23. To what extent are liquidated damages for delay to the completion of the works treated as an exhaustive remedy for all of the employer’s losses due to (a) delay to the completion of the works by the contractual completion date; and (b) delays prior to the contractual completion date (in the absence of, say, interim milestone dates with liquidated damages for delay attaching to them)? What difference does it make if any critical delay is caused by the contractor’s fraud, wilful misconduct, recklessness or gross negligence? If so, what constitutes such behaviour and can it be excluded by agreement?
In a situation where the parties have agreed the liquidated damages for delay, then the employer is not entitled to claim any further damages in respect of the delay and will be entitled only to recover the delay damages even where these are higher (or lower) than the actual losses provided the delay damages are a genuine pre-estimate of the employer’s loss, assessed at the time the contract is entered into.
In the 2015 UK Supreme Court decision of Cavendish v Makdessi  UKSC 67, however, it was held that where compensation went beyond the readily calculable damages resulting from the breach, this could be legitimately upheld by the courts. The Court found that deterrence value of a higher sum can be reasonably determined to protect the performance of the contract, particularly given that both parties had access to legal advice and could negotiate on equal terms. This move away from an emphasis on a genuine pre-estimate of loss means there may now be scope to seek greater sums in liquidated damages than previously, provided the sums stipulated are not 'out of all proportion'.
In the Irish case of Sheehan v Breccia  IEHC 120, the Irish High Court continued to apply the traditional test in relation to liquidated damages. While the High Court did consider the test applied in the 2015 UK Supreme Court decision of Cavendish v Makdessi, it chose not to apply it. Instead, the High Court suggested it would be a matter for an appellate court to determine whether the “Cavendish test” should be adopted in Ireland in future cases.
In Launceston Property Finance Limited v Burke  IESC 62, McKechnie J made the obiter comment that the starting point for an assessment of the law relating to penalty clauses remained the principles set out in the speech of Lord Dunedin in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd  A.C. 79 (Dunlop Pneumatic Tyre Co) at pp. 86-88. While Haughton J, in ACC Bank v Friends First  IEHC 435, saw some merit in the new UK approach, he had stopped short of outright endorsing it, much less applying it, preferring instead to leave it to an appellate court to consider whether a recalibration of the Irish test was required. McKechnie J took the opportunity to say, obiter, that he was not immediately convinced that any change to the test was necessary, nor that the route taken by the UK Supreme Court was necessarily a superior one. However, the live debate would appropriately be left over for a more suitable case.
The decision in Sheehan v Breccia was upheld in the Court of Appeal ( IECA 273) and, to date, the appellate court in Ireland has not overturned the traditional test.
Where there are delays prior to the completion date, it would be difficult to argue that the contractor should be liable for liquidated damages unless they are specifically linked to something such as an interim milestone or sectional completion date.
Subject to the terms of the contract, any fraud, wilful misconduct, recklessness or gross negligence on the part of the contractor may constitute a repudiatory breach of contract for which the employer will be entitled to damages. Depending on the facts of the case, the level of liquidated damages may provide guidance in assessing the quantum of damages flowing from the breach. In a situation of a breach of contract, the parties will not be confined to the agreed liquidated damages.
There is no statutory definition for the terms ‘fraud’, ‘wilful misconduct’, ‘recklessness’ or ‘gross negligence’, although the parties may agree on the definitions of these terms in the contract. It is open to the parties to agree on whether any particular risk shall be excluded and, once freely agreed, the Irish courts will generally uphold the exclusions. In two Irish cases, Western Meats Ltd v National Ice & Cold Storage  I.L.R.M. 99 and Token Grass Products v Sexton & Co Ltd  IEHC 96, Barrington J and Doyle J respectively pointed out that the intentions of the parties must be respected when they freely and voluntarily agree on the question of who is to bear a commercial risk. If it is the intention of the parties to leave the risk of grossly negligent performance or wilful misconduct leading to unsatisfactory performance, at the door of the other, then generally this will be upheld.
It is not usual to limit liability for death and personal injury and such limitation may be regarded as contrary to public policy.
Answer contributed by
Niav O'Higgins and