Three birds, one stone | Court gives clarity on liquidated damages, compensation for loss of renewables subsidies and indemnities

Written on 16 Jan 2019

In GPP Big Field v Solar EPC Solutions, the High Court considered the following issues in the context of engineering, procurement and construction (EPC) contracts for five solar farms:

  • Should contractual liquidated damages provisions be deemed to include compensation for a lower level of accreditation achieved by a plant under the renewables obligation certificate (ROC) scheme as a result of delayed completion?
  • When are liquidated damages (LD) clauses considered penalties (and therefore unenforceable)?
  • Can the days after termination of the contract be included in the liquidated damages calculation?
  • When will a parent company guarantee be deemed to include an indemnity as well as a guarantee?

This decision will be particularly interesting to those operating in the energy sector, and is also of more general interest given the decisions reached on the contractual principles referenced above.

What was the dispute about?

The case concerned five EPC contracts entered into by between the claimants (GPP) and Prosolia UK Ltd for the construction of solar plants. Completion of each of the plants was delayed beyond the target completion date, resulting in some of the plants receiving a lower level of accreditation under the ROC scheme than that required in the contract.

Due to the insolvency of Prosolia UK Ltd, GPP sought compensation for the delayed completions against Prosolia’s (still solvent) parent company Solar as defendant under a guarantee which had been provided as security for completion of the EPC contracts.

What did the judge decide?

The judge decided the following points, across some/all of the five EPC contracts:

1. Should contractual LD provisions be deemed to include compensation for a lower level of accreditation achieved by a plant under the renewables obligation certificate (ROC) scheme as a result of delayed completion?

As the LD provisions were a calculation of the damage that would be suffered by the employer should the target completion dates be missed, arguably they might be considered to be included within the calculation.

Interestingly, this was not an argument raised by the defendant, but it was nevertheless addressed by the judge as it was an issue that caused him “some concern”. The judge found that:

  • The failure to achieve accreditation for the contractually stipulated level of ROCs was not an independent breach of contract – it was a consequence of the breach of contract in failing to achieve final commissioning and handover by the stipulated date.
  • Regardless of this (and “not without some misgivings”), the judge held that compensation for the reduction in ROCs should be awarded to the claimant in addition to the award of LDs for delay. This was largely because of the inclusion in the contract of provisions which expressly dealt with the remedies available to the claimant in the event of a failure to achieve the contractually stipulated level of ROCs. This evidenced an intention that the ROC shortfall was not considered to fall within the LD calculation.

Take-home point: Though decided on its facts, the decision that the certain consequences of delayed completion (ROC shortfall) fell outside of an agreed LD provision is significant. Parties to contracts in which there will be clear consequences that arise from delayed completion should consider including express wording in such contracts to make it clear what is (or is not) intended to be included within an LD calculation.

2. Was the LD clause a penalty (and therefore unenforceable)?

It is a well-established principle of English law that clauses that seek to impose a penalty for breach of contract are unenforceable. The defendant applied this argument to the LD provisions in the EPC contracts, and pointed to the following features of the provisions in support of its argument:

The LD provisions expressly stated that the sums included in the damages calculation were “a penalty”.

The same level of penalty was specified across each of the five EPC contracts, despite the fact that the plants had different outputs (which suggested that this sum was not a genuine pre-estimate of the employers loss in relation to each plant).

Applying the test set out by the Supreme Court in Cavendish v El Makdessi (as discussed in this Insight) the judge found that the clauses were not penalties. Addressing the points argued above:

  • The self-categorisation of a clause was not conclusive.
  • The precise prediction of likely loss for a generation plant is difficult to pin down; importantly, the LD amount was not “exorbitant or unconscionable” (applying Makdessi).

3. Can the days after termination of the contract be included in the LD calculation?

Yes, applying the decision of Coulson J in Hall and another v Van Der Heiden.

This decision is interesting as the Hall judgment has been criticised by commentators as going against previously settled case-law and leading texts on this point. Such authorities conclude that an entitlement to receive LDs stops once the contract is terminated, at which point general damages step-in to compensate the employer.

It does not appear, however, that the judge in GPP Big Field was directed to these contradicting authorities and as such the position reached in this case is likely to be the subject of further case law.

Take-home point – Given the existence of diverging authorities on whether LDs continue to accrue after termination of a contract, contracting parties should consider expressly stating in their contract whether such damages will (or will not) continue to accrue after termination.

4. Was the guarantee provided by the defendant under the parent company guarantee also an indemnity?

The guarantee provided by the defendant had been given on the following terms:

“6.1 [Solar] guarantees the due and punctual performance by the Contractor of the Contractor’s duties and obligations to [the first claimant] under this
Agreement

6.2 If the Contractor fails to observe and perform any of its duties or obligations to [the first claimant], [Solar] (as a separate and independent obligation and liability from its obligations and liabilities under this Agreement) shall indemnify [the first claimant] against all loss, debt, damage, interest, cost and expense incurred by [the first claimant] by reason of such failure or breach and shall pay to the [first claimant], without any deduction or set-off, the amount of that loss, debt, damage, interest, cost and expense.” [emphasis added]

This clause was challenged by the defendant on the following bases:

  • Properly construed, the clause was a guarantee, not a guarantee and an indemnity.
  • As the clause was a guarantee, the following equitable principles applied in the circumstances so as to absolve the guarantor of liability:
    • non-disclosure of material facts which change the position of the contractor (and thereby the surety); and
    • variation of the underlying contract,

The judge concluded on these arguments as follows:

  • In determining the “old chestnut” of whether the clause contained an indemnity, there were “pointers in each direction”. The self-categorisation of the clause as an “indemnity” was not in itself conclusive, and notably, the clause did not include any “primary obligor” wording (which pulled in favour of concluding that the clause was a guarantee only). However, in this instance the wording of the clause – particularly that in bold in clause 6.2 above – amounted to an indemnity.
  • The judge held that the equitable principles referred to above which absolve liability under guarantees did not apply to liability under the indemnity, and did not therefore relieve the defendant of its liability. This decision was reached following “long standing and authoritative dicta”, as well as the decision of the Court of Appeal in Deutsche Bank v Unitech.

Take-home points:

  • Where a guarantee is also intended to include an indemnity, this should be expressly stated. Simply stating that an obligation is an indemnity may not be sufficient to achieve this purpose – the fact that the guarantor is liable as a primary obligor should also be included.
  • The equitable principles referred to above will not necessarily save an indemnifying party (whereas they will come to the aid of a “pure” guarantor). This position has not, however, been conclusively determined by the highest authorities, and may turn on the wording of the indemnity.