Liquidated damages for delay

When a client engages a contractor to undertake construction works under a construction contract, it will usually require that contractor to complete such works by a target date. However, mindful of what can happen to the best laid plans, an astute client will often take steps to ensure it is compensated in the event the target date is missed, including, for example, by requiring the contractor to pay liquidated damages in the event of delay.

However, the contractor will usually only be liable for liquidated damages if the delay has been caused by a matter at the contractor's risk; if delays have been caused by an event considered to be at the risk of the client (for example, a variation to the works at the request of the client), the contractor will be entitled to an extension of time, thereby extending the period for completion of the works (and extinguishing any claim for liquidated damages for delay).

What happens if the contractor subcontracts some or all of the works to a subcontractor? Commonly, the terms of the subcontract will (or at least should) mirror the terms of the main contract. Therefore, should the project be in delay, the main contractor will face liquidated damages. If such delay was caused by the subcontractor then the main contractor will be entitled to claim liquidated damages from the subcontractor (thereby 'backing off' any claim for liquidated damages by the client). Equally, where the delay has been caused by the main contractor (or the client), the subcontractor will be entitled to an extension of time.

But what happens when a subcontractor applies for, and is entitled to, an extension of time for an event occurring after the contractual date for completion has already passed (ie. during a period in which the subcontractor is already in culpable delay)?

The Technology and Construction Court (TCC) has now answered just this question following its decision in the case of Carillion Construction Ltd v Woods Bagot Europe Ltd and others [2016] EWHC 905 (TCC) (28 April 2016).

 

Background

Carillion, the main contractor, was engaged to undertake works to The Rolls Building, being the home of the TCC in London. The building contract provided for the payment of liquidated damages in the event of delay.

Carillion, in turn, subcontracted the M&E works to EMCOR Engineering Services Ltd (the second defendant) under a JCT Domestic Subcontract DOM2 (1981).

Clause 12 of the sub-contract entitled Carillion to recover "any direct loss and/or expense suffered or incurred" as a result of EMCOR's failure to complete the sub-contract works on time.

Carillion's started proceedings against EMCOR (amongst others), for damages caused by the subcontractor's delay. Such damages included those levied by the Employer under the building contract.

EMCOR resisted the claim on the basis that:

  1. It was entitled to an extension of time; and
  2. In accordance with clause 11.3 of the subcontract, such an extension of time should run contiguously (i.e immediately following the pre-existing period for the subcontract works).

 

The parties' submissions

EMCOR pointed to the drafting of clause 11.3 of the subcontract which stated that where the contractor considers that delay has been caused by an event that is at the risk of the contractor (a "Relevant Event"), then the contractor is obliged to revise the date for completion of the works by "fixing such period or further revised periods…as the Contractor then estimates to be reasonable". EMCOR argued that clause 11.3 of the subcontract required Carillion to award the extension of time contiguously to the pre-existing period.

Carillion agreed that clause 11.3 of the subcontract entitled EMCOR to an extension of time in the event of a Relevant Event, but argued that such an extension of time need not be awarded directly (contiguously) to the end of the pre fixed period of works but could be (and should be in this instance) awarded for a discontinuous period. Carillion submitted this was the common sense interpretation of the wording at clause 11.3 of the subcontract and ensured the proper allocation of responsibility for delay. Carillion gave the following hypothetical example in support of its interpretation:

  • the period of completion of the subcontract works is 100 days;
  • at the end of this period, the subcontract works are not complete. Such delay has the effect of delaying the main contract works and causes loss to the main contractor;
  • by day 150 the subcontract works are still not complete. At this point, a major variation to the subcontract works is instructed entitling the subcontractor to an extension of time;
  • it takes the subcontractor 50 days to complete the variation.
  • If the 50 days is added to the original 100 days for completion of the works, then the subcontractor is not in delay until day 150.

Carillion submitted that such an approach was "artificial and does not reflect the reality of the impact of EMCOR's failure to complete by Day 100. Further, if by Day 150 some other sub-contractor's default is now driving the delay to completion of the main contract works, EMCOR may be absolved from all liability because they can say that their failure to complete by Day 150 has not caused loss and expense this is recoverable under clause 12."

Carillion went on to state that "if on the other hand, EMCOR is given a further period of 50 days between Day 150 and Day 200 to complete its works and is relieved from the consequences of its failure to complete for this further period, that properly reflects the loss and expense for which EMCOR is responsible. If the subcontract works were still incomplete by Day 200, EMCOR would again be in breach and liable for the loss and expense caused by its failure to complete by that date.”

 

The Decision

The Court accepted that there were scenarios in which awarding a contiguous extension of time might relieve the sub-contractor of liability with the effect that the subcontractor effectively escaped the consequences of its breach. Notwithstanding this, the Court determined that it was "clear that the natural meaning of clause 11.3" supported EMCOR's interpretation, and consequently directed that any award for an extension of time should run contiguously from the end of the existing period for completion.

 

Conclusion

The Court's decision confirms that, where a subcontractor is entitled to an extension of time, such an extension should be granted contiguously, even in circumstances where the same subcontractor is already in culpable delay. While this decision arguably reflects the generally held view, subcontractors will no doubt be relieved that there is now judicial authority for such an approach.

Moving forward, contractors will need to be alive to the possibility of a subcontractor escaping or limiting its liability for delay in the event an entitlement to an extension of time arises after the date for completion has already passed. Contractors may wish to consider whether special drafting is needed in order to deal with such an eventuality.

The case is also a salutary reminder that the Courts will be slow to depart from the natural meaning of the words within a contract, even if such words appeared at odds with commercial common sense