Case No. 0LS79020

(i) What were the chances of Kier signing the contract? 150. I find that, if TTPM had discharged its duty, there was a two-thirds chance that Kier would have signed the contract (including the liquidated damages provision) and a one-third chance that matters would have turned out much as they did, viz. with works proceeding throughout without a contract. Although it cannot be said that there was literally no chance that Kier would have walked off site and the Trust would have had to find a new contractor, I regard the chance of that having happened as minimal; to the extent that such a chance might have existed, I do not regard it as substantial enough to warrant a specific allowance, having regard to the necessarily broad approach involved in the assessment of the chances of having or failing to have a contract. There is no good reason to suppose that any of the matters identified by Kier and TTPM as standing in the way of a contract were intractable. As explained below, I reject the contention that Kier had unexpressed reasons of its own for being unwilling to sign the contract. It remains possible that, when concentrated efforts were made to finalise the contract, some previously unidentified problem would have been identified and would have prevented the parties concluding the contract within a short timescale. In such circumstances, the strong probability is that the matter would have proceeded in much the way it did, with continuing efforts to resolve the outstanding issues. Only an unrealistic caricature of the appropriate stance for TTPM to have taken, coupled with a failure to appreciate that the parties would necessarily have remained responsive to changing circumstances, would militate against that conclusion.151. Kier does not appear to have had any objection to the liquidated damages provision in itself. In November 2003 Kier had said that it wished to agree that the liquidated damages (that is, per week) did not exceed 1% of the contract price. For the Trust, TTPM had made clear that the level of liquidated damages was not open for negotiation. Kier did not raise the matter again in discussions with TTPM. When Kier wrote in connection with the contract documents on 23rd July 2004 (paragraph 52 above) it mentioned “the two-week LAD-free period” but said nothing about the liquidated damages themselves; it is a reasonable inference that Kier was not proposing to argue further about the level of liquidated damages. As Mr O’Callaghan accepted there appears to be nothing in Kier’s internal documents to show that the level of liquidated damages was regarded as a sticking-point.152. The real question is whether, at a time when the parties might otherwise have been able to execute the contract, Kier was or would have been unwilling to execute it on the ground that the contract would be against its commercial interests—whether because of its exposure to the risk of being liable for liquidated damages or for some other reason.153. The argument raised by TTPM is that at all material times Kier had one reason or another that would have prevented it from signing a contract. Until about the end of May 2004 there were a number of issues that, although resolvable in principle, could not by then have been resolved: the need for evidence of the Trust’s funding arrangements; AIB’s request for a warranty from Kier; warranties and conditions of appointment between Kier and the design consultants. From about the end of May 2004, however, Kier was sufficiently aware of problems with the H5 works that it was looking for reasons to avoid signing the contract and would have been unwilling to sign the contract, because the risk of liability to pay liquidated damages would have been too great.154. TTPM’s case in respect of this latter period was supported by evidence from Mr Hinchliffe. He expressed the opinion that by June 2004 the delays with the works were such that Kier would have been unwilling to execute a contract on the terms proposed by the Trust; any contract that Kier would have accepted would have been on terms that would have been less favourable to the Trust than the terms it eventually achieved at the mediation. 155. Mr Hinchliffe mentioned in particular the fact that, having previously approved a re-design of the housemasters’ building that excluded the steel frame from the construction, in April 2004 Shire had provided to Kier a revised design that provided for the introduction of additional steel. Mr Hinchliffe saw this as the reason why, after Kier had appeared close to signing the contract in early May 2004, it then failed to do so and sought instead further letters of intent. It was significant that Kier’s internal site reports began to show significant delays from about this time; the report for 18th May showed that the works were 2 ½ weeks behind schedule, whereas that for 21st June showed that, although the main building was only 1 ½ weeks behind schedule, the housemasters’ building was 10 weeks behind. By July the recorded delay on the housemasters’ building had increased to 12 weeks, and thereafter matters grew worse. Mr Hinchliffe’s conclusion was as follows: “[H]ad a commercially astute contractor such as Kier been in a position to execute the contract [it] would not have done so on the basis of the terms currently on the table. I consider that, had Kier entered into a single stage design and build contract, at any time from late May 2004 onwards, it would have been, as a minimum, on the basis of an additional payment for 12 weeks prolongation costs plus relief from 12 weeks LADs. By mid September … there were major delays with sub-contractors on the main