Employers cannot demand damages when they hold up projects. But contractors can be liable if they fail to communicate when progress falls behind
IF AN EMPLOYER DELAYS A CONTRACTOR IN THE completion of works, it is generally not entitled to deduct liquidated damages for the delay. This rule of thumb is based on the fundamental principle that a party should not benefit from its own breach of contract to the detriment of the other, injured party. This is often referred to as the "prevention principle".

Modern extension-of-time clauses cover all sorts of omissions, acts or defaults by an employer that could prevent the contractor completing the project on time. These clauses provide a remedy should the employer "prevent" completion and may set a new date from which liquidated damages can be measured.

Notice clauses now routinely state that unless the contractor gives notice it is not entitled to an extension of time. This "condition precedent" allows an employer, who has not been given proper notice by the contractor, to benefit from damages even though he or she caused the delay.

The conflict between the right to insist on notice and the need to prevent a party benefiting from its own breach of contract has been examined in two recent cases. The cases, one Australian and one Scottish, came to different conclusions.

In the Australian case of Gaymark Investments Pty Ltd vs Walter Construction Group [1999], the notice requirements included a "burden of proof" clause. The contractor in this case was required to demonstrate to the satisfaction of the supervisor that it had been delayed and that it had taken all reasonable steps within its control to reduce or avoid the delay. Only then, the contract stated, was the contractor entitled to an extension of time.

On appeal from an arbitrator's decision, it was held that the prevention principle was a barrier to the employer's claim for liquidated damages for delays of its own making. The contract failed to provide for a situation where both the employer caused delays that prevented the contractor completing on time, and the contractor failed to comply with the notice provisions. The arbitrator's finding that the employer could not deduct damages, despite the contractor's failure to give proper notice, was upheld.

In the Scottish case of City Inn Ltd vs Shepherd Construction Ltd [2001], problems arose from a JCT 1980 contract. An additional clause, 13.8.1, required the contractor to give notice within 10 days of instruction by the architect if it considered the directions it received would lead to a delay to completion. It was required not to carry out these delay-producing instructions unless it had given the notice. Procedures were set down that allowed for estimates to be provided. Crucially, clause 13.8.5 stated that the contractor was not entitled to an extension of time if it failed to comply with any of the provisions in clause 13.8.1.

It was held in this case that the contractor's failure to give notice meant that the employer retained the right to deduct liquidated damages, a right that might have been removed by the award of an extension of time. It appears to have been significant, in this decision, that clause 13.8.1 did not impose an excessive burden on the contractor.

It is suggested that the prevention principle should be wide enough to cover breach of contract by an employer as well as cases in which an employer issues instructions for extra work.

The effect of a contractor's breach of contract in failing to give prior warning depends on the intention of the notice clause. If notice requirements are included to allow the employer to reduce or avoid the consequences of a delay, then damages are measured according to the reasonable steps that would have been taken. If the notice is merely a condition to an extension-of-time clause, then damages may be measured as liquidated damages for the delay. It must be shown, however, that the delay would have been avoided or reduced if notice had been given.

Until the law is settled in this area, notice and liquidated damages clauses should be drafted to give effect to both the prevention principle and the consequences of failure to give notice in the terms suggested in the contract.