Tue 21 Jun 2022

Construction: Frequently Asked Questions (Part 2)

In the UK, construction law is made up of several bodies of law, making it a complex area of practice. This is the second in a series of articles which seek to provide a brief overview of some frequently asked questions in the construction industry and in relation to the laws which govern it. Specifically, we take a look at queries from the point of view of a contractor here:

1. Does the contractor lose their entitlement to an ‘extension of time’ if they fail to submit the appropriate notices required under the contract?

Generally, if the contractor fails to serve an adequate delay notice this will not result in the loss of rights to an extension of time unless the contract expressly stipulates that a notice must be served to access such a right (which some do).

2. Is there an automatic right to the recovery of loss and expense where a contractor is granted an ‘extension of time’?

It is a common misconception that where an extension of time has been granted, there will be an automatic right to the recovery of loss and expense.

Under most standard form contracts, a contractor is generally not entitled to the recovery of loss and expense where an extension of time has been granted. However, it should be noted that often the entitlement to loss and expense is found under a separate contractual provision and must be separately complied with.

3. Is a contractor entitled to payment for ‘loss of profit’ as part of a monetary claim?

A contractor will normally be entitled to payment for loss of profit where they can demonstrate that they were prevented from earning profit elsewhere, in the normal course of business, and where it can be shown that the lost opportunity derived from the circumstances which gave rise to the claim.

There are exceptions to this general approach however, as some standard form contracts specifically exclude profit from monetary claims.

4. What is the difference between liquidated damages and penalty clauses, and what impact does their presence have on a contractor?

The terms “liquidated damages” and “penalty” are often incorrectly used interchangeably. As a starting point, one is enforceable, and one is not.

Liquidated damages are intended to be a reasonable and genuine pre-estimate of the losses the employer is likely to incur if the work is completed late. Liquidated damages become enforceable at the point which the contractor completes work late due to their own default. Where correctly incorporated into construction contracts, liquidated damages are enforceable.

Alternatively, a penalty is a sum included within the contract which is intended to penalise the contractor and is far greater than the employer’s estimated loss. Such a sum is unenforceable.

The enforceability of liquidated damages (and the unenforceability of penalty clauses) protects contractors from having to unfairly recompense an employer excessively beyond that which is a reasonable estimate of loss.

As with any construction project, the precise facts and circumstances are important when considering many of the foregoing issues, so it is always important to involve your solicitor early in the process.  For any advice on your contractual rights/obligations, or alternatively for any advice in relation to dispute resolution, please feel free to get in touch with a member of our construction department.

This article was co-written by Josh Grieveson, Trainee Solicitor.

For previous articles in this series, please visit earlier editions of SELECT CABLEtalk and MacRoberts’ social media channels.  

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