The Risk of Poor Contract Drafting and a Hidden Limit of Liability in Construction Contracts

After reading the recent Judgment in Buckingham Group v Peel L&P Investments, you would be forgiven for thinking that there is no need to have a contract drafted by an expert because the Court will sort out any mistakes. In this case, the Court was willing to overlook contractual terms that, on their face, appeared to lack both certainty and clarity. Although this is not necessarily surprising (the Courts have long been reluctant to hold contractual provisions void or unenforceable), the case highlights a risk that inadvertent mistakes during contract drafting can lead to severe and unintended consequences if the Court is less helpful.

Background

The case concerned bespoke liquidated damages provisions in an amended JCT Design and Build Contract.

Under the terms of the contract, the Claimant was to design and construct elements of a new manufacturing facility at Ellesmere Port in Merseyside. The works were significantly delayed, and a dispute arose as to who was responsible. The Defendant, the employer, issued a Pay Less Notice notifying the Claimant that it intended to deduct £1,928,253.77 from the sum otherwise due to the Claimant by way of capped liquidated damages. Unsurprisingly, the Claimant sought to resist the deduction, arguing that the liquidated damages provisions in the contract were void and unenforceable.

The Claimant highlighted various irregularities in the terms of the contract and claimed that it was defective on the basis that (amongst other things):

1. The contract contained two dates for completion. The Claimant argued that a clause that provides for liquidated damages by referencing the date for completion cannot be certain when the contract contains competing dates.
2. The bespoke liquidated damages provisions included two different rates. The Claimant’s position was that this made it impossible to determine which rate should apply.
3. The contract contained two different Contract Sum values. The Claimant sought to argue that it was unclear which of the two sums should be used to calculate the liquidated damages.

The Judge rejected the arguments advanced by the Claimant. On a proper construction of the contract, the parties’ intentions were clear. The Court did note that the two separate rates for liquidated damages could be explained by the parties taking a shortcut, copying and pasting an earlier proposal document into the final contract, but was not perturbed in its determination.

Unintentional General Limit on Liability

The Judge went on to consider whether a void liquidated damages provision can still act as an enforceable general limitation of liability clause. Earlier authorities indicate that liquidated damages clauses that are void are wholly unenforceable. However, whether those provision(s) can still operate as a parallel general limitation of liability is a matter of contractual construction. In the present case, the specific wording of the liquidated damages provisions included a “cap on maximum LADs [liquidated and ascertained damages]”. The cap itself was located in a schedule that related exclusively to liquidated damages. Accordingly, the provisions did not apply a cap to general damages. The provisions were clearly expressed as applying to liquidated damages only.

The position would be different if, for example, it appeared that the provisions were intended to limit overall liability. In Eco World v Dobler, the Court held that if the liquidated damages clause was void and/or unenforceable, the general damages available to the Claimant would be capped on the basis that “the clear intention of the parties was that [the Defendant’s] liability…would be so limited”.

Conclusion

In light of these cases, contracting parties must pay careful attention to ensure that overzealous bespoke liquidated damages provisions do not encompass additional or alternative liability. The effect of an otherwise unenforceable liquidated damages clause acting as a general limitation of liability clause could be devastating for employers.

Our dedicated construction department has experience in navigating pitfalls such as these and can assist you in drafting clear and consistent construction contracts. If you would like to speak with one of our team, please call 0345 314 2044 today.