| Date | 22 August 2001 |
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| Judgment | City Inn Limited -v- Shepherd Construction Limited Court of Session 17 July 2001 |
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| The Issue | Whether a requirement for notices stated to be "condition precedent" to a contractor's entitlement may be construed as a penalty and unenforceable. |
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| Implication |
A clause requiring notification and particulars of the effect of instructions as a condition precedent to an entitlement for extension of time will generally not be construed as a penalty. |
printThe recent case of City Inn Limited -v- Shepherd Construction Limited considered two points of particular interest. The first short point concerned whether an adjudicator's decision might have the effect of reversing the "burden of proof" in subsequent litigation. An adjudicator had awarded a further five weeks extension of time to Shepherd. City Inn disputed that award by court proceedings. Shepherd argued that the effect of the adjudicator's decision was to throw onto City Inn the burden of showing that the extension of time which the adjudicator had awarded was not justified. They contended that the binding quality of the adjudicator's decision continued until the court proceedings were "finally determined". City Inn argued that arbitration or court proceedings are not an appeal against the decision of the adjudicator, but a fresh consideration of the dispute as if no decision had been made by the adjudicator. Lord Macfadyen preferred this latter approach. Adjudication under the 1996 Act provided a speedy means of reaching a binding interim determination of disputes. It goes no further than that. He confirmed that the burden of proof in any action lies where the law places it and is unaffected by the terms of the adjudicator's decision. A second point of interest considered an amendment to the JCT standard form which provided that the contractor should take certain steps to safeguard its entitlement to an extension of time. The added clause required that whenever the contractor received an instruction which would require an adjustment to the contract sum or an extension of time, before executing the instruction, the contractor should give a notice to the architect. The notice was to give details of the adjustment to the contract sum, extension of time and direct loss and expense estimated by the contractor. The notice was stated to be a "condition precedent" to the contractor's rights. In other words, the clause provided that if the contractor failed to comply with these requirements, it would not be entitled to any extension of time. Shepherd raised a series of complaints concerning the operation of the clause. No mention had previously been made of the clause during the course of the works. In each case when an instruction was given Shepherd had proceeded to execute the instruction without complying with the requirements of the clause and yet at no time was any objection taken. Shepherd argued that City Inn had by such conduct waived compliance with the clause as a condition precedent to an extension of time. City Inn were now prevented from asserting the failure of compliance in order to defeat Shepherd's entitlement to extension of time. Shepherd further argued that the clause amounted to a penalty clause and as such was unenforceable. In the event of a failure by Shepherd to comply with the provisions of the clause, the effect would be to deprive it of extensions of time to which it would otherwise have been entitled and to expose it to liquidated and ascertained damages. The rate of liquidated and ascertained damages (which stood at £30,000 per week) was a pre-estimate of the loss and damage which City Inn might sustain as a result of delay in completion, and not of the loss and damage which it might sustain as a result of Shepherd's breach of this particular clause. Shepherd argued that the clause imposed consequences with regard to extension of time which arose from procedural matters rather than from responsibility for the rate of progress of the works. What rendered the clause penal was that the amount of liquidated damages bore no relation to any loss caused by a breach of that clause. City Inn contended that there was no suggestion that the figure of £30,000 per week for liquidated and ascertained damages was anything other than a genuine pre-estimate of the loss the employer would suffer in the event of completion being delayed. What the clause was designed to secure was that the employer would be informed if and when the contractor thought that the issue of an architect's instruction would cause delay. The employer might in some circumstances choose to avoid the delay by having the instruction cancelled. The clause did not remove the contractor's entitlement to payment for instructed work but merely deprived the contractor of its entitlement to an extension of time. It was perfectly legitimate for an employer to require, and the contractor to accept, that in relation to architect's instructions the employer should be forewarned of anticipated consequential delay and for it to be agreed that in the event of the contractor failing to provide such forewarning, the risk of loss through delay should shift from the shoulders of the employer to those of the contractor. Such a provision did not constitute a penalty. Lord Macfadyen concluded that the sum of £30,000 per week remained payable by the contractor on the basis that it was a genuine pre-estimate of the loss suffered by the employer as a result of the delay in completion. That genuine pre-estimate of loss was not converted into a penalty by the fact that the contractor might have avoided the liability by taking certain steps which the contract obliged it to take. Non-compliance with a condition precedent may in many situations result in a party to a contract losing a benefit which it would otherwise have gained or incurring a liability which it would otherwise have avoided.
CJ-0133
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