Philip Harris, Partner and Construction Lawyer with Wright Hassall explains delays, liquidated and ascertained damages, and extensions of time.
Transcript
Please note, this transcript has been automatically generated, so may contain inaccuracies.
So Hello, ladies and gentlemen, this is the latest in the series of talks, the law bites takeaway is that right hustler doing for the construction industry. And this replaces our normal Friday lunchtime law bites sessions. This one is called, it's about time. And we're looking at delays liquidated and acetone damages LADs, and extensions of time. And it's just a simple overview of what's going on under the JCT type of contracts. So why do we have an extension of time clause?
The answer to that is, because if the employer prevents the contract to completing on time in any way, let's say for example, he issues of variation instruction, which takes longer to do, and there's no mechanism for extending time, there's no extension of time who was then time would become at large contracts, who would have a reasonable amount of time in which to do the work rather than a fixed period. And a reasonable amount of time can be a long time, as long as he's a contractor is carrying out his duties properly.
So if the employer prevents the completion date being achieved, and there's no extension of time clause, then also he cannot recover, liquidated damages, he can't do that, unless there's an extension of time chords. And all of that comes out of an early case peak, PEAK, and McKinney, which is in the first building law report, one building law reports.
A very early case. So why do we have an extension of time clause, the extension of time clause stops time being at large, and it keeps alive The liquidated damages provision because you can extend time, you can move the completion date back and then take your liquidated damages from the extended time.
So there are circumstances when time is at large. And I'm just going to list some of these. So as we've said, if there's an act of prevention, which prevents the contract to completing and there's no extending clause, or relevance event, which is an event, which entitles you to an extension of time, then time would be at large, if the provisions have not been properly administered in relation to time and extensions of time. So let's say a contract says, if the contract administrator dies, he has to be replaced within 14 days. He's not replaced within 14 days.
And so there's nobody to extend the time under the contract. So time becomes large. Well, there's been a waiver of the original time requirements, which is surprisingly common. JACK says to Ted in the pub, look, I'm not going to hold you to the original completion dates, or there's interference by the employer in the certifying process, so he wrongly interferes with the impartial certifying process if the contract administrator or for any any other reason, the mechanism for time simply breaks down.
So let's look at liquidated damages. What are liquidated damages, will damages or financial compensation for breach of contracts and liquidated damages are capable of calculation by mere arithmetic. So we know it's 2000 pounds a week, and we've got two weeks delay, then we've got 4000 pounds liquidated damages.
They're capable of being assessed. Even before there's a breach because we've pre agreed them they are agreed damages, and they are calculated before or at the time the contract is made. So at the latest by the time the contract is made.
And the law has moved on in recent years. The position now is that liquidated damages or damages which must not be disproportionate to the breach of contract which caused the breach so there must be a disproportionate level of damages. And they are claimable without loss. And they're claimable without having to prove the loss. So let's say a bit building is complete by the first of February, and it's known that that stage three tenants will move in and each tenant is going to pay 1000 pounds per week. But because of a recession, all of those tenants drop away. So you haven't got any tenants to move in on completion. So you're not really suffering a loss of income. But you would still be able to take your liquidated damages because they've been pre agreed.
Even though there was no loss, you wouldn't have to prove any loss. So what's the distinction between liquidated damages and penalties? Well, liquidated damages are enforceable, law and penalties are not enforceable. As a matter of public policy. It doesn't matter whether the clause is called a penalty, called liquidated damages, the courts will interpret it and decide, but prime of facie people are supposed to mean what they say.
And the case that further recently, deals with these issues is the case the Supreme Court case of Cavendish Square Holdings against Makdessi. And you'll also sometimes hear it referred to as the parking case because that case was also being heard at the same time. And the court laid emphasis on the fact that a penalty is a deterrent. So in the old days, we used to say a penalty is in terrible REM In other words, it's there to frighten the contractor into finishing on time. Still, basically, right, but no language now is a penalty is a deterrent. That's principal purpose. Whereas liquidated damages are a genuine pre estimation of the losses likely to be suffered in the event of delay. And the court in the Cavendish square case, said that the true test is whether the damages are out of all proportion to the legitimate interest of the person who suffers the delay.
