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England and Wales High Court (Technology and Construction Court) Decisions
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Alfred McAlpine Capital Projects Ltd v Tilebox Ltd [2005] EWHC 281 (TCC) (25 February 2005)
URL: http://www.bailii.org/ew/cases/EWHC/TCC/2005/281.html
Cite as:
21 Const LJ 539,
104 Con LR 39,
(2005) 21 Const LJ 539,
[2005] BLR 271,
[2005] EWHC 281 (TCC)
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Neutral Citation Number: [2005] EWHC 281
(TCC) |
|
|
No
HT-04-380 |
IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Court No
7
TECHNOLOGY AND CONSTRUCTION COURTS
|
|
No HT-04-380 St Dunstan's House
133-137 Fetter Lane London EC4A 1HD
|
|
|
25th February
2005 |
B e f o r e :
MR JUSTICE JACKSON
____________________
|
ALFRED McALPINE CAPITAL PROJECTS LIMITED
|
Claimant |
|
-v- |
|
|
TILEBOX LIMITED |
Defendant |
____________________
MR PAUL DARLING QC and MR PAUL SUTHERLAND (instructed by CMS
Cameron McKenna)
appeared on behalf of the Claimant.
MR ROBERT AKENHEAD
QC and MR RIAZ HUSSEIN (instructed by Herbert Smith)
appeared on behalf of
the Respondent.
____________________
Computerised Transcript of the Stenograph Notes
of
Smith Bernal WordWave Limited
190 Fleet Street, London EC4A 2AG
Tel:
020 7404 1400 Fax: 020 7404 1424
(Official Shorthand Writers to the Court)
____________________
HTML VERSION OF JUDGMENT
____________________
Crown Copyright ©
Friday, 25th February 2005
- MR JUSTICE JACKSON: This judgment is in eight
parts, namely:
Introduction |
Part
1 |
The facts |
Part
2 |
The present proceedings |
Part
3 |
The law relating to penalty clauses
|
Part
4 |
Issue 1: does clause 6.8.2 of the DFA
require Tilebox to secure completion by a specific date? |
Part
5 |
Issue 2: does clause 6.8.1 of the DFA
require Tilebox to secure completion by the date required under the
building contract? |
Part
6 |
Issue 3: what losses flowing from delay were
foreseeable on 27th April 2001? |
Part
7 |
Issue 4: having regard to the foregoing
matters is clause 24.2 of the building contract unenforceable as a
penalty? |
Part
8 |
Part 1. Introduction.
- The issue in this case is whether or not a clause
providing for liquidated damages contained in a building contract made between
the parties is valid and enforceable.
- The claimant is Alfred McAlpine Capital Projects
Limited, formerly known as Alfred McAlpine Special Projects Limited. I shall
refer to this party as "McAlpine". The defendant is Tilebox Limited, a
development company which was formed in 1998 for the purpose of acquiring and
developing Onslow House in Guildford. I shall refer to this party as
"Tilebox". The principal directors of Tilebox are Mr Edward Hutley and Mr
Charles Money-Kyrle.
- By way of introduction, I should also mention three
other firms or organisations who feature in this case. Mercer & Miller are
a firm of quantity surveyors which acted for Tilebox in relation to the
development of Onslow House. The firm Insignia Richard Ellis, which changed
its name to CB Richard Ellis, have advised Tilebox in relation to the future
letting of Onslow House. I shall refer to this firm as "Richard Ellis".
- The organisation which is funding the development of
Onslow House is Standard Life Assurance Company. Standard Life Assurance
Company and a related body Standard Life Investments Limited have worked in
tandem in relation to this investment. The division of responsibility between
these two companies is not relevant to the issues in this case. I shall
therefore refer to them compendiously as "Standard Life".
- This is a sufficient introduction of the main
participants in the events with which this court is concerned. It is now
necessary to outline the facts.
Part 2. The Facts.
- In 1998, Tilebox purchased a leasehold interest in
Onslow House. At that time, Onslow House comprised about 50,000 square feet of
space. The directors of Tilebox planned to strip the building to its core and
completely refurbish it creating in the process approximately 90,000 square
feet of space.
- Mr Hutley said in evidence, and I accept, that the
plan was to create a grade A top of the range building which would be suitable
for use as headquarters by a substantial corporation.
- During 1999, Mercer & Miller sent out tender
documents for the proposed development to a number of contractors, including
McAlpine. Tenders duly came in during September 1999. During the following
winter the proposal was mooted that Tilebox and McAlpine should carry out the
development of Onslow House as a joint venture. Between January and March 2000
there were serious discussions between Mr Walton of McAlpine and
representatives of Tilebox about this prospective joint venture. Analyses of
the development were produced by both parties but in the end they were unable
to reach agreement. So the idea of a joint venture fell through.
- Thereafter, Tilebox proposed to carry out the
development itself with the support of a funder. In the summer of 2000,
Tilebox entered into discussions with two of the contractors who had
previously submitted tenders. One of these was McAlpine. On 10th October 2000,
Mr Money-Kyrle of Tilebox sent a letter to McAlpine in effect appointing
McAlpine as the prospective contractor.
- On page 4 of this letter, Mr Money-Kyrle wrote as
follows:
"Sectional Completion of the Contract is essential. At present
there will be two binding sections of the Contract.
"Section 1 -- We will be contractually obliged to provide our tenant at
levels 2-4 with handover to a shell state at a date to be agreed in October
2001. This date will be subject to Liquidated and Ascertained damages at a
rate of £20,000 per week or part thereof.
"Section 2 -- We wish to complete the works as soon as possible but
approximately by February 2002 at a date to be agreed. Liquidated and
Ascertained Damages for this Section of the Works will be a further £24,000
per week or part thereof. We will require you to agree this sum and
determine your programme in such a way that the date for completion is
realistic."
- The part of the building referred to in that
paragraph as "section 1" was at this stage proposed to be occupied by a
company called Regus Limited. Regus was proposing to enter into a tenancy
agreement whereby Regus would become the tenant of section 1 as soon as
building works were complete. This pre-let to Regus remained part of the
Tilebox's planning during October, November and December 2000. Shortly before
Christmas, however, Regus made alternative arrangements for its future
accommodation and the proposed pre-let was abandoned. After the end of 2000,
the whole of Onslow House was viewed as a speculative development in the sense
that no future tenant was firmly identified.
- I turn now to the funding arrangements. In the
summer of 2000, Tilebox entered into discussions with Standard Life as
prospective funder of the development. Mr Craig Thomson, a surveyor employed
by Standard Life, handled much of the negotiations on behalf of Standard Life.