block on cladding and curtain walling, M&E, plasterwork, joinery and decorations. By this time the factors for and against signing the contract were only tipped further against Kier being willing to sign. I consider the detriment to Kier far outweighed any discernible benefit.”156. This evidence gained support from Mr O’Callaghan. He expressed the view that by the summer of 2004—in cross-examination he suggested that he had in mind a date earlier than August but was reluctant to be specific—Kier’s board of directors would have been “very cautious” about entering into the contract, even if all other issues had been resolved, because there was a possibility of delayed completion and even one week’s delay would have resulted in Kier’s entire profit on the works being wiped out. Similarly, Mr O’Callaghan laid significant emphasis on the reintroduction of steel into the design of the housemasters’ block as a factor that would have affected the timetable for the execution and completion of the works and would have made Kier unwilling to execute a contract unless it incorporated an extension of time for completion of the H5 works.157. I am not persuaded that there is significant merit in these contentions. Some preliminary observations are relevant. First, Mr O’Callaghan’s evidence was to the effect that it would always be a priority for Kier to have a contract rather than to proceed with letters of intent and that, if Kier “owned” the problems that had arisen under letters of intent (by which I think he meant had responsibility for them), it would still in the “vast majority” of cases be prepared to “live with” the difficulties and sign the contract. Second, Mr O’Callaghan was keen to deny any suggestion that Kier was given to “slippery” behaviour or that those acting for Kier in 2004 were at all likely to have engaged in such behaviour. Kier’s approach might be pedantic and even difficult, but it was not disingenuous or lacking in good faith. I have seen nothing in the evidence before me to lead me to any different conclusion. Third, Kier’s stance in its communications with TTPM was that it remained committed to signing the contract, albeit that particular issues—primarily warranties at first and the dispute concerning consultants’ fees later—were holding matters up. I do not consider that the evidence justifies a finding that this was a smokescreen for an unwillingness to sign the contract at all or that Kier, a reputable construction company, was acting in bad faith.158. Mr O’Callaghan’s evidence that Kier would have been cautious about signing a contract from summer 2004 onwards has itself to be viewed with some caution. He became involved only in the summer of 2005, specifically with regard to the efforts to resolve the dispute that led to the mediation. In that respect he was instrumental in putting together Kier’s case for an extension of time and additional payment. Part of the work involved commissioning a retrospective programme analysis from Driver Consult, which concluded that the delay in practical completion was due in large measure to the reintroduction of steelwork into the housemasters’ block. That conclusion formed the basis of Kier’s stance at the mediation, in which Mr O’Callaghan was closely involved. However, as Mr Bowdery observed, one must be careful not to look through the wrong end of the telescope. Driver Consult’s analysis did not inform Kier in 2004, whatever may be its merits.159. In my judgment, the contemporary documentation produced by Kier indicates that there is no good reason to suppose that Kier would have considered it to be against its commercial advantage to execute the contract at any time before September 2004. Two categories of document are of particular importance. The reports of Kier’s site team’s monthly “production meetings” monitored progress and programming issues and were prepared by those involved in the project on site. The contract review meeting reports were also primarily the responsibility of the site management team and would contain the input of the contracts manager, the project manager and the managing quantity surveyor, but they were discussed at board level with the construction director, the commercial director and the managing director.160. The reports of the production meetings record fairly clearly that until September the site team considered the project on track for completion by the proposed contractual completion date. Delays were recorded, in particular with regard to the housemasters’ block; but these delays had minimal reference to the critical path for completion, and in July the report engaged in some re-programming in order to bring the housemasters’ block back in line with the rest of the works. It was in September that a delay to the completion date was identified. As for the contract review meeting reports, these remained relatively positive throughout the relevant period; although the report for September, when taken in conjunction with the delays forecast in that month’s report of the production meeting, was sufficient to indicate that the contract would no longer be commercially attractive to Kier.161. Mr O’Callaghan was disinclined either to accept the reports of the production meetings at face value or to conclude that they provided a proper guide to the view that Kier’s board of directors would have taken when presented with a request to sign a contract. I did not find his evidence on this point convincing. In cross-examination he questioned whether the reports represented anything more than a “statement of intent” and said that he suspected that those responsible for the reports “knew they’d got a bigger