Adjudication, Arbitration and Mediation by Atkinson-Law with Articles on Constructi...

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Delay and Disruption - Employers Delay and the Right to Liquidated Damages
Daniel Atkinson 08 April 2007 KEYWORDS: Delay and Disruption - Employers Delay and the Right to Liquidated Damages, Alghussein, Alghussein Establishment -v- Eton College (1988) 1 WLR 587, Prevention Principle, Peak Construction -v- McKinney Foundations (1970) 1 BLR 114, Gaymark Investments Pty Ltd v Walter Construction Group [1999], Contractors Failure to Exercise Right , City Inn Ltd v Shepherd Construction Ltd [2003] Inner House, Recent English Law, Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC), Turner Corporation Limited (Receiver and Manager Appointed) v Austotel Pty Limited [1994] 1997 13 BCL 378, New South Wales Court of Appeal in Peninsula Balmain Pty. Limited v Abigroup Contractors Pty. Limited [2002[ NSWCA 211, City Inn Ltd v Shepherd Construction Ltd [2003],

PRACTICE NOTE The failure of the contractor to give notice condition precedent to an extension of time, will not prevent the Employer deducting LDs either based on Alghussein or the Prevention Principle. The presumption is that the contractor will exercise his right - his failure to do so was not a failure of the contractual machinery. Alghussein Prevention Principle Contractors Failure Recent English Law

1. ALGHUSSEIN If the contractor loses the right to extension of time for the Employers breach of contract, because the contractor failed to provide effective notice, it could be argued that the Employer is not entitled to deduct liquidated damages for the delay caused by the breach. It could be argued that the principle in Alghussein Establishment -v- Eton College (1988) 1 WLR 587 would to prevent the Employer benefiting from his own breach to the detriment of the contractor. It is suggested that the failure of the contractor to give notice condition precedent to an extension of time, will not prevent the Employer deducting LDs. The principle in Alghussein is a principle of construction of the contract. The presumption must be that a contractor will act to preserve his rights. His failure to do so will not prevent LDs being levied. 2. THE PREVENTION P RINCIPLE The Prevention Principle of Peak Construction -v- McKinney Foundations (1970) 1 BLR 114 is that an Employer is not entitled to rely on a liquidated damages clause where the reason for late completion was an act of hindrance or prevention by the employer, at least in the absence of a suitable extension of time clause. The Australian case of Gaymark Investments Pty Ltd v Walter Construction Group [1999] demonstrates the logic of the application of the prevention principle in the situation where the contractor does not apply for an extension of time. The contract provided for liquidated damages at $6,500 per week if the building was completed beyond the completion date. The arbitrator found that Walter was entitled to an extension of time of 77 days for inclement weather and delays for which Gaymark was responsible and that Gaymark was not entitled to liquidated damages on the prevention principle. Gaymark appealed and relied on Clause SC19. This provided that Walter was entitled to an extension of time provided it demonstrated to the satisfaction of the supervisor that it had taken all proper and reasonable steps necessary and within its control to preclude the occurrence of the delay and/or avoid or minimise its consequence and had demonstrated to the supervisors satisfaction that it had been delayed. It was held that the prevention principle presented a formidable barrier to Gaymarks claim for liquidated damages based on delays of its own making. The contract failed to provide for the situation where Gaymark caused actual delays to Walter achieving Practical Completion by the due date, coupled with a failure by Walter to comply with the notice provisions of SC19.1. The arbitrators finding was upheld. It is suggested that the above Australian decision will not be followed in English Law. The prevention principle applies in the situation where the contractual machinery is deficient by not providing a remedy of extension of time for acts of prevention by the Employer causing delay. That was not the situation in Gaymark. The reasoning of the decision was that the contractual machinery was inadequate. It is suggested that in general where the contract allows the contractor the opportunity to exercise a right but he chooses not to do so, this is not a failure of the contractual machinery. In that situation there is no reason to strike down a clause of the contract. 3. CONTRACTORS FAILURE TO E XERCISE RIGHT In the scots case of City Inn Ltd v Shepherd Construction Ltd [2003] Inner House the form of contract was JCT 1980. The contract included an additional clause 13.8.1 which allowed the contractor to give notice within 10 days of the Architects Instruction if he considered an instruction of the Architect to require adjustment of the Contract Sum or delay completion. He was required to carry out the instruction unless he had given the notice. Procedures were set down which allowed for estimates to be provided. Crucially Clause 13.8.5 stated that the contractor was not entitled to extension of time under Clause 25.3 if he failed to comply with any one of the provisions in Clause 13.8.1. Clause 25 provided for extension of time for Relevant Events so that the completion date was postponed and the period of delay resulting from the Relevant Event was not taken into account in computing any period in respect

