Case No. 0LS79020

170. In assessing damages for TTPM’s breach of duty, it is necessary to consider what difference a signed contract would have made to the Trust. This involves both analysing the hand that the Trust would have been dealt and considering how the Trust and Kier would have played the matter out. The contingencies relating to Kier’s conduct are not, in my view, conveniently to be dealt with in terms of the loss of a chance in the strict sense—the endless permutations could not meaningfully be assessed. Rather it is necessary to look at the value in the round and attempt to value the improvement in the Trust’s position. This involves asking, in a rather broad way, what is likely to have happened if there had been a contract.171. I shall address the question how a signed contract would have benefited the Trust by reference to four matters:(a) The argument that there was anyway an implied contract containing the liquidated damages provision;(b) The possibility that the liquidated damages provision was liable to challenge as being an unenforceable penalty;(c) The fact that Kier had arguments that it was not guilty of culpable delay and that it was entitled to further payment from the Trust;(d) The extent to which the Trust would have exploited any advantage. (a) An implied contract, containing the liquidated damages provision 172. Any assessment of the benefit that a signed contract would have provided will have to take into account the fact that the Trust had the existing benefit of an argument that the liquidated damages provision applied despite the absence of a signed contract. Such an argument might have rested on either of two grounds, each of which was considered by those acting for the Trust before the mediation took place.173. First, reliance might have been placed on the terms of the letters of intent, which say that “payment shall be in accordance with the payment conditions” in the JCT contract. But it is far-fetched to suppose that those words suffice to incorporate the liquidated damages provision. The relevant part of the letters of intent is the express statement that neither party would be bound by the intended contract unless and until the contract was signed.174. Secondly, reliance might have been placed on the conduct of the parties after the letters of intent had expired, in particular, Kier’s request for an extension of time, as giving rise to an implied contract on the terms of the unsigned JCT contract. I make the following observations in respect of this line of argument.(1) The test for implication of a contract is necessity. Tomlinson LJ summarised the position in J.D. Cleverly Ltd v Family Finance Ltd [2010] EWCA Civ 1477, [2011] R.T.R. 22, at paragraph 31: “In The Aramis [1989] 1 Lloyd’s Law Reports 213 at page 224 Bingham LJ cited with approval the following passage from the judgment of May LJ in The Elli [1985] 1 Lloyd’s Law Reports 107 at 115 to the effect that:- ‘No such contract should be implied on the facts of any given case unless it is necessary to do so: necessary, that is to say, to give business reality to a transaction and to create enforceable obligations between parties who are dealing with one another in circumstances in which one would expect [that] business reality and those enforceable obligations to exist.’ Those principles were also endorsed and applied by the Court of Appeal in Baird Textile Holdings Limited v Marks & Spencer plc [2001] EWCA Civ 274. Mance LJ observed at paragraph 62 that that the test of any such implication is necessity is clear both on authority and also as a matter of consistency. It could not, he observed, be right to adopt a test of necessity when implying terms into a contract and a more relaxed test when implying a contract, which must itself have terms.” (2) The fact that parties have been dealing on a “subject to contract” basis—I refer again to the express statement in the letters of intent that neither party would be bound by the intended contract unless and until the contract was signed—does not of itself exclude the possibility that the time will come when the necessary implication of their conduct is that they have waived the requirement of a formal written contract. This has been put beyond doubt by the decision of the Supreme Court in RTS Flexible Systems Ltd v Molkerei Alois Müller Gmbh & Co KG (UK Production) [2010] UKSC 14, [2010] 1 W.L.R. 753. Although that was a decision on a case that raised issues close to that under consideration here, I do not think that counsel referred me to it in argument. In RTS Flexible Systems the Supreme Court was at pains to make clear that whether or not a contract had come into existence would depend on the particular facts of each case. The decision post-dates the dispute between the Trust and Kier; it does not, I think, make new law, but it does perhaps serve to shine a brighter light on the argument under consideration than did the previous authorities.(3) The Trust’s argument that there was an implied contract incorporating the liquidated damages provision had some plausibility. In February 2005 BW had felt that it was more likely than not to succeed, and in October 2005 very experienced construction counsel, Mr Justin Fenwick QC, expressed the view that, although the contractual issues were tricky, the Trust’s was probably the better argument. (It should be emphasised that the view was expressed informally, after only a quick look at limited papers. The relevant point is simply that, having received such a reaction from such experienced counsel, the argument cannot be dismissed as unworthy of consideration.) However, by May 2005 BW had come to the view that, regarding incorporation of the liquidated damages provision, the Trust “[did] not have much of a case” (attendance note of 4th May 2005). Further, in a careful written Opinion given on 25 October 2005 experienced junior counsel, Mr Ben Patten, (now Ben Patten QC), advised that it was “clear beyond any real doubt that the parties contracted on the basis of the letters of intent only” and that an entitlement to recover liquidated damages under the letters of intent was “extremely improbable”. By the time the Trust went to mediation with Kier, it was not in a position to rely with any confidence on the argument from an implied contract.