How to interpret a LDs clause when the contract contains conflicting and inconsistent information?
Introduction
As previously
discussed in our newsletter article “The past, present, future of
liquidated damages in Hong Kong“, it is common practice for parties to include a liquidated damages (“LDs”) clause in commercial contracts to
stipulate the amount of damages payable by the defaulting party in the event of a breach of contract. In a construction
contract, LDs usually relate to the contractor failing to achieve practical
completion by the completion date set out in the contract.
However, in practice,
disputes often arise on the construction and interpretation of the LDs
provision. In Buckingham Group
Contracting Ltd v Peel L&P Investments and Property Ltd [2022] EWHC
1842 (TCC), the Court shed some light on how to interpret a LDs clause when the
contract contains conflicting and inconsistent information.
Background
Buckingham Group Contracting Ltd (“Buckingham”) was engaged by Peel L&P Investments and Property
Ltd (“Peel”) to design and construct
the production building and certain works for a project for the construction of
a new plant at Ellesmere Port in Merseyside (the “Works”) pursuant to a written agreement dated 29
January 2018 (the “Contract”). The
Contract was based on a JCT standard form contract together with a schedule of
bespoke amendments (the “Schedule of
Amendments”).
The Contract expressly stated that the Schedule of
Amendments form part of the Contract and in case of any differences between the Schedule and the JCT standard form contract, the
former is to prevail.
According to the Contract Particulars of the Contract, the
completion date was 1 October 2018 (the “Contract
Particulars Completion Date”) and
the contract sum was £26,164,049.28 (the “Contract
Particulars Contract Sum”). On one hand there is a clause 2.29 concerning LDs
for delay in completing the Works, on the other hand, a bespoke clause 2.29A concerning
LDs for failure to achieve “Milestone
Dates” was also inserted by the Schedule of Amendments. It provides, inter alia, that:
“2.29A .1 If the
Contractor fails to complete the works necessary to reach a Milestone Date the
Employer may give notice to the Contractor that:
.1 he requires the Contractor
to pay liquidated damages at the rate stated Schedule 10 or lesser rate stated
in the notice, in which event the Employer may recover the same as a debt;
and/or
.2 that he will withhold or
deduct liquidated damages at the rate stated in Schedule 10 or at such lesser
stated rate, from sums due to the Contractor.”
Schedule 10 contained a table setting out a list of
milestone dates, of which the seventh Milestone Date for Practical Completion was
identified as 30 November 2018 (the “Schedule
10 Completion Date”). It also contained a proposed contract sum of
£25,710,050.28 (the “Schedule 10 Contract
Sum”) (which is different from the Contract Particulars Contract Sum), two sets
of daily rates for LDs, two sets of
weekly rates for LDs and a cap on maximum LDs in the sum of £1,928,253.77.
Furthermore, it expressly stated that:-
“If there is any conflict or inconsistency between the
wording of this schedule and clause 2.29 the wording of this schedule shall take precedence.”
The dispute
The Works were significantly delayed and parties were in dispute as to
the responsibility for those delays. Buckingham then commenced
proceedings against Peel, seeking declarations that the provisions in respect
of LDs were void for uncertainty and that the cap on the LDs also operated as a
cap on their liability for general damages.
Buckingham argued that the LDs provisions were void and
thus unenforceable due to the following reasons:
1.
The Contract Particulars Completion Date was 1 October 2018, whereas the
Schedule 10 Completion Date was 30 November 2018;
2.
Schedule 10 contains two sets of rates and it is impossible to discern which
set the parties intended to apply;
3.
There were two sums contained in the Contract, i.e. the Contract
Particulars Contract Sum of £26,164,049.28 and the
Schedule 10 Contract Sum of £25,710.050.28;
4.
Schedule 10 failed to provide a scheme in respect of sectional
completion/partial possession.
Decisions
When considering whether the LDs
provisions were void and thus unenforceable, the Court examined and re-affirmed some decisions made by other courts in previous
cases. As summarised in paragraph 39 of the judgement:-
“the court
is reluctant to hold a provision in a contract is void for uncertainty and if
it is open to the court to find an interpretation which gives effect to the
parties’ intentions, then it will do so. It is only if the court cannot reach
any conclusion as to what was in the minds of the parties or where it is unsafe to prefer
one possible meaning to other equally possible meanings that the provision
would be void.”
Different completion
dates
In respect of the two different completion
dates, the Court concluded that by choosing to include a bespoke milestone date
regime in Schedule 10, which actually included a date for practical completion
of the whole of the Works and LDs in respect thereof, the parties must have intended for that clause to
operate as the sole regime in this respect. The bespoke regime prevails. In the
circumstance, liability would arise when the contractor failed to meet the
milestone dates, not the Contract Particulars Completion Date.
Different sets of rates
For the issue of two sets of rates
described in Schedule 10, the Court allowed Peel to rely on the evidence of a
witness to explain the background to Schedule 10. Notwithstanding Buckingham
had objected to the relevance of the witness evidence on the grounds that it
was evidence of negotiations, the Court still found that it was appropriate to
take into account the factual background for the purpose of ascertaining
parties’ intention. The Court concluded that it was “plain that the parties had (perhaps unwisely) taken a short cut by
copying and pasting the entire table into Schedule 10 without removing those
parts of it which described it as a proposal”. Since parties had executed
the entire agreement as a deed, the parties must have intended the table to
have had legal effect. In respect of the two sets of rates, the Court found
that it is perfectly possible to rule that the right hand set of columns was
the only relevant one.
Different contract sums
Regarding the conflicting contract sums issue, the Court accepted Peel’s submissions
and found that it was obvious that the LDs table
within Schedule 10 was initially drawn up as a proposal. Despite the contract
sum being changed after the table was prepared, the parties nonetheless
included the table in that form and the parties clearly intended to adopt the
weekly LDs rates as calculated in Schedule 10.
Sectional
completion
Lastly, the Court
also rejected Buckingham’s submissions on how Schedule 10 was unenforceable for
its failure to provide a workable scheme in respect of partial possession. The
Court was of the view that the Contract did not provide for sectional
completion. In fact, “on multiple
occasions within the Contract Particulars they stated ‘Sections do not apply’”.
Although there are descriptions within in the table of “sectional milestones” in Schedule 10, this does not turn them into
Sections. For a more detailed discussion on the relationship between sectional
completion and LDs, please refer to our earlier article “One of the burning questions in
construction project – Are you entitled to reduction of liquidated damages upon
sectional completion?”
To conclude, it was
held that the provisions were therefore certain and enforceable.
Takeaway
Poorly drafted LDs provisions may result in disputes in the future. In
the present case, the Court confirmed that they are reluctant to hold that LDs
provisions are void for uncertainty if a clear interpretation can be deduced.
As such, it is vitally important to ensure the contract terms in respect of LDs are
well drafted for the purpose of avoiding inconsistencies and ambiguities and
mitigating legal risks.
For enquiries,
please feel free to contact us at: |
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Important: The law and procedure on
this subject are very specialised and
complicated. This article is just a very general outline for reference and
cannot be relied upon as legal advice in any individual case. If any advice
or assistance is needed, please contact our solicitors. |
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Published by ONC Lawyers © 2022 |
