Liquidated Damages

10 October 2016

Time and completion are complex areas of construction law and often give rise to a number of legal and practical issues (Tangy, 2010). A contractor that fails to complete work on time exposes themselves to a host of contractual difficulties where financial remedies are frequently imposed. Certainly the construction industry as a whole and specifically where a project is running behind programme and has ‘missed the boat on the completion date’ has always been perceptible to the negative connotations of extensive legal proceedings, hefty court cases and unresolved conflicts.

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Before considering the extent to which a contractor can be held liable for failing to complete works on time, it is important to establish what is actually meant by the term ‘completion’. Salmon LJ in the case of J Jarvis & Sons Ltd V Westminster City Council (1969) stated that completion for all practical purposes is allowing the employers to take possession of the works and use them as intended. In other words, the works are sufficiently complete for the purpose for which they were designed (Nestor, 2004).

However it is the contract administrator that certifies when a project has reached practical completion and with each construction project proving to vary largely in details, reaching a state of practical completion is no generic state. As such, it can be argued that completion is a matter of observation, and therefore interpretation (Nestor, 2004). In terms of adjusting the completion date, if the completion date is moved forward in time a contractor is not expected to comply with the original date as set in the contract particulars.

Specifically, clause 2. 28. 6. 3 makes it evident that no matter how much work is omitted by the architect, through use of clause 3. 14, the contract period cannot be shortened in an attempt to force the contactor to complete early. It is now fundamental to illustrate the effect of ‘Liquidated Damages’ concerning a contractor delivering a project that is beyond the specified completion date and therefore in the eyes of the employer and the contract, late.

Liquidated damages are a remedy at the heart of a project that has overrun and are described as adapted from Lal as a genuine covenanted pre-estimate of damages judged at the time of making the contract, not at the time of the breach (Lal, 2009). Simply put, if a contractor fails to complete work on time then he will hand over a fixed, predetermined amount of damages (money) for every day, week or set period as defined in the contract that he is late until the works are finished to the state described in the contract documents.

Nestor describes three factors relating to liquidated dames concerning their recovery and the dependence on these three factors. Firstly, the works should have been completed by a particular date. Secondly, that they should have been completed on an earlier date and thirdly, that there is a pre-agreed stipulated sum of money that forms a genuine pre-estimate of the loss that is likely to flow from the breach (Nestor, 2004).

Generally, points one and three are of particular note as they form the very essence of liquidated damages. In terms of the actual amount payable to the employer, MCGregor takes an interesting approach stating that the normal measure of damages for failing to complete a building by the time required by the contract should be the value of the use of the building during the period of delay, the value generally being taken as the rental value (McGregor, 2012).

It should also be noted that clause 25 enables the architect to amend the completion date in a variety of circumstances and in consequence alter the contractor’s liability for liquidated and ascertained damages for delay (Trickey & Hackett, 2001) The relationship between an employer taking possession of a building and the cessation of liquidated damages is of an intrinsic and complex nature. There is evidence of two attitudes towards taking possession and liquidated damages.

One such stance is that, if the employer takes possession of the works, liquidated damages cease; but if the employer does not take possession, even though the works are reasonably available for such possession, liquidated damages do not cease provided that the existence of defects preludes the issue of a practical completion certificate (Nestor, 2004). On the other hand, the employer is not bound to take possession of a completed part of the works.

But it is thought that were liquidated damages are running, an employer who, in all circumstances was unreasonable in refusing the contractor’s offer of possession of a completed part of the works might be open to arguments in favour of a proportional reduction in liquidated damages for failing to mitigate his loss (Furst & Ramsey, 2012). Nestor’s position vastly contrasts Furst & Ramsey’s and seems to conclude that when works are reasonable available for possession and their premeditated use, liquidated damages should come to an end.

In the event of a contractor failing to complete work on time, one must not simply assume that liquidated damages are immediately claimed for by the employer. There must be close examination of the events surrounding the delay and the ascertainment if the said delay was caused by a ‘Relevant Event’ or any ‘Extensions of Time’. These two phrases generally go hand in hand; that is that a relevant event has occurred and therefore an extension of time to the contractor has been awarded, consequentially erasing any claim for liquidated damages by the employer for late completion.

