Construction — Building contract — Liquidated and ascertained damages (LADs) — Penalty — Delay — Contract providing for sectional completion of works — First section of work delayed — Employer granting time extension for part of delay but deducting LADs in respect of remainder — Knock-on effect on later sections — Whether contractor entitled to time extension for entire delay to later sections regardless of how delay arising under first section — Whether “cascading” liability for LADs for later sections constituting penalty
The claimant engaged the defendant to construct four retail units under a building contract in the JCT standard form (1998 ed) (2003 revision). The contract was amended to provide for sectional completion and contained further modifications. The various sections of the works, with dates for completion and possession, were set out in a separate document that also stated an amount of liquidated and ascertained damages (LADs) payable per week in the event of delays.
The first section was delayed by eight weeks. The claimant’s architect granted the defendant a four-week time extension, but it indicated that the remaining four weeks constituted culpable delay attributable to the defendant. LADs of £48,000 were deducted in respect of that delay, which had consequences for the remaining four sections. Although the architect granted a similar four-week extension of time in respect of those sections, that left a further period of delay of up to four weeks on each, in respect of which no extension was given.
The defendant raised various arguments, namely: (i) the sectional completion schedule was void for uncertainty because it contained no contractual provision addressing the effect of delayed completion upon the remaining sections of the works; (ii) since possession on the later sections had been delayed by eight weeks in total, it was entitled to a time extension of that length in respect of those sections, regardless of the circumstances in which that delay had arisen under phase 1; and (iii) the LADs constituted a penalty because the defendant had been repeatedly penalised for the same delay in a “cascade” effect by deductions across all sections of the work. The parties sought a court ruling on those issues by a claim under CPR 8, with a view to referring the remaining time and money claims for adjudication thereafter.
Held: Declaratory relief was granted in favour of the claimant. The contract was workable and no question of any penalty arose. The dates “of” completion referred to in the sectional completion schedule corresponded to the dates “for” completion referred to in the contract and identified the dates upon which the defendant was obliged to complete each section, subject to any time extension that might be granted. A delay on the first section would inevitably result in a late start on work on subsequent sections. The parties had intended that any extension of time granted to the defendant on the first section would follow through to the subsequent sections, and that any period of culpable delay under the first section would likewise give rise to a similar period of culpable delay, and therefore liability for LADs, on those subsequent sections. That was fair and appropriate and had the effect of attributing the delay, and the loss caused thereby, to the party responsible for it. The fact that the amount of LADs varied from one section to another to reflect the different work involved in each section, and the different losses that would flow if one particular section were delayed, strongly supported the proposition that those sums did not represent a penalty but were instead a genuine pre-estimate of the specific loss that would be suffered in the event that the section in question were delayed. If LADs were not recoverable in that manner, the defendant would be able to take advantage if its own wrong, contrary to the proper operation of the contract. Moreover, the defendant’s contentions were contrary to other provisions in the contract as modified by the parties and prohibiting any extension of time for delays caused by the negligence, breach of duty, omission or default of the contractor.
The following cases are referred to in this report.
Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] EWHC 426 (TCC); [2008] 2 All ER (Comm) 493; [2008] 1 Lloyd’s Rep 608
Bramall & Ogden Ltd v Sheffield City Council (1983) 29 BLR 73
Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79
Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 215 EG 1259; 1 BLR 111; 69 LGR 1, CA
Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 61 BLR 41; (1993) 9 Const LJ 202, PC
This was the hearing of a claim by the claimant, Liberty Mercian Ltd, under CPR 8 for declaratory relief against the defendant, Dean & Dyball Construction Ltd, as to the meaning and effect of a building contract.
Simon Lofthouse QC (instructed by Morgan Laroche, of Swansea) appeared for the claimant; Simon Henderson (instructed by Clarke Willmott, of Bristol) represented the defendant.
Giving judgment, Coulson J said:
A. Introduction
[1] By a claim form issued under CPR 8, the claimant seeks declarations as to the proper construction of the building contract into which it entered with the defendant. The construction issues centre upon the sectional completion agreement and the accompanying schedule: was it workable and/or did it give rise to a penalty?
[2] As a result of the diligence of counsel, the trial of these issues on 22 October 2008 took less than half-a-day. At the end of the hearing, I indicated to the parties my conclusions on certain matters, and I promised to provide a written judgment dealing with all of the issues as soon as possible. This is that judgment.
