Failure to give notice costs dearly, no matter the cause

If a contractor fails to give notice that an instruction may cause a delay and entitle it to an extension of time, it can find itself liable for damages, even if the employer is the cause of that delay, warns Daniel Atkinson.

TIME is an important commodity in construction contracts. Delay imposes additional costs on the contractor and delayed completion is likely to cause loss to the employer. Modern forms of contract routinely make provision for liquidated damages in the event of delay to compensate the employer. But the amounts are usually insufficient to compensate for all the consequences of delayed completion.

Many contracts are started without fully completed designs.

Invariably the design is developed and modified during construction, with the result that the architect or engineer is likely to issue instructions modifying work or ordering additional work that may delay completion.

In order to safeguard the contractor against having to pay liquidated damages for delay caused by the employer, contracts usually allow the contractor an extension of time for delay due to such instructions.

The completion date, and hence the date from which liquidated damages can be deducted, is moved back. This legal principle is often referred to as the 'Prevention Principle', as it prevents the employer claiming damages for a delay it has caused itself.

Modern construction contracts require the contractor to give notice of any event that may entitle it to an extension of time.

The clauses are drafted as "condition precedent", so that, if the contractor does not give notice, it is not entitled to an extension of time. The clause can be extended to require the contractor to assess the risk of an instruction causing a delay before carrying it out. The architect can then make an informed decision whether to proceed with the instruction.

This sensible approach was adopted in the contract in the Scottish case of City Inn v Shepherd Construction. An additional clause (clause 13.8.1) required Shepherd, as the contractor, to give notice within 10 days of the architect's instruction if it considered that this would lead to a delay in completion.

Shepherd was also required not to carry out any instruction unless and until it had given the notice. Crucially, another clause (clause 13.8.5) stated Shepherd was not entitled to an extension of time if it failed to comply with the provisions in clause 13.8.1.

In other words, notice was a condition precedent to the right to an extension of time.

This meant that if Shepherd did not give notice, the employer would appear to benefit from the liquidated damages even though it was the cause of the delay, contrary to the Prevention Principle. That is exactly what happened. Shepherd had not given the necessary notice and found itself liable for liquidated damages for delayed completion.

In the Outer House, (broadly equivalent to the High Court) Shepherd argued that its failure to operate the procedures in Clause 13.8.1 was a breach of contract and that the imposition of liquidated damages that followed was a penalty and thus unenforceable. The law relating to penalties only applies to breaches of contract. If Shepherd succeeded on this argument then the whole mechanism for liquidated damages would fall.

The Outer House accepted that failure to follow the procedures was a breach of contract. It also recognised the material value of clause 13.8.1 to the employer. Shepherd's failure to comply with clause 13.8.1 deprived the architect of the opportunity to review the instruction in the light of the contractor's assessment. It was accepted that there was a causal connection between Shepherd's failure, the delay and the imposition of liquidated damages. It was decided that the liquidated damages clause was enforceable.

That analysis does not apply the full rigour of the logic of breach of contract to the contractor's failure to operate clause 13.8.1 and ignores the Prevention Principle. It has now been simplified by the subsequent decision of the Inner House (rather like the Appeal Court). But the result is still unsatisfactory, as it ignores the commercial reality of the situation, which is that the employer required the contractor to inform it if an instruction would cause a delay so it could plan and budget accordingly.

First, it was decided that it was a false analysis to describe Shepherd's failure to operate clause 13.8.1 as a breach of contract.

Shepherd had a right to give notice under the clause but might choose not to do so. By refusing to classify the failure as a breach of contract, the problem of the imposition of liquidated damages being a penalty was avoided. This approach ignores the material benefit to the employer of an obligation, as opposed to a right, to give notice.

Second, even if failure to follow the procedure in clause 13.8.1 was a breach of contract, that breach would not result in the payment of a penalty in the legal sense. The liquidated damages was not payable at that stage and might never be payable. It only gave rise to the possibility that liquidated damages would become due. The likelihood depended on the circumstances. If that liability did arise in due course, it was not as a consequence of the assumed breach of contract but as a result of the contractor's breach in failing to complete by the completion date.

The Inner House upheld the liquidated damages provisions on the basis of this simple analysis. If the contractor failed to give the notice that entitled it to an extension of time, then it suffered the consequences. The fact the delay was caused by the architect's instruction was not a factor that had to be considered.

This does not appear to be a satisfactory analysis as it does not allow the effect of the instructions and the gravity of the contractor's failure to be balanced.

But it provides a simple certainty. Failure to give a notice that is condition precedent to an extension of time for delay due to an instruction, will allow the employer to deduct liquidated damages. Contractors beware.

Key points

The 'Prevention Principle' prevents the employer claiming damages for a delay it has caused itself.

Modern construction contracts require the contractor to give notice of any event that may entitle it to an extension of time. This allows the architect to decide whether the instruction to vary the works is worth the risk of delay.

It goes against the Prevention Principle if a clause denies the contractor the right to an extension of time if it fails to give notice that an instruction will cause a delay.

Failure to give notice that an instruction will cause delay does not amount to breach of contract, but it will allow the employer to deduct liquidated damages.