Liquidated damages

An important pitfall to avoid

24/01/2017

One of the issues that often arises under a construction contract is the circumstances in which an Employer is able to deduct liquidated damages from a Contractor as a result of late completion of the Works.

The recent case of Octoesse LLP v Trak Special Projects Limited[1] ("Octoesse") is a useful reminder to check the terms of your contract and ensure that all relevant notices have been served in the correct way in order to preserve any rights to liquidated damages.

In Octoesse, the Contractor failed to complete the Works by the Date for Completion and a certificate of non-completion was duly issued by the Contract Administrator. The Works were subsequently certified as complete some months later. Following the Practical Completion Certificate, the Contractor submitted a claim for an extension of time which was partially granted by the Contractor Administrator. Importantly, in this case, no further certificate of non-completion was issued at that point.

The Final Certificate was issued for payment and prior to the final date for the Employer to make that payment, the Employer gave notice of their intention to deduct liquidated damaged from the sum stated in the Final Certificate. The liquidated damages were then subsequently deducted which was challenged by the Contractor.

The dispute, which went to adjudication prior to going to the courts, centred around the wording of clauses 2.22 and 2.23 of the JCT Intermediate Building Contract (IC 2011) ("the Contract").

Clause 2.22 of the Contract states as follows:

"If the Contractor fails to complete the Works or a Section by the relevant Completion Date, the Architect/Contract Administrator shall issue a certificate to that effect…".

The certificate required by clause 2.22 was duly issued by the Contract Administrator following non-completion of the Works in order to comply with this part of the clause.

However, the Contractor went on to submit an application for an extension of time following Practical Completion of the Works which was partially granted by the Contract Administrator. Clause 2.22 of the Contract goes on to say:

"…If an extension of time is made after the issue of such a certificate, the extension shall cancel that certificate and the Architect/ Contract Administrator shall where necessary issue a further certificate" (our emphasis).

In Octoesse, the Contract Administrator did not issue a further certificate of non-completion following the partial grant of the extension of time. This was an important failure as the wording of clause 2.22 makes it clear that the effect of having granted that extension of time is to cancel the certificate of non-completion previously issued.

The effect of this failure was to deny the Employer its ability to deduct liquidated damages from the sums otherwise due to the Contractor. Clause 2.23 of the Contract makes it clear that issuing a certificate of non-completion is a prerequisite to the Employer being able to serve a notice on the Contractor informing them of his intention to deduct or withhold liquidated damages. This clause says:

"Provided:

  1. the Architect/Contract Administrator has issued a certificate under clause 2.22; and
  2. the Employer has notified the Contractor before the date of the Final Certificate that he may require payment of, or deduct, liquidated damages…".

As the original certificate of non-completion had been cancelled by virtue of the subsequent extension of time and no further certificate of non-completion had been issued, the Employer had not complied with clause 2.22 of the Contract and was not entitled to deduct liquidated damages from the Contractor.

The Judge clarified that the reservation of the right to withhold or deduct liquidated damages in a notice validly served under clause 2.23 would be unaffected by there having been a further extension of time (insofar as the extension of time did not remove the Employer's entitlement to deduct liquidated damages from the Contactor). It was the failure to issue a further certificate of non-completion as required by clause 2.22 which was the downfall of the Employer in this case.

This case serves as an important reminder for Contract Administrators and Employers to fully understand the terms of its building contracts, to regularly check the terms of those contracts and to be aware that there are pitfalls that may deny Employer's their right to deduct liquidated damages if notices are not served in accordance with the contract.

This is particularly so towards the end of the contract, especially after the Final Certificate has been issued, as there are unlikely to be further payments falling due to the Contractor against which the Employer can deduct, or reserve its right to deduct, liquidated damages.

 

[1]               [2016] EWHC 3180 (TCC)

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