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of which liquidated damages must be paid or allowed. Consequently, where delay occurred because of a Relevant Event and an extension was granted, the Employer himself bore any loss caused to him by the delay, whereas otherwise the Employer was compensated for loss caused by delay of the completion of the works to the pre-estimated extent provided for in the liquidated damages provisions. The contractor had not given the necessary notice. It was argued that in that situation Clause 13.8.5 was a penalty, since the loss to the contractor measured as the liquidated damages levied by the Employer was not a genuine pre-estimate of the loss likely to be suffered by the Employer as a result of non-compliance by the contractor with the notice provisions. It was held that Clause 13.8 did not impose any obligation on the contractor when he received an architect's instruction. If the contractor received such an instruction, he had to consider its likely effects, and in particular its likely effect on the duration of the building period. He might, for reasons of his own, decide to accept the instruction without resistance and hope that he would be able to complete the work, as varied by the instruction, within the building period. But if he wished an extension of time, he had to comply with the conditions precedent that clause 13.8 provided for in these specific circumstances. Clause 13.8 did not oblige the contractor to invoke its protection. It merely provided the contractor with an option to take certain action if he sought the protection of an extension of time in the circumstances in which the clause applied. The provisions of clause 13.8 were merely conditions precedent to his doing so. If the contractor failed to take action in accordance with clause 13.8.1, it was a false analysis to describe him as being in breach of contract. The ultimate effect of that failure might be that he was unable to complete the works, as varied by the instruction, by the completion date; although that could not be assumed at that stage. But the breach of contract that that would constitute would not be a breach of clause 13.8. It would be a breach of clause 23, of which the ultimate cause may be the contractor's failure to take advantage of clause 13.8. It was held that the Employer was entitled to deduct liquidated damages for the contractors failure to complete. 4. RECENT ENGLISH LAW In Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC) the issue to be to determined was whether time had been set at large under one of the sub-contracts for the Wembley Stadium project. Under the main contract Multiplex agreed to design and construct the New National Stadium at Wembley and subcontracted to Honeywell the the design, supply and installation of various electronic systems for communication and control of the building. Honeywell relied on the above Australian decision of Gaymark to argue that Honeywells failure to comply with the noitice condition precedent to an extension of time meant that time was put at large in relation to liquidated damages. Jackson J reviewed the authorities. He observed that the judgment of Gaymark was contrary to a previous Australian view expressed obiter by Cole J in Turner Corporation Limited (Receiver and Manager Appointed) v Austotel Pty Limited [1994] 1997 13 BCL 378:
"If the Builder, having a right to claim an extension of time fails to do so, it cannot claim that the act of prevention which would have entitled it to an extension of time for Practical Completion resulted in its inability to complete by that time. A party to a contract cannot rely upon preventing the contract of the other party where it failed to exercise a contractual right which would have negated the effect of that preventing conduct.

Jackson J observed that Gaymark was not followed by the New South Wales Court of Appeal in Peninsula Balmain Pty. Limited v Abigroup Contractors Pty. Limited [2002[ NSWCA 211 in which it was said
I accept that, in the absence of the Superintendent's power to extend time, even if a claim had not been made within time, Abigroup would be precluded from the benefit of an extension of time and liable for liquidated damages, even if delay had been caused by variations required by Peninsula and thus within the so-called 'prevention principle'. I think this does follow from the two Turner cases and the article by Mr. Wallace referred to by Mr. Rudge [Prevention and Liquidated Damages: A Theory Too Far (2002) 18 Building and Construction Law 82].

Jackson J also referred to the scots case of City Inn Ltd v Shepherd Construction Ltd [2003] Inner House and doubted that Gaymark represented English law. He observed that if it was then a contractor could disregard any provision making proper notice a condition precedent and therefore at his option the contractor could set time at large. Jackson J stated that in this case it was unnecessary to decide the point since Gaymark was to be distinguished on the facts. Jackson J held that the liquidated damages Clause 12 did not automatically lead to the deduction of liquidated damages.
In Gaymark non-compliance with the notice clause exposed the contractor to an automatic liability for liquidated damages (if the liquidated damages clause were upheld). In the present case, non-compliance with clause 11.1.3 has no such automatic consequences. Even if (contrary to Mr. Thomas' submissions) Honeywell forfeits any entitlement to extension of time, that does not automatically make Honeywell liable to pay damages for delay. Under clause 12 of the Sub-Contract Conditions, Multiplex can only recover in respect of loss or damage "caused by the failure of the Sub-Contractor". If in reality the relevant delay was caused by Multiplex, not Honeywell, then (whatever the position under clause 11) Multiplex cannot recover against Honeywell under clause 12. . If the facts are that it was possible to comply with clause 11.1.3 but Honeywell simply failed to do so (whether or not deliberately), then those facts do not set time at large. Honeywell is not entitled to the relief which it seeks in respect of the Gaymark point.

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The interpretation of Clause 12 by Jackson J is expansive. The phrase relied upon to import the concept of causation does not appear to relate to the cause of the delay at all but to the simple failure of Honeywell to complete by the required date. The liquidated damages appear to be triggered automatically simply by the failure to complete. The interpretation by Jackson J is somewhat strained. It is unlikely however that a different decision would be reached on any other interpretation, particularly in view of the decision on the other arguments by Honeywell.

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17/02/2011