Introduction

1. Modern construction projects often comprise of different sections, phases or portions which come together at the end of the project to constitute a completed whole. Whilst it is often the case that Employers will have provisions in their construction contracts which enable them to occupy or take control of portions, sections or phases of the construction project, they may sometimes overlook or neglect to consider including provisions which allow the Employer to proportionately reduce the rate of liquidated damages for delay (LDs) payable to account for that partial occupation or partial control. In doing so, such LD provisions may inadvertently contravene what is widely known in the common law universe as the penalties doctrine or the rule against penalties (the Penalty Rule).
2. The concerns highlighted above is embodied in the case of Stanor Electric Ltd v R Mansell Ltd (1988) CILL 399 (Stanor). In Stanor, the defendant (R Mansell Ltd) main contractor engaged the plaintiff sub-contractor (Stanor Electric Ltd) to carry out electrical installations in two houses in London. Amongst the conditions of contract were provisions for LDs to be payable at a rate of £5,000.00 per week for failure to complete the works within the contractual time period. The contractor only completed one of the two houses in time and the other house was delayed by 2 weeks. R Mansell Ltd sought to recover LDs at a rate of one half of 2 weeks at £5,000.00 per week. The learned Judge James Fox-Andrews QC held that as there was a presumption that a clause was a penalty where “a single sum was made payable by way of compensation on the occurrence of one or more or all of several events, some of which might occasion serious and others but trifling damages.” Considering the matters at hand, the learned Judge Andrews QC held that the clause was a “self-evidently a penalty” and refused to enforce the clause. The point was simply that only one rate of LD was specified to apply regardless of whether one or both houses remained incomplete and there clearly was a significant difference in terms of loss in the two situations.
3. Not too long ago, the Technology and Construction Court in England and Wales had a chance to consider the issue again and it came to the opposite conclusion. In Eco World – Ballymore Embassy Gardens Co Ltd v Dobler UK Ltd [2021] EWHC 2207 (TCC) (Eco World), the learned Judge Justice Finola O’Farrell (O’Farrell J) held that an LD clause which did not contain a mechanism for reduction to reflect partial occupation or possession by the employer was not unenforceable for being a penalty.
4. As there are presently no local decisions on the issue, we seek to examine Eco World in this article and provide some insight on how a court or tribunal applying Singapore law may approach the issue.

Facts

5. In Eco World, Eco World – Ballymore Embassy Gardens Co Ltd (EWB) engaged Dobler UK Ltd (Dobler) as a trade contractor to carry out the design, supply and installation of façade and glazing works (the Works) for 'Building A04' (the Building), which was part of a development of apartments known as Embassy Gardens Phase 2, Nine Elms, London, for the lump sum price of £8,604,809 (the Contract Sum). The Building consisted of three (3) residential blocks: Block A, B and C. Completion of the whole Building was fixed on 30 April 2018.
6. The LD provision in the written contract between EWB and Dobler (the Contract) stated as follows:

“2.32.1 If the Trade Contractor fails to complete the Works or works in a Section by the relevant Date for Completion of a Section or the Works, the Employer may, not later than 5 days before the final date for payment of the amount payable under clause 4.16, given notice to the Trade Contractor which shall state that for the period between the relevant Date for Completion of a Section or the Works and the date of practical completion of the Works or Section that:

2.32.1.1 he requires the Trade Contractor to pay liquidated damages at the rate stated in the Trade Contractor Particulars, or lesser rate stated in the notice, in which event the Employer may recover the same as a debt; and/or

2.32.1.2 that he will withhold or deduct liquidated damages at the rate stated in the Trade Contract Particulars, or at such lesser stated rate, from sums due to the Trade Contractor.

2.32.2 If the Employer intends to withhold or deduct all or any of the liquidated damages payable, an appropriate Pay Less Notice must be given by or on behalf of the Employer.

