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.
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:
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 on 02922 67 5400.