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What happens when the liquidated damages end?

The question of whether liquidated damages can be claimed after termination is relevant in the current climate, where contracts are often terminated following contractor insolvency, among other things.

Recently I commented upon the case of GPP Big Field LLP v Solar EPC Solutions which concerned the recovery of liquidated damages under five Engineering Procure and Construct Contracts (EPCs).  The case concerned a claim under GPP’s parent company guarantee (GGP itself  having become insolvent).

One of the questions asked was whether liquidated damages continued after the date of termination of the relevant contract.

The Court held that the liquidated damages would continue until the actual date of commissioning of the plant despite the contract having been terminated prior to this point. In doing so the Court relied upon a decision of Coulson J in Hall v Van Der Heiden.

The basis of the decision reached was that if liquidated damages ceased on termination then the contractor would be rewarded for its own default.

That element of the decision has raised some eyebrows because the relevant books on building contract law (Hudson and Keating) suggest that if a contract is brought to an end by the termination or otherwise then all future obligations cease and no claim can be made for liquidated damages accruing after determination.

The position may be otherwise if there was a specific provision allowing such recovery.

Hudson identifies the reason being that liquidated damages are only recoverable for a period when the contractor is in a position to complete the work. It then goes on to suggest that after termination only general damages will be recoverable.

Given that liquidated damages in a contract are generally thought to be an exhaustive remedy, is that the correct approach?

The position is supported in Shaw v MFP Foundations and Pilings Ltd [2010].  In that case the contract stated that the liquidated damages would be “£nil” meaning that no damages were recoverable for delay.  The question posed was whether after termination the employer could recover general damages for delay or whether it was still bound by the £nil provision.

The Court held that the requirement to pay liquidated damages falls away after termination, the logic being 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 liquidated damages becomes irrelevant.

The decision in Shaw followed the House of Lords decision in British Glanzstoff Manufacturing Co Ltd v General Accident Fire and Life Assurance Corp Ltd [1912] where the Court held that a liquidated damages clause only applied where there was a delay in completion by the contractor. It did not apply if the work was completed by others and in such circumstances the employer must prove the damage suffered.

The essential difference between a liquidated damages provision and an ability to recover general unliquidated damages is that the former are recoverable without proof of loss and are generally easier to recover.

In British Glanzstoff the court found that even though the liquidated damages provision fell away, in its place arises an obligation to pay damages for the employer’s losses resulting from the breach of contract i.e. failure to finish on time.

The contractor’s liability on termination will depend on how the contract was terminated i.e. whether for repudiatory breach or under its terms and any contractual provisions dealing with payments on termination.

Until GPP Big Solar it had been accepted, more or less, that liquidated damages were not payable after termination.

We are, however, now in the unenviable position of having conflicting decisions of the Courts and this ought to be rectified by the Court of Appeal.

The messages are clear: your contract should include express provisions dealing with what is to happen with the liquidated damages provision and what – if any – damages are recoverable for termination, whatever the grounds for termination are.

For help and guidance, please get in touch with Martin Collingwood, head of construction at Andrew Jackson Solicitors LLP.

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