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Notice Provisions in Extension of Time Clauses

It is increasingly common for employers to include in their contract forms notice requirements in respect of claims for an extension of time. Some of these requirements are particularly stringent, requiring the service of a notice and particulars within a short period as a condition precedent to the contractors' right to an extension of time.

One however must not forget that the main purpose of including the extension of time provisions is not to provide relief for the Contractor, but to allow the original completion date under the contract to be extended for any delay which is the responsibility of the Employer. This is necessary to preserve the Employer's entitlement to liquidated damages for delay in completion.

The imposition of stringent notice requirements as conditions precedent may well defeat the primary purpose of including the extension of time provisions in the first place. If the Contractor fails to comply with such provisions following a delay caused by the Employer, the Architect may be unable to grant any extension of time. According to the prevention principle, the Employer should not benefit from its own wrong, here in delaying the project yet remaining entitled to liquidated damages for the contractor's failure to complete on time. Time may be set" at large" in those circumstances, and the liquidated damages may no longer be enforceable. Support for this proposition may be found in the case of Gaymark Investments Pty Limited v Walter Construction Group Limited [1999] NTSC143 - a decision in the Northern Territory of Australia.

In the Scottish case of City Inn Limited v Shepherd Construction Limited, 20 May 2003, the Contractor, Shepherd Construction Limited ("Shepherd"), was similarly subject to stringent notice requirements. The contract provided that if the Contractor failed to comply with any one or more of these requirements, the Contractor would not be entitled to an extension of time.

The Contractor advanced an ingenious argument that the liquidated damages provision was a penalty clause because it was not a genuine pre-estimate of any loss suffered by the Employer in consequence of the Contractor's failure to comply with the notice provisions.

For Shepherd to succeed with the argument, Shepherd had to show firstly that it was a breach of the contract if the Contractor did not follow the procedure set out in the notice provisions and secondly that the liquidated damages payable as a consequence was not a genuine pre-estimate of the loss likely to be suffered by the Employer as a result of the breach, but was instead designed to operate in terrorem, oppressively or punitively.

At first instance, the Court agreed that it was a breach of contract for Shepherd not to comply with the notice provisions and the first limb of the test was satisfied. However, the Court considered that the liquidated damages remained payable by the Contractor as a result of delay in completion which the parties had agreed to pay as the likely loss the Employer would incur at the pre-estimated rate, and not as a penalty for failure to comply with the notice provisions.

The outcome of the first instance decision was affirmed by the Scottish court of appeal, the Inner House of the Court of Session. However, the Inner House differed from the lower court's reasoning in one aspect. The Inner House held that the Contractor was entitled to choose whether to comply with the notice provisions or not in order to claim an extension of time. If the Contractor did not comply, it would lose its right to claim an extension of time and expose itself to liquidated damages. If the Architect issues an instruction that may have the consequence of adjusting the contract sum, or other consequences specified in the notice provisions, the chance that the Contractor will not contest it is just one of the risks that the Architect takes. If the Contractor does carry out the works in accordance with the instruction without complying with the notice provisions, it does not commit any breach of contract. The Inner House agreed with the Court at first instance that the liquidated damages clause was enforceable.

Lovells, Asia Focus
January 2004

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