Time please

Time. Nobody ever seems to have enough of it. In the Scottish case of City Inn versus Shepherd Construction, the contractor, Shepherd Construction Ltd, ran out of time and overran the contractual completion date by several weeks.

Shepherd were employed by City Inn to build a hotel at Temple Way, Bristol. Shepherd argued that the delay was caused by certain instructions issued by the architect, entitling them to an extension of time. They referred the matter to the architect who gave them an extension of four weeks. An adjudicator then allowed a further extension of five weeks.

City Inn however claimed that Shepherd was not entitled to either of the extensions and sued Shepherd for liquidated and ascertained damages.

The building contract was a JCT 1980 with bespoke amendments. Clause 13.8.1 obliged the contractor to give notice within 10 days of the architect's instruction if it considered that the instruction would result in a delay to completion. The notice had to contain an estimate of the length of any extension of time required as a result of the instruction. Shepherd failed to issue any such notice.

Clause 13.8.5 struck the killer blow. It read as follows: 'If the contractor fails to comply with any one or more of the provisions of clause 13.8.1…the contractor shall not be entitled to any extension of time under clause 25.3.'

On the basis of clause 13.8.5, City Inn maintained that Shepherd had lost the right to an extension of time by failing to issue a notice within the 10 day time limit. Shepherd argued that clause 13.8.5 was a penalty clause and therefore unenforceable.

A clause may oblige one party (party A) to pay the other (party B) a sum of money if party A breaches the contract. To constitute a 'penalty', the sum claimed under the clause must be punitive in nature, that is, it must not represent a genuine pre-estimate of the loss likely to be suffered by party B as a result of that breach: Dunlop Pneumatic Tyre Co Ltd versus New Garage and Motor Co Ltd, [1915] AC 79.

By failing to give notice, the contractor had deprived the architect of the opportunity to consider the effect of a time extension.

The case raised interesting issues: City Inn, the employer (through its architect) had effectively caused the delay but Shepherd, the contractor, had failed to operate the contractual mechanisms which allowed Shepherd to claim an extension of time in such circumstances. Could City Inn rely on Shepherd's failure to issue a notice in time to defeat Shepherd's otherwise justifiable claim for an extension of time? There is no direct authority on this question under English law but the general rule is that the question as to whether or not service of a notice in accordance with the contractual clause is a condition precedent to an extension of time depends upon the wording of the particular clause.

The outcome
Both the Outer and Inner Houses of the Court of Session (broadly equivalent to the English High Court and the Court of Appeal respectively) found in favour of City Inn.

The Outer House concluded that clause 13.8.1 had been breached by Shepherd. The clause had 'material value' to the employer: by requiring information from the contractor, the architect could consider the effect of the instruction, in terms of delay and on the contract sum, and decide whether or not to insist on it or withdraw it. By failing to give notice, the contractor had deprived the architect of this opportunity.

However, liquidated and ascertained damages were awarded for failure by the contractor to complete on time not simply for a breach of clause 13.8.5. They did not therefore constitute a penalty. Clause 13.8.1 was a 'condition precedent' (ie a clause which had to be complied with) to an extension of time. If the clause was not complied with (as was the case here) City Inn retained its right to liquidated and ascertained damages. The liquidated and ascertained damages didn't become a penalty just because the contractor had failed to issue the correct notice.

The Inner House came to the same conclusion via a different route. It did not consider that there had been a breach of clause 13.8.1 by Shepherd: clause 13.8.1 merely gave Shepherd a right to choose whether or not to respond to an instruction and attempt to agree to an extension of time. It was up to the contractor whether to exercise that right. Since there was no breach of contract by Shepherd, clause 13.8.5 could not be interpreted as a penalty clause. The result was simple: if the contractor failed to respond to the instruction and take the steps outlined in clause 13.8.1, he was not entitled to an extension of time for that instruction. The appeal was therefore dismissed.

The conclusion reached by the Inner House may appear harsh but it reflects the wording of the contract (specifically, clause 13.8.5) which the parties had freely negotiated.