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August 2017

Late Completion and Delay Damages

By | Problem Solved

The Problem

We entered into a contract to build 3 detached bungalows on the outskirts of Rugby.  The form of contract was not a usual standard form, but one that our client had drafted in-house, and it is fairly basic, which to be honest, suits us.

One of the terms that the contract did include was for a penalty if we failed to complete on time.  Unfortunately, we did not complete on time, and the client is now seeking a whopping £27,000 based on the 9 weeks that we were late completing.  Is there anything we can do?

Shaun

Response:

Ouch!  £27,000 is a big hit for your job to take.

Your problem relates to delay damages, and more specifically liquidated damages (e.g, the contract has set out a pre-determined periodic rate should you fail to complete on time).  I am therefore assuming that there is a valid liquidated damages clause in your contract and that there was a single date for completion.  I also assume that the rate for any delay caused to the date for completion as a result of contractor culpability was expressed as £3,000 per week (i.e. £3,000 x 9 weeks = £27,000).

Questions on delay damages have been quite frequent over the years, although since I last responded to a problem on liquidated damages (back in early 2013), the law has shifted, albeit because of a private parking charge case back in 2015, which my column touched upon in March 2016.

Prior to 2015, even where the parties had agreed in writing the rate of damages for delay, if challenged the employer must show that the liquidated damages rate was a genuine pre-estimate of the likely loss at the time they are fixed, otherwise the liquidated damages stated in the contract would not be enforceable (albeit the employer would not lose entitlement, but would then need to prove its losses).  This principle was established in the 1915 case of Dunlop Pneumatic Tyre Company Ltd. v New Garage and Motor Company Ltd.

Is a clause a penalty and enforceable?

In 2015, a dispute over a £85 private parking infringement notice went all the way to the Supreme Court.  The importance of this case however, was not the outcome, but the new test that the Supreme Court laid down for deciding if a clause is a penalty and thus unenforceable.  That new test was that the charge was neither “extravagant nor unconscionable”.

Until 2015 therefore, to successfully defend a challenge to a pre-determined loss, all the innocent party needed to show was that the sum was a genuine pre-estimate of the likely loss to be suffered at the time the sum was fixed.  Now, and providing that the innocent party has a legitimate interest in the sum claimed, the liquidated sum stipulated must not be extravagant or unconscionable when measured against those interests.  Quite what this means in practice is not yet clear and will no doubt be the subject of arguments in the future.

£3,000 per week for 3 bungalows, although high, I would say is probably seen as neither extravagant nor unconscionable.


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You’ve been sick for too long so you’re fired!

By | news

One of the potentially fair reasons for dismissal under the Employment Rights Act 1996 (ERA) is “capability and qualification”.

If an employee is off work and ill they are incapable of doing the job.

At what stage in long-term sickness will a dismissal be fair.

Firstly, you must follow a fair procedure.  (The Acas Code of Practice on Disciplinary and Grievance Procedures does not apply).  You must also establish the true medical condition and consult appropriately with the employee before deciding whether or not to dismiss.

Consider the following carefully: –

  1. The nature and type of the illness;
  2. The prospect of the employee returning to work and the likelihood of the recurrence of that illness;
  3. How much do you need someone to do that work and what is the effect on the rest of the workforce – in other words how disruptive is it to the business;
  4. Does the employee on sick leave fully understand their position – do they know and understand how it is dealt with in their contract and in your policies and that in due course it will bring their job to an end;
  5. The employee’s length of service.

Then you must get to grips with the underlying health condition and prognosis and consider whether the employee is suffering from a disability.

If there is a disability you are under a duty to make reasonable adjustments and not discriminate because of that disability.

In every case, as well as going through the list above, before dismissing you should also: –

  1. Know the up-to-date medical position;
  2. Consult fully and carefully with the employee (make sure you follow your policy);
  3. Consider the availability of alternative employment.

Having carefully considered all of the above the employer should consider whether a reasonable person would expect them to keep the employee’s job open any longer.

In deciding whether it is reasonable to dismiss a Tribunal will look retrospectively at: –

  1. The availability of temporary cover and its cost;
  2. The sick pay situation and the cost to your business;
  3. The administrative costs of keeping the employee in your business;
  4. The above in relation to the size of your business.

In summary, the Tribunal and Appeal Courts have decided employers are entitled to some finality in cases of long-term sickness.

The employer will have to show it has obtained up-to-date medical evidence.

An occupational health report from, say, three months before the dismissal date is not going to be good enough.

The employer must be able to show the Tribunal evidence of the impact and cost on the business unless it is completely obvious the impact is severe.

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