Contract interpretation: assessing liquidated and ascertained damages

In a recent case, the Technology and Construction Court considered an application for leave to appeal an arbitrator’s award. It concerned whether the provision in a parties’ contract governing the application of liquidated and ascertained damages was a penalty or was a genuine pre-estimate of likely loss.

The case arose from a contract for the construction of 36 wind turbine generators (WTGs) at a site near Stirling in Scotland. The employer, Braes of Doune wind farm, engaged the contractor, Alfred McAlpine, to construct foundations for the WTGs, in addition to all related civil and electrical works. The employer also engaged another contractor to design, supply, construct and install all 36 WTGs. There was an ‘interface agreement’ that governed the relationship between all three parties.

The contract between McAlpine and Braes of Doune incorporated an engineering, procurement and construction (EPC) contract, which was modelled upon the FIDIC ‘Silver Book’. Clause 8.7 of the EPC contract contained the liquidated and ascertained damages provisions. This clause provided that delay damages would be paid by the contractor for every day that elapsed between the relevant time for completion up to and including the date of issue of the taking-over certificate. The contractor would be entitled to an extension of time to the extent that it suffered delay caused by other contractors on site, including the WTG contractor, “subject to compliance by the contractor of his applicable and relevant obligations under this contract and under the interface agreement”. Typically, the amount of damages varied according to the seasons of the year and was based upon each megawatt of power “of the total installed capacity for the plant which was unavailable”, calculated on a daily basis.

The arbitrator, John Uff QC, had carefully considered the wording of Clause 8.7, as well as the provisions governing extensions of time and had concluded that Clause 8.7 did not provide certainty as to the amount of delay damages flowing from an identified breach by the contractor. He accordingly held that any imposition of delay damages by Braes of Doune, based upon the provisions of Clause 8.7, could not be enforced.

Leave to appeal

In considering McAlpine’s application for leave to appeal the arbitrator’s decision, Mr Justice Akenhead said it was unusual for liquidated damages clauses, which had been freely entered into by the parties, to be regarded as unenforceable. He also noted that it was not unusual on turnkey power station contracts for liquidated damages to be related to the loss of electricity that could have been generated during a period of culpable delay. In this instance, however, he noted the unusual situation whereby the liquidated damages arrangements lay in the “practical juxtaposition of the work of the contractor and the WTG
contractor”.

He observed that the court can only grant leave to appeal an Arbitrator’s award if the conditions of Section 69(3) of the Arbitration Act 1996 are met. This application fell to be considered against the provisions of Clause 69(3)(c), which relate to where “the decision of the tribunal on the question is obviously wrong”.

Justice Akenhead said that in deciding whether an award was “obviously wrong” or not, it was not enough for him to find that a part of an arbitrator’s reasoning was wrong or that another tribunal would have reached a different conclusion. He also drew the distinction between an arbitrator’s decision which was considered wrong, perhaps just on balance, by a judge considering an application for leave to appeal, and a decision which was “obviously wrong”.

He concluded that the arbitrator’s decision in this instance was ultimately correct, even though he may have disagreed with part of the arbitrator’s reasoning. In reaching that conclusion, he noted that there was no requirement for sectional completion and that until all 36 WTG’s were complete, the works under the EPC contract could not be said to be complete.

Justice Akenhead found that it was unjust that delay damages could be imposed on McAlpine in respect of delays to individual wind turbine generators caused by the WTG contractor. In such circumstances, the liquidated damages provision constituted a penalty and was therefore unenforceable.

The judge held that the arbitrator’s decision was not “obviously wrong” and dismissed the application for leave to appeal.

Summing up

The case: 

Braes of Doune Wind Farm (Scotland) Limited and Alfred McAlpine Business Services Limited [2008] EWHC 426 (TCC).

The issue:

Liquidated and ascertained damages.

The implication:

Provisions for liquidated and ascertained damages must be clearly related to a party’s failure to perform its contractual obligations, otherwise they run the risk of being considered a penalty and thus unenforceable.