Some significant issues in relation to the application of liquidated damages for delay have been considered in the recent case of GPP Big Field LLP & Anor v Solar EPC Solutions SL (2018).
GPP Big Field LLP and GPP Langstone LLP (together and separately “GPP”), as employer, entered into five EPC contracts with Prosolia UK Limited (“Prosolia”), the contractor, for the construction of solar power generation plants in the UK. The terms of the five EPC contracts were substantially the same.
Solar EPC Solutions SL (“Solar”), was the contractor’s parent company. Solar guaranteed the obligations of the contractor under four of the EPC contracts.
Under each EPC contract, GPP claimed liquidated damages for Prosolia’s failure to commission each plant by the date specified in the relevant contract. In March 2014, Prosolia became insolvent and as a result, GPP claimed against Solar under the guarantees.
Two key issues arose:
Were the liquidated damages an unenforceable penalty?
Solar argued that the liquidated damages provision was a penalty because:
Whilst the judge found there probably had not been detailed negotiations in relation to the rate of liquidated damages, the liquidated damages provision was not a penalty and was enforceable because:
Do liquidated damages accrue after termination?
One of the EPC contracts was terminated by GPP prior to commissioning being achieved. Solar argued that its liability for liquidated damages ended when GPP terminated the contract. However, GPP argued that the liquidated damages provision continued to apply until commissioning was achieved using alternative contracts.
In reliance on Hall and another v Van den Heiden (No 2) (2010), the court held that liquidated damages survived termination of the contract. In Hall it was held that an interpretation which brought liquidated damages to an end upon termination would otherwise reward the defendant for his own default.
It should be noted that, even given the decision in Hall, the common view remains that liquidated damages would not be payable after termination. This is because at termination the contractor loses control of the time for completion, especially if another contractor is employed to complete the works. The contractor will be liable for the cost of completing the works and other losses and expenses of the employer arising from termination in accordance with the express terms of the building contract.
This case confirms that in a negotiated contract between properly advised parties with comparable bargaining power, it is the parties themselves who are the best judges of what is legitimate in a liquidated damages provision dealing with the consequences of a failure by the contractor to complete the works by the date for completion as specified in the contract.
In determining what constitutes a penalty, Employers should ensure the rate of liquidated damages can be commercially justified and the relevant tests are whether it is a “genuine pre-estimate of loss” and if the sum agreed is likely to be out of all proportion to the greatest loss likely to be suffered.
Finally, the court’s decision as to liquidated damages continuing to accrue post-termination is controversial and this issue is likely to necessitate resolution by the Court of Appeal in the future.