It was clearly necessary to carry out detailed analyses of the likely costs of
and the likely returns from the proposed development. Three firms of letting
agents or property consultants were instructed to assist and advise. They were
Richard Ellis (instructed by Tilebox), Holley Blake (instructed by Standard
Life) and Wadham Isherwood. These three firms produced various reports on the
property market and appraisals of the proposed development.
- Discussions and negotiations between Tilebox and
Standard Life continued through the autumn of 2000 and the early part of the
2001. On 12th February 2001, Tilebox and Standard Life entered into a
development funding agreement which all parties refer to as "the DFA". The
scheme of the DFA was that Tilebox surrendered its leasehold interest in
Onslow House and Standard Life acquired a long lease of the property for a
price of £10 million. Tilebox would enter into a building contract with
McAlpine to carry out substantial rebuilding works at Onslow House. Tilebox
would procure architects, engineers and other professionals to provide the
necessary professional services. Standard Life would fund the costs of the
development subject to a maximum figure. Tilebox would arrange for the
completed building to be let to one or more tenants for a term of at least 15
years. As reward for its services Tilebox would receive (i) a management fee
of £225,000 and (ii) a development completion payment calculated in accordance
with a formula set out in the contract. The development completion payment has
been referred to by all parties as "the DCP" and I shall use the same term.
- Clause 3 of the DFA provided as follows:
- "The Developer hereby covenants with the Fund (but
without prejudice to the requirements of the Developer's other covenants with
the Fund in this Agreement) forthwith to commence and carry out and complete
the Works or cause the same to be carried out and completed in every regard at
the Developer's own cost (subject to the provisions of clause 9.1) as soon as
reasonably practicable and in the event in accordance with the provisions of
this Agreement."
- Clause 6 of the DFA included the following
provisions:
"The Developer hereby covenants with the Fund: ...
"6.8.1. Without prejudice to any other rights and remedies of
the Fund, whether arising by virtue of the terms of this Agreement and/or
any deed or other document executed in favour of the Fund either at law or
otherwise (and without prejudice to the rights and remedies of any other
person in which the benefit of these covenants or any of them shall for
the time being be vested), that:
"(A) the Works and each part of them have been and shall be
carried out and completed in accordance with the various engagements under
which the Works have been instructed;
"(B) the Developer will supervise the Works and the Project so
that all its objectives are met in accordance with this Agreement and the
Programme.
"6.8.2. As soon as reasonably practicable after the
Unconditional Date to commence the Works and thereafter to take all
reasonable steps to insure that Practical Completion is achieved on or
before 30th November 2002 but so that (subject and without prejudice to
the provisions of clause 20.3) the date shall be extended by the period of
any delay due to any cause in respect of which the Employer's Agent
(acting properly) shall have issued a certificate authorising an extension
of time update the Building Contract and for which cause neither the
Developer nor any of the Consultants is
responsible."
- The phrase "employer's agent" in clause 6.8.2 is a
reference to Mercer & Miller.
- After entering into the DFA it was necessary for
Tilebox to finalise the terms of its building contract with McAlpine. These
negotiations took place during February, March and April 2001. One of the
matters discussed in these negotiations was the level of liquidated and
ascertained damages which would be payable in the event of delayed completion
of the works. Tilebox proposed £45,000 per week. This figure was calculated by
Mr Hutley as representing the minimum weekly rental value of the completed
building. McAlpine initially resisted this figure as being too high. However,
there was give and take about numerous issues in the course of the
negotiations and in the end McAlpine agreed to accept the figure of £45,000
per week. The final phase of this part of the negotiations can be traced
through the following documents: a note by Masons', Tilebox's solicitors, of a
meeting on 4th April 2001; an e-mail from McAlpine to Mercer & Miller
dated 9th April; a letter from Masons to Mr Tiplady, McAlpine's in-house legal
adviser, dated 10th April; an e-mail from Mercer & Miller to McAlpine
dated 11th April.
- On 27th April 2001, Tilebox and McAlpine entered
into a written building contract in the JCT Standard Form with Contractor's
Design 1998 subject to a number of amendments. The contract sum was
£11,573,076. The date for completion was 12th July 2002. Clause 24 of the
contract conditions provided that McAlpine should pay liquidated and
ascertained damages for delay at the rate specified in appendix 1 to the
contract. Appendix 1 to the contract in its amended form provided as follows
in relation to clause 24:
"At the rate of £45,000 per week or part thereof."
- Clause 25 of the contract conditions provided for
extensions of time to be granted in certain events.
- By a supplemental agreement dated 24th August 2001,
the completion date for the building works has been changed from 12th July to
9th August 2002. During the course of the works extensions of time have been
granted to McAlpine under clause 25 of the contract conditions, so that the
extended date for completion of the works has now become 14th August 2002.
- McAlpine duly commenced work in accordance with the
contract. Unfortunately, very substantial delays have occurred in the course
of the works. It has been no part of this trial to investigate the cause of
these delays. I have been told, however, that a substantial cause of delay was
defective work by the cladding subcontractor.
- Building works were not completed by the due date,
namely 14th August 2002. Indeed, even today, some 2.5 years later, those works
are still not completed. It is anticipated by the parties that practical
completion will probably be achieved in May or June of this year.
- Against this background, McAlpine became concerned
about its potential liability to liquidated and ascertained damages under
clause 24 of the contract conditions. McAlpine realistically acknowledges
that, on any view, there must be a substantial period of delay for which it
cannot be granted any extension of time. Accordingly, McAlpine took legal
advice and, having done so, formed the view that the rate of liquidated and
ascertained damages specified in the building contract was excessive. In a
letter to Tilebox dated 7th December 2004, McAlpine asserted that the
liquidated damages provision contained in clause 24.2 of the contract
conditions was a penalty clause and therefore invalid.
- Tilebox responded to that assertion by three
letters dated between 17th and 20th December 2004. In these letters Tilebox
denied that clause 24.2 was a penalty clause. Furthermore, Tilebox intimated a
claim under clause 24.2 for liquidated and ascertained damages in respect of
delay up to 2nd December 2004 in the sum of £5.4 million. There was clearly an
issue between the parties as to the status of clause 24.2 and a substantial
sum of money turned on that issue.
- In order to achieve a resolution of that issue,
McAlpine commenced the present proceedings.
Part 3. The Present Proceedings.
- By a claim form issued on 20th December 2004 under
part 8 of the Civil Procedure Rules, McAlpine applied to the Technology and
Construction Court for a declaration that clause 24.2 of the building contract
was an unenforceable penalty.
- At a directions hearing on the following day,
namely 21st December, I gave directions for the service of evidence and the
future conduct of this action. On 26th January 2005, Tilebox served its
response to the claim.