problem on than they would commit to paper”. He suggested that the site team was sitting “on the fence” because it was unwilling “to be the bearer of bad news to [the] board of directors”. In fact, the reports do not “sit on the fence”, unless by that is meant that they do not identify delays to completion which Mr O’Callaghan, with his knowledge of the Driver Consult analysis, thinks they ought to have identified. Nor is it clear why the site team should have failed to acknowledge apparent programming problems, in circumstances where the worst possible outcome would be for Kier to assume unrealistic contractual obligations because the site team had ignored reality. The clear inference to be drawn from the reports is that until September 2004 those responsible for carrying out the works considered that the project could be completed on time. 162. I am also not persuaded by Mr O’Callaghan’s contention that the optimism shown in the production meeting reports would not have got past Kier’s board. The contract review meeting reports, which were considered at board level, do not betray any awareness that the project was heading for the rocks. One of the people instrumental in the production of the reports was Simon Phillips, the managing quantity surveyor. When it was put to Mr O’Callaghan that the reports were presumably a fair reflection of Mr Phillips’ perception of where the project was, month by month, Mr O’Callaghan answered: “I’m afraid I would—I go back to what I said earlier. I think Simon—and I know Simon—is sitting on the fence. If I had been there, I would have looked at this and said, ‘This doesn’t stack up to me. You are not reflecting the true level of risk here,’ because the flags are already there before this report. They’re already saying we are getting into delays and he’s not factoring that. He’s just—he’s excluding that from his report to give himself probably—to enable himself to sit on the fence, is my view of this.” In fact, delays had been identified; the complaint apparently is that they were not reflected in the projected completion dates. But that is to ignore the fact that the identified delays were not thought to impact on projected completion. Why Mr Phillips should wish to ignore the true level of risk is unexplained and remains unclear to me, particularly as Mr O’Callaghan’s apparent belief is that Kier was not responsible for the delays. And I view with scepticism Mr O’Callaghan’s claims as to what he would have done had he been present: as a matter of fact, the directors who were present did not do what he says he would have done; and his views on the hypothetical situation are informed by Driver Concept’s analysis which, it appears, was obtained at a cost of up to £30,000 but was not available to Kier in 2004.163. Dr Aldridge analysed Kier’s documentation and disagreed with Mr Hinchliffe’s conclusions. In his opinion, the documentation showed that as late as September 2004 Kier expected no more than a four-week delay, for which it believed it had a good case for an extension of time. It was accordingly unlikely that concern over delay would have prevented Kier from signing a contract until October, when indeed it became aware of more significant delays for which no extension of time was to be expected. He disagreed fundamentally with Mr Hinchliffe regarding the relevance of the reintroduction of steel into the design of the housemasters’ block. Although Kier later claimed that this design alteration was of critical importance, it was in fact not a cause of actual delay at all and—as Mr Hinchliffe himself acknowledged—was not identified as a cause of delay in any of Kier’s contemporaneous documents; the delays mentioned in Kier’s internal reports for June and July related to slippage in the programme but not to delay of the final completion of the works in their entirety. 164. On these matters, Dr Aldridge’s analysis of the position as it stood in 2004 appears to me to be more consistent with the evidence than does that of Mr Hinchliffe and Mr O’Callaghan. I find that even in September 2004 Kier would probably have been willing to sign a contract in September, because it believed that it could justify the modest predicted delay to completion. In October Kier’s perception of the likely delays had significantly altered and it would probably not have signed a contract without substantial renegotiation of its terms. 165. Mention may be made of other arguments that were adduced to show that Kier would have been unlikely to sign the contract.166. First, recognising (I think) in the course of cross-examination that Kier’s internal records did not contain any expressions of awareness that delays made it unwise to sign the contract, Mr Hinchliffe suggested that there was a perceptible change of tone in the emails being sent to TTPM by Kier after May 2004. Although programming issues are properly within the scope of expert evidence, questions regarding the tone of emails and the recognition by Kier that a contract would be disadvantageous to it are matters of fact for the court. I do not consider that there is any relevant change of tone in Kier’s communications or that the terms in which it wrote to TTPM reasonably lead to the conclusion that it had decided not to sign the contract.167. Second, Mr O’Callaghan raised the question of the additional costs referable to the reintroduction of steel into the design of the housemasters’ block. That is not a matter that prevented Kier from continuing with the works under the letters of intent, including the final letter of intent to the full value of the contract. It might also be thought somewhat remarkable that TTPM should