B. Contract
[3] The claimant engaged the defendant to carry out and complete the construction of four new retail units at Parc Avenue, Aberystwyth, South Wales. Unit A was to be a new store for Somerfield, which was |page:2| trading from another building on the site. It is not, I think, in dispute that an integral feature of the proposed project was the phased release of the site. Unit A was to be completed first, to allow Somerfield to carry out its fit-out works. That would free up other parts of the site, which were occupied by the old Somerfield store and associated car parking. Thus, because Somerfield wanted to continue to trade from the old store until the new building was ready for fitting out, phased possession of the various parts of the site was always going to be necessary.
[4] The contract incorporated the JCT standard form of building contract (1998 ed) 2003 revision. It was dated 15 August 2005 and incorporated the amendments required by the parties’ sectional completion agreement. There were also a number of “home-made” amendments to the JCT terms and conditions, entitled “Modifications”.
[5] In the appendix to the contract, against the words “Date for completion of section”, the parties wrote “See attached sectional completion details”. This was a separate document entitled “Details of the Sectional Completion Arrangements”. That document provided as follows:
Details of the sectional completion arrangements
|
Section no |
Phase title |
Content (refer to the per week possession completion accompanying text) |
LADs per week |
Date of possession |
Date of completion |
|
1 |
1A |
Completion of new retain units A,B, C and D to stage to enable access for the tenant’s fit-out (but this is not deemed to be practical completion (pc)) |
£12,000 |
6 June 05 |
10 Feb 06 |
|
2 |
1B |
Completion of remaining works to s1 and completion of external works and car park providing the initial 87 spaces, to a stage of pc |
£1,500 in addition to the above |
On completion of s1, phase 1A to the required stage |
7 April 06 |
|
3 |
1C |
To complete the extended car park of 195 spaces |
£2,000 |
On completion of s2 phase 1B to be required stage |
5 May 06 |
|
4 |
2A |
Completion to refurbished and extended existing retail unit to a stage enabling access for tenant’s fit-out (but this is not deemed to be pc) |
£7,000 |
After pc of s3, phase 1C |
3 Nov 06 |
|
5 |
2B |
Completion of remaining works to s4 and completion of external works, all to a stage of pc |
£1,000 in addition to the above |
Date of possession as s4, phase 2A |
3 Nov 06 |
Notes
Section 2 cannot achieve practical completion until 8 weeks after section 1 achieves practical completion.
[6] The same document was also identified in the appendix as providing the rate or rates of liquidated and ascertained damages.
[7] I should make brief mention of one or two of the other clauses of the contract. Clause 2.2.1 provided that nothing within the specification and similar documents should override or modify the application or interpretation of the articles of agreement and the conditions. Clauses 24 and 25 were concerned with damages for non-completion and extensions of time. Those clauses were amended to reflect the sectional completion agreement. Among the relevant events that might trigger an extension of time were clauses 25.4.12 (failure by the claimant “to give in due time ingress to or egress from the site of the works or any part thereof through or [over] any land, buildings, way or passage adjoining or connected with this site and in the possession and control” of the claimant), and clause 25.4.13, which was concerned with the deferment by the claimant of giving possession of the site or parts of the site. Clause 23.1.2 allowed the claimant to defer the giving of possession of the site or part of the site for a period not exceeding six weeks.
[8] The specification included a variety of separate documents, including the lengthy document containing a large number of modifications to the JCT standard form. This included a new clause 25.3.4.3, which provided as follows:
Save where clause 24.5.3 applies, the contractor shall not in any event be entitled to an extension of time to the extent that the delay in the progress of the Works is caused to by any negligence, breach of statutory duty, omission or default of the contractor, his servants or agents or of any person employed or engaged upon or in connection with the Works or any part thereof, his servants or agents other than the employer or a tenant or any person employed or engaged by any of them.
C. Dispute
[9] Section 1 was delayed by a period of eight weeks. The defendant sought an extension of time in respect of that period. The claimant’s architect granted an extension of time of four weeks and indicated that there was therefore a period of culpable delay of four weeks attributable to the defendant on section 1. Liquidated damages in the sum of £48,000 were deducted in consequence of this culpable delay.