- The parties have made appropriate disclosure and
have exchanged their evidence and skeleton arguments without any need for
further case management hearings. With commendable despatch both parties were
ready for trial by the beginning of this week. That is just two months after
the date when proceedings were issued. The trial commenced on Tuesday of this
week, namely 22nd February. Mr Paul Darling QC and Mr Paul Sutherland
represent McAlpine. Mr Robert Akenhead QC and Mr Riaz Hussain represent
Tilebox.
- The following witnesses were called to give
evidence at the trial on behalf of McAlpine: Mr Steven Goulston, a senior
director of McAlpine, and Mr Matthew Walton, a development and construction
executive employed by McAlpine. Mr Goulston did not join McAlpine until
February 2003. So he could not give any direct evidence about events during
the crucial period, namely late 2000 and early 2001. However, he makes helpful
and considered comments about the issues in the case and I take into account
those comments. Mr Walton, likewise, was not involved with Onslow House during
the crucial period. His involvement effectively ended in March 2000.
Nevertheless, Mr Walton is a chartered surveyor by profession and he comments
on some of the issues in the case. Again, I find these comments helpful and I
take them into account.
- The following witnesses were called to give
evidence on behalf of Tilebox: Mr Edward Hutley, a director of Tilebox, and Mr
Andrew Meikle, an associate director of Richard Ellis. Tilebox also relied
upon the written witness statements of Mr Craig Thomson, a surveyor employed
by Standard Life; Mr David Stewart, a portfolio manager employed by Standard
Life; Mr Michael Fitzgerald, a partner in the firm Mercer & Miller.
- The defendants' witnesses have the advantage of
having been involved with Onslow House during the crucial period, late 2000 to
early 2001.
- I have formed the view that all of the witnesses in
this case were entirely honest in their evidence. They made concessions where
they felt it appropriate to do so. They are experienced professional people
who have done their best to assist this court in resolving some quite
difficult issues.
- As the battle lines were finally drawn at the end
of the trial, four crucial issues have emerged for resolution by this court.
The issues are:
(1) Does clause 6.8.2 of the DFA require Tilebox to secure
completion by a specific date?
(2) Does clause 6.8.1 of the DFA require Tilebox to secure
completion by the date required under the building contract?
(3) What losses flowing from delay were foreseeable on 27th
April 2001?
(4) Having regard to the foregoing matters, is clause 24.2 of
the building contract unenforceable as a penalty
clause?
- Before I embark upon these four issues, however, I
must first outline the law relating to penalty clauses.
Part 4. The Law Relating to Penalty
Clauses.
- It is an anomalous feature of the law of contract
that the court will strike down penalty clauses. This is not part of any wider
doctrine which requires or permits the courts to rewrite contracts or to
strike out clauses which are unduly harsh as between the contracting parties.
The Law Commission refers to the doubtful origins of the rule in paragraph 15
of its Working Paper Number 61, "Penalty clauses and forfeiture of monies
paid."
- In his well known work "The Rise and Fall of
Freedom of Contract" (Clarendon Press, 1979) Professor Atiyah traces how both
judges and textbook writers developed the concept of freedom of contract
during the 19th century and moved away from the notion that the courts would
mend unfair bargains on an equitable basis. Nevertheless the rule about
penalty clauses survived from an earlier age.
- In Law v Local Board of Redditch
[1892] 1 QB 127 (a case to which counsel have drawn my attention) Kay LJ
describes how the courts of equity developed the rule against penalty clauses.
That rule was then taken over by the courts of law, which looked behind
phrases used, such as "penalty" or "liquidated damages" and considered the
substance of each clause. In Law v Local Board the court held
that a clause, providing for liquidated damages at the rate of 100 guineas per
week for delay in the construction of a sewage works, was enforceable.
- In Clydebank Engineering and Shipbuilding
Company Limited v Don Jose Ramos Ysquierdo y Castaneda and Others [1905] AC 6. The appellant defendants were late in delivering four torpedo boats to
the Spanish Government. The House of Lords upheld the decision of the Court of
Session that a clause providing for payment of £50 per vessel per week was
valid and enforceable. The appellants argued that the loss flowing from the
late delivery of a warship was extremely difficult to quantify and may on some
scenarios be nil. Therefore, the clause should be struck down. The House of
Lords rejected this argument roundly. The Earl of Halsbury, Lord Chancellor,
expressed the view that the liquidated damages clause served a useful purpose,
precisely because the true amount of damages was uncertain and difficult to
assess. See page 11 of the report.
- In Commissioner of Public Works v
Hills [1906] AC 368, Lord Dunedin formulated the test in this way at
pages 375 to 376:
"The general principle to be deduced from that judgment seems
to be this, that the criterion of whether a sum -- be it called penalty or
damages -- is truly liquidated damages, and as such not to be interfered
with by the Court, or is truly a penalty which covers the damage if
proved, but does not assess it, is to be found in whether the sum
stipulated for can or can not be regarded as a 'genuine pre-estimate of
the creditor's probable or possible interest in the due performance of the
principal obligation'. The indicia of this question will vary according to
circumstances. Enormous disparity of the sum to any conceivable loss will
point one way, while the fact of the payment being in terms proportionate
to the loss will point the other. But the circumstances must be taken as a
whole, and must be viewed as at the time the bargain was
made."
- Lord Dunedin returned to this topic in the
well-known decision Dunlop Pneumatic Tyre Company Limited v New Garage
and Motor Company Limited [1915] AC 79. The facts of that case are far
removed from the present. However, after a review of the earlier authorities,
Lord Dunedin set out a series of propositions, which have often been cited and
relied upon for the last 90 years. At pages 86 to 88, Lord Dunedin said this:
"1. Though the parties to a contract who use the word
'penalty' or 'liquidated damages' may prima facie be supposed to
mean what they say, yet the expression used is not conclusive. The Court
must find out whether the payment stipulated is in truth penalty or
liquidated damages. This doctrine may be said to be found passim in nearly
every case.
"2. The essence of a penalty is a payment of money stipulated
as in terrorem of the offending party; the essence of liquidated damages
is a genuine covenanted pre-estimate of damage (Clydebank
Engineering and Shipbuilding Company v Don Jose Ramos Yzquierdo y
Castaneda).
"3. The question whether a sum stipulated is penalty or
liquidated damages is a question of construction to be decided upon the
terms and inherent circumstances of each particular contract, judged as at
the time of making the contract, not as at the time of the breach
(Public Works Commissioner v Hills and Webster v
Bosanquet).
"4. To assist this task of construction various tests have
been suggested, which if applicable to the case under consideration, may
prove helpful, or even inclusive. Such are:
(a) 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 that could conceivably be proved to have followed from the
breach. (Illustration given by Lord Halsbury in Clydebank
case) ...
