Construction contracts contain start dates and end dates. With many projects, the end date is critical to meet follow-on works, trigger a funding release, or avoid penalties for overrunning and not operating on time in the case of infrastructure projects. For this reason, many clients seek to invoke the right to levy liquidated and ascertained damages, usually at a rate per day or week, as stated in the contract documents.
However, contracts also contain the provision to amend the completion date through entitlement to be granted an extension of time. However, suppose a contractor overruns the completion date and does not have a requisite extension of time. In that case, some forms of JCT Contract (Standard Form of Building Contract, Design and Build and the Intermediate Building Contract) require the Employer to issue a Certificate of Non-Completion.
Some forms, such as the JCT Minor Works Contract, do not require the serving of non-completion notices.
JCT and Liquidated and Ascertained Damages
For the Contractor to be subject to a demand to pay or for the Employer to make allowance for the recovery of liquidated and ascertained damages through the payment assessment cycle, the Contract Administrator must first serve the following notices on the Contractor:
- The Contract Administrator serves a Non-Completion Certificate (also known as a non-completion notice)
- The Employer serves a notice informing the Contractor the Employer may require payment, withhold or deduct liquidated damages before the Final Certificate.
- Then, not less than five days before the final date for payment of the debt due under the Final Certificate, the Employer should serve a notice on the Contractor that for the period between the Completion Date and the date of practical completion:
- the Contractor is to pay liquidated damages at the rate stated in the Contract Particulars
- Or the Employer will withhold or deduct liquidated damages at the rate stated in the Contract Particulars from the amount owed to the Contractor.
If the contract includes sectional completion dates, the same applies that the Contract Administrator and the Employer should serve notices on the Contractor for each section before applying liquidated and ascertained damages.
The contract then states that if the Contract Administrator should fix a later Completion Date for the Works or a Section of Works, they will repay liquidated and ascertained damages up to the new adjusted Completion Date.
Serving of Notices and Condition Precedence
The serving of the notices above and in the correct order is imperative for a successful application of damages. The contract is essentially describing a process that you must go through to complete an action, and for such action to stand up to scrutiny, it must be served correctly. Failure to do so means that it will not be enforceable.
Equally, there is the question: should the Contract Administrator assess any Relevant Event claims for an extension of time in their possession before making their assessment of the damages due and serving the requisite notices?
To be blunt, if this were the case, the contract would state so, but if it does not, and therefore the submission of Relevant Events as claims for extensions are separated out in the contract, there is not a contractual link between the two. Without a condition precedence on the Contract Administrator to make such assessment, they are simply assessing the current date of practical completion to the Completion Date as amended by the award of any extensions of time up to that point in time.
The contract is clear in that if later assessments amend the Completion Date, the Employer will make a payment back to the Contractor of damages they have recovered to that point in time. This in effect allows the two processes to be separate, but whilst one should take cognisance of the other, there is no contractual requirement that you must consider claims for time extensions before the recovery of damages.
However, it would be foolhardy for a Contract Administrator not to consider the two, even if there is no express contractual obligation on them to do so. However, just because the Contract Administrator can serve a non-completion notice, and a notice that they may require the payment or withholding of damages, they do not have to take payment. Merely serving the notices would probably have the desired effect of bringing the parties together to agree on the Relevant Events, and therefore the ‘correct’ application of damages could ensue.
If you were to put yourself in the Contractor’s position, what would your argument be to recover delay damages where open claims for time were apparent? They could suggest that the Contract Administrator has failed in their duty to assess the extension of time submissions through Contractor’s submission of Relevant Events and therefore, because of this, the recovery of damages is erroneous. However, the Contractor may have to launch formal dispute resolution procedures for this to be invoked, e.g., adjudication, unless there are alternative dispute resolution procedures stated in the contract.
Relevant Case Law
There are several intriguing cases involving decisions or rulings on the process set down in the JCT contract and the importance of serving the notices correctly, and of course, whether the assessment of Relevant Events should be completed before serving the non-completion notice.
For example, in the case of Henia Investments Inc vs Bec Interiors Ltd , the Judge had to consider whether an Employer could rely on the notice of non-completion and the application of damages, even though it could be demonstrated that the Contract Administrator had not assessed the Relevant Events. Therefore the Contractors position of an extension of timing owing was essentially at large.
