Late payment of liquidated damages, a qualified debt?

17 February, 2017

In Mailbox (Birmingham) Limited v Galliford Try Construction Limited [2017] EWHC 67 (TCC), Galliford challenged the validity of the adjudicator’s decision to determine Mailbox was entitled to the enhanced interest on the liquidated damages awarded pursuant to the Late of Commercial Debts (Interest) Act 1998 (Late Payment Act).

The background

GTC agreed to carry out refurbishment works of a mixed use office and retail space in Birmingham under a JCT Design and Build Contract (2011 edition) as further amended by the parties. Mailbox then purported to determine GTC’s employment and a dispute arose between the parties as to responsibility for the delay, liability of liquidated damages, the proper valuation of the final account and lawfulness of the termination by Mailbox.

It was determined by the adjudicator that Mailbox was entitled to liquidated damages, interest on the sums awarded in adjudication pursuant to the Late Payment Act and an order for Mailbox to pay 25% of the adjudicators fees and expenses with GTC to foot 75% of the bill.

Decision

The main challenge was actually whether the adjudicator’s decision that an initial assignment and subsequent re-assignment of the contract between Mailbox and the Security Trustee were valid – they were as the assignment was an equitable assignment pursuant to Section 136(1) of the Law of Property Act 1925 and the re-assignment was also valid and took place on or before the date of the commencement of the adjudication proceedings.  Therefore the adjudicator did have jurisdiction to determine the dispute and this decision was valid.

However, an interesting point to note here is how the court determined the interest for the late payment of liquidated damages. The Court considered Section 1(1) of the Late Payment Act and more particularly Section 3(1) which provided that a qualifying debt is, ‘a debt created by virtue of an obligation under a contract to which this act applies.. .’

Jervis v Harris [1995] EWCA Civ 9, shed light on the difference between a debt and damages for breach of contract. In that case a debt was defined by a two limb test (i) the sum payable must be fixed and (ii) the trigger must be a primary duty under contract (i.e. a duty to perform the promises in the contract) and not secondary (a party failing to perform their duties under the contract). This two limb test read in conjunction with the Late Payment Act makes it clear that as liquidated damages are generally for a party failing to perform their duties under contract, they will rarely be considered a debt.  

The parties agreed that liquidated damages did not amount in this case to a qualifying debt but Mailbox submitted that GTC should still have to pay at the increased rate under the act and interest could not be claimed under the act for failing to pay the liquidated damages assessed in the adjudication.  The Court decided that is was not unreasonable for GTC to dispute jurisdiction and so it should not be punished by having to pay an enhanced rate of interest.