(c) There is a presumption (but no more) that it is a penalty
when, 'A single lump sum is made payable by way of compensation, on the
occurrence of one or more or all of several events, some of which may
occasion serious and others but trifling damage.' (Lord Watson in
Lord Elphinstone v Monkland Iron and Coal Company)
"On the other hand:
"(d) It is no obstacle to the sum stipulated being a genuine
pre-estimate of damage, that the consequences of the breach are such as to
make precise pre-estimation almost an impossibility on. On the contrary,
that is just the situation when it is probable that pre-estimate damage
was the true bargain between the parties (Clydebank case,
Lord Halsbury; Webster v Bosanquet, Lord Mersey).
- In Campbell Discount Co Ltd v Bridge
[1962] AC 600 the House of Lords struck down as a penalty a clause in a hire
purchase agreement requiring the hirer to pay compensation for premature
termination. The objectionable feature of this clause was that it provided a
sliding scale which operated in the wrong direction. The less the depreciation
of the vehicle, the greater was the compensation payable.
- In Robophone Facilities Limited v
Blank [1966] 1 WLR 1428, the Court of Appeal by a majority upheld a
liquidated damages clause in a hiring contract. The relevant clause in this
case was subject to closer arithmetical scrutiny than appears to have been
applied earlier cases, before a decision was reached that this was a
reasonable pre-estimate of the loss. At the end of his judgment, at page 1449
Diplock LJ said this:
"I see no reason in public policy why the parties should not
enter into so sensible an arrangement under which each know where they
stand in the event of a breach by the defendant, and can avoid the heavy
costs of proving the actual damage if litigation ensues. And I see no
ground in authority which would permit, much less compel me to hold that
this clause is a 'penalty clause' and so unenforceable by the courts ...
"In the present case there is clause 11, and pacta sunt
servenda is still a useful principle of English law which in my view
applies."
- In Philips v The Attorney General of Hong
Kong [1993] 61 BLR 41. The Privy Council upheld the decision of the
Hong Kong Court of Appeal that the liquidated and ascertained damages clause
in a construction contract was valid and enforceable. Lord Woolf, delivering
the judgment of the judicial committee of the Privy Council, cited with
approval the passage from Lord Dunedin's speech in Dunlop which
I have already read out. At pages 58 to 59, Lord Woolf said this:
"Except possibly in the case of situations where one of the
parties to the contract is able to dominate the other as to the choice of
the terms of a contract, it will normally be insufficient to establish
that a provision is objectionably penal to identify situations where the
application of the provision could result in a larger sum being recovered
by the injured party than his actual loss. Even in such situations so long
as the sum payable in the event of non-compliance with the contract is not
extravagant, having regard to the range of losses that it could reasonably
be anticipated it would have to cover at the time that the contract was
made, it can still be a genuine pre-estimate of the loss that would be
suffered and so a perfectly valid liquidated damage provision. The use in
argument of unlikely illustrations should therefore not assist a party to
defeat a provision as to liquidated damages. As the Law Commission stated
in Working Paper No 61 (page 30):
"'The fact that in certain circumstances a party to a contract
might derive a benefit in excess of his loss does not ... outweigh the
very definite practical advantages of the present rule upholding a genuine
estimate, formed at the time the contract was made of the probable loss'.
"A difficulty can arise where the range of possible loss is
broad. Where it should be obvious that, in relation to part of the range,
the liquidated damages are totally out of proportion to certain of the
losses which may be incurred, the failure to make special provision for
those losses may result in the 'liquidated damages' not being recoverable.
(See the decision of Court of Appeal on very special facts in
Ariston SRL v Charly Records Limited (1990) The Independent 13
April 1990.) However, the court has to be careful not to set too stringent
a standard and bear in mind that what the parties have agreed should
normally be upheld. Any other approach will lead to undesirable
uncertainty, especially in commercial contracts."
- The Ariston case to which Lord Woolf
referred to in that passage was an extreme one. In Ariston SRL v Charly
Records, Court of Appeal, 13th March 1990, the offending clause
required a fixed amount of compensation to be paid for wrongful failure to
return items, quite regardless of whether many items or only a few items were
withheld. After that digression, let me now return to one more passage in
Philips. At pages 59 to 60, Lord Woolf said this:
"Likewise, the fact that two parties who should be well
capable of protecting their respective commercial interests agreed the
allegedly penal provision suggests that the formula for calculating
liquidated damages is unlikely to be oppressive."
- In addition to the authorities which I have
mentioned, counsel have also drawn my attention to the relevant passages in
Chitty on Contracts (29th edition) and Hudson's Building and Engineering
Contracts (11th edition). At paragraph 10-021 of Hudson, the editor states:
"It may be a consequence of producer influence, but there
would appear in fact to be virtually no reported cases in the United
Kingdom where periodical liquidated damages for delay in building
contracts have been held excessive so as to constitute a penalty.
Liquidated damages clauses in general are not looked on with the same
disfavour at the present day, and modern disallowances seem to arise
almost entirely in the field of hire-purchase where Lord Dunedin's
principle 4(c) above has frequently been violated."
- Let me now stand back from the authorities and make
four general observations, which are pertinent to the issues in the present
case.
1. There seem to be two strands in the authorities. In some
cases judges consider whether there is an unconscionable or extravagant
disproportion between the damages stipulated in the contract and the true
amount of damages likely to be suffered. In other cases the courts
consider whether the level of damages stipulated was reasonable. Mr
Darling submits, and I accept, that these two strands can be reconciled.
In my view, a pre-estimate of damages does not have to be right in order
to be reasonable. There must be a substantial discrepancy between the
level of damages stipulated in the contract and the level of damages which
is likely to be suffered before it can be said that the agreed
pre-estimate is unreasonable.
2. Although many authorities use or echo the phrase "genuine
pre-estimate", the test does not turn upon the genuineness or honesty of
the party or parties who made the pre-estimate. The test is primarily an
objective one, even though the court has some regard to the thought
processes of the parties at the time of contracting.
3. Because the rule about penalties is an anomaly within the
law of contract, the courts are predisposed, where possible, to uphold
contractual terms which fix the level of damages for breach. This
predisposition is even stronger in the case of commercial contracts freely
entered into between parties of comparable bargaining
power.
4. 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.
- That concludes my review of the authorities on
penalty clauses. It is now time to address the four key issues in this case.
Part 5. Issue 1: Does clause 6.8.2 of the DFA require
Tilebox to secure completion by a specific date?
- Mr Akenhead's submissions on the interpretation of
clause 6.8.2 are set out in paragraph 5.12 of his skeleton argument, in the
transcript of Day 1 at pages 12 to 17, and in the transcript of Day 2 at pages
160 to 162 and 175 to 177. In essence, Mr Akenhead's argument may be
summarised in three stages:
1. The completion date specified in clause 6.8.2 of the DFA is
30th November 2002. However, that is subject to any extension of time
which may be granted to the contractor under the building contract on
grounds for which neither Tilebox nor the consultants are responsible.