Along with escaping liquidated damages for a late completion even though an extension of time is given, the contractor may also be entitled to its loss and expense, for example in the form of additional preliminaries (running the site per week) (Brawn, 2012). Therefore there is not just one reason for the contractor to claim for an extension of time but two. Clause 2. 29 provides a list of what constitutes as relevant events in the contract. The relevant events are variations, instructions of the contract administrator, deferment of Date of Possession under clause 2. , Execution of work under an approximate quantity, suspension of work by the contractor, any impediment, prevention or default by the employer or employer’s agents, statutory undertakings, exceptionally adverse weather conditions, loss or damage occasioned by the specified perils, civil commotion, us or threat of terrorism, strike, the exercise by the government of any power which directly affects the works, force majeure and delay on their part of nominated subcontractors (Murdoch & Hughes, 2008).

Brawn describes a three stage process on the occurrence of any of the above delays. Firstly, there is an assessment as to whether the delay was caused by a relevant event. Secondly, if it was a relevant event, the next question is whether it caused critical delay and thirdly, if it did, a ‘fair and reasonable’ extension of time should be granted (usually equal to the period of delay caused by the relevant event) (Brawn, 2012). A critical delay is one that actually affects the contractor’s ability to meet the completion date as oppose to taking up available float time.

If a contractor has failed to complete the work on time, thus causing a culpable delay, yet a relevant event has occurred around the same time, it is often unclear how extensions of time should apply in these situations of concurrent delay. A further difficulty arises as to the meaning of the word concurrent, because most delays are not truly concurrent, in that they start at the same time, they are sequential, and in that they operate in parallel but may start or finish at different times (Brawn, 2012).

It is noteworthy that if a contractor fails to complete the works on or before the completion date the employer has a right to terminate the contract. This will be the case if time is made of the essence (Murdoch & Hughes, 2008). It will also be the case if the breach goes to the root of the contract (Oram, 2012). However, once the contractor is in breach of contract through delay, it is possible to make time of the essence by giving notice to the contractor to this effect (Murdoch & Hughes, 2008).

Furthermore, the normal rule is that time is not of the essence in construction contracts, unless it expressly states so. So the contractor is liable for having their contract terminated and ceasing to be able to work on that project. Where late completion does not justify the employer terminating the contract, the employer’s legal remedy will be an award of damages for breach of contract (Murdoch & Hughes, 2008). Indeed the imposition of liquidated damages is intended to serve as a compensation of loss and not as a penalty (Furst & Ramsey, 2012).

Where penalties are needed however, the allocation of damages is carried out. This is an area where other breaches of contract have occurred and the employer is seeking to recover an amount of money to compensate for the loss they have suffered. It is fundamental to this principle to understand that if the contract provides for the issue of liquidated damages for failing to meet the specified completion date, the employer positively cannot make a claim for any other breaches of contract that may have occurred as an effect of the negligence of the contractor.

The Honourable Mr. Justice Ramsey made it quite evident in Biffa Leicester Ltd and Another v Maschinenfabrik Ernst GmbH and Others (2008) that if liquidated and ascertained damages provisions are expressed to be a complete remedy for delayed completion, they should be treated as a complete remedy (Brann, 2012). Simply put this means that un-liquidated damages cannot be awarded if liquidated damages are in place in the contract.

In summary, the contractor, upon failing to deliver the project on time and to the completion date as in accordance with the contract particulars, can suffer greatly in terms of monies to be handed over to the employer. It is evident that the contractor can have their contract terminated and no longer work on the project, be exposed to liquated damages for every part they are late in delivering the project and where there is no provision of liquidated damages, expose themselves to claims for general, un-liquidated damages.

The contractor must do their upmost to deliver the project on time to avoid these unpleasant situations. References Journal Papers & Books Brawn, D. 2012. Extensions of Time and Liquidated Damages in Construction Contracts in England & Wales. Society of Construction Law. Furst, S. & Ramsey. 2012. Keating on Building Contracts. 9th Edition. McGregor, H. 2012. McGregor on Damages. 17th Edition. Murdoch, J & Hughes, W. 2008. Construction Contracts Law and Management. Fourth Edition. Nestor, J. 2004. ‘Completion’ is the Key to Liquidated Damages: But what is Completion?

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