(4) I am also, with respect, of the view that Mr Patten’s opinion was compelling and that Kier probably took the view that little weight should be attached to the argument. It is unnecessary for the purposes of this judgment to analyse the issue or Mr Patten’s reasoning in detail. Even the decision in RTS Flexible Systems makes it clear that it will be exceptional for an implied contract to arise through conduct where the parties have been in the equivalent of a “subject to contract” situation. At all times Kier and the Trust clearly distinguished between the position under the letters of intent and the requirement of a signed formal contract. There was never a time when either party indicated the belief that the requirement of a signed contract had been dispensed with or was no longer operative or that a contract had been formed. The strongest argument for the implication of a contract is that, after the expiry of the period to which the final letter of intent was expressed to relate, the parties conducted themselves as though in accordance with the terms of the JCT contract. However, this is explicable by reference to the fact that the execution of a contract remained both the parties’ ostensible intention and a continuing possibility and that the contract, when executed, would have retrospective effect. The fact that the period mentioned in the final letter of intent had expired does not make it necessary to imply a full contract on the JCT terms, particularly when the final letter of intent was clearly intended to cover the works up to the stage of practical completion. The need to resolve contractual issues was specifically mentioned by Kier just four days before the expiry of the time period covered by the final letter of intent: see paragraph 58 above. Further, the factual circumstances from the time of the expiry of the final letter of intent involved issues of delay as between the parties; in the circumstances it is the more necessary to bear in mind that the implication of a contract in a situation like the present is exceptional and that “[t]he court should not impose binding contracts on the parties which they have not reached” (RTS Flexible Systems at paragraph 47).175. In conclusion, the availability of the argument that despite the failure to execute a formal contract there was an implied contract containing the liquidated damages provision does not significantly derogate from the advantage that would have accrued to the Trust from the execution of the formal contract. (b) The liquidated damages provision: an unenforceable penalty? 176. Counsel identified the relevant issue as follows: 8. Had there been an executed contract, were the liquidated damages of £50,000 per week liable to attack by Kier and at risk of being unenforceable?177. For TTPM, Mr Fraser submitted that the value to the Trust of the inclusion of the liquidated damages provision would have been much reduced by the likelihood that the provision was unenforceable as being a penalty. He observed that the level of liquidated damages had not been subject to negotiation—when Kier questioned it, the Trust made clear that the liquidated damages were not negotiable—and were very high. 178. Mr Fraser also relied on the evidence of Mr Bryan regarding the manner in which the liquidated damages had been calculated. In short summary, that evidence was to the following effect. The figure of £50,000 was calculated by reference to the weekly cost of providing alternative accommodation for the students in hotels and guest-houses. It was possible that such alternative accommodation would have been provided, although the Trust’s intention had been instead to house the students in the older accommodation at the College. The Trust had adopted its method of calculation as a convenient, though artificial, way of taking into account the real risk that it would suffer significant damages under an altogether different head which was difficult to quantify, namely the deleterious impact on recruitment of girls as students at the College. The calculation of liquidated damages that was prepared by Mr Bryan and Mr Talabani was intended to make some realistic allowance for both these heads of loss—alternative accommodation costs and loss of recruitment—but was presented solely in terms of the former head because of the difficulty both of calculating the latter head and of presenting it intelligibly to a contractor.179. In Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79, Lord Dunedin said at 86-87: “The essence of a penalty is a payment of money stipulated as in terrorem of the offending party; the essence of liquidated damages is a genuine covenanted pre-estimate of damage. … The question whether a sum stipulated is a penalty or liquidated damages is a question of construction to be decided upon the terms and inherent circumstances of each particular contract, judged as at the time of the making of the contract, not as at the time of breach. To assist this task of construction various tests have been suggested, which if applicable to the case under consideration may prove helpful, or even conclusive. … It will be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.”180. A more modern statement of the concept of penalty was given by Colman J in Lordsvale Finance Plc v Bank of Zambia [1996] QB 752 at 762H: “… whether a provision is to be treated as a penalty is a matter of construction to be resolved by asking whether at the time the contract was entered into the predominant contractual function of the provision was to deter a party from breaking the contract or to compensate the innocent party for breach. That the contractual function is deterrent rather than compensatory can be deduced by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred.”181. In Murray v Leisureplay Plc [2005] EWCA Civ 963 Buxton LJ, with whose approach Clarke LJ agreed, referred with approval to Colman J’s statement and continued at paragraph 108: “It is important to note that the two alternatives, a deterrent penalty; or a genuine pre-estimate of loss; are indeed alternatives, with no middle ground between them. Accordingly, if the court cannot say with some confidence that the clause is indeed intended as a deterrent, it appears to be forced back upon finding it to be a genuine pre-estimate of loss. That choice illuminates the meaning of the latter phrase. ‘Genuine’ in this context does not mean ‘honest’; and much less, as the argument before us at one stage suggested, that the sum stipulated must be in fact an accurate statement of the loss. Rather, the expression merely underlines the requirement that the clause should be compensatory rather than deterrent.” I would, with respect, observe that the language of intention and purpose must be understood objectively rather than subjectively, as is shown by the terms in which Lord Dunedin and Colman J expressed themselves. (Cf. also Bridge v Campbell Discount Co Ltd [1962] A.C. 600, per Lord Radcliffe at 621-2.)182. In my judgment, the evidence before me does not establish either that the liquidated damages provision was in truth a penalty or that the argument that it was a penalty would have been strong. My reasons are as follows.