Thus the completion date required by clause 6.8.2 of the DFA can readily
be ascertained by examining the extensions of time issued under the
building contract. I will refer to this completion date, which is capable
of future ascertainment, as "the clause 6.8.2 date". This term is not part
of Mr Akenhead's armoury, but it is a convenient
shorthand.
2. Tilebox is under an obligation to secure completion by the
clause 6.8.2 date. This obligation arises because clause 6.8.2 must be
read in conjunction with clause 3 of the DFA. Also the phrase in clause
6.8.2, "but so that the date shall be extended", connotes an obligation to
achieve the extended date.
3. Accordingly, in clause 6.8.2 the phrase "take all
reasonable steps to ensure" means simply "to ensure". See Day 2 at page
175.
- Mr Darling, for his part, accepts the first stage
of this argument, but he submits that the second and third stages are
incorrect. The words "take all reasonable steps" must be given their natural
meaning.
- Although Mr Akenhead's argument has been
attractively presented, I am not persuaded by it. The phrase "take all
reasonable steps" is a familiar one. It is regularly used in contractual
documents to connote a low level obligation. It is the antithesis of a
contractual provision requiring the promisor to achieve a particular result.
In my judgment, it is not possible read clause 6.8.2 of the DFA in such a way
as to disregard the phrase "take all reasonable steps".
- What then does clause 6.8.2 require? In my view, it
requires Tilebox to take all the reasonable steps to secure completion on or
before the clause 6.8.2 date. There is, nevertheless, a limit to what Tilebox
can do. Tilebox is not the builder. Tilebox is not the architect. If
substantial delay to completion occurs because of default by the contractor or
a subcontractor then, absent special circumstances, this does not put Tilebox
in breach of clause 6.8.2 of the DFA. For these reasons, my answer to the
question posed in Part 5 of this judgment is "No".
Part 6. Issue 2: Does clause 6.8.1 of the DFA require
Tilebox to secure completion by the date required under the building
contract?
- Mr Darling's submissions on this issue are set out
in paragraphs 23 to 30 of his skeleton argument and in the transcript of Day 2
at pages 99 to 112. Mr Akenhead's submissions on this issue are set out in
paragraphs 3.3, 3.4, 5.9 and 5.10 of his skeleton argument, in the transcript
of Day 1 at pages 9 to 12, and in the transcript of Day 2 at pages 156 to 160.
- In essence, Mr Darling contends that clause 6.8.1
imposes a duty upon Tilebox to ensure that the various consultants comply with
their contractual obligations. It does not require Tilebox to secure
compliance with a building contract which had not been entered into at the
time when the DFA was executed. Alternatively, if clause 6.8.1 does bite upon
the building contract, that clause only relates to the manner in which
building works should be carried out. It does not relate to the time for
completion.
- Mr Akenhead, on the other hand, submits that clause
6.8.1 embraces both the contract of engagement with the various consultants
and also the building contract which was shortly to be entered into with
McAlpine. Furthermore, says Mr Akenhead, clause 6.8.1 requires Tilebox to
secure compliance with those various contracts, not only in relation to manner
of performance but also in relation to time of performance.
- Both counsel deployed a range of ingenious
arguments in support of their rival interpretations of this clause. I have
already given the paragraph and page references where those arguments can be
found. I shall not lengthen this judgment by reading out those passages.
Instead I shall state my conclusion and my reasons.
- In my judgment, the interpretation of clause 6.8.1
for which Mr Akenhead contends is correct. That clause imposes upon Tilebox an
obligation to secure that the contractor shall perform its obligations under
the building contract, including its obligations as to completion.
- I reach this conclusion for six reasons:
(i) Although the building contract had not been entered into
on 12th February 2001, all parties intended the building contract to be
entered into shortly. Negotiations on the terms of the building contract
had reached an advanced stage. There are frequent references to the
building contract in the DFA and it is defined very specifically on the
third page of the definitions clause in the DFA. The DFA and the building
contract, although entered into on different dates, formed part of an
interlocking group of contracts. This was the commercial reality and it
was the intention of all participants in the
project.
(ii) The phrase, "the Works", which occurs three times in
clause 6.8.1 of the DFA clearly connotes the physical building works. See
the definition of "Works" on the 18th page of the definitions clause in
the DFA.
(iii) Clause 3 of the DFA imposes upon Tilebox an obligation
to cause the building works to be carried out and completed. Clause 6.8.1
of the DFA meshes in with this. It requires that the building works shall
be designed, carried out and completed in accordance with the provisions
of the various contracts between Tilebox, on the one hand, and the
professionals and the contractors, on the other
hand.
(iv) Ownership of Onslow House was passing from Tilebox to
Standard Life. If the professionals or contractors failed to perform their
contracts, this was likely to cause loss to Standard Life. The obvious
commercial purpose of clause 6.8.1 was to create back-to-back liability.
This would enable Standard Life to recover its losses through the medium
of Tilebox. If back-to-back liability was not created, it was clearly
foreseeable that there would be a variety of "no loss" arguments in the
event of future claims.
(v) The fact that clause 6.8.2 imposes an obligation in
respect of the completion date does not prevent clause 6.8.1 from imposing
a separate and more onerous obligation as to timing. I say this for two
reasons. First, clause 6.8.1 begins with the phrase, "Without prejudice to
any other rights and remedies". Secondly, McAlpine has succeeded and
Tilebox has failed in the battle about the true construction of clause
6.8.2. The practical consequence of McAlpine's victory on that issue is
that clause 6.8.2 provides only modest and insufficient protection for
Standard Life in the event of delay.
(vi) It is quite true, as Mr Darling says, that the draft
building contract annexed as appendix 3 to the DFA did not state a
specific completion date. On the other hand, this did not mean that time
would be at large under the building contract. It was inevitable that a
completion date would be specified and that that completion date would
precede 30th November 2002. The fact that the exact completion date for
inclusion in the building contract was left to be determined later cannot
prevent clause 6.8.1 from fulfilling its obvious commercial purpose or
from having the effect which was obviously intended by the
parties.
- Let me now draw the threads together. For the
reasons set out above I conclude that clause 6.8.1 of the DFA requires Tilebox
to achieve completion of the building works by the date specified in the
building contract, subject to any extensions of time which may be granted
under clause 25 of the building contract. Accordingly, my answer to the
question posed in Part 6 of this judgment is "Yes".
Part 7. Issue 3: What losses flowing from delay were
foreseeable on 27th April 2001?
- The 27th April 2001 was, of course, the date on
which the building contract was executed. It is necessary to identify the
losses flowing from future delay which were foreseeable on that date. In this
context I use the word "delay" to denote failure by McAlpine to complete the
building works by the date stipulated in the building contract, subject to any
extensions of time granted under clause 25 of the contract conditions. The
period of delay would be the period between (a) the contractual completion
date or the extended completion date and (b) the actual date of practical
completion.