[10] The disputes between the parties arose as a result of the knock-on consequences of the delay on section 1 and sections 2 to 5. The architect granted extensions of time of four weeks in respect of each of sections 2 to 5 on the basis that the four week non-culpable delay to section 1 had caused a similar delay on sections 2 to 5, and that this was a delay for which the defendant was entitled to an extension of time under the contract. That left a period of delay of up to four weeks on each of sections 2 to 5 (depending upon the delay to completion of each section caused by the four-week delay in possession) in respect of which the architect did not award an extension of time. Thus, the four-week culpable delay on section 1 was not the subject of any extension of time under sections 2 to 5. The defendant maintained that because possession on sections 2 to 5 had been delayed by eight weeks, it was entitled to an extension of time of eight weeks in respect of each of sections 2 to 5 regardless of the circumstances in which that delay had arisen under section 1.
[11] On 14 July 2008, the solicitor acting for the defendant wrote to the claimant, seeking to refer to adjudication the issues on the contract. It identified those issues as follows:
(a) The sectional completion schedule was void for uncertainty because there was no provision in the contract that addressed the effect of delayed completion upon the remaining sections of the works.
(b) The sectional completion schedule was to be disregarded and time was to be regarded as being at large because the schedule failed to identify the date for completion in respect of each section, and instead referred to the date of completion, which was not a term defined in the contract.
(c) The architect had been wrong to grant an extension of time of only four weeks in respect of sections 2 to 5. Since the date of possession for each of those sections was dependent upon practical completion of a preceding section, the defendant was entitled to a full extension of time of eight weeks on each subsequent section.
(d) The liquidated damages constituted a penalty because the defendant was repeatedly penalised for the same delay by the deduction of the liquidated damages in respect of each section and/or because the delay on section 1 was then the subject of liquidated damages in respect of the remaining sections. This became known as the “cascade” argument.
[12] The parties agreed that these contractual issues should be the subject of a CPR 8 claim so that the TCC could rule on them. |page:3| Thereafter, on the basis of that ruling, the parties could then refer the outstanding time and money claims to the adjudicator.
D. Law
[13] The courts have always been wary of allowing one party to a contract to avoid the consequences of a liquidated damages provision freely entered into. In Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1915] AC 79, the House of Lords held that where a single sum was agreed to be paid by way of liquidated damages on the breach of a number of stipulations of varying importance and the damage was the same in kind for every possible breach, and was incapable of being precisely ascertained, the stipulated sum, provided that it was a fair pre-estimate of the damage and not unconscionable, would be regarded as liquidated damages and not as a penalty.
[14] In more recent years, arguments as to whether the sum in question was or might be a penalty have often turned on the clumsy drafting of the contract in question that, so it was argued, could give rise to sums that would not be a genuine pre-estimate of loss. An example of this “mathematical” approach in a building case, where the court declined to construe the provisions as a penalty, was Philips Hong Kong Ltd v Attorney-General of Hong Kong (1993) 61 BLR 41.
[15] However, there are building cases in which that contention has been successful. In Bramall & Ogden Ltd v Sheffield City Council (1983) 29 BLR 73, HH Judge Hawser QC held that the contractual arrangement was a penalty because the sums payable by way of liquidated damages could substantially exceed the actual loss suffered. The difficulty in Bramal & Odgen was that the contract did not provide for sectional completion, although that was what was happening on the ground. As a result, because the contract merely provided that damages might be recoverable at the rate of £20 per week for each dwelling, there was a risk that liquidated damages could be levied in respect of properties that had already been completed and handed over. The learned editors of the Building Law Reports comment that this was a rather strict construction of the contract provisions. It led directly to the amendments to the JCT forms that expressly allowed for sectional completion.
[16] An argument that a liquidated damages provision was, in reality, a penalty arose very recently in the TCC. In Braes of Doune Wind Farm (Scotland) Ltd v Alfred McAlpine Business Services Ltd [2008] EWHC 426 (TCC)*, Akenhead J was dealing with an appeal from an arbitrator who had found that the provisions of the contract were not capable of generating with certainty liquidated damages flowing from an identified breach by the contractor, and that the relevant clause should not therefore be enforced. Akenhead J initially thought that it was at least arguable that the arbitrator was obviously wrong because, as he observed, it was unusual for liquidated damages clauses freely agreed by the parties to be regarded as being unenforceable. However, having worked his way through the contractual provisions, the learned judge concluded that not only was the arbitrator not obviously wrong but that his decision was ultimately right. The problem in that case was that because of how it was drafted, the liquidated damages clause could well impose a liquidated damages liability on the contractor in respect of delays to individual wind turbines that were caused by another contractor.
