High Court finds liquidated damages clause for delay in construction contract was not unlawful penalty

The High Court has found that clauses in engineering, procurement and construction (EPC) contracts relating to solar power plants, which provided for a delay damages rate of £500 per day per MWp, were enforceable liquidated damages clauses: GPP Big Field LLP v Solar EPC Solutions SL [2018] EWHC 2866 (Comm).

Applying the Supreme Court’s recast penalties test from Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (considered here), the court rejected the contractor’s argument that the clauses were unenforceable as penalties. It found that the provisions did not exceed a genuine pre-estimate of loss, and that the sums were not in any way extravagant or unconscionable in comparison with the legitimate interest of the employer in ensuring timely performance of the contracts.

The court reached that conclusion despite the provisions being described as a “penalty” in the relevant clauses. It said this was nothing more than an equivocal indication, requiring an enquiry into the substance of the matter.

The court reached its conclusion for a number of reasons including because the parties were experienced and sophisticated commercial parties of equal bargaining power, who were capable of assessing the commercial implications of the liquidated damages provisions. The sum provided for in each liquidated damages clause was payable only on a single type of breach. The fact that the loss resulting from that breach might vary in amount depending on the circumstances did not of itself give rise to any inference that the sum was a penalty, provided that it was not extravagant and unconscionable in comparison with the greatest loss that might have been expected as likely to flow from the breach when the contract was made.

For more information please see our construction e-bulletin on the decision.

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