Whether liquidated damages (LDs) can be claimed after termination is a question which comes up regularly. It is very relevant in the current climate where contracts are often terminated following contractor insolvency. If I were devising a construction law exam paper, this classic question would undoubtedly appear.
An unlucky student sitting my imaginary exam paper might start with the recent case of GPP Big Field LLP v Solar EPC Solutions. This case concerned five EPC contracts relating to solar power generation plants in the UK. The contractor became insolvent and GPP (the employer) sued the parent company of the contractor as guarantor/indemnifier of the contractor’s obligations under four of the EPC contracts.
GPP claimed damages (both liquidated and unliquidated) for late and/or non-completion of the works. The case was heard in the commercial court by Mr Richard Salter QC, and one of the questions he was asked to consider was whether the contractor was liable for LDs after the date of termination of one of the EPC contracts.
The point was dealt with very briefly in the judgment. Relying on the judgment of Coulson J in Hall v Van Der Heiden, the judge held that LDs would continue until the actual date of commissioning of the plant, despite that the contract had been terminated prior to this point.
In Hall, Coulson J held:
“Accordingly, as a matter of principle, I reject the submission that the defendant’s liability to pay liquidated damages came to an end when the employment was terminated.”
The principle referred to was that, if LDs ceased to be payable upon termination, the contractor would be rewarded for its own default (it being the contractor’s default which led to termination).
My poor student might be forgiven for stopping there. However, a quick look in Keating suggests that the position is more complex:
“If the contract is brought to an end by determination or otherwise, then prima facie all future obligations cease and no claim can be made for liquidated damages accruing after determination. But there may be some special clause which has the effect of keeping the provision for payment of liquidated damages alive although the work has been taken out of the hands of the contractor.”
Hudson agrees with Keating:
“Further liquidated damages are only recoverable for a period when the Contractor is in a position to complete the work. Therefore, after termination, only general damages will be recoverable.”
The case which supports this position is Shaw v MFP Foundations and Pilings Ltd, another TCC case heard by Mr Justice Edwards-Stuart in 2010, just after Hall. Here the contract in question stated that LDs would be “£nil”, meaning that no damages were recoverable for delay. The question was whether, after termination, the employer could recover general damages for delay or whether it was still bound by the £nil provision. Mr Edwards-Stuart J held that the requirement to pay LDs at the contractual rate (or nothing, if so provided) falls away after termination.
The logic is that, after termination, the parties are no longer required to perform their primary obligations and so the contractor’s obligation to complete by the completion date no longer remains and the provision for LDs becomes irrelevant.
The decision in Shaw v MFP Foundations followed the House of Lords decision in British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp Ltd (1912). In this case the court held that an LDs clause only applied where there was a delay in completion by the contractor itself. Where the work was completed by others, the employer was not entitled to recover LDs and must prove the damage suffered.
Even though the LDs provision falls away, in its place arises an obligation to pay damages for the employer’s losses resulting from the breach of contract (that is, the failure to finish on time). This obligation may include damages for loss resulting from any further delay caused by the need to have the works completed by a different contractor. The contractor’s liability on termination will depend on how the contract was terminated (whether by repudiatory breach or under the terms of the contract), and any contractual provisions dealing with payments following termination.
Until GPP Big Solar, it had been reasonably well accepted that LDs were not payable after termination (indeed, Hudson describes the decision in Hall as “questionable” and the judge was not directed to British Glanzstoff). It seems that the judge in GPP Big Solar was not directed to either of the text books or the cases I refer to earlier in this post.
GPP Big Solar leaves us with a further conflicting first instance decision and no right answer for my exam paper. It would be very helpful to have a Court of Appeal decision on this issue.