When pre-determined damages for delay are considered a penalty

Have you ever ‘entered’ into a contract without giving the sum quoted for delay damages much thought until the time that the damages were deducted from a payment? It has happened to the best of them!

In this briefing, we examine the possibility of challenging the level of damages even where the culpability for the delay is incontrovertibly your fault!

The JCT suite of contracts refers to damages for delay as Liquidated and Ascertained Damages whilst the NEC refers to them as Delay Damages. But in either case, a party on the receiving end will feel the pain! However, if you are unfortunate enough to be faced with such a claim, you could plead ‘penalty’ in an attempt to make the clause unenforceable.

A sum is deemed a penalty and unenforceable where there has been no genuine attempt by the party relying on the clause to pre-estimate the likely level of loss that it would be likely to suffer. Chitty on Contracts, 29th Edition, paragraph 26-109, states that: “…the sum fixed may be classified by the courts either as a penalty (which is irrecoverable) or as liquidated damages (which are recoverable). The clause is enforceable if it does not exceed a genuine attempt to estimate in advance the loss which the claimant would be likely to suffer from a breach of the obligation in question…” Therefore, damages for delay must be a genuine pre-estimate of the likely loss which the party would have suffered if the contractor had failed to complete on time.

In Alfred McAlpine Capital Projects Limited v Tilebox Limited [2005] EWHC (TCC), Jackson J at paragraph 48 (4) said: “Looking at the bundle of authorities provided in this case, I note only four cases where the relevant clause has been struck down as a penalty. These are Commissioner of Public Works v Hills [1906] AC 368, Bridge v Campbell Discount Co Limited [1962] AC 600, Workers Trust and Merchant Bank Limited v Dojap Investments Limited [1993] AC 573, and Ariston SRL v Charly Records (Court of Appeal 13th March 1990). In each of these four cases there was, in fact, a very wide gulf between (a) the level of damages likely to be suffered, and (b) the level of damages stipulated in the contract”

Therefore, if it was not possible for the Claimant, at the time that the Contract was entered into, to actually incur anywhere near the level of damages that it has stipulated in the Contract for delay, the damages are not enforceable.

Chitty on Contracts, 29th Edition, paragraph 26-110, has referred to the case of Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, 86-88, and lists various tests to assist with the task of whether or not damages are a penalty: “It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss which could conceivably be proved to have followed from the breach.”

Where the Claimant has clearly made no genuine pre-estimate of the Delay Damages, then there is a strong possibility that the sum will be held to be a penalty and be unenforceable.

However, do not be drawn into a false sense of security. Where the contractor is culpable for the delay on a contract, there is nothing stopping the Claimant from recovering his proven losses.

Quarter 4, 2007