It happens every day.  Contractor falls behind on a project.  Completion date passes.  Employer is chomping at the bit to get into their shiny new building.  Liquidated damages are racking up.  The attractive solution for both parties is for the contractor to grant the employer partial possession over the premises.  Employer gets to start using their new canteen and meeting rooms.  Contractor takes the sting out of liquidated damages.  Everyone is a winner… Right?  Well, that depends on the terms of the contract between the parties which are often overlooked on the assumption that nobody appears to be losing.

The primary risk in this scenario is with the employer.  Unless the contract has express and workable mechanisms providing for partial possession by the employer before completion of the works, or sectional completion, then getting into the new premises earlier than expected could have a significant disadvantage in at least one respect.  Liquidated damages and partial possession or sectional completion will not work together at all unless the contract terms specifically provide a mechanism for partial liquidated damages.

In respect of sectional completion, a separate figure for liquidated damages should be assessed in respect of each identifiable section, and the figures in question should of course be a genuine pre-estimate of loss, which is not disproportionate to the legitimate interest of the employer.  The parties to the contract should also agree whether culpable delay by the contractor in one section will be taken into account or disregarded when considering delay in subsequent sections.  It is possible for such provisions to provide that the delay will “cascade” down and trigger liquidated damages in later sections.

It is the same for partial possession.  The liquidated damages clause should provide that, where the contractor grants possession to some of the premises before completion of the works, that the liquidated damages figure is adjusted in some way to take account of that part of the premises which is no longer within the contractor’s control.

Many standard form contracts provide adequate mechanisms for carving up liquidated damages in the case of partial possession or sectional completion.  But there are some standard form contracts that do not.  For example, the JCT Minor Works Building Contract 2011 does not provide for partial possession or sectional completion, likely because this form of contract is usually only be use for relatively minor works which will in effect be completed in one go and will not be divided.

So, what if a contract does not make adequate provision but yet the contractor grants partial possession to an employer before completion of the works?

Well, there are two main consequences:

• Either the liquidated damages clause will fail for uncertainty.
• Alternatively, the figure agreed between the parties at the outset may be construed as a penalty and therefore unenforceable.

Why would such a clause fail for uncertainty?  In the scenario outlined above, had the parties only agreed a liquidated damages amount of say £10,000 per week in respect of the whole of the works, in the absence of any express mechanism to apportion this, it would be impossible to assess what liquidated damages would be applicable to the remaining premises within the contractor’s control that were subject to ongoing delay.

Likewise for the parts returned to the employer, the contract is devoid of any assessment of what level of liquidated damages would be attributable to that part of the premises.  The courts will not make any assumptions that say for example if 20 per cent of the premises were returned to the employer, that 20 per cent of the overall liquidated damages figure rate should be applied.  That may not in all circumstances be a reasonable or appropriate way to apportion liquidated damages.  The courts will only imply extra terms into a contract where it is necessary to do so in order to allow the contract to function.  Just because something might be sensible or reasonable does not make it necessary.

With regard to the clause being a penalty, if the sum of £10,000 is attributable to the whole of the works and 20 per cent of the premises is returned to the employer after a short period of delay giving rise to a claim for liquidated damages, applying the rate of £10,000 per week is or would be clearly a penalty because that rate reflects the genuine pre-estimate of loss applicable to delay of the whole of the works and the whole of the building.

So where does that leave the parties?  In effect it results in the liquidated damages clause being unenforceable.  The employer will not be able to claim liquidated damages in respect of the part of the premises returned to them, and the same issue applies to the remainder of the premises which will be handed over at practical completion.

The contractor in effect is off the hook and does not have to pay liquidated damages for any part of the delay which they caused.

There may be the option of the employer seeking standard, common law damages for actual loss suffered as a result of the delay, which is entirely possible if a loss was suffered.  However, liquidated damages clauses in many standard form contracts in effect amount to an exclusive remedy for the breach covered by them.  An exclusive remedy is something which the parties agree in advance that will be the only remedy if the breach relating to the remedy happens, to the exclusion of any other remedy, including standard damages.  Having liquidated damages for delayed completion as an exclusive remedy is common, and in that scenario if liquidated damages are unenforceable then the employer will have completely lost the right to sue for any damages whatsoever.

Take away points:

• Where standard form contracts are being used, carefully considered which one to use at the outset.
• Think about whether partial possession or early practical completion of part of the works will or may take place.
• Ensure that the contract adequately provides for partial possession or early practical completion of part of the works.
• If you are already in contract without adequate provision, it will be necessary for the parties and their advisors to determine the best thing to do, thinking through the legal consequences, before taking or granting partial possession.

If you would like to discuss these issues in more detail, please contact Desmond Carr at desmond.carr@tughans.com.

 

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.