now identify a supposed impediment to the execution of the contract which they had failed to identify during the period to which the Trust’s claim relates, in circumstances where it would have been to Kier’s advantage to mention the suggested problem and not to remain silent about it. Although it is possible that increased costs of construction of the housemasters’ block would have impeded the execution of a contract, I have not been persuaded on the evidence that it was likely to do so.168. Third, some limited reliance was placed on Mr Bryan’s oral evidence that at the mediation in 2005 Kier had stated that it had taken a commercial decision not to execute the contract. Mr Bryan was uncertain and vague in that recollection and I have no hesitation in finding that Kier did not say any such thing, at least if it amounted to confirming that during 2004 it had only pretended to be desirous of executing the contract while in fact having decided not to do so. Mr Bryan’s evidence on the point was not given with confidence as to his recollection. There is no documentary evidence to support it. No other witness who attended the mediation had a similar recollection, although it is to be expected that they would have done so if Kier had said what is alleged, as it would have been a striking position to adopt at a mediation. And Kier itself would have had no obvious reason to make such a statement, which would have been irrelevant to any position it could have wished to advance at the mediation and would have served to confirm in the Trust and TTPM any suspicions of Kier’s bad faith. 169. Fourth, it was said that Kier’s failure to sign the contract promptly for more than two years after the mediation settlement is clear evidence that nothing TTPM could have done would have been at all likely to induce Kier to sign a contract during the currency of the H5 works. I am not persuaded by that argument. The situations were very different and are not properly comparable. In the events that happened, the parties had an adversarial dispute, there was no ongoing commercial relationship and the contract was ultimately signed pursuant to a compromise agreement. Kier’s delay in those circumstances is not a good guide to its willingness to sign a contract in an ongoing commercial relationship, particularly when I reject, as I do, the suggestion that Kier was in anything other than good faith with regard to the intention to sign a contract. Further, it is apparent from the evidence of Mr Marsh that there were some genuine issues to be resolved in the aftermath of the mediation and that what he saw as Kier’s “opportunism” was not the sole reason for continuing delay. (ii) How would the Trust have benefited from a signed contract? 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. The claim for an extension of time(1) Kier advanced this claim at the mediation, with the support of an analysis from Driver Consult.(2) The claim was analysed by Mark Edge, TTPM’s Senior Project Manager, in a “Current Status Report” dated 27th January 2006. Mr Edge did not give evidence at the trial, and there is nothing before me to indicate that either he or any other relevant person at TTPM has ever resiled from the analysis in that document. This is what Mr Edge wrote: “3. Claims for an Extension of Time 3.1 Weather The majority of time claimed for the Extension of Time is due to inclement weather. This application was initially submitted by Kier in their letter of 17th September 2004. Turner & Townsend responded to this letter on 1st October 2004 requesting additional Information. Kier subsequently issued a second letter on 30th November 2004 which requested a nine week extension of time. The amount of time claimed did not appear realistic and of the seven week’s attributed to inclement weather a five week delay was rejected. An extension of time granting a two week extension was therefore issued on 2nd December 2004.3.2 Value Engineering KN have requested an extension of time (letter of 20th November 2004) due to the inclusion of works in the Value Engineering Register. The re-design of various elements due to VE opportunities brought about difficulties in construction on site which KN claim added to the programme. For example during value engineering it was proposed by Kier’s team that the Housemaster’s houses could be built without the need for a steel frame. However Kier’s implementation team which had not been party to their value engineered re-design did not feel this was feasible and therefore the programme and costs to Kier appeared to be increased. The roof voids had been proposed to be reduced in size however this appeared to create problems during the construction phase in the routing of the services which clashed with the steelwork. As these works were included in KN’s Contractor’s Proposals they are not a valid reason for an Extension of Time.3.3 Variations The total variations on the project generated a reduction in the contract sum of £97,463. The variations instructed are of a minor nature. Works such as the joinery fit-out of the Boot Room (£6k) and the provision and installation of furniture (£152k) have been omitted from the contract which should have reduced Kier’s programme overall. As such an extension of time due to variation is not considered valid.…5 Conclusion The issue of the contract being in place is central. Were the contract in place and the LAD sum not considered penal it appears that the Abbey have a strong case for pursuing their claim.”