Stay on the ball

Imagine this kind of shouting match, not on the terraces of Anfield or Highbury but in the august surroundings of the Scottish Court of Session. Well that's where it took place. Kind of.

It all began with a contract to build a hotel. It was a JCT80 with some amendments, including changes to the extension of time clause. To tighten up this clause, City Inn required that if Shepherd received an instruction that would justify an extension, it should not proceed without submitting an estimate of the length of that extension. If it failed to comply, it would not be entitled to any extension.

Instructions that caused delay were issued and Shepherd missed the contractual completion date. It might well have been justified in requesting an extension, but it had failed to comply with the requirement that the extension be requested before executing the works in question. As a result, the contractual completion date was not extended and Shepherd was exposed to liquidated damages.

This is when the cry for a penalty went up. A penalty in law is a different to a penalty in football. Rather than allowing you to shoot at goal, it effectively disallows what would have been a goal for the other side. Shepherd argued that the clause was a penalty and was therefore unenforceable. As a result, it said, it could still apply for an extension.

The standard form was amended and put in a drawer, never to see the light of day until it was too late

The law says that a clause is a penalty if it makes a sum payable on a breach of contract, which is not a genuine pre-estimate of loss, but is designed to punish the party in breach. Shepherd maintained that to deny it relief from liquidated damages just because it had not complied with the contract procedures was a penalty because the amount of the liquidated damages was wholly disproportionate to the loss (if any) that City Inn would actually suffer as a result of the failure to give notice. The liquidated damages were in respect of late completion, and that had occurred because of the instruction, not the failure to comply with procedural requirements

The Scottish courts had two problems with this argument. First, the clause simply regulated the manner in which Shepherd could apply for an extension after receipt of an instruction. That Shepherd elected not to follow the procedure (or, more likely, forgot to) was not a breach of contract and therefore the law of penalties did not come into play.

Second, Shepherd should not link the liquidated damages for late completion to the failure to comply with the procedural requirement. Even if such failure was a breach, it did not in itself lead to any liability to pay liquidated damages. These become payable because the job is finished late.

This case is another example of a standard form being amended and then put in a drawer, never to see the light of day until it is too late for the contractor. There may be legitimate reasons for clients wanting amendments of the type that was made to this contract. They give them greater certainty as to where they stand on extensions. But once the parties agree to amend a standard form, they are fooling themselves if they then operate it as though it was the standard form. Under the JCT80 there is a requirement to notify events which are likely to cause delay but the contractor is largely saved from a failure to do so by the review of time issues that the contract administrator is to undertake during the 12 week period after practical completion. The JCT says that the administrator must have regard to any delay events whether or not specifically notified. In Shepherd Construction vs City Inns, either that provision had been amended or it was overridden by the additional clause stating that the contractor was entitled to no extension of time if it failed to comply with the notification procedures.