I work as a contracts manager for a main contractor. Back in January 2016, we started work on the refurbishment of an office block in Birmingham. It was nothing too complex, and we were supposed to finish in December 2016.
However, delays were incurred during construction, resulting in the eventual completion being at the end of March 2017 – approximately 13 weeks late. Most of the delays were down to us (let down by a couple of sub-contractors), although part of the delay was the client’s fault.
At a meeting towards the back end of 2016, I approached the client and stated that we would not make a claim for an extension of time with loss and expense, providing the client would waiver its claim for liquidated damages. The client seemed quite enthusiastic about this and said it was a good idea. This arrangement was kept to, until we put in the payment application just before completion of the work. Although the client’s agent certified most of our application, we then received a letter from the client headed up ‘Pay Less Notice’, which claimed that we were late in completion and therefore had a right to deduct the liquidated damages as per the contract.
Can the client do this? What can we do?
If you wanted to have made the ‘arrangement’ binding, you should have executed a side agreement, which is an agreement that sits in parallel to the main agreement but effectively moves the goal posts as regards to the terms of completion. From your outline, I very much doubt you could establish a binding agreement was reached, or there was a legal waiver as to the right to claim damages or, estoppel.
Your client, as the employer under the building contract, was quite within its rights to issue a pay less notice. Where an employer to a construction contract wishes to set-off sums against a payment that is due to a contractor, it is mandatory for the employer to issue a pay less notice, and providing the pay less notice is a) issued on time; b) specifies both the sum that is considered to be due at the date the notice is given; and c) the basis on which that sum has been calculated, then the pay less notice is valid.
However, it does not mean that the pay less notice cannot be challenged. For example, if the contract is a JCT, a condition precedent to the deduction of liquidated damages is for a notice of non-completion to have previously been issued. You could also challenge the liquidated damages as being a penalty if the damages are extremely high when compared to the actual or likely losses.
I would however suggest that the best way forward, would be for you to provide the necessary level of evidence that would establish that you are not responsible for at least part of the delay, and then try and reach a formal agreement where each party is responsible for its own costs.
© Michael P. Gerard
The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.