(3) The logic of TTPM’s primary case on causation at the trial—that Kier’s alleged unwillingness to sign the contract was due to the risk of liability for liquidated damages for delay—was entirely consistent with Mr Edge’s opinion regarding extension of time. The point is made neatly by Mr Hinchliffe (paragraph 102 of his supplemental report): “… from late May 2004, and probably earlier, I believe Kier was aware of programme slippage, for which it realised it would probably struggle to justify the award of an EOT [extension of time].”(4) Dr Aldridge has considered the causes of delay and Kier’s claim for an extension of time. It is unnecessary for the purposes of this judgment to rehearse that analysis in detail; it is consistent with Mr Edge’s opinion and the implication of Mr Hinchliffe’s remark set out above. Dr Aldridge’s conclusion is as follows (supplemental report, paragraph 1.3.17): “The only EOT claim that appears valid is the claim for exceptionally adverse weather. TTPM’s 2 week award for this Relevant Event appears generous …”(5) The claim for an extension of time cannot be discounted entirely, in circumstances where, as Mr Edge had anticipated in his Report, Kier was ostensibly keen “to vigorously defend [its] position”. The Trust would reasonably have taken it into account when negotiating a settlement or pressing on with protracted litigation. However, on the basis of the evidence before me I do not consider that the claim for an extension of time would substantially have diminished the value of the liquidated damages provision.186. The claim for additional payment(1) At the mediation Kier argued that it was entitled to payment significantly in excess of the amount mentioned in the letters of intent: in round terms, £5.6m as opposed to £4.9m. At trial there was very little consideration of that claim or of how it might have been advanced if there had been a signed contract. However, on the basis of the information before me I do not consider that the possibility of exposure to such a claim weighs heavily against the Trust’s position.(2) The difficulty with Kier’s argument in the circumstances that obtained at the mediation was identified by Mr Patten: “The terms of the letter could not have been clearer—‘you will not be entitled to any further payment whether by way of quantum meruit or otherwise.’ There is no room in these words for Kier to import an obligation on the part of the Trust to extend that figure by such sum as may be deemed reasonable in the light of Kier’s claim for loss and expense.” (Mr Patten considered and dealt—in my view, with respect, correctly—with the possible counter-argument, namely that works had extended beyond the date mentioned in the final letter of intent.)(3) Mr Fraser submitted that, if the contract had been signed, the Trust would have been deprived of this knockout blow, which was based on the wording of the letters of intent. Far from being in a better position, the Trust (he says) would have obtained the dubious benefit of a possibly invalid liquidated damages provision at the price of exposure to a claim by Kier in a sum that was approximately equal to the Trust’s maximum possible recovery of liquidated damages.(4) However, the fact that, in the circumstances that obtained, the letters of intent provided a straightforward answer to Kier’s claim for further payment does nothing to indicate that such a claim would have had greater merit if the JCT contract had been executed. (5) In fact, Kier’s position statement at the mediation shows that its claim was advanced precisely on the basis that, because the JCT Standard Form of Building Contract With Contractor’s Design (my italics) had never been executed, Kier was not responsible for additional costs incurred by it in consequence of the VE exercise. The nub of the Trust’s argument was that there was indeed a contract, namely an implied contract on the JCT terms, and that Kier was responsible for design, just as it would have been under a signed contract; the only entitlement to payment in excess of the contract price under the contract would have been on the usual basis reflected in approved variations and the final account; and only very minor variations had been notified and agreed, resulting in a minimal reduction in the total price. (It might be noted, in this connection, that part of the delay in executing the contract pursuant to the agreement reached at the mediation was due to Kier’s attempt to negotiate an exclusion of liability in respect of pre-contract design of the Works.)(6) In conclusion, if a contract had been signed, Kier’s claim for substantial additional payment might never have been brought; if brought, it would not have been given much weight by the Trust. (d) The extent to which the Trust would have exploited the advantage 187. I do not consider it plausible to contend that, if the Trust had considered itself to be in a reasonably strong position vis-à-vis Kier, it would not have sought to exploit its position. Whether because it is a charitable trust or for other reasons, the Trust appears from this entire story as a body that does not willingly forego its rights or give concessions. One example of that is the argument with Shire about additional fees. Another example is this litigation itself, which appears to have been pursued for the vindication of a legal entitlement rather than because of any “out of pocket” losses. Mr Fraser pointed to the fact that, when a dispute did indeed arise with Kier, the Trust was keen to mediate rather than to litigate or go to arbitration. I cannot draw any conclusions from that fact, not least because the Trust was following the advice of BW, who had come to take a pessimistic view of the Trust’s case on liquidated damages. In declining to follow TTPM’s more bullish advice to go to