It has long been thought that a party’s liability for liquidated damages ended upon the termination of his contract. Indeed as stated in Keating on Building Contracts:
“If the contact is brought to an end by determination or otherwise, then prima facie all future obligations cease and no claim can be made for liquidated damages accruing after determination”.
Such a position would not normally cause any undue concern for an employer who could pursue any losses as a claim for general damages. Indeed it is generally thought that under both the JCT and NEC 3 forms of contract the right to liquidated damages ceases upon termination and it is the actual losses to the Employer that are recoverable. In other forms of contract the wording may be a little less clear although the author when negotiating bespoke forms of contract has always sought an express provision stating that liquidated damages cease upon termination.
The case of Hall & Shivers v Van Der Heiden 2010 which was decided by Coulson J now casts some doubt over the previously thought position.
The case concerned extensive refurbishment works to a London flat where the contractor failed to achieve practical completion notwithstanding having received a sum of money well in excess of the Contract Sum. Following the owners taking possession of the flat the contractor refused to rectify defects or complete the works and eventually the works were completed by a replacement contractor.
The owners were awarded damages equivalent to the cost of rectifying the defects, something which is uncontroversial. However, Coulson J then went onto to award the owners liquidated damages up until the time that the works were completed by the replacement contractor. The fact that the owners had taken possession of the flat was considered by Coulson J to be irrelevant to the issue of completion and indeed the ability to apply liquidated damages. It will be noted that the contract was a JCT Minor Works which does not contain any provision reducing liquidated damages following early possession, unlike the JCT Design and Build Contract.
Coulson J, contrary to the previous authorities, decided that there was nothing in principle to prevent liquidated damages being applied post termination of the contract. In a case such as this where the owners were not suffering any ongoing loss (as they continued to reside in the flat) the liquidated damages were something of a windfall.
The lessons to be learnt from this case are quite clear. Contractors should consider seeking a provision stating that liquidated damages end upon the termination of a contract. Contractors should also ensure that the contract provides for the level of liquidated damages reducing when early possession occurs.
