Clifford Chance

Whilst not quite consigned to the dustbin of history, the phrase "genuine pre-estimate of loss" no longer needs to be uttered with the shrill insistence of past generations. In a landmark case [1], the Supreme Court held that what really matters is that the obligation to pay LDs does not impose a detriment on the Contractor "out of all proportion to any legitimate interest of the Employer". So a rate of LDs which was not ‘genuinely pre-estimated' will still be enforceable unless it is actually a penalty by that measure.

What does this mean in practice?

We can shelve concerns over the common practice of calculating LDs on an ongoing costs basis (including scheduled costs such as debt service which are not the result of the delay), rather than by referencing the lost revenue that would have covered those costs. A calculation based on costs is, by definition, unlikely to be penal in nature under the new test. There should also be greatly reduced concern over LD rates which are expressed as percentages of the contract price rather than in monetary figures (unless the rate chosen is actually penal).

Without exploring the many intricacies of concurrent delay, the question here is whether an English law contract can deny extensions of time for cases of concurrent delay. The concern was that contracts apportioning responsibility to the Contractor for cases of concurrent delay could fall foul of the infamous prevention principle (which, in short, would mean the loss of the delay LD remedy and in some cases no remedy at all for delay – more on this below). We now have a judgment [2] supporting the parties' right to make this bargain without risking their Delay LD remedy. It is only a first instance case but helpful nonetheless.

What does this mean in practice?

We can expect to see more contracts providing for situations of concurrent delay to be resolved without extensions of time. This is likely to spin off into debates as to the fairness of such risk allocation and whether it should be limited to cases of 'true' or 'full' concurrency.

For delay liquidated damages to be enforceable, there must be a clear obligation to complete by a date that is certain. This point has been reinforced in a recent judgment[3]. Here, the obligation was to use "fullest endeavours" to complete by the specified date, which the Court held was not an absolute obligation and therefore could not support the imposition of liquidated damages for a failure to complete by such date.

What does this mean in practice?

Employers need to be aware not to agree to water down obligations to which delay LDs are linked. Modifications to these obligations should be left to extension of time mechanisms and not to the completion obligation itself.

It is an absolute and standard principle of law in probably all legal jurisdictions that a party to a contract cannot enforce a remedy for the counter-party's default if it has caused that default to occur. This means that it is vital for common law-governed contracts to contain a clear mechanism to extend time for Employer impediments - its acts of prevention. If not, the Court will have no choice but to set time for completion "at large" – which means no delay LDs and potentially no delay damages remedy at all.

Whilst this principle seems straightforward, it can, in practice, be much more complex to identify a prevention problem hiding in the long grass of an extension of time clause. We reckon that as many as one-third of all construction contracts we review have the potential to fall foul of the rules on prevention, with the period after the target completion date has passed being particularly prone to issues. Sometimes this is down to aggressive attempts by Employers to appropriate the 'float', but more often than not it is just down to a lack of understanding of the application of common law rules in this arena. As this is the kind of mistake that can be extremely and unnecessarily costly for Employers, they must be extra careful not to be caught out.