Out-Law / Your Daily Need-To-Know
Most contracts for construction works will include an extension of time mechanism, whereby the contractor will be entitled to an extension of time to the agreed completion date – the date by which the works must be completed – in circumstances where there are delays to a project which are not the contractor’s fault or for which the employer has taken the risk.
As well as an entitlement to time, the contractor may also be entitled to money, to reimburse it for any losses which it has incurred as a result of the delays. For more information on this, see our guide to prolongation costs.
The inclusion of an extension of time mechanism in contracts for construction works is important. Without such a provision, in the event the works are delayed due to a matter which is not the contractor’s fault, then time is said to be “at large”, and the contractor’s obligation is to complete the works within a reasonable time.
What are liquidated damages?
Liquidated damages are an agreed fixed sum that the employer in a contract for construction works can recover in the event there is a delay in completing the work which is the contractor’s fault or for which the contractor has taken the risk. An employer is entitled to recover liquidated damages in the agreed amount without having to prove the loss that has been suffered.
If the contractor is awarded an extension of time, it means that the contractor is entitled to complete its works within a certain period of time after the original completion date without the employer being able to claim liquidated damages for that period.
An extension of time mechanism in a construction contract is there to protect both the employer and the contractor in a construction contract:
- for the contractor, the mechanism ensures that any exposure to liquidated damages is limited and where time is extended due to employer delay or employer risk, it allows the contractor to claim time related costs; and
- for the employer, the mechanism preserves the contractual completion date and also allows the employer to claim liquidated damages where there is a delay to the completion date which is the contractor’s fault or risk.
Extensions of time under the standard form contracts
Under JCT contracts, events entitling the contractor to an extension of time are known as “relevant events” and events entitling the contractor to loss and expense are known as “relevant matters”. Under NEC contracts, events entitling the contractor to both time and money are known as “compensation events”. During pre-contract negotiations, the parties will usually decide which events to include in the contract.
Other events are “neutral” events, meaning that neither party is at fault – therefore, where those events arise, the contractor will be entitled to time but not money. Examples of neutral events are adverse weather conditions, force majeure events and terrorism.
Contractual procedures for making an extension of time claim
It is important that when making an extension of time claim, the exact procedure prescribed by the contract is followed. The contractual requirements may include the following:
- making the claim to a specified person: for instance, under JCT contracts, the contract requires that any claim for time and/or money is made to the architect or contract administrator, whereas under NEC contracts, any claim should be made to the project manager;
- providing early/advance notice: under some contracts, it is a requirement to provide notice as soon as it becomes apparent that something might cause delay to the completion date or additional costs;
- giving notice: notice is usually required to be given as soon as possible, or there may be a requirement for it to be given within a certain timeframe. The requirement to give notice of the delay may also be a condition precedent to an extension of time, meaning that the contractor will lose its entitlement to an extension of time if it does not give that notice; and
- providing relevant information/substantiation for your claim: it is important to give enough information about the event and the associated delay so that the contract administrator/project manager can assess the claim properly.
Concurrent delay
Where the contractor seeks an extension of time for a period of delay due to an event for which it is not responsible, but there is a competing delay event for which it is responsible, the contractor will be entitled to an extension of time for the delay event that is not its responsibility but will not be entitled to the associated loss and expense. For more information, see our guide to concurrent delay in UK construction projects.
The law on liquidated damages
Historically, liquidated damages had to be a genuine pre-estimate of loss. If liquidated damages were disproportionate or excessive in comparison to the loss actually suffered by the employer, there was a risk that they could be deemed to be a penalty and would be irrecoverable, on the basis that the liquidated damages clause could not be enforced. That said, it was rare for the courts to find that a liquidated damages provision was a penalty.
More recently, the UK Supreme Court considered the law on penalty clauses in the cases of Cavendish Square Holding v El Makdessi and ParkingEye v Beavis, which were heard together, and held that the fact that a clause is not a genuine pre-estimate of loss does not necessarily mean that the clause will be a penalty. Instead, a liquidated damages clause will generally be enforceable, as long as it is protecting a commercial interest.
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