…

Trade Contract Particulars

“The following rates of liquidated damages will apply for the first 4 weeks (inclusive) of delay in completion of the Works beyond the Date for Completion:

• £nil per week or pro rata for part of a week.

Liquidated damages will apply thereafter at the rate of £25,000 per week (or pro rata for part of a week) up to an aggregate maximum of 7% of the final Trade Contract Sum …'”

7. Clause 2.33 further provided that EWB may take over part of the Works prior to practical completion of the whole Works, at which time the Construction Manager was to provide Dobler with a notice identifying the works taken over (the Relevant Part) and the date on which they were taken over (the Relevant Date). The next clause provided that practical completion of a Relevant Part was deemed to occur on a Relevant Date.
8. On 8 August 2016, Dobler commenced the Works on site. The Works were not completed by the contractual completion date of 30 April 2018. During the week ending 15 June 2018, EWB took partial possession of the works (Blocks B and C). EWB did not issue a practical completion certificate in respect of those parts. At that time, the Works to Block A remained incomplete. On 20 December 2018, the Works were certified as having achieved practical completion.
9. Disputes then arose between the parties as to the final account valuation. EWB sought to deduct liquidated damages at the rate of £25,000 a week, capped at 7% of the contract sum. Dobler disputed EWB's entitlement. Three adjudications ensued. The first adjudication did not result in a decision. In the second adjudication, the adjudicator decided that EWB was entitled to liquidated damages for delay up to the date on which it took partial possession (Blocks B and C), which amounted to deemed practical completion, following which no liquidated damages were payable. In the third adjudication, EWB relied on the second adjudication decision, and claimed general damages for delay in respect of Block A. The adjudicator decided that the liquidated damages provision was not uncertain or unenforceable as a penalty, and was an exhaustive remedy for delay, excluding any entitlement to general damages.
10. In an unusual turn of events, EWB subsequently commenced proceedings to seek the court’s determination on amongst other things that its own LD clause was penal. Unsurprisingly, Dobler resisted the application and sought to argue that the LD clause was not a penalty.

Holding

11. The learned O’Farrell J first considered the general proposition by EWB that “where an employer under a construction contract has (and exercises) a contractual right to take early possession, but the liquidated damages provisions do not contain a mechanism for reducing the level of liquidated damages to reflect such early possession, the liquidated damages provisions are void and/or unenforceable”.
12. She cautioned that “it is important not to elevate statements of general principle into an inflexible rule of law. The above extracts do not state that liquidated damages provisions will never be enforceable where sectional completion or partial possession is used without any related reduction in the liquidated damages payable; they identify the potential danger of failing to draft effective provisions to respond in such circumstances. In each case, it is necessary to construe the relevant provisions of the contract in question, adopting the established rules of contractual interpretation, to determine whether they give rise to a liquidated damages regime that is certain and enforceable.”
13. Having considered previous decisions of the English Courts where similar clauses had been struck down when the employer took partial possession of the Works, she noted that those cases were not demonstrable of any principle that a single lump sum liquidated damages rate could never apply where sectional completion existed. Instead, they were examples where the intentions of the contracting parties to apply different rates of liquidated damages for different situations had broken down due to errors in drafting.
14. Turning toward the LD provisions in the case before her, the learned O’Farrell J held that the provisions in the present case were reasonably clear and certain because there was one completion date for the whole of the Works and LDs were payable at the rate stated for failure to complete the whole of the Works by the completion date.
15. She then considered EWB’s submission that the LD provisions were a penalty. The main thrust behind that submission was that the use of a single rate of LDs as compensation for late completion of any combination of Blocks A, B and/ or C, despite the fact that it would result in varying levels of loss, may be considered a penalty especially in a situation where EWB chose to exercise its right under Clause 2.33 to take over parts of the Works. This was the concern that the Privy Council raised in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (Dunlop) at [94] wherein Lord Dunedin had stated that “there was a presumption (but not more) that a provision would be penal ‘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’.
16. Applying the test in Cavendish Square Holding BV v Talal El Makdessi [2015] UKSC 67 (Cavendish), the learned O’Farrell J held that the LD provisions were not penal because of the following reasons:

