Alfred McAlpine Capital Projects Ltd v Tilebox Ltd

A liquidated damages clause is enforceable where the stipulated sum is a reasonable pre-estimate of the loss likely to result from breach. The estimate need not be exact. A substantial discrepancy between the stipulated sum and the likely loss is required before the clause is characterised as a penalty. The assessment is objective and is made at the time of contracting, although the parties’ commercial knowledge and negotiations may be relevant. Courts are predisposed to uphold freely negotiated commercial terms, particularly between parties of comparable bargaining power. Difficulty in quantifying future loss supports, rather than undermines, the use of liquidated damages.

McAlpine entered into a building contract with Tilebox for the refurbishment of Onslow House. The contract required payment of liquidated damages at £45,000 per week for delay. After substantial delay occurred, McAlpine sought a declaration that the clause was an unenforceable penalty.

The dispute concerned the interaction between the building contract and a development funding agreement between Tilebox and Standard Life. The court had to construe Tilebox’s obligations under the funding agreement, identify the losses foreseeable when the building contract was made, and determine whether the agreed rate was penal.

1. Construction of the development funding agreement. Clause 6.8.2 required Tilebox to take all reasonable steps to secure completion by the specified date, as extended under the building contract. That wording imposed an obligation as to reasonable steps, not an absolute obligation to achieve completion. Tilebox would not ordinarily breach it merely because delay resulted from default by the contractor or a subcontractor.
2. Clause 6.8.1 imposed a separate obligation requiring Tilebox to secure the contractor’s performance of the building contract, including its completion obligations. The funding agreement and building contract formed an interlocking contractual arrangement intended to create back-to-back liability to Standard Life.
3. The foreseeable losses at the date of the building contract comprised: diminution of the development completion payment; Tilebox’s own direct losses, including management, professional, overhead and insurance costs; and Tilebox’s liability in damages to Standard Life. The latter head was assessed by reference to lost rental income, subject to credit for the development completion payment which Standard Life no longer had to pay.
4. Applying the principles in Clydebank Engineering and Shipbuilding Company Limited v Don Jose Ramos Ysquierdo y Castaneda and Others [1905] AC 6, Dunlop Pneumatic Tyre Company Limited v New Garage and Motor Company Limited [1915] AC 79 and Philips v The Attorney General of Hong Kong [1993] 61 BLR 41, the £45,000 rate was a reasonable pre-estimate of loss. It was not necessary for the estimate to be exact, and the uncertainty of future loss justified agreeing a weekly figure.
5. Even assuming that Tilebox had no back-to-back liability to Standard Life, the clause was not penal. The stipulated sum was at or only slightly above the upper range of foreseeable losses. The parties had specifically negotiated it in a commercial contract between parties of comparable bargaining power.

McAlpine’s claim for a declaration failed and was dismissed.