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Liquidated Damages for Post-Termination Delay?

Liquidated Damages for Post-Termination Delay?

The High Court of England & Wales considered, in respect of the delayed completion of a solar project, the appropriate end date for liquidated damages under a terminated construction contract.

It is usual and standard for a construction contract to contain a liquidated damages clause. It is also common for a termination clause to be included and it is not unusual for it to be exercised. Strangely, however, it is not clear under English law how these two concepts interact.

Specifically, if the contract has been terminated with the project unfinished, and the work completed by an alternative contractor, when does the first contractor's liability to pay liquidated damages end? This question remains open following the recent case of GPP Big Field LLP & Anor v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).

 

Background

GPP, the employer, and Prosolia UK, the contractor, entered into five EPC contracts for the development of five different solar power generation plants in the United Kingdom. Four out of the five developments failed to be commissioned by the relevant due dates, with the delays ranging from 44 to 285 days.

Among other claims, GPP, acting through its two investment vehicles, claimed liquidated damages of £500 per day in all four contracts for Prosolia UK's failure to achieve completion of the plants by the due date. The liquidated damages claimed amounted to £1,804,221 across the four delayed contracts.

Prosolia UK had become insolvent and was placed into liquidation in August 2015, so GPP sued Prosolia UK's parent company, Solar, as the guarantor and indemnifier of Prosolia UK's obligations under the four EPC contracts. Solar raised various defences (including that the liquidated damages provisions amounted to a penalty, discussed here). At the time of termination, one of the projects remained incomplete and in relation to this project, Solar raised the defence that its liability to pay liquidated damages could not extend beyond the date on which the relevant contract was terminated by GPP (30 September 2014). As a result, Solar argued that it was not liable to pay liquidated damages in respect of the further 61 days that elapsed before the relevant solar plant was completed by an alternative contractor.

 

The End Date for Liquidated Damages

The task for the court, therefore, was to identify the correct end date for Solar's liability to pay liquidated damages; whether that was the date of termination, or the later date on which the plant was actually commissioned. The judge held that the correct date was the date of actual commissioning. In doing so, he relied on the ruling in Hall v Van Der Heiden (No 2) [2010] EWHC 586 (TCC), in which the same argument had received short shrift from Coulson J:

"I reject the suggestion that the defendant's liability to pay liquidated damages somehow came to an end when his employment under the contract was terminated. There is no such provision in the contract. Any such term would reward the defendant for his own default."

Solar was, therefore, liable to pay liquidated damages in respect of the total delay caused to the project, including that portion of the delay which extended beyond the date on which the contract was terminated. However, it appears that in neither case was contrary authority cited to the courts, despite the fact that the House of Lords had ruled otherwise, albeit in a Scots law case (British Glanzstoff Manufacturing v General Accident Fire and Life Assurance (1913) S.C. (H.L.) 1).

 

Comment

This ruling leaves the current position under English law in a state of considerable uncertainty. In general, the assumption under English law is that no further right to liquidated damages could accrue, and only general damages would be recoverable in respect of post-termination delay. This position is supported not only by the British Glanzstoff case but also other recent authorities (e.g. Shaw v MFP Foundations and Pilings Ltd [2010] EWHC 1839 (TCC)) and textbooks.

On the other hand, other recent authorities take the opposite view (as in the present case). Somewhat curiously, the point does not appear to have been the subject of full argument in any of them. As a result, it is at present entirely unclear how similar circumstances would be addressed by tribunals and the courts.

Parties to construction contracts should, therefore, be aware of the possibility that their liquidated damages provisions might survive termination (or might not). Given the strong recent emphasis in the courts of England & Wales that contracts should be applied in accordance with their written terms (such as the Court of Appeal's recent ruling in relation to extension of time provisions, discussed here), perhaps the safest course is to expressly provide what happens to the liquidated damages provisions in the event of termination.

 

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