to the partial completion of works, these mechanisms should be carefully negotiated and expressly drafted into the contract.

Cap on general damages

Dobler also advanced a fourth argument that even if Clause 2.32.1 was found to be penal and/or unenforceable, Clause 2.32.1 would still operate to cap any general damages at the level of liquidated damages otherwise payable. The Court acknowledged that a literal reading of Clause 2.32.1 suggests that the 7% cap only applies to liquidated damages and not general damages, but nonetheless accepted Dobler's argument. The Court reasoned that the objective understanding of the parties in the commercial context was that Clause 2.32.1 served dual purposes: to quantify automatic liability for damages in the event of delay, and to limit Dobler's overall liability for late completion to a specific percentage of the final contract sum. This finding demonstrates that the courts will not be blind to the commercial context when interpreting contractual terms.

In contrast, the Singapore High Court in Crescendas Bionics ruled that the following liquidated damages clause ("Clause 6.0") there did not operate as a cap on general damages:

6.0      LIQUIDATED DAMAGES

In the event of a delay in completing the Works, the Management Contractor shall be liable to pay the Employer liquidated damages for late completion. In this regard, the rates of the liquidated damages that shall apply are as follows:

1. 1. S$30,000.00 per calendar day including Sundays and Public Holidays for the first 30 days the Works remain incomplete after the contract period, as defined herein Clause 5.0
   2. S$70,000.00 per calendar day including Sundays and Public Holiday for the duration the Works remain incomplete beyond the 30^th day up to the 60^th day after the contract period, as defined herein Clause 5.0
   3. S$50,000.00 per calendar day including Sundays and Public Holidays for the duration of the Works remain incomplete beyond the 60^th day after the contract period, as defined herein Clause 5.0

The High Court declared that "there is no principled reason for capping the amount of general damages recoverable by the plaintiff [based on Clause 6.0]". The High Court reasoned that general damages and liquidated damages are underpinned by different considerations: liquidated damages are intended to be parties' genuine pre-estimate of the likely loses that would be suffered in the event of a breach, whereas general damages are intended to compensate the innocent party for the actual losses suffered as a result of the breach. In addition, the High Court noted that Clause 6.0 is a contractual term which the parties had willingly agreed to be bound by in the event of a delay, and such there was no principled reason for the Court to find that Clause 6.0 operated as a cap on general damages recoverable.

As such, the position on the cap on general damages in Crescendas Bionics, as opposed to that in Eco World, will remain binding in Singapore unless and until such time it is revised by the Court of Appeal. To avoid all doubt, parties should expressly and clearly state in their contracts if they intend for caps on liquidated damages to also operate to cap general delay damages, in the event that the liquidated damages clause is void and/or otherwise unenforceable.

Contributed by:

Nandakumar Ponniya - Principal, Head Dispute Resolution Asia-Pacific, Baker McKenzie.Wong & Leow

Wong Tjen Wee - Associate Principal, Baker McKenzie.Wong & Leow

Daniel Ho - Senior Associate, Baker McKenzie.Wong & Leow

Tay Zhi Yuan - Associate, Baker McKenzie.Wong & Leow

Joshua Nathan - Consultant, Baker McKenzie.Wong & Leow