Notices and Effect on Liquidated Damages

© Daniel Atkinson 2001 21 October 2001 (First Published in Building 23rd November 2001)

If the Employer delays the contractor in completing the works, then generally he is not entitled to deduct any liquidated damages for that delay. This is said to be based on the fundamental principal that a party cannot benefit from its own breach to the detriment of the injured party Alghussein Establishment -v- Eton College (1988) 1 WLR 587. It is often referred to as the "Prevention Principle" and the seminal case is Peak Construction Ltd -v- McKinney Foundations Ltd (1976) 1 BLR 111. Modern extension of time clauses are widely drafted to get round the Prevention Principle. They attempt to cover all possible omissions or acts or defaults by the Employer which would prevent the contractor completing on time. They provide a remedy for the Employer’s prevention and establish a new date from which the liquidated damages can be measured.

Modern construction contracts require the contractor to give notice of any event which may entitle him to an extension of time. The clauses are drafted as "condition precedent" so that if he does not give the notice then he is not entitled to an extension of time. The problem is that if the contractor does not give notice when it is condition precedent, the Employer appears to have a right to the benefit of the liquidated damages even though he is the cause of the delay, contrary to the Prevention Principle.

This conflict between the right to insist on notice and the Prevention Principle has been examined in two recent cases, one Australian and one Scottish. They come to different conclusions, but there is a suggested route that the law should take.

The first decision is the Australian case of Gaymark Investments Pty Ltd v Walter Construction Group [1999]. It was an appeal from the decision of an arbitrator that the Prevention Principle prevented the Employer from deducting liquidated damages, even though the contractor had failed to satisfy the notice requirements for extension of time. The notice requirements in this case were unusual. It required the contractor to overcome a threshold of "burden of proof".  The Contractor was required to demonstrate to the satisfaction of the supervisor that he had been delayed and that he had taken all proper and reasonable steps necessary and within its control to reduce or avoid the delay. Only then was the Contractor entitled to an extension of time.

It was held that the Prevention Principle presented a formidable barrier to the Employer’s claim for liquidated damages based on delays of its own making. The contract failed to provide for the situation where the Employer caused actual delays to the contractor achieving Practical Completion by the due date, coupled with a failure by the contractor to comply with the notice provisions. The arbitrator’s finding was upheld.

In the Scottish case of City Inn Ltd v Shepherd Construction Ltd [2001] the form of contract was JCT 1980. An additional clause 13.8.1 required the contractor to give notice within 10 days of the Architect’s Instruction if he considered it led to delay to completion. He was required not to carry out the instruction in that case unless he had given the notice. Procedures were set down which allowed for estimates to be provided. Crucially Clause 13.8.5 stated that the contractor was not entitled to extension of time if he failed to comply with any one of the provisions in Clause 13.8.1.

The contractor had not given the necessary notice, and in that respect was in breach of contract. It was recognised that notice was a condition precedent to an extension of time. It was held that the contractor’s failure to give the notice meant that the Employer retained the right to deduct liquidated damages that might have been taken away by the award of an extension of time. It appears to have been significant that Clause 13.8.1 did not impose an excessive burden on the contractor.

So how are these cases to be reconciled, if at all. It is necessary to look at those events which may entitle the contractor to an extension of time. There are three types:

1. Risk Events
2. Instructions for Extra Works
3. Employer’s defaults including breaches of contract

A risk event is a situation which has not been caused by the fault of either party, but by an event designated as at the risk of the Employer. If the contractor is required to give notice of the event before he is entitled to an extension of time, then the proper operation of the notice clause is that it triggers the transfer of risk.

This operation of a notice clause is seen in Humber Oils Terminal Trustees Ltd -v- Hersent Offshore Ltd, 20 BLR 22 (1981) which involved unforeseen physical conditions. The notice clause stated that the cost of all work done prior to the giving of effective notice was deemed to have been recovered in the rates and prices under the contract. It was common ground, it is suggested correctly, that the risk only passed to the Employer after the notice was given and before then remained with the Contractor. It was considered significant that the information required to be given in a notice was necessary to allow the Employer to make decisions which could be of crucial importance for the future implementation of the contract.

It is suggested that this approach of risk transfer is the correct interpretation of notice clauses for risk events, since the Prevention Principle does not apply in such situations.

In the case of notice clauses relating to extra works the Prevention Principle does apply. It is suggested that the important point is whether or not the extra works are intended to be carried out with or without notice from the contractor. In City Inn the notice clause required the contractor not to carry out the instruction if he gave notice. It could be argued in that case that the contractor’s failure to give notice prevented the Employer taking the anticipated steps to reduce the consequences of instruction.

In the case of notice clauses relating to breaches of contract by the Employer it is suggested that the Prevention Principle should always prevent the Employer deducting liquidated damages irrespective of the notice provisions.

So, how are the cases to be reconciled. It is suggested that the Prevention Principle should be wide enough to cover both the events of breach of contract by the Employer as well as instructions for extra works. It prevents the Employer deducting liquidated damages for delays of his own making. The effect of a contractor’s breach of contract in failing to give notice depends on the intended operation of the notice clause. If notice is intended to allow the Employer to reduce or avoid the consequences of the event, then the measure of damages is based on the reasonable steps that would have been taken given the opportunity. If notice is a condition precedent to extension of time for the event, then it is suggested the damages may be measured as the liquidated damages for the delay. It must be shown, however, that the delay would have been avoided or reduced if the notice had been given.

It is suggested that until the law is settled in this area, that notice and liquidated damages clauses should be drafted to give effect to both the Prevention Principle and the consequences of failure to give notice in the terms suggested.