UK: Liquidated Damages And Termination

Last Updated: 15 August 2010
Article by Christopher Hill, Steve Abraham and Donald Warnock

In the following case the court had to consider whether an employer's right to liquidated and ascertained damages ended upon termination of the employment of the contractor under the contract.

Hall & Shivers v Van der Heiden No 2 [2010] EWHC 586 (TCC)

The employer entered into a JCT Minor Works Building Contract (With Contractor's Design) for "internal refurbishment and remodelling" of a domestic flat in London. The contract commencement date was 21 May 2007 and completion was scheduled for 22 September 2007. Liquidated damages for delay were specified as £700 per week.

The scheduled date for completion was not achieved and disputes arose between the parties which included the claim by the employer for liquidated damages for delay in completion of the works.

In January 2008 the contractor requested an extension of time, further payment and suspended the works. The architect awarded a six week extension of time to November 2007 but did not issue any further certificates for payment. The employer had paid all the sums which had been certified by the architect. (The employer had in fact been making interim payments in advance of the contractor's applications for payment the effect of which was that until December 2007 the payments to the contractor were in fact higher than the sums to which the contractor was entitled.)

In March 2008 the employer terminated the contractor's employment under the contract. The works were eventually completed by a replacement contractor in May 2008.

Practical completion: the principles

One of the issues before the court was the date of practical completion, and whether or not the contractor ever achieved practical completion of his works before suspending them in January 2008.

The court considered the principles for determining whether practical completion had been achieved:

  • Practical completion meant the completion of all the construction work that had to be done (Jarvis and Sons v Westminster Corp [1970] I WLR 637).
  • An architect had a discretion to certify practical completion where there were very minor items of work left incomplete on 'de minimis' principles: (HW Nevill (Sunblest) v William Press (1981) 20 BLR 78).
  • A practical completion certificate could be issued where there were latent defects but not where there were patent defects.

Practical completion: applying the principles

The court's view was that there was no doubt that the works were not practically complete in January 2008 because there were:

  • a series of patent defects which were the subject of repeated written notices and complaints from the architect and from the employer during December 2007 and January 2008 which the contractor failed to rectify;
  • a number of incomplete items which the contractor had failed to complete; and
  • several completed items off-site which had not been bought back to site.

In the court's view practical completion of the works was only achieved once the replacement contractor had completed the outstanding works in May 2008. Consequently the contractor was in delay from November 2007 and that delay extended beyond the period of suspension to May 2008, a delay of 29 weeks (the Period of Delay).

Liquidated damages and termination

The employer sought liquidated damages for the Period of Delay. However, the contractor argued that its liability to pay liquidated damages ceased when the contractor's employment under the contract was terminated in March 2008 and not when the works achieved practical completion.

Mr Justice Coulson rejected the contractor's argument "as a matter of principle" leaving the employer able to claim liquidated damages beyond termination of the employment of the contractor under the contract on the basis that:

(i) there was no provision in the contract to the effect that the liquidated damages ceased to be payable in such circumstances. In his view "any such term would reward [the contractor] for his own default"; and

(ii) a contractor who was in considerable delay and facing a notice of termination should not be liable for liquidated damages only until termination as this would reward the contractor for "sitting on his hands and failing to carry out the works ..." - that could not be a commonsense interpretation of the contract or indeed any other construction contract.

As a result the employer succeeded in its claim for liquidated damages beyond termination of the contractor's employment under the contract.

Editors' comments

The case concerned a JCT Minor Works contract which in common with other JCT standard forms contains a provision that one of the consequences on termination is that "any further payment or any release of Retention to the contractor" will cease. This provision suggests that the payments which cease would be those made by the employer to the contractor rather than payments made to the employer (such as liquidated damages). However, it should be noted that the contractor did not appear at trial and gave no evidence so no counter-argument was made to the court.

The termination provisions in the JCT standard form contracts also provide for the termination of the "employment of the contractor" rather than the termination of the contract itself. If the employment of the contractor is terminated (rather than the contract itself), the argument is that the contract and in particular any clauses providing for the consequences of termination, such as clauses providing for the continued use of plant and materials or assignment of contracts, remain alive.

However, Hudson in Building and Engineering Contracts (11 edition), a leading construction text, suggests that the distinction between terminating the contract and terminating the employment of the contractor is simply "poor and diffuse draftsmanship" (para 12-008), which stems from the fact that it took some time for it to be established in common law that contract repudiation still required certain contractual provisions, such as the dispute resolution clause, to survive the termination (Heyman v Darwins Ltd [1942] AC 356).

Hudson also suggests that unless the contract contains an express provision to the contrary, the position regarding liquidated damages and termination is as follows:

  • the employer is entitled to liquidated damages for delay up to the date of termination;
  • after the date of termination the employer's entitlement is to recover any additional damages for delay and the additional completion costs by way of general damages.

This is in line with the thinking that a contractor has no ability to affect the completion date after termination has taken place so it would not be appropriate to apply a liquidated damages clause to completion by a subsequent contractor (without express wording to this effect). Indeed the subsequent contractor could further delay the works.

The practical solution would be for contract drafters to include express provisions making it clear what would happen to the liquidated damages provisions in the event of termination.

View: Hall & Shivers v Van der Heiden [2010] EWHC 586 (TCC)

This article was first published in the Norton Rose Construction and infrastructure updater June 2010

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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