- In my judgment, the losses flowing from delay which
were foreseeable on 27th April 2001 fall under three heads, namely:
(i) Diminution of the DCP which Tilebox would receive from
Standard Life.
(ii) Tilebox's own direct losses.
(iii) Tilebox's liability in damages to Standard
Life.
- It is convenient to deal with these three heads
separately.
(i) The Diminution of the DCP.
- The formula for calculating the DCP is set out as
follows in clause 1 of the DFA:
"(A minus B) + C
"Where:
"A = the aggregate in respect of each Lettable Unit of:
"(1) an amount equal to the capitalisation factor multiplied
by the Base Rent; plus
"(2) an amount equal to one half of the Capitalisation Factor
multiplied by the amount (if any) by which the Initial Rental Income
exceeds the Base Rent.
"And for the avoidance the doubt the Capitalisation Factor
will be applied individually to each Granted Lease and not to the
aggregate of the rents payable under all the Granted
Leases.
"B = the aggregate of:
"(1) the Interim Commitment at the Development Completion
Date;
"(2) the total of the rent that would otherwise be payable
during all Rent-free Periods which are unexpired at the Development
Completion Date;
"(3) the total of all Capital Contributions which are unpaid
at the Development Completion Date;
"(4) save to the extent any element of such amount may already
have been included in the interim commitment by virtue of paragraph C of
that definition, an amount equal to 125 per cent of the Fund's Surveyor's
reasonable estimate of the total cost of carrying out all work required by
any notice served by the Fund under clause 6.14 on or before the date on
which the Development Completion Payment is paid; and
"C = VAT ... "
- The "capitalisation factor" is defined as 11.8189,
provided that the lease granted is for 15 years or more. The "base rent" is
defined as £25 per square foot. The term "capital contributions" refers to the
various forms of incentive payment which may be made to or for the benefit of
a tenant at the start of his lease.
- The term "interim commitment" has a somewhat
lengthy definition. In essence, however this comprises the total costs of the
development. Within these total costs, there is an element of finance charge
which is called "notional accumulation". This notional accumulation is
assessed at the rate of 7.5 per cent compound interest with quarterly rests.
It can be seen at once that the longer completion is delayed, the greater will
be the amount of notional accumulation. Every pound of notional accumulation
which accrues constitutes a deduction from the DCP.
- Tilebox's case as pleaded in its response is that,
absent any delay, Tilebox would have expected to receive a DCP of at least
£1,666,310. However, the effect of delay upon this DCP was to erode it at the
rate of £38,182 per week. Thus the anticipated DCP was completely eroded over
a period of 43 weeks. No one expected the building works to be delayed for
anywhere near as along as that. Accordingly, a loss under this head of £38,182
per week was foreseeable as a consequence of delay. The detailed calculations
in support of this contention appear in paragraphs 18 to 22 of Mr Hutley's
witness statement.
- McAlpine strongly dispute these contentions.
McAlpine assert that, on a proper analysis of the evidence, Tilebox were
unlikely ever to receive any DCP at all. If that is wrong, the DCP would be
very low. McAlpine further contend that the weekly erosion of any DCP would be
at a lower rate than alleged by Tilebox.
- In paragraph 2(c)( iii) of his skeleton argument,
Mr Darling suggests that a maximum weekly loss of about £31,000 per week could
be envisaged under this head. In paragraph 63, he suggests that the weekly
figure might range between £17,300 and £36,000 per week depending upon the
stage at which delay occurs.
- Let me now turn to the evidence. Much of the
written evidence and most of the oral evidence was directed to the question
what DCP Tilebox could reasonably have expected to achieve in the absence of
any delay. The amount of DCP would depend upon a number of factors including,
in particular:
(i) What rent per square foot would be achieved.
(ii) How soon after completion the whole of Onslow House could
be let to one or more tenants upon a lease or leases of 15 years.
(iii) What rent-free period, if any, would be granted to the
tenants.
(iv) What other incentives, if any, would be given to the
tenants.
(v) What would be the net internal area of the building.
(vi) The amount of the total costs of the
development.
- Let me deal first with the rent per square foot
which was likely to be achieved. A helpful table of comparables was put in
evidence. This table is part of a joint report on the Guildford office market
prepared in January 2001 by Richard Ellis, Holley Blake and Wadham Isherwood.
The two comparables upon which most attention has been focussed are both at
Cathedral Hill in Guildford. They are new buildings. The first one has an area
of 110,000 square feet. This was let in January 2001 on a 15-year lease at a
rent of £28 per square foot. The second one has an area of 55,000 square feet.
This was let in December 2000 at a rent of £27.22 per square foot. It can be
seen that the first of the two Cathedral Hill properties is comparable in size
to Onslow House.
- Mr Meikle of Richard Ellis comments as follows on
the state of the market in his witness statement:
"6. At the end of 2000 market conditions were strong. The M25
office market peaked in this year in terms of the demand and the resulting
level of take up. As a consequence rents exceeded £26 and there was an
expectation of a rising market throughout the building contract.
"7. I would say that in 2000 and 2001 we considered that there
was an exceptionally good chance that the building would have been let
very quickly, either during the construction period or very soon after
practical completion was achieved. This was because of the relatively low
supply of office space and competition within Guildford and the high level
of demand for offices."
- Mr Meikle went on to state, in paragraph 12, that
during early 2001 he was hoping and expecting that there would be a rise in
rent levels above £28 per square foot.
- In his oral evidence, Mr Meikle was questioned in
some detail about the likely rent which would be foreseeable for Onslow House
in the spring of 2001. He said that, in some respects, the first Cathedral
Hill property had an advantage over Onslow House. In particular, Cathedral
Hill was a brand new building and had its own extensive car parking. In other
respects, Onslow House had an advantage over Cathedral Hill. In particular,
Cathedral Hill was out of town whereas Onslow House was not. Also, Onslow
House was close to Guildford railway station which has an excellent service to
London. Furthermore, Onslow House is next to a large multistorey public car
park with over 1,000 spaces.
- In January 2001, Mr Meikle considered that a rental
of £28 per square foot was established for properties such as Onslow House. In
his opinion, the highest rent that might possibly be achieved for Onslow House
on a 15-year lease was £30 per square foot.
- I turn now to Mr Hutley's evidence. In paragraph
19, of his witness statement, Mr Hutley took a rental figure of £27.50 per
square foot. He then added that he and his colleagues were hoping to achieve
something between £28 and £30. When pressed in cross-examination, Mr Hutley
did not retreat from these figures. Indeed, in re-examination he became
somewhat more optimistic and expressed the view that, "the early 30s" might be
achievable.