And the question of penalty or proper liquidated damages, is decided in all the circumstances of the contract, judged at the time that the contract is made, and not at the dates of the breach. Now, the courts are not keen to strike down liquidated damages clauses as penalties. Sometimes they do say to penalty, but they recognise that liquidated damages causes avoid the difficulty and cost of proving loss, because you've just agreed it, and they create certainty, again, because you've just agree that all liquidated damages and exhausted remedies. So if you've got a liquidated damages provision, is that all that you can get for delay losses? And the answer to that is basically Yes. And the main case on that was a case called Tim lock T m l o c against arrow here double our high double L and nil was inserted in the contract. It was a JCT 80 contract for damages. The contract finished late and the employer tried to claim general damages for delay saying, Well, we've got no liquidated damages. So all of my general delay damages. And the court said no, this business of liquidated damages are an exhaustive remedy.
Because you put nil in the ceiling also met the floor. There is nothing in between. So there were no liquidated damages nil, but that determines that there was no rights to claim general damages either. So they are an exhaustive remedy.
So if we're under a JCT contract, what do we have to do as an employer to take on liquidated damages. Three things really there should be a certificate or if it's a design, build contract and notice of non completion certificate of non completion if one then there must be a notice of intention to deduct liquidated damages. To that must be that notice. Three, there has to be what we call construction act compliance, which means that you have to serve a pay less notice deducting the liquidated damages, and they have to be served in the time and as required under the JCT contracts.
What happens in the event of termination or in the event that the contract just doesn't complete the job? Well, that was looked at in the Court of Appeal case, triple points technology, Inc. and PTT, public Co. triple point never finished the works and the issue was whether, therefore liquidated damages could be taken.
And the Court of Appeal looked at a House of Lords case. So the top court case in gland stuff, which was a 1912 case, a very old case. But in that case, the court had said that liquidated damages only applied where the contractor had completed the works. So if it was terminated for insolvency of the contract, then you couldn't take the liquidated damages. Now, it seems that if the contract has sectional completion dates, and one or more of those sections has been completed, then you can take liquidated damages for those individual sections. But if it's if it's not sectional, and the contract is terminated for the contractors, insolvency, then you can't have liquidated damages, you just get general damages for delay.
The next thing is looking at it from the point of view of the contracts or in the contracts of claiming is delayed losses where he is delayed. And the leading case on that is Glen Lyon, against Guinness. And this was all about the programme. So the contracts it had a fairly opportunistic, let's call it programme, where he intended to finish before the contract completion date. He was delayed beyond his own programmed completion date. And so he said, I've been delayed I want to claim my delay losses. And the court said no, the promise from the employer was only that the contracts it could finish by the contractual completion date, not by the contractors own programmed completion date.
Let's look at applying for extensions of time. Under the JCT contracts, there's an application or condition precedent, is it necessary that there's been an application? Well, basically no, because in a case, which we know is Merton, and Leach or Stanley who leads against London Borough of Merton. The court looked at the fact that these JCT contracts tend to have a 12 week review by the contract administrator after practical completion, so you get to practical completion. And there's then this 12 week review by the contract administrator. And the contracts tend to say, the contract administrator carries out his review of delay.
Whether or not the contractor has applied for an extension of time, the court said, Well, look, you've got this whether or not business, it can't be faithful to the contract that he's not applied for an extension of time. So that is, is basically the law. Delaying giving notice that you've been delayed may be prejudicial to the contractor. Because the architect may then be unable to assess delay properly, or to reduce delay as the job goes on. What details Do you have to apply in? Well, you give the material circumstances including the cause of delay, which will usually be the relevant event. And so so you must state what the relevant event is, whether it's variations or impediments and prevention by the employer, whichever listed events you're relying on for your delay.
