Main contractors often make claims against subcontractors for liquidated damages for delay. A question that sometimes arises is whether liquidated damages may be claimed by a main contractor where there is no corresponding claim for delay damages by the employer against the main contractor. Is this a defence for the subcontractor?
In a recent Client Alert, we discussed the difficulties facing a main contractor whose claim against its subcontractor depends on an uncertain liability to its employer (Claims Against Subcontractors: Contingent Loss, No Recovery?). But a main contractor might also find itself with a liquidated claim against its subcontractor, without any corresponding liability to its employer. In such a situation, where the contractor has suffered no loss, can it still recover liquidated damages from the subcontractor? This scenario has arisen only rarely in cases reported in England and Wales, but was recently addressed by the High Court of Singapore in Comfort Management Pte Ltd v OGSP Engineering Pte Ltd  SGHC 165.
Comfort Management v OGSP Engineering
Under the last of a series of back-to-back subcontracting arrangements, the subcontractor had been engaged to provide an air conditioning ducting system and mechanical ventilation system for a project in Jurong, Singapore. One year after work began, and nearly three months after the project was due to have been completed, the subcontractor withdrew its team from the site, leaving the works unfinished. The project was eventually completed a few months later. No delay claim was to be brought against the main contractor by its employer.
Nonetheless, the main contractor brought a number of claims against the subcontractor, among these a delay claim seeking liquidated damages. The subcontractor argued that in the absence of any possible liability for delay on the part of the main contractor, the main contractor had suffered no loss, and therefore ought not be entitled to claim liquidated damages.
This argument was rejected by the Singapore High Court, which held that the contractor’s right to recover liquidated damages did not depend on it having demonstrated loss, and was unaffected by whatever arrangement the main contractor had entered into to avoid liability for delay damages.
In contrast to many civil law jurisdictions, common law courts do not generally have any power to reduce a claimant’s ability to recover liquidated damages by reference to actual losses. It not being open to the subcontractor to argue that its liability should be reduced, it sought instead to rely on the absence of any loss to eliminate that liability altogether.
Such an argument is usually formulated as an appeal to the rule against penalties. The law of Singapore in this regard continues to rely on Lord Dunedin's propositions in Dunlop Pneumatic Tyre Ltd v New Garage & Motor Co Ltd  AC 79 such that, in determining whether a liquidated damages provision is an unenforceable penalty, the relevant issue is not the delta between the liquidated amount and the loss the contractor actually suffered, but that between the liquidated amount and the greatest loss the contractor could conceivably have suffered. Therefore, in rejecting the subcontractor's argument, the Singapore High Court was simply following the clear requirements of the Dunlop test, which gives no weight to the main contractor’s actual losses.
This outcome may be seen as positive for two reasons:
- First, it gives primacy to the terms of the parties’ contract. If they agree that liquidated damages in a particular amount shall be payable should the subcontractor fail to complete its works on time, the parties can proceed safe in the knowledge that their agreement will be upheld. This certainty of outcome is valued by many contracting parties, which is why they often select the laws of a common law jurisdiction to govern their contract.
- Secondly, it clarifies an issue of commercial law which has not often been addressed, namely whether the existence of some demonstrable loss is necessary in order for a liquidated damages claim to be made. Comfort Management concludes that no loss need be shown.
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