- I have carefully considered the written and oral
evidence of Mr Hutley and Mr Meikle, as well as the contemporaneous documents
and the evidence of Mr Walton. I do not think that in early 2001 a rent higher
than £30 per square foot was realistically achievable for Onslow House on a
15-year lease. In my view, £26 per square foot was a conservative figure.
Tilebox had a reasonable prospect of securing a rent somewhere in the range
between £27 and £30 per square foot.
- I turn next to the factors (ii), (iii) and (iv).
These factors are all affected by the level of supply and demand for office
accommodation in Guildford at any given time. It can be seen from the joint
report of Richard Ellis, Holley Blake and Wadham Isherwood that, during 2000,
the demand for office space in Guildford substantially increased and the
supply of office space substantially diminished.
- Factor (ii) is the void period, if any, between
completion of the building and commencement of the lease. Mr Meikle said in
cross-examination that the void period on Cathedral Hill was 12 months. Whilst
I take this fact into account, it should be noted that that void period
occurred at a time when the balance of supply and demand was not established
in the same way that it was by January 2001. It is, of course, possible to
start marketing a building well before practical completion. Whether a tenant
is found promptly or not must depend in part upon chance. Mr Hutley, in his
evidence, went so far as to say that he did not expect any void period on
Onslow House. In my judgment, that was over-optimistic. In my view, it was
certainly possible that there would be no void period. It was also possible
that there would be a void period. If so, that void would probably have been
for six months or less. I find some support for this conclusion in paragraph 9
of Mr Walton's witness statement and in the cross-examination of Mr Walton at
Day 1, pages 98 to 116.
- I turn now to factors (iii) and (iv). Tenants are
often offered an incentive to take up a lease. Such incentive may take the
form of a rent-free period. Alternatively, it may take the form of a capital
contribution to fitting out works or some similar sum.
- In cross-examination, Mr Meikle expressed the view
that on Onslow House there would probably be a rent-free period of between six
and nine months. Mr Hutley was more optimistic. In the course of his evidence
he was taken through a large number of appraisals which were carried out for
Tilebox or Standard Life during 2000 and 2001. In most of these appraisals
allowance was made for a rent-free period of about six months or for a capital
contribution of similar value. In the last two appraisals, however, these
items were omitted. Mr Hutley made the point that appraisals were done for
different purposes. Those which were shown to Standard Life had to be based
upon conservative figures. However, Mr Hutley's own expectations based upon
his long career as a developer were more optimistic. There is some support for
Mr Hutley's optimism to be found in one of the contemporaneous documents. On
23rd January 2001, Standard Life prepared an internal memo approving the
proposed development. Paragraphs 1 and 2 on the second page of this memo read
as follows:
"1. This is a good opportunity to acquire grade A space in a
prime position within Guildford Town Centre. Completion is due in April
2002 and we consider the timing to be good. Demand is strong, rents are
established at £27/£28 [per square foot]. There is no competing space,
over 10,000 [square feet] currently on the market and the supply pipeline
is very limited for the next two years.
"2. The development cost figures given above do not include a
sufficient allowance for void/rent free periods. However, developers
profit provides total cover of 11 months on an interest basis or 9 months
on a rent basis. We are therefore accepting the letting risk but there is
considerable upside potential through both an improvement in rents and
yield once the building is fully income producing."
- My conclusion on factors (iii) and (iv) is as
follows: it is probable that a rent-free period would have been required. That
period might have been about six months. It might have been more, perhaps in
the region of nine months. It might have been less, perhaps in the region of
three months. Alternatively, it may be that a similar incentive would have
been given to the tenant not by means of a rent-free period, but by means of
some form of capital contribution.
- I turn now to factor (v). The contractual
provisions concerning floor area are neither simple nor straightforward. An
amendment to clause 24 of the building contract required McAlpine to pay
liquidated and ascertained damages at a specified rate in the event that the
net usable floor area fell below 89,000 square feet. On the other hand, the
specification attached to the building contract required McAlpine to use its
best endeavours to achieve 90,000 square feet. Immediately above that passage
is a breakdown of areas on each floor. The figures in this table, when added
together, amount to 90,787 square feet. What I have to do is to look at what
was expected in April 2001. In my view, the expectation then was for a floor
area of 90,000 square feet. There was a possibility, which was acknowledged,
that the area would be greater, namely up to 90,787 square feet. There was
also a possibility, which was acknowledged, that the area would be less,
namely down to 89,000 square feet.
- I come finally to factor (vi). There was little
evidence about this. The figure used for costs in Mr Hutley's calculations s
£26,473,276. It is quite true, as Mr Akenhead pointed out in closing, that the
actual figure might be less than this. On the other hand, there is no evidence
as to what that lower figure may be.
- Let me now draw the threads together. Mr Darling
and his team have prepared a very helpful schedule showing what the DCP might
be depending upon a number of variable factors. The figure for the DCP in this
schedule varies between nil and £1,640,554. I agree with Mr Darling that there
was a risk, if things went badly, that Tilebox would get no DCP at all. On the
other hand, if everything went well, it is possible in my view that Tilebox
would have done somewhat better than the top figure shown in Mr Darling's
table. The range of possible DCPs lies between nil and about £1.7 million. The
DCP was unlikely to be as low as nil. It was unlikely to be as high as £1.7
million. Viewed, however, from the perspective of early 2001, it was perfectly
possible that the DCP would fall anywhere within that range.
- I turn next to the weekly loss through the erosion
of the DCP. Mr Akenhead has prepared a helpful chart showing how the weekly
loss would be affected by the date when delay occurred. The date of any future
delay would of course be unknown in April 2001. In my view, it would have been
reasonable in April 2001 to expect the weekly loss attributable to erosion of
the DCP to be in the region of £30,000. The actual figure may be somewhat
higher or it may be somewhat lower. This could not be foretold at the time
when the building contract was executed.
(ii) Tilebox's own direct losses.
- This head of loss is dealt with in paragraphs 5.3
to 5.6 of Mr Akenhead's skeleton argument, and paragraphs 64 and 65 of Mr
Darling's skeleton argument. It is dealt with by Mr Goulston at paragraphs 10
to 14 of his second witness statement. It is dealt with by Mr Hutley at
paragraphs 30 to 36 of his first witness statement. These matters were
explored in cross-examination of Mr Hutley on Day 1 at pages 166 to 170 of the
transcript and in re-examination at page 174.
- McAlpine's final position on this issue is that a
weekly loss of £4,000, but no more, was foreseeable under this head. See Mr
Darling's closing speech at Day 2, pages 144 to 145. Tilebox's case is that a
weekly loss of £15,160 was foreseeable. The items which make up this head of
loss are set out in Mr Hutley's witness statement.
