17
CONSTRUCTION EUROPE
SEPTEMBER 2014
LAW AND CONTRACT
change of key personnel can be
detrimental to the success of
a project and damaging to the
contracting parties’ relationship.
DAMAGES
The recent case of Bluewater
Energy Services BV v Mercon
Steel Structures BV and Others
(2014) decided in the Technology
& Construction Court of England
& Wales highlights the factors
a court will examine when
considering a party’s entitlement
to liquidated damages for a
change in key personnel.
Bluewater
commissioned
Russian oil company Lukoil for
the design, construction and
installation of a soft yokemooring
system (SYMS) for installation
as part of the development of
the Yuri Korchagin Field in the
Caspian Sea.
The case concerned a sub-
contract from 2007 between
Bluewater and several Mercon
companies for the fabrication
of a tower based SYMS (the
contract). Mercon in turn sub-
contracted part of its works
to
Astrakhan
Shipbuilding
Production Association LLC.
However, delays to Mercon’s
and Astrakhan’s works occurred,
and disputes arose which led to
Bluewater issuing a termination
notice in 2009. Bluewater then
issued a claim against Mercon
later that year.
There were several disputes
issues including termination,
the valuation of lump sum and
re-measurable works, variations,
and delay and disruption.
Bluewater’s claim for liquidated
damages
for
unauthorised
changes to key personnel by
Mercon is a notable claim.
The
liquidated
damages
provisions in the contract
provided that,“The key personnel
shall be provided by Mercon and
shall not be replaced without
the prior approval of Bluewater.
Any replacement shall work with
the person to be replaced for a
reasonable handover period.”
The contract also provided
that, “Key personnel shall not
be replaced without the prior
approval of Bluewater. Mercon
shall pay the liquidated damages
specified
in
Attachment
9B for each replacement,
unless otherwise agreed with
Bluewater.”
Rates between €20,000 and
€50,000 were agreed as the
amounts payable in liquidated
damages in the event of the
unauthorised replacement of key
personnel.
During the project, Mercon did
not seek Bluewater’s approval
for the replacement of certain
key
individuals.
Bluewater
therefore claimed €180,000 for
the unauthorised replacement or
removal of four key personnel.
Mercon argued that Bluewater
had consented to the changes
and that the liquidated damages
were a penalty, and as such, were
unenforceable.
ENTITLED
In its judgement, the court held
that Bluewater was entitled to
the payment of €150,000 in
liquidated damages for Mercon’s
unauthorised changes to three
of the four key personnel that
Bluewater’s claim was based
upon.
The court also held that key
personnel had been central to
the successful performance of
the contract, with the burden
of responsibility being on
Mercon to show the sums in the
liquidation damages provisions
were a penalty.
In addition, the court found
that while it was not possible to
put a precise figure on damages
that Bluewater would incur as a
result of unauthorised changes
to personnel, the relevant sums
needed to be assessed by people
who were experienced in such
projects, as they were in this case.
The sums of €20,000 to €50,000
were deemed not unethical in
terms of being “extravagant or
exorbitant”. Therefore, the sums
allocated as liquidated damages
for changes to key personnel
were therefore not seen as being
a penalty by Mercon at the time
when it was deciding to replace
the key personnel, and that
Mercon did not “come close to
demonstrating that [the] sums
were penalties”.
Contractors and employers
are advised to take caution
when negotiating liquidated
damages clauses linked to the
replacement or removal of key
personnel. The quantification of
liquidated damages will need
to be considered carefully, so as
not to be deemed a penalty, and
experienced personnel should
be involved in this process.
It is, however, not readily
apparent how this case will affect
decisions made by employers
and contractors relating to
liquidated damages in practice.
Nevertheless, this example is
a useful reminder of the issues
a contracting party must take
into account during pre-contract
negotiations.
ce
Penalty for replacing
key personnel
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Court in England and Wales will uphold a clause providing for payment
of liquidated damages on a change of key personnel.
Sam Snell
, solicitor
of Pinsent Masons in London, discusses a recent case
I
n legal terms, a liquidated
damages
clause
is
the
amount
agreed
to
be
paid by a contracting party as
compensation for the breach
of a contract, and such clauses
are intended to be recovered
whether the actual damages
incurred are more or less than the
agreed sum.
However, if these claims are
not a genuine pre-estimate of
loss, it may constitute a penalty
and will not be enforceable, as
originally found in the case of
Dunlop Pneumatic Tire Company
Ltd v New Garage & Motor Co
Ltd [1915].
Liquidated damages clauses
are usually used in contracts for
several reasons. They act as a
deterrent against breaches of
contract and, furthermore, the
clause provides certainty for
all contracting parties, as well
as saving time and expense if
disputes arise.
Because of this, they are likely
to be a commercial sticking
point for contracting parties, so
the careful negotiation required
relating to such clauses should
not be underestimated.
An example of how such
damages have been used
includes the payment of damages
upon the unauthorised change of
key personnel. The unapproved
