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9 September 2014 | Comment | Article by Matthew Stevens

The TCC gives guidance on withholding LADs (Liquidated and ascertained damages)

It’s not often that a judgment of the TCC is handed down that considers aspects of a construction dispute that arises time and time again. Thankfully, Bluewater Energy Services BV v Mercon Steel Structures BV and others [2014] EWHC 2132 (TCC) is one of them.

In a judgment handed down recently, Ramsey J’s detailed decision addresses issues such as:

  • termination;
  • time at large;
  • re-measurement, variation orders and discounts;
  • valuing reimbursable costs;
  • loss of profit; and
  • contractor’s discretion on variations.

The above list is only a flavour for what was addressed – the full judgment may take some time to read and digest but I’m bound to say it’s worth it! The part of the judgment that I thought was worthy of more than a passing mention was the part that addresses the analysis of levying liquidated damages for the replacement or removal of key personnel.

Bluewater (main contractor) retained Mercon (subcontractor) to fabricate a soft yolk mooring system that was to be constructed by Bluewater in the Caspian Sea. In addition to the usual provisions about liquidated damages for subcontractor culpable delay, the subcontract also applied liquidated damages if the subcontractor removed or replaced key personnel without the prior approval of the contractor. It’s interesting to note that the level of liquidated damages ranged from 20,000 EUR for the HSE engineer up to 50,000 EUR for the project manger.

Perhaps somewhat predictably, on a project that seemingly went wrong, Mercon changed key personnel without Bluewater’s consent and Bluewater deducted liquidated damages. Mercon argued that the liquidated damages were a penalty and therefore unenforceable.

In his judgment, Ramsey J gave a clear message to the industry that rarely will a court declare unenforceable a liquidated damages figure that has been agreed between the parties. On the facts of this case he said that the subcontractor had not ‘come close to demonstrating that these sums were penalties’.

In dismissing the subcontractor’s argument the judge considered:

  • “key personnel” on this type of project were key to its success. The right to approve key personnel was important and replacement without approval could cause ‘a great deal of disruption on the project’;
  • it was for the subcontractor to establish that the liquidated damages were a penalty. The damages were to be judged objectively at the time the subcontract was entered into;
  • as the liquidated damages were negotiated it was important to note that:
  • on the facts of this case, it was not possible to determine whether the liquidated damages were a precise pre-estimate of loss but that the rates were assessed by experienced personnel;
  • the sums claimed were not ‘extravagant or exorbitant’; and
  • the subcontractor did not seem to believe the rates to be a penalty when it was deciding to replace the key personnel.

Consequently, the judge decided that the contractor could deduct liquidated damages in respect of three of the four personnel that it claimed.

This case is yet another example of the court’s reluctance to interfere with commercially negotiated contracts. It remains to be seen whether on the back of this case we will see a rise in these types of liquidated damages provisions. Either way, my advice to anyone considering the use of such provisions would be to keep a careful note of the negotiations – it could prove invaluable in the event of a challenge.

Author bio

Matthew has specialised exclusively in construction and engineering law since qualification and has considerable experience in dealing with contentious, non-contentious and professional negligence issues.

Disclaimer: The information on the Hugh James website is for general information only and reflects the position at the date of publication. It does not constitute legal advice and should not be treated as such. If you would like to ensure the commentary reflects current legislation, case law or best practice, please contact the blog author.

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