What liabilities do building contractors face if they do not complete their contract on time?

These are unprecedented times for building contractors many of whom are under pressure to deliver contracts despite staff shortages and delays in materials being delivered. What liabilities do contractors face if they do not complete their contract on time? Consultant Solicitor, Iain Cole in our Construction and Property Dispute Resolution team looks at the issues.

One of the most reassuring aspects of a Construction contract is the ability to agree at the outset what damages will be paid by the contractor if they are late in delivering a project. These are known as liquated and ascertained damages, ‘LADs’ for short. They are common practice in JCT’s and most other forms of contract where construction activity will be carried out to a schedule or programme and where the customer needs reassurance that the works will be completed on time, so that they can then occupy the premises and make use of it for their own purposes.

But what happens if the contract allows for the customer to occupy the premises part-way through?

This was recently considered in the case of Echoworld–Ballymore Embassy Gardens Company Limited v Dobler UK Limited. In that matter the Claimant had taken partial possession of the premises prior to the practical completion of the entire project. The contract said the Claimant was entitled to £25,000 per week in LADs for delayed completion to the entire works, subject to a cap of 7% of the total contract price.

Importantly, the contract provided that if the Claimant took early possession of part of the premises at any time prior to practical completion of the whole of the works, that part of the works that possession was taken over would be deemed to have been practically complete. Often in such instances there are provisions for sectional completion where damages are apportioned, but not here. The Claimant took possession in April 2018, and practical completion of the works was certified on 20th December 2018. There followed the usual disputes about whether or not the LADs could be applied in the final account.

The Claimant issued proceedings seeking a determination from the Court as to whether the LADs clause were void or unenforceable, and if so was the Claimant entitled to claim uncapped general damages for the delays. £25,000.00 a week wasn’t enough to recompense them for the delay. The contractor argued that the Court had to consider whether or not i) the clause was sufficiently clear and certain, ii) whether or not it was a penalty, and iii) whether the cap on the LADs ceiling of 7% of the total contract value could still apply even if the LADs clause was unenforceable.

The Court found, as expected, that the LADs clause was reasonably clear and certain, the parties having agreed it in advance. That meant that because the contractor had failed to complete all of the works by the contractual completion date, it was exposed to the LADs at the full rate set out in the contract. The LADs clause didn’t get reduced in value simply because the employer had taken possession of parts of the site early. Was this a penalty?

The Court considered whether or not the appropriate test was passed, that being that if the clause was extravagant, exorbitant or unconscionable it would be a penalty. Again, without too much surprise the Court found it not to be a penalty. The parties had negotiated it in advance with professional legal advice, the customer had a legitimate interest in ensuring that the contractor completed the works by the completion date, the damages quantification would have been difficult without the clause, and neither party had suggested that the level of LADs was unreasonable or disproportionate. The LADs were therefore enforceable, in full.

The Court then considered whether or not, had it found the LADs to be unenforceable, the customer would have been entitled to claim general damages. What the Court was really considering was whether there was anything in the LADs clause that would have acted as a cap to those damages i.e the 7% of the total contract value. Surprisingly the Court found that an unenforceable LADs clause would still operate as a limitation clause in such circumstances, and so liability would be limited to 7% of the total contract value.

The moral of the story is that if the contract provides for liquated and ascertained damages, make sure that it does so properly. If you underestimate the level of the LADs clause as a customer, you may be left short. Even if the main parts of the clause are not enforceable, there could be a sting in the tail since a limitation on the extent of liability could still be binding.

For more information please contact Iain Cole iain.cole@battens.co.uk or call 01935 846456