Back to basics law: contractural provisoins for time and money - who benefits?
Barristers Kim Franklin and Sue Lindsey look at points that the certifying architct may wish to bear in mind when balancing an employer’s and a contractor’s desire for compensation for delay
Most standard forms of construction contract contain an intricate mechanism designed to balance the rights and obligations of the contractor and the employer. That mechanism is operated by an independent certifier whose job
it is to see fair play between the two. Despite the current vogue for partnering, the interests of the contractor and the employer remain polarised. The employer wants the project completed as quickly and cheaply as possible or to be compensated for delay. The contractor wants to profit from the job generally and to recover any cost overrun that is incurred as a result of late completion.
WHAT IS AN EXTENSION OF TIME?
Most contracts tend to stipulate a date for completion. If they don’t it is assumed that the parties intended the work to be completed within a reasonable time. Time is said to be ‘at large’ and it is much harder to show that the contractor is in delay.
Even where there is a contractual completion date, the industry recognises that things can go wrong. The leading textbook, Keating on Construction Contracts, takes a particularly gloomy view: ‘The completion of the works may be delayed by ordering variations, by late or inadequate instructions, by shortage of materials or delay on the part of subcontractors. The contractor may find that he is required to execute more work or spend more money to complete than he originally estimated. A third party annoyed by dust and noise may make a claim. One or both of the parties may become bankrupt or go into liquidation.’
Anticipating these eventualities, the contract provides for the completion date to be extended in particular circumstances. Extending the completion date tends to be seen by the contractor as a good thing because:
- it exonerates the contractor from responsibility for delay;
- it relieves the contractor from liability for liquidated damages;
- it entitles the contractor to claim loss and expense for the duration of the delay.
WHAT ARE LIQUIDATED DAMAGES?
If a contractor fails to complete a project by the contractually agreed completion date, the employer will be out of pocket. It is not always easy to calculate the extent of the employer’s losses. Rather than slog through all the permutations, the parties can agree on a genuine pre-estimate of the employer’s losses. This is usually calculated or ‘ascertained’ at a fixed or ‘liquidated’ weekly rate and referred to as liquidated and ascertained damages (LAD). If it is a genuine pre-estimate, it is not a penalty, no matter what the parties call it. Traditionally the courts were suspicious of liquidated damages. Now they are delighted by them, since it saves them the job of working out what the actual losses were.
Delay for which the contractor is responsible, or culpable, entitles the employer to claim liquidated damages. If the contractor is delayed by the acts or omissions of the employer, sometimes called ‘acts of prevention’, the contractor may instead be entitled to claim loss and expense.
WHAT IS LOSS AND EXPENSE?
At the time of contract, the contractor calculated their price with reference to the planned duration of the contract. If they are delayed by the employer’s variations or late instructions the contractor will incur additional costs. These costs may be in the form of extended preliminaries; that is, the site set-up costs, extended for the duration of the delay, or particular one-off costs, such as the cost of another tower crane to carry out unplanned additional work.
SO HOW DOES IT ALL FIT TOGETHER?
The contractual completion date, the power to extend time, the entitlement to deduct liquidated damages and to claim loss and expense are all interrelated. At the fulcrum of these provisions is the completion date. If the project is completed on time then there is no need to extend time, and the employer’s entitlement to liquidated damages or the contractor’s entitlement to loss and expense are not triggered.
If the project is delayed the machinery swings into action. It is the architect who has to decide what has caused the delay and who is responsible for it. If the contractor is culpable, liquidated damages can be deducted by the employer. If the employer has prevented completion, loss and expense can be claimed by the contractor.
DO YOU HAVE TO HAVE LIQUIDATED DAMAGES?
No. If the contract does not provide for liquidated damages the employer will still usually be able to claim their actual losses. They will, however, have to calculate and prove them. But if the parties stipulate that liquidated damages will be ‘£nil’, this will be taken as an agreement that the losses in the event of delay have been pre-agreed as zero and no other damages will be recoverable.
When marvelling at how the contractual provisions for time and money operate it is worth remembering that it wasn’t always thus. Traditionally the courts viewed the completion date as sacrosanct. An employer who caused delay by an act of prevention would blow the completion date out of the water, and with it the liquidated damages provisions. The fixed completion date would be replaced by a toothless obligation simply to complete within a reasonable time.
These days the courts are keen to uphold the agreement of the parties, and to ensure that the time and money provisions of the contract are operated as intended.