arbitration, the Trust wisely decided not to proceed on the basis of an unduly optimistic assessment of the prospects of recovering liquidated damages. I cannot infer that the Trust was unwilling to fight to enforce its rights.188. At the same time, I do not think that it would be right to characterise either Mr Bryan or the Trust as intransigent. The example of the eventual compromise with Shire illustrates the Trust’s capacity for pragmatism. I also consider that the circumstances of the dispute with Kier would have been likely to encourage the Trust not to become embroiled in extended litigation. First, Kier would probably have fought its corner hard (though that is not to say without pragmatism) and might have attempted to argue that it was entitled to additional payment. Second, as I have mentioned, there is no evidence to suggest that the Trust’s actual losses were believed to be anything like £750,000; this would have been likely to make the Trust more amenable to compromise at a lower figure, particularly when it otherwise faced the prospect of an extended arbitration or litigation. In support of the submission that the Trust would have sought to vindicate its legal rights against Kier, Mr Bowdery pointed to the manner in which it has pursued the claim in the present case. The argument is valid so far as it goes, but it does not greatly advance consideration of the present issue: the circumstances of the present litigation are different from those of the putative dispute with Kier; and, of course, I know nothing about the terms on which the Trust would have been willing to compromise the present litigation. 189. In short, the Trust would in my judgment have looked for a substantive recovery from Kier but would not have pressed for the greatest possible amount of recovery if a reasonable settlement were available. It is possible that the arguments would have had to be resolved by determination in arbitration or at court. It is more likely that some compromise would have been reached. Both parties would have had expert assistance and legal advice and it is probable that they would have been pragmatic, as most parties in such a situation are. I see no reason to suppose that Kier would not have been willing to reach a reasonable compromise in the light of the merits of the parties’ respective positions.190. In addition to these matters, I have regard to the financial position relating to the H5 works. The state of account between the Trust and Kier is indicated by the eventual mediated settlement, which provided for further payments by the Trust to Kier in the total sum of approximately £423,000, including the retention. This is a circumstance that would have been in the parties’ minds in any negotiation.191. Weighing all these matters, I am of the view that the likely level of settlement of the dispute between Kier and the Trust would have been £350,000 in respect of liquidated damages. I also consider it likely that the price to the Trust of achieving the contract with Kier would have been a payment of a further £10,000 to Shire, in addition to the £10,000 that it did in fact pay. Accordingly the value of the benefit of the settlement would have been £340,000.192. Subject to what follows, damages for TTPM’s breach of duty should accordingly be two-thirds of £340,000. (The payment to Shire is to be taken into account at this stage, because it would be made only in circumstances where the contract would follow.) That is £226,667. (iii) Does TTPM have the benefit of an effective limitation clause? 193. The Terms of Appointment that TTPM sent to the Trust with its fee proposal on 27th November 2002 contained a limitation of liability provision in clause 11. The two issues that arise in respect of that clause are, first, whether it was incorporated into the contract between TTPM and the Trust and, second, if it was incorporated, whether it was deprived of effect by reason of section 3 of the Unfair Contract Terms Act 1977.194. Mr Bowdery submits that the Terms of Appointment were not incorporated into the contract between the parties. The Trust did not return a signed copy of them, although page 4 contained a place for the parties to sign in acceptance of the terms. There was no other express agreement to the terms, and indeed the Trust’s approval was said to relate to “the fees”: see paragraph 16 above. There had been no discussion concerning the Terms of Appointment and TTPM did not draw Mr Bryan’s attention to the proposal to incorporate new terms that differed from those which had applied to the H2 works and the H3 works. Further, the purport of the Terms of Appointment was unclear, as the document set out only the services to be provided by TTPM itself (as distinct from other parts of the Group) but gave a costs breakdown only for TTCM.195. I reject that submission and hold that the Terms of Appointment did form part of the contract between the parties. It is true that the Terms of Appointment had a place, on page 4, for signature on behalf of both parties and that the form was not signed. It is also true that Mr Bryan mentioned only approval of the fees; he said nothing about terms. However, the fact that the document was not signed does not mean that there was no acceptance of it on an objective basis. In my judgment, it is unreasonable to separate the fee proposal from the eleven-page document of which the Terms of Appointment formed the first four pages. That latter document purported to relate to the entirety of the works to which the fee proposal related. Page 6 contained a “Fee Schedule and Programme” for the entirety of the works and fees: project management, quantity