The application of liquidated damages

A recent judgement in the English Court of Appeal that I came across presented an interesting view especially to practising contract managers in Malaysia. The case is The Bath & North East Somerset District Council v Mowlem, CA 20February 2004. The issue in question is liquidated and ascertained damages must for all purposes be treated as an adequate measure of damages in the event of a delay.

The facts of the case are as follows: The B&NESDC undertook the restoration of a hot spring spa building in Bath for use as leisure and health facilities. The work was given out to Mowlem and were expected to be completed in 2002.Unfortunately that did not occur. By mid 2003 problems appeared in the paint coating applied to the pools. The pool itself was leaking. The council attributed this to Mowlem's poor workmanship. The contractor responded that the default lay elsewhere, in inadequete design or poor specifications or inappropriate choice of materials.

Subsequently the contractor were instructed under clause 8.3 to remove all paint finishes. This was resisted by the contractor contending that the instruction should be under clause 13 and that such work should be treated as a variation. They refused to carry out the instruction under clause 8.3. The Council stood its grounds and gave notive under clause 4.1.2, that is if Mowlem did not comply within 7 days, they would employ others to carry out the work and the costs be charged to Mowlem's account.

When the new contractor wanted to carry out the work, they were denied access by Mowlem. The Council then went to the courts for an injunction restraining Mowlem from denying the alternative contractor access to the site, and they successfully got the order.

In granting the Council the injunction, judge Seymour QC was unimpressed with Mowlem's stand that the situation was beyond testing. Mowlem also pointed out that the contract contained provision for LAD at 12,000 sterling pounds per week and if it were proved in the long run that they were at fault, then the Council would be adequately compensated by the payment on those damages for the delay period.

The Council accepted that it is bound by the provisions of the delay, but claimed that its true loss would be considerably be higher if the project were to be stuck whilst the disputes are being resolved. There could have been an indefinite stalemate and they would suffer significant loss and damage which is in excess of the LAD stated. They also contended that there would be a negative effect on economic regeneration within the area and public confidence on the council.

Judge Seymour in granting the injunction agreed with these propositions so did the Court of Appeal. The LAD provisions represented a cap on the recoverable damages the Council could obtain in the event of a delayed completion and this may not be a fair measure of likely loss suffered by the Council. The Court held that Mowlem committed a breach of contract in refusing to permit the council to appoint its own contractors to carry out the paint removal works. The agreement on LAD was not an agreed price to Mowlem to commit breach of contract.