Contractual Dimensions in Construction

Penalty imposition A common belief is that time extension (EOT) provisions are for the benefit of the Contractor and liquidated damages (LD) for the benefit of the Employer. However, this belief is not only wrong but promotes the reverse of true intensions. LD is an early calculation of the expected loss under the contract whereas penal damages are to treat the Contractor in a punitive sense probably beyond the actual loss. Even if two parties genuinely and without coercion wish to consent to a contract which includes a penal clause, they are unable to, in strict legal terms, subject to however that in some cases, Courts uphold the application of contractual provisions. LD should be a genuine estimate of the likely loss provided the true intension is to persuade timely completion. If the intention is to counter slow progress, then there is a separate provision in the contract where the Engineer calls for a recovery plan that is technically feasible, because it is not that easy to reverse penalty. In essence, the decision in Dunlop Pneumatic case was that there must be a presumption that liquidated damages clauses must be valid and can not be a penalty that is not enforceable as a matter of public policy. Courts also contend that liquidated damages are to be treated as an “entire remedy” This means that the liquidated damages shall be treated as a comprehensive remedy for the breach to which it relates - for example delay. However, Penalty and LD has no difference in some countries where Employers impose penalty subject to a ceiling limit, without fear of being contested in Courts. Although the Contractor’s exposure to penalty starts only when he fails to achieve scheduled completion, there are notable exceptions. Levying penalty starts according to a schedule of eventualities qualified already in the contract. These may be for instance in a road project when the Contractor delayed in commencing some designated trench work or even a section of asphalt work. There are cases where penalty is applicable in delay in either commencement or in completion of almost all the individual activities, shown in the bar schedule. A delay due to submission of a traffic management plan would even be a case for penalty in addition to usual delay in completion of whole of works, to the extent where the Engineer has been given discretion to consider further penalty if he deems required. However, this discretion has no legal effect, so is a ‘dummy’ clause that is non-enforceable when the other eventualities meet the ceiling limit. Contracts with full of penalty events keep the Contractor in a very inflexible setting that restricts him in managing the project, definitely upsets the Contractor’s technical movements freely within the project and tilts the even risk apportionment in the contract. Any subsequent improvement in the progress to catch up delays is not a matter to waive off penalty, and in fact is a Contractor’s obligation under the clause, Rate of Progress. However, a request to reverse penalty already imposed on the contract can not be based on ‘good conduct’ which is immeasurable and is a pure subjective opinion as the Engineer on what truly happened on the project. But they are not reasons valid enough to reverse penalty as such. In fact, there is no discretion conferred on the Engineer under the contract to reconsider penalty even in cases where the Engineer deems desirable. There is no mechanism for penalty reversal, expressly or impliedly, given in the contract also. Where the Engineer issues a variation after the contract completion date but before practical completion, it is appropriate where resultant delays occur for an EOT to be granted. Such EOT will be calculated by extending the completion date by the net period of delay. In a court case involved Balfour Beatty Building Ltd , it was held that gross period up to the time when the varied work had been completed was not the correct measure of the EOT but the period of delay is to be added to the contract period or the extended contract period as the case may be while a variation issued during a period of culpable delay would not render time at large. This is fair by one way because it avoids excusing the Contractor from his own delays during the period under LD or penalty. However, where the contract stipulates that time is of essence, failure to meet the particular date is a fundamental breach of contract entitling the other party to treat the contract as repudiated and claim damages. Time is rarely of the essence in a construction contract because the effect of such a provision is that if the building is not completed on a certain date then the Employer does not want the building at all and will treat the contract as repudiated, which is not the reality. It is always up to the Contractor to justify his basis and quantum of entitlement with the contemporary records in support so that the Consultant shall revisit the entire issue and establish his verified final opinion on the net resultant impact on the scheduled completion in line with the contract principles after taking all the circumstances into detail consideration. It is illogical to consider payment on time-related preliminary items as it would not realistically give a ‘fair entitlement’ since the basis of reimbursement might change from case to case depending on the causes of delay and their impact. For instance, an initial delay in the commencement itself due to Employer’s fault or his request would shift the whole schedule towards a definitive period so that the Contractor shall be compensated on pro rata basis on time related preliminary activities, that were directly affected.