1. The Contract had been negotiated by sophisticated parties with external lawyers. In this regard, the Court should be cautious about any interference in the freedom of the parties to agree to commercial terms and the allocation of risk in their business dealings. Liquidated damages provisions limited a contractor’s exposure to an unknown and open-ended liability, while at the same time giving the employer certainty about the amount that it will be entitled to recover as compensation. Each party would then be able to better manage their risk of delay in completion of the Project.
2. There was also a legitimate interest on EWB enforcing the primary obligation of Dobler to complete all the works by a certain date.
3. There would also be great difficulty in quantifying the damages that would be suffered by EWB, particularly if part but not all, of the Works were completed on time. Due to the possible combinations and permutations by which the Works could have been completed, fixing the LDs in advance would help parties avoid the difficulties associated with quantifying the losses arising from delay completion of the Works.
4. Finally, there was no evidence before the Court that the level of damages stipulated in the LD provisions were disproportionate or unreasonable to the likely losses suffered by EWB in the event of late completion of the Works or any part of the Works.

17. Accordingly, EWB was entitled to the levy the full rate of the LDs notwithstanding it had taken partial occupation of the Works on 15 June 2018 (after the date of completion).

Significance and Implications in Singapore

18. The decision of the TCC in Eco World certainly reflects the general reluctance of English law to rewrite contractual bargains, preferring instead to uphold the commercial intentions of the Parties.
19. However, this result is certainly unexpected for many in the construction industry who still labour under the assumption that LDs should be reduced where there is early possession of the Works by the employer and in the absence of a contract provision for reduction, the LD provisions should ipso facto be considered penal and unenforceable.
20. Indeed, clauses which provide for a mechanism to reduce LDs are par for the course in the prominent standard construction forms used in Singapore: See clause 16.2 of the Public Sector Standard Conditions of Contract for Construction Works 2020, sub-clause 26(4)(d)(iv) of the Singapore Institute of Architects Building Contract 2016 Without Quantities and clause 12.1.1. of the REDAS Design and Build Conditions of Main Contract (4^th Ed, 2022).
21. Accordingly, it remains to be seen whether the Singapore courts or a tribunal applying Singapore law would reach the same outcome if a similar factual scenario came before it.
22. We hasten to point out that Eco World relied heavily on the principle laid down by the Supreme Court in Cavendish, a case which the Singapore Court of Appeal has deliberately declined to follow¹. Therefore, any precedential value that Eco World is likely to offer to our Courts has to weighed within such constraints.
23. Nevertheless, a closer inspection of learned O’Farrell J’s reasoning in Eco World would reveal that the legal principles and considerations applied by her are not dissimilar to our own Court of Appeal’s analysis. In particular, the authors would highlight that the Court of Appeal ² also echoed similar observations regarding the single lump sum principle in Dunlop as highlighted below:

24. Hence, it is not unlikely that Singapore courts or a tribunal applying the test in Dunlop may reach the same result or outcome in Eco World as noted by our Court of Appeal.

Concluding Remarks

25. Pending clarification from the Singapore courts on the issue, a provision to reduce LDs in the event of partial occupation or phased completion may still be necessary in order to prevent or avoid the sort of arguments raised by EWB in Eco World. Therefore, employers, main contractors and sub-contractors need to take special care when drafting and incorporating LD provisions into their construction contracts so as to ensure that they have a clear and enforceable mechanism for reduction or adjustment of LDs if the parties intend to allow partial handover of the works.
26. Employers should also take special note of their contractual provisions before exercising their right to take partial occupation or possession of construction projects so as to ensure that they do not inadvertently undermine their rights to levy LDs.

1. [2021] 1 SLR 631↩
2. [2021] 1 SLR 631↩