Latest on Liquidated Damages

16 January, 2019

The recent case of GPP Big Field LLP v Solar EPC Solutions SL (formerly Prosolia Siglio XXI) [2018] EWHC 2866 (Comm) discusses some interesting issues affecting the application of liquidated damages provisions contained in Engineering, Procurement and Construction contracts (EPC contracts).

Liquidated damages clauses

Liquidated damages clauses, common provisions contained in EPC contracts in order to protect employers from specified breaches – generally for late or faulty performance – help parties to increase certainty and reduce the risk of litigation by pre-establishing the amount of damages recoverable in the event of a specific breach of contract.  However, to ensure the provisions are fully enforceable, any such damages stated to be awarded pursuant to a liquidated damages clause should be compensatory and not punitive.  Relevant clauses should not be unconscionable nor extravagant so as to constitute a “penalty” and thus unenforceable.

In this recent case, given the facts in hand, the court held that the liquidated damages provision in the EPC contract was still an enforceable penalty.  In coming to such a conclusion the court, amongst other things, considered that the parties were of equal bargaining power and well placed to assess potential implications of the clause.  In addition, the court was satisfied that the sum specified as payable did not exceed a genuine estimate of the loss likely to be suffered as a result of the breach.  It was held that the sum stated was not extravagant nor unconscionable when compared to the legitimate interest of timely performance.  Even though the EPC contract specifically referred to the liquidated damages payment as a “penalty” this did not make it unenforceable when full consideration was given to the actual substance of the position.

Do liquidated damages survive termination?

Perhaps a little more surprisingly, however, was the court’s decision that the defendant’s liability to pay the liquidated damages had not ended at the same time the EPC contract was terminated, an argument asserted by the defendant.  Despite the conventional position that liquidated damages do not continue to be payable after the termination of a contract, the facts of this case lend themselves to the decision which was that to assume the conventional position would effectively reward the defendant for its own default, which was not seen as an acceptable position to adopt.

Conclusion

The outcome will provide some degree of comfort to intrigued parties to EPC contracts, and indeed any interested third parties such as investors or lenders, that the courts remain highly reluctant to strike out elements of commercial contracts that have undoubtedly been negotiated and established with a set of clear and mutually understood objectives in mind.  Conversely, the party giving the penalty clause (and its lenders) may be concerned as any penalty pay out will deplete the business’ overall funds making it harder for the party in question to meet its other finance obligations.