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Failing to see the wood for the trees - How Termination and Liquidated Damages Provisions Interact

Failing to see the wood for the trees - How Termination and Liquidated Damages Provisions Interact

With construction contracts it is not unknown for the parties to fail to see the wood for the trees, often viewing each clause separately rather than considering it as part of the contract as a whole. Even when the parties do so however, there are times where various clauses can conflict with one another. While good drafting can account for this, sometimes a contract can be silent on the matter leading to ambiguity and the risk of unnecessary costs being incurred. This was seen recently in the case of GPP Big Field LLP & Anor v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).

Here, Prosolia UK had been hired by GPP to develop five solar power generation plants in the UK under five separate contracts. Prosolia however failed to complete the sites on time with completion delayed anywhere from 44 to 285 days after the relevant due date. To make matters worse, Prosolia went into insolvency. With Solar acting as guarantor, GPP sought liquidated damages from them set at £500 per day. Solar argued however that the contract had been terminated as a result of Prosolia’s insolvency and that, as a result, their liability for liquidated damages had also been brought to an end. It was therefore left to the court to subsequently identify the date when Solar’s liability to pay these liquidated damages was brought to an end – whether this was the date of termination or the date of completion.

The court concluded that the date of completion was the correct date for the purpose of determining the scope of liquidated damages. While the contract had been silent on the matter, the Court stated it was a “matter of principle” that liquidated damages continued beyond the date of termination as to do so otherwise would risk rewarding the defendant for their failure to complete the project.

This decision came as a surprise to many as it was commonly understood that liquidated damages ended with the termination of the contract. Contractors are particularly exposed as termination prior to a project’s completion may still leave them liable to paying liquidated damages where the project fails to complete by the due date originally agreed. If an unscrupulous employer subsequently takes their time to appoint a new contractor to complete the works then, in the absence of a cut-off date for such damages, this financial risk can become exponential.

Taking steps to outline how liquidated damages interact with the termination provisions contained within your contract can help to resolve this risk. It also remains vital however that parties to a contract consider the clauses within the context of the entire contract rather than in isolation. By doing this prior to execution both parties can seek to minimise their exposure to risk and, where the contract is silent, negotiate the best route on which to proceed with the project in a cost effective and timely manner that suits both parties.

 

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View profile for Christopher LambChristopher Lamb