Now, I want to mention this case of Walter Lilly against MCI, because it's a classic, very sensible decision of a judge looking at delay and loss and expense. A lot of contractors sort of breathe a sigh of relief, after the Walter Lilly Mackay case.
The judgments of Mr. Justice Aikenhead in the technology and construction Corps, and he said, as regards extensions of time the court decides what delay has actually been caused on a balance of probabilities, whether it's more likely than not taking into account the actual evidence and any expert evidence. And then he went on to look at concurrent delay what happens where the delay is caused both by the contractor and the employer at the same time.
And he said under a JCT contracts where that happens, the contract he gets a full extension for the period of delay. He may well not get any money out of it, but he will get the full extension for the concurrent period of delay. And that departs from the law as it is in Scotland.
In a case called city and Shepherd where under Scots law, you would actually a caution the delay between parties, but not under English law, and also I’ll come on I mentioned this in a minute. There is a case North Midland building against Sidon homes, where the courts have said, if the parties have a clause in the contract saying the contractor will not get an extension for concurrent delay, then that that will be held back to Walter Lilly and MCI to the judge goes on to say snagging is an inevitable part of complex projects. So as long as the snagging is not excessive, it won't be regarded as having delays. The contracts is works.
As regards loss and expense under the JCT standard forms, the judge said, the contractor does not lose the right to loss and expense just because some of the loss details are not provided. Only details which are reasonably necessary have to be provided allowing an architect to inspect the contracts, contractors records could be enough. The requisite details do not necessarily include all the accounting and backup information, loss and expense is not to be too strictly interpreted, given that the relevant matters, that's the matters that entitle you to claim loss and expense are the faults of the employer.
And you can take into account that the architects contract administrator and the quantity surveyor are not strangers to the contracts. And because they know what's going on, they can't ask for interminable detail from the contract. So the architects and the contract administrator must be in a position to be satisfied that all or some of the loss has been incurred, but they don't have to be certain about it. He then looks at global claims. These are where you say, or in the old days, you can say we can't disentangle the various causes of this delay. So we're going to have to put in a rolled up claim. But the judge looked at this and he said is not necessary for the contract to show that it's impossible to prove cause and effect in the conventional way.
And that the impossibility is not the contracts his fault. The contract just needs to show that events occurred which entitle him to loss an expense, and that the events resulted in that delay or loss of expense.
This could be proved by an admission by the architect or contract administrator, or actual evidence, which links reimbursable events with periods of delay and items of disruption. He said there's no principle that global claims are inadmissible and have to be thrown out. But the contractor does have to show that the loss wouldn't have arisen in any event. So it mustn't be a situation where he has undervalued the work in the first place. And that's why he's suffered the loss. It's also not the case that say a million pound global claim fails, just because it's proven that 50,000 pounds of it is not genuine.
It doesn't work on that basis. 50,000 pounds was not genuine, you'd take that down to the million pounds. The courts are entitled to treat global claims sceptically.
But it won't necessarily fail, just because of the impossibility of disentangling the events. And that and that that has been caused by the contractor coming back down to this north, middle and building and site in case.
The question was, is an extension of time clause valid if it says that where there's been delay by the contractor and its concurrence with delay by the employer is not taken into account in calculating an extension of time. And so the employer can take liquidated damages, even though he has caused or contributed to some extent to the to the delay? And the court said, Yes, the answer to that is yes, such a cause is valid. And it goes from five reasons for that, which I won't go into the details of. But it concluded by saying the allocation of risk within this clause was one that the parties were entitled to agree on. So the court was saying it's up to the parties, how they deal with this, how they distribute the risk. And even though the employer could take liquidated damages, where he had caused some period of delay himself. That was okay, because that was a reasonable allocation of risk.
So, those are just some brief points on time, extensions of time, delays and loss and expense, and I hope that's been useful. Thank you very much.
