Supreme Court provides clarity around claims for liquidated damages

This case review was co-authored by Tegan Johnson, Solicitor Apprentice, Sheffield.

We previously considered this case in 2019, when the Court of Appeal found that liquidated and ascertained damages (LADs) could not apply to work that had never been completed, and would only apply to work that is accepted after a delay. Work that never completed was only to be assessed according to the usual principles of damages – and not the contractual mechanism for LADs.

This Court of Appeal judgment has now been overturned. The Supreme Court returned to the prior accepted position: LADs accrued before the contract is terminated are due and payable regardless, and for any losses thereafter, the principles of general damages are applicable.

Background

The contract in question was for the supply of a software system. There was a suspension for non-payment, and the contract was subsequently terminated. Proceedings were brought in respect of the non-payment, and a counter claim for LADs arising out of delay was commenced. The contract allowed for 0.1% of the sum for the unfinished work per day of delay until the work was accepted.

Key issues

There are three issues at play in this case.

First issue

The first and main issue is the interpretation of the LADs clause in the contract, and whether LADs should apply to elements of the works that weren’t completed before termination.

Here it was noted that the decision of the Court of Appeal had departed from the norm – and the approach of ignoring the LADs accruing up to the date of termination did not fit with commercial reality. It can in fact be more logical to consider the damages accruing before and after termination separately.

The court unanimously allowed the appeal on this issue, noting that the Court of Appeal had undertaken a “radical reinterpretation of the case law”.

Second issue

The second is the interpretation of a cap on damages when the damages arise from negligence – and whether ‘negligence’ meant the independent tort of negligence only, or whether it included a breach of the contractual reasonable skill and care clause.

The Court of Appeal, had found that “negligence” in context meant only independent torts, and did not include breach of the reasonable skill and care requirement. The Supreme Court was split on this issue, with the majority allowing the appeal and rejecting the earlier decision. They considered the generally accepted meaning of negligence in law and that the word should be given its ordinary meaning in the absence of clear wording to the contrary. It was decided that the word negligence in the exclusion to the cap excluded all breaches of the duty of care required.

Lord Sales and Lord Hodge, however, dissented; although pointing out that their decision was purely based on the facts and had no wider application.

Third issue

The third and final issue at hand was whether the LADs due (whatever the sum was) contributed to or fell under a contractual cap to recoverable damages.

This was another unanimous result. The Supreme Court agreed with the Court of Appeal on this issue, confirming that LADs were indeed included in the liability cap. In any case, because of the decisions in issues 1 and 2, this did not affect the ultimate outcome.

Comment

The Supreme Court’s decision has brought back some welcome clarity to the case law around LADs, and will likely be appreciated by parties wishing to rely on LADs clauses during times of delay. While, as usual, the contract is king, construction professionals may now breathe a sigh of relief as the courts return to the orthodox position in respect of LADs.

Read other items in Construction and Engineering Brief - July 2021

Related item: Construction Brief: latest decisions June 2019