As noted above, the Judge considered the wording in the contract and noted there was no condition precedence on the Contract Administrator to consider applications for extension of time in the serving of non-completion notices which, whilst deemed to be unusual, was contractually compliant. The Judge considered the other contractual remedies available to the Contractor and noted they did have the option of adjudication. If they could convince the adjudicator that they should have been granted an extension of time, they would be entitled to recover the damages levied. However, even in this scenario, there would not presumably be any criticism towards the Employer and/or Contract Administrator as, whilst it may be proven there was entitlement to the Contractor, they had not mis-managed their contractual obligations in recovering liquidated and ascertained damages.
Another pertinent case is that of Octoesse LLP vs Trak Special Projects Limited , whereby Octoesse engaged Track to construct residential and retail units in London. The chosen form of contract was the JCT Intermediate Building Contract 2011. The position was that Completion was required by the 22nd of September 2013, where Practical Completion was achieved on the 13th of February 2015. The Contract Administrator had previously issued an extension of time from the 22nd of September 2013 to the 29th of September 2013. A notice of non-completion was issued on the 3rd of October 2014.
The dispute arose around the serving of notices following the submission of an extension of time claim and whether the re-issuing of the relevant notices is a condition precedence to continually recover liquidated and ascertained damages.
In this case, the Contractor, following Practical Completion, provided a claim for an 18-week extension of time to the Employer. At this point, the previous notices and application for liquidated and ascertained damages were in force for the period between the 13th of February 2015 and the Completion Date of the 29th of September 2013. However, the Employer/Contract Administrator then assessed the extension of time claim and awarded the Contractor a further nine-week extension to the 29th of September 2013.
Following the revised Completion Date, the Employer and Contract Administrator should have served new notices of non-completion in strict accordance with the contract, followed by notices stating that they may require the payment of damages, or notifying that they will withhold them from the next application for payment. However, when making the following payment assessment, they issued a payment notice and a pay less notice deducting the liquidated and ascertained damages. Still, the Contractor launched adjudication on the basis that this was incorrect, as the Employer was not entitled to make such deduction as they had not served the requisite notices.
The adjudicator upheld the Contractors position and determined that not only was the payment notice invalid, but the Employer should pay the deductions back plus interest. The Employer did not abide by the adjudicator’s decision and sought legal clarity on the ruling. The Judge subsequently ruled that the Employer was not entitled to deduct damages as the contract is clear regarding Non-Completion Certificates, “If a new Completion Date is fixed after the issue of such a certificate, such fixing shall cancel that certificate and the Architect/Contract Administrator shall where necessary issue a further certificate.”
Therefore, as the Employer did not issue a new non-completion notice and the following notices regarding how this will impact payment, they were not entitled to levy the liquidated and ascertained damages. However, when you consider that at the time there would have been no further payments due as the project was completed sometime before, releasing the balance of damages would cause an issue for the Employer. Even if they subsequently serve the new notice and demand the revised damages are paid, they would likely not have the ability to offset such deductions against a monthly application for payment and would therefore require the Contractor to pay as a debt. If the Contractor resists, the Employer would need to adjudicate to enforce their contractual right. Still, when you consider the sums in play (the damages were circa £90k), you would have to question the appetite to launch such actions to recover such sums.
Reflection on other contracts
In NEC ECC Delay Damages is a secondary option clause (X7) and applies to Completion, but if secondary option clause X5 is also used, the same can apply to Sectional Completion. The rate of damages is stated in Contract Data Part 1. The date for Completion is also stated in Contract Data Part 1. Once the Completion Date has passed, and if Completion has not been achieved, the Project Manager should assess delay damages due in subsequent payment assessments.
The Contractor should acknowledge the lateness of the works against the Completion Date and deduct delay damages when working out their application for payment, but they probably won’t. Therefore, the Project Manager would need to work out the number of days late at the assessment date and multiply it by the rate stated in the contract.
It is worth noting there is not a requirement to serve a non-completion notice before recovering delay damages. Under NEC ECC contracts the amount due refers to:
- the Price for Work Done to Date,
- plus other amounts to be paid to the Contractor,
- less amounts to be paid by or retained from the Contractor
Delay damages are applied through the third bullet point. The Project Manager is also obliged to consider compensation events within the period allowed in the contract, but as per JCT, there is no condition precedent where any open compensation events that may entitle the Contractor to an extension to the Completion Date must be assessed before delay damages are invoked.
Considerations and Good Practice
In making any deductions from a payment requested, it is vital to follow the contract to the letter as it is likely to come under challenge and therefore needs to be watertight. If there are open claims for extension of time provisions, contractually speaking, the Employer/Contract Administrator/Project Manager does not have to conclude an assessment before deducting damages, although it would be prudent to do so.