Liquidated damages clauses – the position on penalties confirmed
The recent case of in the English High Court confirmed the enforceability of liquidated damages agreed by commercial parties even if the liquidated damages to be recovered are not an exact or precise estimate of loss.
The decision in GPP Big Field LLP and Anor v. Solar EPC Solutions SL followed the consideration of the law on penalties in 2015 in Cavendish Square Holding BV v EL Makdessi and Parking Eye Ltd v Beavis. The Supreme Court's decision in Cavendish Square considered the common starting point of the law on penalties – whether liquidated damages were a genuine pre-estimate of the loss (the "established" authority of Dunlop Pneumatic Tyre Company Ltd v New Garage Motor Co Ltd (1915). The Supreme Court in Cavendish Square found that the correct test is to ask:
- Whether the obligation to pay liquidated damages was a primary or secondary obligation; and, if a secondary obligation
- Whether the liquidated damages claimed were not out of all proportion to the injured party's legitimate interests.
In GPP Big Field LLP and Anor v. Solar EPC Solutions SL, the English High Court had to address claims and counterclaims arising under five EPC contracts for solar power generation plants in the UK. GPP claimed liquidated damages for late and/or non-completion by the contractor under four of the contracts. The claim was made against Solar, the contractor's parent company, as the contractor was insolvent and Solar had given indemnities for the contractor's performance.
The liquidated damages under each contract were specified as £500 per MWp installed per day of delay. However, each contract had different specifications, schedules and milestone payments. There were variations of over 30% in the expected electricity prices on each plant and the actual losses varied in relation to the time of year they were suffered. Solar relied on these differences in support of its defence that the liquidated damages were not genuine pre-estimates of the losses likely to be suffered.
In GPP Big Field, the judge considered each of the contracts in turn, although he considered the liquidated damages provisions of each contract to be broadly the same. It was common ground that the obligations to pay liquidated damages were secondary obligations to the primary obligation to carry out the works in accordance with the timetable. Therefore, in line with Cavendish Square, they were potential penalties. The judge rejected GPP's evidence that the parties had detailed discussions of the amount of the liquidated damages. Despite the differences in the losses suffered under each contract, referring to Cavendish Square and to ZCCM Investment Holdings plc v Konkola Copper Mines plc, the judge found that the delay damages did not constitute unenforceable penalties (see paragraphs 60 to 70 of the judgment). He agreed with GPP that such delay damages provisions are common in construction contracts and that the parties were experienced and sophisticated commercial parties of equal bargaining power and capable of assessing the implications of the relevant provision. The judge went on to explain that he did not find that the delay damages agreed exceeded a genuine pre-estimate of the loss and that the sum was not extravagant or unconscionable in comparison with the legitimate interest of GPP.
GPP Big Field confirms that liquidated damages do not have to be a genuine pre-estimate of expected losses. Although there is still room for discussion on the facts of each case, as long as the liquidated damages claimed are not extravagant or unconscionable and are not out of all proportion to a party's potential losses, a clause will be enforceable and the courts will not help a party to get out of what the now consider to be a bad bargain.
GPP Big Field also considered whether the contractor was liable for liquidated damages after the date of termination of one of the EPC contracts. The point was dealt with very briefly in the judgment. Relying on Hall v Van Der Heiden, the judge held that liquidated damages would continue to be deducted until the actual date of commissioning of the plant, despite the fact that the contract had been terminated before this point. The rationale was that, if liquidated damages ceased to be payable upon termination, the contractor would be rewarded for its own default (in the sense that the contract was terminated because of the contractor’s default).
However, there are conflicting lines of authority which say that, after termination, the parties are no longer required to perform their primary obligations. Therefore (this line of thinking goes) the contractor’s obligation to complete by the completion date falls away, so the liquidated damages become irrelevant because there is no completion date for them to bite upon. This line of authority was generally considered to be the "better" view, and the Hall decision has been "questioned" by commentators.
But, as things currently stand, GPP Big Field creates a further conflicting authority. It would be very helpful if the appellate courts could resolve this conflict sooner rather than later.