surveying, and planning supervision. Pages 5 and 6 set out the project management services. Page 11 set out the planning supervision services. Page 8 set out the cost management services; it simply did so in the form of a breakdown of the costs payable for each state of those services. Although the Terms of Appointment document deals with the various services in rather different ways, therefore, it is incorrect to suggest that it lacks coherence or clear reference to the entirety of the works.196. Accordingly I would not divide the proposal as to fees from the proposal as to terms. If one asks, “Fees for what?” the answer is, “Fees for doing such-and-such work on such-and-such terms.” It is unfortunate that Mr Bryan did not read the Terms of Appointment and did not satisfy himself that they were acceptable. In my judgment, however, the acceptance of the fees proposed by TTPM is objectively to be understood as acceptance of the basis on which those fees were proposed. It follows that the limitation clause was incorporated into the contract between the parties.197. Accordingly, it is necessary to consider whether the limitation clause was effective. The clause itself is in these terms; I have italicised the most relevant parts:“Liability for any negligent failure by Us [TTPM] to carry out Our duties under these Terms shall be limited to such liability as is covered by Our Professional Indemnity Insurance Policy terms. Liability is also limited to such a sum as it would be equitable for Us to pay having regard to the extent of Our responsibility for any loss or damage suffered by You on the basis that all other consultants, contractors and subcontractors who also have a liability shall be deemed to have provided contractual undertakings to You on terms no less onerous than these Terms and shall be deemed to have paid to You such sums as it would be just and equitable for them to pay having regard to the extent of their responsibility for any such loss or damage and in no event shall Our liability exceed the fees paid to Us or £1million whichever is the less.” I should also mention clause 5 of the Terms of Appointment: “We shall take out a policy of Professional Indemnity Insurance with a limit of indemnity of £10 million for any one occurrence or series of occurrences arising out of any one event … and maintain such insurance for a period of 6 years from the date of completion of the services providing such insurance remains available in the market on reasonable rates and terms.”198. The material parts of sections 2, 3 and 11 of the Unfair Contract Terms Act 1977 provide as follows:“2. Negligence Liability(2) In the case of other loss or damage [i.e. other than personal injury or death], a person cannot [by reference to any contract term] exclude or restrict his liability for negligence except in so far as the term … satisfies the requirement of reasonableness.”“3. Liability arising in contract(1) This section applies as between contracting parties where one of them deals … on the other’s written standard terms of business.(2) As against that party, the other cannot by reference to any contract term—(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach … except in so far as … the contract term satisfies the requirement of reasonableness.”“11. The ‘reasonableness’ test(1) In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.(4) Where by reference to a contract term … a person seeks to restrict liability to a specified sum of money, and the question arises … whether the term … satisfies the requirement of reasonableness, regard shall be had in particular … to—(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and(b) how far it was open to him to cover himself by insurance.(5) It is for those claiming that a contract term … satisfies the requirement of reasonableness to show that it does.”199. Pursuant to section 11 (2) of the 1977 Act, Schedule 2 to the Act gives “guidelines” for the application of the reasonableness test in cases of the sale and supply of goods, in the form of a non-exhaustive list of matters to which the court shall have regard. Among those matters are: the strength of the parties’ respective bargaining positions; whether the customer received an inducement to agree to the term; and whether the customer knew or ought reasonably to have known of the existence and extent of the term, having regard among other things to any previous course of dealing between the parties. Those guidelines have no statutory force in the case of the present contract, but many decisions of he courts have recognised that they are nonetheless of general usefulness in considering the application of the reasonableness test.200. Mr Fraser did not seek to argue that the reasonableness test was not engaged or that, if the Terms of Appointment applied, the contract was not made on TTPM’s written standard terms of business. But he submitted that the limitation clause satisfied the requirement of reasonableness: its terms were clear and unambiguous and would have been understood by Mr Bryan if he had taken the trouble to read the Terms of Appointment; there was no relevant inequality of bargaining power; the Trust did not receive an inducement to accept the Terms and Conditions; and the Trust had time, opportunity and freedom to turn to other project managers, if it did not care to contract on the terms proffered by TTPM. Generally, he drew attention to the importance of leaving commercial parties “free to apportion the risks as they think fit … and respecting their decisions” (per Lord Wilberforce in Photo Productions Ltd v Securicor Transport Ltd [1980] A.C. 827, 843).201. Although there is some force