The recent case of GPP Big Field LLP and another v Solar EPC Solutions SL (formerly known as Prosolia Siglio XXI)  EWHC 2866 (Comm) considers the enforceability of a liquidated damages clause contained in construction contracts.
What are liquidated damages (“LDs”)?
In the context of construction and engineering projects, liquidated damages are common and most often relate to delay in completing the project.
A LDs clause will commonly provide that if the contractor fails to complete by the date for completion specified in the contract, the employer is entitled to LDs at a fixed rate for each day or week (or pro rata for part of a week), until the contractor actually completes the work.
Prosolia UK Ltd was engaged as the contractor (“the Contractor”) under five Engineering, Procurement and Construction (“EPC”) contracts relating to solar power generation plants in the UK.
GPP Big Field LLP and GPP Langstone LLP were special purpose limited liability partnerships incorporated in England and one or other of the entities was the employer under the EPC contracts (“the Employer”).
Solar EPC Solutions SL (“the Parent Company”), as the Contractor’s parent company was a party to four of the EPC contracts for the purpose of guaranteeing the obligations of the Contractor under them.
Each of the four EPC contracts provided for a penalty of £500 per day per megawatt peak (WMp).
In March 2014 the Contractor became insolvent. As a result, the Employer issued a claim against the Parent Company for liquidated damages as guarantor and/or indemnifier under four of the EPC contracts for the Contractor’s failure to achieve commissioning of the plant by the date specified in the relevant contract.
The Parent Company alleged that the LDs clause was a penalty and therefore unenforceable.
It argued that an express reference to “a penalty” within the LDs clause was a powerful indicator of the parties’ intention. In addition, it alleged that the LDs clause was not a “genuine pre-estimate of loss” likely to be suffered by the Employer as it was acknowledged that each of the plants, under each of the four EPC contracts, had a different output and a difference of over 30% in the expected electricity prices.
The court disagreed and held that the LDs provision did not constitute an unenforceable penalty because:
- both the Employer and the Contractor were experienced and sophisticated commercial parties of equal bargaining power who were able to assess the commercial implications of such a clause;
- the sum specified in the LDs clause did not exceed a genuine attempt to estimate in advance the loss which the Employer would be likely to suffer from a breach, and that sum was not in any way extravagant or unconscionable in comparison with the legitimate interest of the Employer in ensuring timely performance;
- the fact that the LDs clause referred to it as “the penalty” was an “equivocal indication”. It was the substance of the matter that was important and
- the fact that a round figure had been used, that might not match up to the actual loss incurred in any circumstances, was common across the construction industry.
This case highlights the courts reluctance to strike out a LDs clause on the basis of a penalty argument. It reinforces the position that the courts approach is not to merely reveal a party of a bad bargain. In a negotiated contract between properly advised parties of comparable bargaining power, the presumption will be that the parties themselves are the best judges of the consequence which will apply when such a breach occurs.
If you would like any further information or advice on liquidated damages please contact our construction team.