(1) The burden of showing that the provision was an unenforceable penalty would have lain squarely on Kier.(2) The courts lean in favour of upholding liquidated damages clauses in contracts freely entered into: see, for example, Robophone Facilities Ltd v Blank [1966] 1 W.L.R. 1428, per Diplock LJ at 1447 B-F; Philips Hong Kong Ltd v The Attorney General of Hong Kong (1993) 61 B.L.R. 41 (Privy Council) at 58-9; Murray v Leisureplay Plc, per Clarke LJ in propositions (i) and (vii) at paragraph 106. It is not to be forgotten that, although the contractor with potential liability to pay liquidated damages will have an interest in restricting the level of such damages, that party too may stand to benefit from a clear knowledge of the extent of its potential liability.(3) It might perhaps be thought that the artificial manner in which the calculation of liquidated damages was carried out, as described above, was an objection to supposing that the provision was a “genuine pre-estimate of loss”. In my judgment, that is not so; Buxton LJ’s explanation of the expression “genuine pre-estimate of loss” squarely addresses the point. The method of calculation might indicate that the specified figure for liquidated damages is not an accurate calculation of loss, but it does not show that the purpose of the provision is deterrence rather than compensation. (4) A closely related point was made by Lord Dunedin in the Dunlop Pneumatic Tyre case, just after the passage set out above: “It is no obstacle to the sum stipulated being a genuine pre-estimate of damage, that the consequences of the breach are such as to make precise pre-estimation almost an impossibility. On the contrary, that is just the situation when it is probable that pre-estimated damage was the true bargain between the parties.” It is true that in the present case the nature of the loss anticipated by the Trust was not within the knowledge of both prospective parties to the building contract. But the point remains that the difficulty of assessing the likely loss—and in my view such difficulty existed in the present case—does not count against the validity of a liquidated damages provision.(5) Colman J suggested that the deterrent, rather than compensatory, function of the provision might be deduced “by comparing the amount that would be payable on breach with the loss that might be sustained if breach occurred”. This consideration does not lead me to consider the provision in this case to be a penalty, for two reasons. In the first place, the fact of a difference between the liquidated and the contractual damages would not of itself justify the conclusion that the provision is a penalty, although it is a factor that might indicate such a conclusion. See Murray v Leisureplay Plc, per Buxton LJ at paragraphs 110 and 111, and per Clarke LJ in propositions (iv) at paragraph 106.(6) Further, the comparison mentioned by Colman J is not primarily with the actual loss in the given case but with the “worst case scenario”; see the concluding sentence of the dictum of Lord Dunedin set out above. In this case, there was a potential loss, difficult to predict and to quantify, in respect of damage to recruitment; there was also, as I accept, a real though modest risk that the students would have to be accommodated at substantial expense to the College. In some cases, it will be possible to take a confident view that the stipulated figure bears no relation to any possible loss; in that case, it can safely be concluded that the figure does not relate to any possible loss but has another (penal or deterrent) purpose. In my judgment, this is not such a case.(7) Although the figure for liquidated damages was high, it was not so high as to set alarm bells ringing. Kier was willing to accept it, in accordance with its own rulebook. The contractor on the H2 and H3 works had accepted a provision for liquidated damages in the same or a slightly higher figure. More importantly, TTPM had been privy to the calculation of the figure and its insertion into the draft contract and repeatedly expressed the view in the later stages of the project that no issue arose. In this regard I reject the evidence of Mr Bullen that he advised Mr Bryan that the level of liquidated damages was “ridiculously high”; that evidence is inconsistent with the documentation recording TTPM’s views on the liquidated damages, with the fact that neither Clugston nor Kier baulked at the level of liquidated damages, and with Mr Bryan’s evidence, which I generally found measured, consistent and persuasive.(8) The fact that the Trust told Kier that the proposed provision for liquidated damages was non-negotiable seems to me to be irrelevant. A contract between two commercial entities does not cease to be a freely negotiated contract just because each side has its sticking-points. It is open to TTPM to contend that Kier would never have agreed to a contract containing the liquidated damages provision, but it would be absurd to contend that, if Kier had agreed to such a contract, it would not have done so freely as an equal commercial party.183. I do, however, consider that in a dispute with Kier regarding entitlements under the contract the Trust would probably have discounted its recovery, in the event of settlement, to take account of the litigation risk on this issue. (c) Weighing Kier’s other arguments in the balance 184. For TTPM, Mr Fraser submitted that it was wrong to look only at the potential advantage of a signed contract (the liquidated damages provision) without also taking into account the factors on the other side of the scales. In particular, he submitted that a signed contract would have made available to Kier two important arguments: first, that it was entitled to an extension of time beyond the two-week extension that TTPM had agreed, with the result that the potential application of the liquidated damages provision was limited on the facts; second, that Kier was entitled to payment in a substantially greater sum than the bare contract price. I shall address these possible arguments in turn.185.