We can all say that we have had our fair share of heated discussions about delay and EOT’s.
Whether you’re a small builder or a major civil contractor, liquidated damages, extension of time (EOT) and delay are always controversial topics.
Liquidated Damages, Penalty or Compensation?
Liquidated damages are back charged when there is a delay to the programme critical path for practical completion. Usually, the contract allows for a pre-estimated and agreed sum of money in the form of a fixed day rate for every day that delay occurs. The day rate can only be an estimate because it is agreed at the time of entering into a contract, for delays that may occur in the future.
As the rate for liquidated damages seek to estimate loss into the future, it is essential that the estimate for liquidated damages is not regarded as penalising a contractor but rather is a genuine estimate of compensation for the other parties’ loss at the time of contract, in the event of delay.
The 2016 High Court decision in Paciocco v Australia and New Zealand Banking Group Ltd  HCA 28, the Court found that to decide whether the rate for liquidated damages is a genuine pre-estimate of future loss and therefore not a penalty, the relevant question is whether the agreed sum is out of all proportion to the interests of the party seeking its payment. If the question is answered “yes” then it is a penalty and not enforceable. Of course, the question does not come without its own set of unanswered practical questions, which are asked by many contractors in the civil industry.
Prior to Paciocco, it was considered by some that a liquidated damages clause could only cover losses which were recoverable for a breach of contract. However, it is now clear that loss attributable to a party’s interests may include items of loss that could be suffered, even if they would be considered too remote to be recoverable by way of damages for breach of contract. For example, in a contract for a civil project, the Government, in addition to losses that it may suffer in the ordinary course of contract damages, has interest in protecting against losses caused by:
- additional costs incurred by the Government or the intended users or beneficiaries of the project;
- loss of, or delay in realising benefits for the community;
- lost productivity in the economy generally; and
- damage to reputation of Government.
Accordingly, when negotiating liquidated damages for your projects at tender, do not hesitate to query how the estimated rate for liquidated damages is calculated and what is included as potential loss for delay. This will provide you with a better understanding of the basis for the rate proposed and allow you to challenge it early in the negotiations to ensure that the figure is a true representation of the other party’s future loss in the event of delay. This is especially important when dealing with a government project that may have specific expectations, which attract project specific liabilities in the event of delay.
EOT and Delay Notices
Ensuring you comply with time limits for the provision of notices under a contract is a must when seeking to avoid the risk of losing your rights to claims such as EOTs.
A decision in a recent Western Australian Supreme Court case, reinforces the strict obligations on contractors to comply with the terms of a contract with respect to issuing notices under the contract.
The case involved a subcontract between a major contractor and their subcontractor on a civil project to upgrade and extend a wharf. The subcontractor made delay claims against the head contractor, however, it failed to issue notices of delay in accordance with the strict requirements of the subcontract. These clauses in the contract were a condition precedent to the subcontractor being able to make an EOT claim.
The Court accepted that the subcontractor was delayed by the head contractor and that the head contractor was made fully aware of those delays but the Court denied the claims on the basis that the subcontractor had not complied with the notice requirements under the subcontract.
Accordingly, the cardinal rule to take away is that regardless of how harsh the terms of a contract may be, it is essential that the terms of a contract are followed as the risk of loss for not doing so may be harsher. Simply proving that the other party was made aware of your claims is not sufficient, notification must accord strictly with the contract.
It is critical that you understand the contract and maintain adequate contract administration practices so that your notices are submitted on time and in accordance with the terms of the contract.
What to do now!
Having a specialist construction lawyer to review your contract at tender and assist you during contract administration is of value in order to avoid the common pitfalls which may be experienced later in the project.
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