in the particular points taken by Mr Fraser, I reject the conclusion he urged upon me and hold that the limitation clause was unreasonable. The central factor that leads me to that decision is that the contract imposed on TTPM an obligation to take out professional indemnity insurance to a level of £10 million. The cost of such insurance would, as a matter of commercial reality, be passed on to the Trust within the fees payable. Yet the limitation clause would result in a limit of liability equal to the fees paid to TTPM, which is £111,321 (together with whatever might be awarded on the counterclaim). In the absence of any explanation as to why in this case TTPM should have stipulated insurance cover of £10 million despite a limitation of liability to less than £200,000, I consider it unreasonable that the contract purported to limit liability in that manner. The effect of upholding the limitation clause would be that, although the parties had contracted for the insurance of the risks and (implicitly) for the Trust to pay for that insurance, far the greater part of that insurance would be rendered illusory. I accept that the contract between the Trust and TTPM was freely made and that the limitation clause was plain to be read and easy to understand. Those facts are not determinative, however, either singly or together, and in my judgment they do not outweigh the considerations in respect of the interrelationship of the contractual provisions. Further, while Mr Bryan should of course have read the documentation more closely, it is not altogether surprising that he did not do so and that, in circumstances where he had asked simply for a fee proposal and where TTPM had not pointed out to him that they were seeking to include new terms in the contract for the H5 works, he assumed that the terms that had applied to the H2 works and the H3 works would simply “roll over”. In my judgment, in respect of the requirement of reasonableness, there is force in Mr Bowdery’s submission that it was “wrong that, after building up a relationship of trust from two previous projects, and knowing that the third project was not going out to competitive tender, TTPM should seek to introduce this Draconian term which was wholly inconsistent with the requirement for substantial professional indemnity insurance without specific notice and any discussion.”202. In his written opening submissions, Mr Fraser also relied on the words in the central part of clause 11 (shown without italics in the quotation above) and contended that any liability on the part of TTPM must be limited by applying the assumption that Kier had paid the Trust “for those matters for which Kier was responsible”. Insofar as I can understand that submission, it is as much as to argue that, where TTPM is sued for negligent failure to ensure that Kier had a liability (viz. for liquidated damages), TTPM’s liability is to be reduced by the amount of the liquidated damages. That is clearly not what the words in question mean; in broad terms, what they are seeking to do is to limit TTPM’s exposure by taking into account the contribution that would justly be required of other wrongdoers liable for the same damage. Mr Fraser did not raise this point in his closing submissions and I need say no more about it. Summary and conclusion on the claim 203. Accordingly the Trust is entitled to recover £226,667 on the claim. The Counterclaim 204. TTPM’s counterclaim is for additional fees in respect of its extended involvement with the H5 works and the assistance it provided to the Trust, at the request of the Trust and its solicitors, in its dispute with Kier at the conclusion of the H5 works. There are four relevant invoices, in the total sum of £53,435 net of VAT (£62,730 inclusive of VAT).205. When the claim for additional fees was first intimated to the Trust in February 2005, Mr Bryan accepted the principle of the claim but not the amount and he suggested that payment be contingent on the recovery of liquidated damages from Kier, a suggestion that TTPM rejected (paragraph 63 above). The correspondence shows that during 2005 the principle that TTPM was entitled to additional fees was not in question.206. The Trust does not dispute that TTPM carried out the work to which the counterclaim relates. However, for the Trust, Mr Bowdery submitted that TTPM was not entitled to further payment, because the work to which the additional fees relate only became necessary because of TTPM’s negligence. I rejected that submission. Insofar as the counterclaim relates to TTPM’s extended involvement with the H5 works, I see no good reason to suppose that the failure to procure a contract is relevant. Insofar as the counterclaim relates to work done in connection with the dispute with Kier and the mediation, I consider that the existence of a contract would have affected the relative merits of the arguments in the dispute with Kier and at the mediation but would not have prevented either the dispute or the need for a mediation.207. Mr Hinchliffe considered the counterclaim in his first report and concluded that the proper amount of additional fees was £37,167—some £25,000 less than the amount claimed by TTPM. The reason for that conclusion was, in essence, that the original fee proposal was properly to be understood as including fees for services provided during an overrun period at the conclusion of the works; therefore the additional fees have been claimed for a longer period than is appropriate. I accept Mr Hinchliffe’s opinion and the reason he gives for it.208. Accordingly there will be judgment for TTPM on the counterclaim for £37,167._________________________________