The common belief is that time extension (EOT) provisions are for the benefit of the contractor and liquidated damages (LD) for the benefit of the client. However, a closer look at these provisions suggests that this belief is not only wrong but promotes the reverse of true intensions. LD is an early calculation of the expected loss under the contract whereas penal damages are to treat the contractor in a punitive sense beyond the actual loss. Even if two parties genuinely and without coercion wish to consent to a contract which includes a penal clause, they are unable to, in strict legal terms, subject to however that in some cases, courts uphold the application of contractual provisions. LD should be a genuine estimate of the likely loss provided the true intension is to persuade timely completion. If the intention is to counter slow progress, then there is a separate provision in the contract where the engineer calls for recovery plan that is technically feasible, becau se it is not that easy to reverse penalty.
The primary idea of including an EOT provision is to preserve the contractors obligation to complete within a specified time and in doing so to prevent the clients right to LD when by his acts, the client has delayed the contractor and is responsible in part for late completion. The fact that the contractor is the obvious recipient of benefit in gaining relief from LD is a secondary outcome. In fact, in the absence of EOT provisions, a contractor would be able to successfully contest the LD provisions when the client contributes to delays. All what client gets out of LD provisions is the relief on the burden of proving his loss and the right to deduct LD from sums due to the contractor. To the extent that the clients true losses may be greater than the stipulated level for LD the client is disadvantaged by agreeing to a restrictive remedy. On the other hand, LD provisions are beneficial to contractors for they not onl y limit their liability for late completion to the sums stipulated, but they know in advance the extent of risk in late completion. If such provisions are not in place, the contractor would be able to claim time at large and the contractors obligation would be to complete within a reasonable time presumably that the clause 14 program is the basis in order to be consistent with the bargain which both parties entered into. Accordingly if the employer carries out some act that prevents the contractor completing the works by the date for completion, for example failing to give possession of the site on due date, then he can no longer insist that the contractor finishes his works by the stipulated date for completion. This principle has been established in the case of Holme vs Guppy far back in 1838.
It was also noted in Biltoin vs GLC (1982) that the main contractor is bound to complete the work by the date for completion stated in the contract if he fails to do s o; he will be liable for LD to the client, subject to exception that the client is not entitled to LD if by his acts or omissions he has prevented the main contractor from completing his work by the completion date. On the other hand, if the contractor intends to avoid LD by showing his entitlement for EOT, he must produce evidence to prove that; his program at the time was realistic and he could have achieved targets, he was achieving the preplanned rate of progress, a delaying event occurred, cause of the delay gives a EOT entitlement under the contract, delaying event affected the rate of progress of relevant activities, and the effect to such activities has affected the completion date indeed a chain in the burden of proof for any typical claim.
On the other hand, the Employer does not need to prove actual damages but LDs are not usually enforceable if imposed as a penalty. Two cases, Dunlop Pneumatic Tyre Co. Ltd v New Garage and Motor Co. Ltd (1914-15) and Philips HK Ltd v The Attorney General of HK (1993), provide some guidelines for distinguishing between LD and a penalty. In short, it is a penalty if the sum is excessive in amount in comparison with the greatest loss conceivably followed from the breach. Accordingly, a party can challenge the validity of a LDs sum after the contract has been signed. However, McAlphine vs Tilebox emphasis that a court will be slow to interfere with a LD clause negotiated at arms length between commercial parties. In particular, the court will not be impressed by arguments that the actual loss suffered is less than the estimated damages, unless the discrepancy is so large that it demonstrates that the sum could not have been a genuine pre-estimate of the likely loss. LD based on sensible criteria is unlikely to be unenforesseable as a penalty, therefore.
However, Penalty and LD has no difference in some countries where clients impose penalty subject to a ceiling limit, without fear of being contested in courts. Although the contractors exposure to penalty starts only when he fails to achieve scheduled completion, there are notable exceptions. Levying penalty starts according to a schedule of eventualities qualified already in the contract. These may be for instance in a road project when the contractor delayed in commencing some designated trench work or even a section of asphalt work. There are cases where penalty is applicable in delay in either commencement or in completion of almost all the individual activities, shown in the bar schedule. A delay due to submission of a traffic management plan would even be a case for penalty in addition to usual delay in completion of whole of works, to the extent where the engineer has been given discretion to consider further penalty if he deems required. However this discretion has no legal effect, so is a dummy clause that is non-enforceable when the other eventualities meet the ceiling limit. Contracts with full of penalty events keep the contractor in a very inflexible setting that restricts him in managing the project, definitely upsets the contractors technical movements freely within the project and tilts the even risk apportionment in the contract.
Any subsequent improvement in the progress to catch up delays is not a matter to waive off penalty, and in fact is a contractors obligation under the clause, Rate of Progress. However, a request to reverse penalty already imposed on the contract can not be based on good conduct which is immeasurable and is a pure subjective opinion as the Engineer on what truly happened on the project. But they are not reasons valid enough to reverse penalty as such. In fact, there is no discretion confe rred on the Engineer under the contract to reconsider penalty even in cases where the engineer deems desirable. There is no mechanism for penalty reversal, expressly or impliedly, given in the contract also.
Where the engineer issues a variation after the contract completion date but before practical completion, it is appropriate where resultant delays occur for an EOT to be granted. Such EOT will be calculated by extending the completion date by the net period of delay. In Balfour Beatty Building Ltd. v Chestermount Properties Ltd., it was held that gross period up to the time when the varied work had been completed was not the correct measure of the EOT but the period of delay is to be added to the contract period or the extended contract period as the case may be while a variation issued during a period of culpable delay would not render time at large. This is fair by one way because it avoids excusing the contractor from his own delays during the period un der LD or penalty. However, where the contract stipulates that time is of essence, failure to meet the particular date is a fundamental breach of contract entitling the other party to treat the contract as repudiated and claim damages. Time is rarely of the essence in a construction contract because the effect of such a provision is that if the building is not completed on a certain date then the employer does not want the building at all and will treat the contract as repudiated, which is not the reality.
It is always upto the contractor to justify his basis and quantum of entitlement with the contemporary records in support so that the Consultant shall revisit the entire issue and establish his verified final opinion on the net resultant impact on the scheduled completion in line with the contract principles after taking all the circumstances into detail consideration. It is illogical to consider payment on time-related preliminary items as it would not real istically give a fair entitlement since the basis of reimbursement might change from case to case depending on the causes of delay and their impact. For instance, an initial delay in the commencement itself due to employers fault or his request would shift the whole schedule towards a definitive period so that the contractor shall be compensated on pro rata basis on time related preliminary activities.
Any assessment shall be based on the details made available in submissions subject to an extra opportunity to justify his claim for the cost on prolongation if any with the contemporary records in support so that the engineer is able to review and confirm the eligibility and quantum of claim. Also, when a milestone completion is absent under the contract, (being a patent defect) and the contractor becomes eligible for extension, the engineer has no option but to grant the contractor a period of extension to the contract as a whole. This is no longer sensible as it unduly benefits the contractor for time extension for the entire contract even on an excusable delay at any single location and penalizes him on delay in completion of work at any single location despite of timely completion in other locations. The contract should specifically provide for milestones and such a requirement shall be stated under conditions. If the intention of the contract is to complete in milestones, it is essential that the contract document expressly provides for it, as it is entirely a different contractual machinery, where the certificates of completion by milestones are issued in respect of works that have been taken over by the employer for his beneficial use and accordingly the insurance, defects liability, penalty etc will take effect.
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