- In my view, all of these items are real and
foreseeable, but they are not easy to quantify in advance. Tilebox would
certainly incur management costs during the period of delay, but it is
difficult to predict precisely how much. Clearly, Tilebox would incur
additional professional fees during that period but the amount is uncertain.
There might be savings if, for example, the quantity surveyors were not
required to carry out valuations. There would certainly be continuing
overheads and insurance costs. In addition to that, delayed receipt of the DCP
would result in a diminution of capital available for use on other projects.
- I do not consider that a minute analysis of each of
these heads is appropriate. What I am concerned with is what was sensibly
foreseeable in April 2001 as the likely weekly loss under these heads. In my
judgment, it would have been reasonable in April 2001 to foresee a weekly loss
falling somewhere within the range between £5,000 and £10,000 under this head.
(iii) Tilebox's liability in damages to Standard
Life.
- It was foreseeable in April 2001 that if McAlpine
delayed completion, then Tilebox would be liable to Standard Life for breach
of clause 6.8.1 of the DFA. Both McAlpine and Tilebox had copies of this
provision. Tilebox has suggested that the measure of damages as between
Tilebox and Standard Life would be loss of rental income. In my judgment, that
is not quite right. In the event of litigation between Standard Life and
Tilebox, Standard Life would have to give credit for the notional DCP. One
benefit which Standard Life has gained from the delay is that it no longer has
to pay any DCP to Tilebox. Once this credit has been given, however, I agree
with Mr Akenhead that the starting point for assessing damages is the rental
income which has been lost.
- There is no dispute between the parties that it was
foreseeable in April 2001 that lost rental income would be somewhere in the
region of £45,000 per week. Tilebox would say that the true figure is higher
but this contention is not relevant for present purposes.
Part 8. Issue 4: Having regard to the foregoing matters,
is clause 24.2 of the building contract unenforceable as a
penalty?
- On the basis of the conclusions set out in Parts 6
and 7 of this judgment, clause 24.2 of the building contract was an entirely
reasonable pre-estimate of damages. Indeed, when one adds together Tilebox's
own losses and Tilebox's liability in damages to Standard Life, it can be seen
that £45,000 per week is too low.
- There is, however, a separate question which I must
address. Suppose that I am wrong in my interpretation of clause 6.8.1 of the
DFA. Suppose that this clause does not impose upon McAlpine a back-to-back
liability to Standard Life in the event of delay by McAlpine. In those
circumstances, would clause 24.2 of the building contract become a penalty
clause?
- On this hypothesis, Tilebox's foreseeable losses
flowing from delay would fall under two heads, namely: (i) diminution of the
DCP, and (ii) Tilebox's own direct losses. For the reasons set out in Part 7
of this judgment, the amount of Tilebox's future losses under each of those
two heads would, in April 2001, have been difficult to quantify. A weekly loss
somewhere in the region of £30,000 could have been foreseen under head (i),
although the actual figure might turn out to be higher or lower than that. A
weekly loss somewhere between £5,000 and £10,000 could have been foreseen
under head (ii). From the viewpoint of April 2001, it was most unlikely,
although just conceivable, that the total weekly loss would be as high as
£45,000. Against that background, should clause 24.2 be struck down as a
penalty? In my judgment, it should not, for five reasons.
1. The figure of £45,000 was at or slightly above the top of
the range of possible weekly losses flowing from delay. Whether one takes
the top of the range or the middle of the range of possible future losses
as the yardstick, it seems to me that the gap between that yardstick and
£45,000 was not nearly wide enough to warrant characterising this clause
as a penalty.
2. Mr Hutley did make a genuine attempt to estimate the losses
which would flow from future delay. Mr Hutley, unlike me, did not have the
good fortune to listen to two days of legal argument about what that loss
was likely to be. Instead, perfectly sensibly, he took as his yardstick a
conservative estimate of rental value. I accept, of course, that if Mr
Hutley's estimate was substantially wrong, then the genuineness of his
efforts cannot save the clause. Nevertheless, this is a relevant
factor.
3. The difficulty which was inherent in the exercise of
estimating future losses makes it particularly sensible in this case for
the parties to have agreed upon a weekly figure. See the Clydebank
Engineering case at page 11. See also Lord Dunedin's speech in
Dunlop at pages 87 to 88, sub-paragraph
(d).
4. This court, following the lead set by higher courts, is
predisposed where possible to uphold contractual terms which fix the level
of damages. This predisposition is somewhat stronger in the present case
for the following reason: the building contract dated 27th April 2001, is
a commercial contract made between two parties of comparable bargaining
power.
5. During the course of the pre-contract negotiations, the
level of liquidated damages was the subject of specific debate. A figure
of £45,000 was considered not only by the parties, but also, as can be
seen from the documents, by their legal advisors. The fact that clause
24.2 and its appendix survived such scrutiny is further evidence that, as
at April 2001, the liquidated damages provision was
reasonable.
- There is, next, a further point to consider (in the
event that I am wrong in my interpretation of clause 6.8.1). On Tilebox's case
the weekly erosion of the DCP would come to an end after 43 weeks. On
McAlpine's case, such erosion would end very much sooner. After that point in
time, Tilebox's losses flowing from delay would reduce to somewhere between
£5,000 and £10,000 per week. Does this circumstance cause clause 24.2 to
become a penalty? In my judgment, it does not, essentially, for three reasons.
1. The precise length of time before this head of loss would
end was uncertain. It was, however, foreseeable that this head of loss
might continue to run for up to about 40 weeks.
2. At the time of negotiating the contract, both parties took
the view that, if there was delay, it would be for substantially less than
40 weeks. See paragraph 51 of Mr Fitzgerald's witness statement and
paragraphs 2 to 3 of Mr Goulston's second witness
statement.
3. Against this background, it was perfectly sensible and
reasonable for the parties to agree a weekly figure which included
allowance for erosion of the DCP.
- Let me now draw the threads together. If I am right
in my interpretation of clause 6.8.1 of the DFA (as set out in Part 6 of this
judgment) there can be no suggestion that clause 24.2 is a penalty clause. On
this hypothesis, clause 24.2 is clearly an enforceable provision for
liquidated damages and Mr Darling does not argue otherwise. If I am wrong in
my interpretation of clause 6.8.1, then I still conclude, for the reasons set
out above, that clause 24.2 of the building contract is not a penalty clause.
- Accordingly, my answer to the question posed in
Part 8 of this judgment is "No."
- Before parting with this case, may I express my
appreciation of the immense labours by solicitors, junior counsel and leading
counsel on both sides. This case has been prepared immaculately. It has
progressed from commencement to trial within the space of two months. The
advocacy on both sides has been of a high order.
- Finally, for the reasons stated above, McAlpine's
claim for a declaration fails and must be dismissed.