Liquidated Damages

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Liquidated Damages

Published 17 December 2018

Liquidated damages and penalties: GPP v Solar [2018] EWHC 2866

Executive Summary

The decision in GPP Big Field LLP will be of particular interest to those involved in renewable energy projects, but it also has wider implications for the construction industry. In short, it was a claim for damages for late and/or non-completion of works required under Engineering, Procurement and Construction contracts (“EPC contracts”).

The High Court found that the liquidated damages clause in the EPC contracts did not amount to penalties and was enforceable. The court also allowed liquidated damages to accrue after contract termination and permitted a separate general damages claim suffered due to delays in commissioning.

Facts

The dispute concerned five EPC contracts entered into between GPP Big Field LLP/ GPP Langstone LLP (“GPP”) as employer, and Prosolia UK Ltd (“the Contractor”) to build solar power generation plants in the UK.

The terms of the EPC contracts were materially the same, but were not identical in all respects. Each EPC contract allowed for liquidated damages in the event of the Contractor’s failure to achieve the commissioning of the plant by the date specified in the various EPC contracts.

The EPC contracts did not prove profitable for the Contractor and the projects ran into difficulties. The Contractor was subsequently placed into liquidation. Solar EPC Solutions SL (“Solar”) was the parent company of the Contractor, and was sued by GPP for late and/or non-completion of four of the solar plants as guarantor and/or indemnifier of the Contractor’s obligations under the EPC contracts.

GPP’s primary claim was that it was entitled to liquidated damages, as a consequence of the Contractor's failure to achieve the commissioning of the plants by the required dates set out in the relevant EPC contracts. GPP also sought a separate general damages claim in respect of other losses caused to it because the Contractor’s delay resulted in it securing a lower rate of ROCs.

Solar argued that the liquidated damages clause in the EPC contracts was a penalty clause, and so was unenforceable in law. Specifically, they argued that (i) the clause expressly described the sum payable as "the penalty", which was a powerful indicator of the parties' intentions in including this provision; and (ii) each of the EPC contracts provided for the same penalty of £500 per day per MWp, even though each of the plants had a different output and there was a difference of over 30% in the expected electricity prices recorded in the various EPC contracts. Consequently, this amount could not be based on any genuine pre-estimate of the losses likely to be suffered because the extent of the loss would be dependent upon the output of the plant and the prevailing electricity price.

Solar also argued that the Contractor was in any event relieved of its obligation to achieve “commissioning” by the contractual date in the various EPC contracts because a substantial part of any relevant delay was caused by force majeure in the form of local residents' protests. They asserted that this entitled them to relief from liability for the delay.

Decision

Penalty clause: The court rejected the argument that the liquidated damages clause in the EPC contracts was unenforceable as it was a penalty clause. It applied the Supreme Court’s test set out in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67. The court accepted that the provisions in the liquidated damages clause did not exceed a genuine pre-estimate of loss, and that the sums were not in any way extravagant or unconscionable in comparison with the legitimate interest of GPP in ensuring timely performance of the EPC contracts. What mattered, and what the court analysed, was the substance of the clause.

The court reached its conclusion, noting that liquidated damages provisions are commonly found in construction contracts and that the parties were experienced, sophisticated commercial entities, of equal bargaining power. They were able to therefore assess the commercial implications of the liquidated damages provisions. The fact that the loss resulting from any breach might vary in amount depending on the circumstances did not matter, provided that it was not extravagant and unconscionable in amount in comparison with the greatest loss that might have been expected to be likely to follow from the breach when the contract was made.

End date for liquidated damages: one of the EPC contracts was terminated by GPP prior to commissioning being achieved. GPP argued, in the circumstances, that the liquidated damages provision continued to apply until commissioning was achieved. The court accepted this argument and took the view that the appropriate end date was the date of actual commissioning (Hall v Van den Heiden (No 2)).

Separate claim for loss in relation to the ROCs: GPP also claimed general damages because the Contractor failed to achieve the required accreditation for contractually stipulated levels of ROC certificates, under two of the EPC contracts. The parties had contemplated that GPP may be entitled to compensation through price reduction. The court considered that this was totally separate to any entitlement to liquidated damages. GPP could therefore recover both liquidated damages and the price reduction. 

Lessons for the Construction Industry

This case demonstrates that courts will not, at least for the time being, interfere with commercially negotiated liquidated damages provisions, when dealing with experienced commercial parties, who are able to assess the commercial implications of the liquidated damages clauses and where the sums can be commercially justified.

Ultimately, this should give employers more flexibility in including liquidated damages in construction contracts, making legal challenges by contractors less likely to succeed. However, the court’s decision to uphold a claim for the accrual of liquidated damages until commissioning was achieved, is more uncertain. We anticipate that we may see a challenge on this issue in due course.

 

Authors

Mark Roach

Mark Roach

London - Walbrook

+44 (0)20 7894 6314

Maisie Hull

Maisie Hull

London - Walbrook

+44(0)20 7894 6256