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* Editor’s note: Reported at [2008] 2 All ER (Comm) 493
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[17] Of course, another way in which it can sometimes be argued that the liquidated damages provisions constitute a penalty is the situation where the employer has prevented completion and could be said to be seeking to take advantage of that wrong by levying liquidated damages in respect of the delay. It was the proliferation of such arguments that gave rise to extension of time provisions in the first place, in order to ensure that the contractor was not penalised for delays that were not its responsibility, but that an employer could be compensated by way of liquidated damages for those delays for which the contractor did bear the risk under the contract. The decision of the Court of Appeal in Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 1 BLR 111* is an example of a case in which the liquidated damages provision was not found to be operable because the particular extension of time mechanism under consideration there did not allow a proper extension of time to be granted in respect of delays for which the employer was to blame.
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* Editor’s note: Also reported at (1970 215 EG 1259
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[18] With those principles in mind, I turn to address the particular issues that arise in the present case.
E. Dates of/for completion
[19] I shall deal first with the argument that the sectional completion agreement was unenforceable and that time was therefore at large: see the issue identified in [11(b)] above. As Mr Simon Henderson fairly accepted, this is really a technical point. The sectional completion schedule (see [5] above) refers to five dates of completion, which is not an expression identified in the contract. The contract, of course, refers to dates for completion. Mr Henderson submitted that, although the date for completion was the anticipated date upon which each of the sections would be completed, the date of completion was undefined and therefore unclear. He suggested that the date of completion might be the actual date of completion, whether that was the anticipated date or a later date.
[20] As I indicated at the conclusion of the hearing, I do not believe that there is anything in this point. I must construe this contract in a common-sense and purposive way. I do not believe that the ordinary reader would have any difficulty in concluding that the dates of completion in the sectional completion schedule were precisely the same as the dates for completion referred to in the contract. Furthermore, those dates must be the anticipated dates upon which the parties were agreeing that the works would be completed because, at the time that the contract was made, no other dates could be relevant. The dates could be the subject only of a contractual promise; they could not be a matter of fact, because they had not yet occurred.
[21] Accordingly, I do not consider that this wording gives rise to any difficulty in the operation of the sectional completion agreement or the schedule. The five dates identified there were the dates upon which the defendant promised (and was obliged) to complete each of those sections. Each of those dates was, of course, capable of being extended pursuant to clause 25.
F. Penalty
[22] Mr Henderson helpfully illustrated his next argument (the point identified in [11(d)] above) by reference to the facts. He took as his example the four weeks’ culpable delay on section 1. For that delay, liquidated damages of £48,000 were deducted. However, because, on the architect’s interpretation of the contract, the four weeks’ delay on section 1 had been “cascaded” down through sections 2, 3, 4 and 5, further liquidated damages, amounting to £38,000-odd, had also been deducted in respect of those subsequent sections. Mr Henderson submitted that, in this way, the liquidated damages had become a penalty and were therefore unenforceable.
[23] Attractively though this point was argued, I do not accept Mr Henderson’s submission. It seems to me that it shies away from the critical feature of this contract, namely that the building works were always going to be carried out sequentially, and that the work on one section could not start until the work on the previous section had reached practical completion or (in certain instances) the stage of completion identified in the sectional completion schedule. It is plain from that schedule, and from the sectional completion agreement as a whole, that both sides were aware that a culpable delay of four weeks on section 1 would automatically mean that work on sections 2, 3, 4 and 5 would start four weeks late.
[24] I accept Mr Henderson’s submission that the contract does not say in express terms that a culpable delay under section 1 would give rise to a culpable delay (and, therefore, the deduction of liquidated damages) on sections 2, 3, 4 and 5. That is the issue identified in [11(a)] above. However, I am satisfied that, when construing the contract as a |page:4| whole, that is what the parties intended to achieve. I consider that this is the only sensible construction of the sectional completion agreement and the schedule in [5] above, and the only construction that gives effect to the words used. What is more, such a result cannot be regarded as unfair. On the contrary, if the contractor is in culpable delay for four weeks in respect of section 1, which inevitably means that section 2 is also going to start four weeks late, so that the contractor’s default has caused that delay to section 2, it should therefore be liable for the liquidated damages that flow in consequence.
