Verbal agreements can extinguish liquidated damages claims

A recent High Court Judgment in Mansion Place Ltd v Fox Industrial Services Ltd [2021] EWHC 2747 (TCC) (the full judgment may be found here) considers the effect of verbal agreements on the enforceability of liquidated damages clauses. It also raises some interesting issues concerning the operability and proportionality of liquidated damages provisions and reminds us how important it is to be able to prove what we have or have not said.

In this case, Mansion Place (the employer) appointed Fox (the contractor) under an amended JCT Design & Build Contract (2016 Edition) to refurbish and extend student accommodation in Nottingham.  Completion of the project was delayed (for reasons which the parties disputed) and Mansion sought to deduct liquidated damages from Fox’s payment notice.

Fox alleged that no liquidated damages were due as the directors of the respective companies had agreed over the telephone that Mansion would not deduct liquidated damages if Fox dropped a separate claim for loss and expense.

Mansion’s account of the telephone call was different. They argued that no such agreement had been reached and even if its director had discussed foregoing liquidated damages, this amounted to no more than an intention to waive rights which the company later revoked by issuing a pay less notice.

The dispute was referred to an adjudicator who found that the conversation had resulted in a binding agreement and concluded that Mansion had abandoned its right to claim liquidated damages.

Mansion later applied to the High Court seeking a declaration that there was no such binding agreement and that Mansion’s rights under the contract should be reaffirmed. Neither director had kept a written record of the telephone call, so the court considered which version of events it found more convincing based on the “external and objective” factors and other contemporaneous evidence before the court.

Giving his decision, Mr Justice Eyre said that he found the contractor’s account more convincing even though he was satisfied that neither director was intending to mislead. He consequently found that the conversation was a binding agreement which extinguished any right Mansion had to deduct liquidated damages and found in favour of Fox, the contractor.

Points to consider

This case turned largely on the court’s impression of the verbal agreement and is a reminder to everyone inside and outside the construction industry to be careful what we say and what we record, especially if a dispute is likely to emerge.

Interestingly, the court also considered whether the way the contract calculated liquidated damages (a somewhat unusual calculation which referred to the number of student bedrooms) made the terms inoperable or even an invalid penalty clause. Even though the court found the terms would have been valid if they had not been abandoned, this judgement highlights the importance of taking appropriate advice to prevent arrangements being struck down as disproportionate or unworkable.