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?
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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