Can You Recover Delay Damages After Termination?

Construction contracts and engineering contracts take a flexible approach to completion:

  • time is not of the essence (if they were, then when the contractor was late the client could reject the works, plant or section and pay nothing) the original dates for completion of the work, plant or sections can be extended for circumstances arising during the project
  • the client can ask (but not require) the contractor to accelerate the works to speed up the rate of progress.

Delay is a Breach

Completion is still important enough to be a clear breach of contract, allowing the client to recover damages.The client could claim general damages (and have to prove a breach of the completion date requirement, that the breach caused certain losses, and the amount of those losses). The alternative is to recover damages at a pre-agreed rate for each day of delay.

Subcontracts tend to favour indemnities for main contract delay damages, although the argument is not as clear cut as you might suppose [read more].

Agreed Damages for Delay

Most of the construction and engineering standard forms allow the client to recover agreed damages if the contractor breaches its obligation to complete the works (or a section) by the completion date.

The provisions (paraphrased below) are only marginally different:

  • JCT 2016 DB says the employer can (by notice) require the contractor to pay liquidated damages for the period between the agreed completion date and the date of actual practical completion of the works or section [clause2.29.2]
  • NEC4 X7 requires the contractor to pay delay damages at the agreed rate from the completion date for each day until the earlier of completion and the date on which the client takes over the works [X7.1]
  • MF/1 rev 6 says that if the contractor fails to complete the works or any section within the applicable time for completion (or a reasonable time) the employer can deduct the percentage stated in the appendix for each week between the relevant time for completion and the actual date of completion [34.2]
  • RIBA Domestic Building Contractor 2018 says the client can deduct liquidated damages as the agreed rate but does not clarify the period [10.1]
  • IChemE Red Book (2013) states that if the contractor fails to complete the construction of the plant or any section within the times for completion, it shall pay liquidated damages to the purchaser as set out in Schedule 12 [15.1]

So Late the Client Terminates

What happens when the contractor is already in delay, and the client is already entitled to delay damages, but decides to terminate before the works are actually complete?

Some of the contracts include a right to terminate for prolonged delay eg MF/1 clause 34.2, but others only have a more generic right to terminate for breach of contract (NEC4 91.2 R11) or failure to proceed regularly and dilgiently (JCT 8.4.2, RIBA 12.1.2 and IChemE 44.2(c)).

In Triple Point v PTT, the Court of Appeal had to choose between the clause no longer applying, applying up to termination, or applying until another contractor completed the works (a highly doubtful option). Sir Rupert Jackson said:

In my view, the question whether the liquidated damages clause (a) ceases to apply or (b) continues to apply up to termination/abandonment, or even conceivably beyond that date, must depend upon the wording of the clause itself. There is no invariable rule that liquidated damages must be used as a formula for compensating the employer for part of its loss.[110]

The court reviewed the terms of the delay damages clause and said that it only allowed delay damages to be paid between the agreed date for completion and when the works were actually completed by this contractor.

The wording in the case mirrored that of JCT, NEC4 and MF/1. It may also reflect IChemE Red Book depending how Schedule 12 is completed.

What should you do?

As a client, if you would like to preserve your right to delay damages (and save the hassle of claiming general damages) between the completion date and termination, where the contractor is in culpable delay, you will need to change your contract provision on delay damages.

Your contract will need to amend the client’s right to deduct (or the contractor’s obligation to pay) delay damages from extended completion date until actual completion or termination, whichever is the earlier.

As a contractor, delay damages between completion and termination are a means of crystallising the client’s loss to a fixed sum for that period. It reduces need for proof of causation and losses, and often acts as a limit on what the client could otherwise recover. Other damages will still be recoverable linked to the termination but nonetheless this sort of provision will simplify part of the client’s claim, and may aid negotiations.

Case: Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230

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