Philip Duffield on an important ruling allowing recovery of delay losses in addition to liquidated damages
A Commercial Court decision from November considered several issues around liquidated damages for delay in a renewables context. In addition to upholding the validity of the clauses in question, the court allowed liquidated damages to accrue after termination and also permitted a separate claim to be made for general damages in respect of lost renewable energy certification arising from delays in commissioning.
GPP Big Field LLP (GPP) entered into five engineering, procurement and construction (EPC) contracts with Prosolia UK Ltd (Prosolia) to build solar power generation plants in the UK. Prosolia’s obligations were guaranteed by its Spanish parent company, Solar EPC Solutions SL (Solar).
These projects were to be accredited under the Renewables Obligation (RO) – in effect a subsidy mechanism administered by Ofgem. Under the RO, GPP stood to receive renewables obligation certificates (ROCs) for 20 years for each megawatt hour (MWh) of electricity generated by the plants. The RO incorporated a degression mechanism whereby the plants would be eligible for more ROCs per MWh of electricity generated if commissioned after 31 March 2013 than if commissioned before (and lower still if commissioned after 31 March 2014). This degression mechanism became relevant for two of the plants: late commissioning meant one plant missed the 2013 deadline and another missed the 2014 deadline.
GPP claimed for delay-related losses in relation to the five projects, principally under delay liquidated damages provisions. GPP also claimed for lost ROCs attributable to the lower ROC accreditation due to delayed commissioning.
Solar argued that liquidated damages ought to be unenforceable as a penalty, as the same rate of liquidated damages were specified in each of the contracts despite the fact that there could be up to 30% variance in revenue, and also on the basis that the word “penalty” was used in the liquidated damages clause.
The court rejected this argument, applying the Supreme Court decision in Cavendish Square vs Makdessi. The test was whether the clause was “out of all proportion to any legitimate interest of [GPP] in the enforcement of the primary obligation” and/or whether the sums stated were “extravagant, exorbitant or unconscionable”.
Although there had been no specific negotiation around liquidated damages figure, a precise calculation of financial losses on a solar project was difficult to produce and the specified amount was not beyond the maximum loss that might be sustained. The reference to a “penalty” was not determinative, particularly as the term “delay damages” was used elsewhere.
One EPC contract was terminated by GPP prior to commissioning. In that case, GPP argued that the liquidated damages provision continued to apply until commissioning was achieved using alternative contractors. The court accepted this argument in reliance on comments made by the Technology and Construction Court in Hall vs Van den Heiden (No 2) to the effect that an interpretation that brought liquidated damages to an end upon termination would “reward the [contractor] for his own default” and would penalise the employer for trying to get the works completed by another contractor.
This decision is contrary to other recent decisions (for example, in Shaw vs MFP Foundations and Pilings Ltd ), which were not cited by the court. It is also contrary to the preferred view espoused by commentators and construction law textbooks. GPP ought, perhaps, to consider itself fortunate to receive a favourable determination on this point – which may in due course require clarification by the appeal court.
Solar argued GPP’s claim for additional damages for lost ROCs (due to the lower ROCs accreditation) was limited by the liquidated damages provision.
The court agreed with Solar’s assertion that the failure to achieve the required level of ROCs was purely a consequence of late completion of commissioning. However, “not without some misgivings” the court found that the EPC contracts treated “that part of the loss that relates to the failure to achieve the contracted level of ROCs as falling outside the ambit of the delay damages provision”.
The primary reason for reaching this conclusion was that the EPC contracts provided an express right of termination for failing to achieve the required level of ROCs. Upon such a termination the parties were obliged to attempt to agree a revised price, with guidance being given as to the level of reduction that might be agreed for a specified reduction in ROCs. This suggested that GPP was intended to be compensated for a reduced level of ROCs separately from the delay damages provision.
This decision is highly significant. It is rare for delay related losses not to fall within a liquidated damages provision, regardless of whether the delay can be characterised as a separate breach of contract. Similar issues are likely to arise whenever the commercial viability of a project is premised on government subsidies or approvals which are time sensitive. The court relied heavily on indications of intention found in other parts of the contracts in the present case and parties would be wise to spell out whether the loss of such subsidies or approvals are to be covered by any liquidated damages for delay.