[25] I should make one further point on the schedule. I consider that Mr Simon Lofthouse QC was right to point out that the amount of liquidated damages varied from one section to another to reflect the different work involved in each section and the different losses that would flow if one particular section was delayed. That is strong support for the proposition that these sums do not represent a penalty but are instead a genuine pre-estimate of the specific loss that would be suffered in the event that the particular section in question was delayed.
[26] In the light of those views, it is perhaps unnecessary for me to go on to consider in detail Mr Lofthouse’s alternative arguments, to the effect that any other result would mean that the defendant was seeking to take advantage of its own wrong and/or that the defendant’s argument was contrary to clause 25.3.4.3: see [8] above. However, I should say that, in my judgment, both submissions are right, for the reasons outlined briefly below.
[27] I deal with the argument in respect of clause 25.3.4.3 first. I cannot see any reason for finding that clause 25.3.4.3 was not part of the contract, since it was one of the expressly agreed modifications to that contract. The fact that it was physically included within the specification document was an administrative matter, and nothing more. I consider that the modifications themselves formed part of the agreed terms and conditions and were therefore not caught by the hierarchy provisions of clause 2.2.1. In any event, I am unaware of anything within the contract terms and conditions that was altered or modified by the new clause 25.3.4.3. It was an additional provision, no more and no less. In truth, it did no more than make express what is often implied into contracts of this sort. The term was therefore part of the contract and provides another reason why the defendant’s argument cannot succeed.
[28] Second, I conclude that if the liquidated damages were not recoverable in the way in which I have explained, the defendant would be taking advantage of its own default: it would be starting section 2, say, four weeks late because of its own default, and yet it would be seeking to be excused from paying liquidated damages for that period. That is contrary to the proper operation of the contract.
[29] For all those reasons, I conclude that the sectional completion agreement was not void for uncertainty and the liquidated damages set out in the schedule did not amount to a penalty.
G. Proper operation of the sectional completion agreement
[30] As an alternative argument, Mr Henderson maintained, on behalf of the defendant, that the dates of possession for sections 2 to 5 were the actual dates for possession and, to the extent that those had been delayed, the defendant was entitled to an extension of time for the period of that delay. This was the point identified in [11(c)] above. Mr Henderson relied upon relevant event 25.4.12 (about which I am doubtful, given that it is very specific and refers to ingress or egress from adjoining land) and clause 25.4.13, dealing with the deferment in giving possession.
[31] As I have already indicated in [22] to [29] above, the difficulty with this argument is not the date of possession, which is a matter of historical fact, but the correct approach to the date of/for completion, and the possible extension to those dates. As Mr Lofthouse correctly noted, extensions of time and liquidated damages concern completion dates, not dates for possession. In essence, therefore, the defendant is here seeking a full extension of time for the deferred possession. However, since the deferred possession in respect of sections 2, 3, 4 and 5 arose only because of the four-week culpable delay on the part of the defendant in respect of section 1, it would be a nonsense to reward the defendant for that four-week delay by giving it a full extension of time for it on the subsequent sections.
[32] I repeat what I have said above as to the way in which the contract was intended to operate. I am in no doubt that the parties had intended that any extension of time granted to the defendant on section 1 would follow through to the subsequent sections; that was fair and appropriate and in accordance with the contract provisions. Similarly, I am in no doubt that the parties had intended that any period of culpable delay on section 1 would give rise to a similar period of culpable delay (and liability for liquidated damages) under sections 2 to 5; that, too, was also fair and appropriate. It has the effect of attributing the delay (and the loss caused thereby) to the party responsible for it.
H. Conclusions
[33] For all those reasons, I have concluded that the contract was entirely workable as it was. There is no question of there being any penalty. I have been through the declarations sought by the claimant in para 15 of its CPR 8 claim form document. It seems to me that, in the light of my conclusions, I ought to grant the claimant the declarations there set out. I would ask the parties to agree the form of order consequential upon this judgment.
Declaratory relief granted in favour of the claimant.
