| Date | 9 October 2002 |
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| Judgment | Peak Construction (Liverpool) Ltd -v- McKinney Foundations Ltd, CA 1 July 1970 |
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| The Issue | Deduction of liquidated damages where the employer is partly to blame for delay. |
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| Implication |
Where an employer is partly at fault for delay and the contract fails to provide a mechanism for extending time in respect of that fault, the liquidated damages provisions will be rendered inoperable. |
printLiquidated damages are damages calculated according to a formula set out in the contract. They are designed to save the employer from having to prove the actual damage suffered. A clause in a construction contract providing for liquidated damages for delay has to be closely linked with a clause which provides for an extension of time. This is because it is to be assumed that if the contractor is to be held liable for liquidated damages, the delay for which damages are to be calculated must be the responsibility of the contractor. It follows that if delays are caused which are the responsibility of the employer, the contract must provide a mechanism whereby the date for completion can be extended. If the contract fails to provide for such an extension, or if the architect or engineer fails to administer the extension of time provisions correctly, then the liquidated damages clause may become unworkable, if only because there is no fixed date from which to calculate the delay for which the contractor is responsible. These principles were examined by the Court of Appeal in 1970, in the case of Peak Construction (Liverpool) -v- McKinney Foundations. Peak Construction were main contractors engaged by Liverpool Corporation for the construction of a 14-storey block of 58 flats, together with 33 garages, at East Lancashire Road, Liverpool, for the price of £232,000. How times change! McKinney were nominated sub-contractors for piling works. The main contract was not based on any standard form, but was devised by the Corporation. The Court of Appeal had this to say about the form "Indeed, if a prize were to be offered for the form of a building contract which contained the most one-sided, obscurely and ineptly drafted clauses in the United Kingdom, the claim of this contract could hardly be ignored, even if the (JCT) form of contract was among the competitors". The problems centred around the piling, designed and constructed by McKinney. McKinney had left the site, having supposedly completed the work satisfactorily within six weeks of commencement. Shortly after, however, by chance another sub-contractor discovered a very grave fault in one of the perimeter piles. For all practical purposes it was useless. The defect was caused by McKinney's use of unsuitable material and faulty workmanship. It clearly constituted a serious breach of contract on their part. Everyone concerned was naturally very alarmed. Had the defective pile gone unnoticed, it would probably have caused a serious crack in the completed structure. Moreover, the chance discovery of this defective pile suggested that there might well be other similarly defective piles which, unless discovered and replaced, might cause the whole block of flats to collapse with serious consequence. As Lord Justice Salmon pointed out in the Court of Appeal, there might have been much loss of life, for which the Corporation, Peak and McKinney, would have been blamed. They would not only have suffered gravely in reputations, but would no doubt all have been liable for enormous damages. There was a meeting on site between representatives of all parties concerned. Everyone agreed in principle that an investigation of the piles was urgently required and that the necessary remedial work should be carried out as soon as possible. It was accepted that the problem should be submitted to an independent expert engineer and all agreed to abide by his opinion. In the meantime, all further work on the site was suspended. However, a month later the Corporation's housing committee refused to be bound by this agreement to accept the engineer's opinion and stated that they would merely consider it without prejudice to their freedom of choice. This left a considerable delay in the appointment of the independent engineer and, once his report had been submitted, the Corporation refused to accept his findings and refused to give instructions for the recommended remedial work. Eventually, the remedial work was carried out over a period of approximately six weeks, following which normal work on the site recommenced. A delay of no less than 58 weeks had occurred from the suspension of the works. In the Official Referees' court, the judge held that Peak was entitled to substantial damages from McKinney, since the entirety of this delay was as a consequence of McKinney's breach of contract. The Court of Appeal disagreed. Lord Justice Salmon commented that a delay of as long as 58 weeks in remedying the faults in piling, which took only six weeks to execute, was beyond all reason. He ordered a new trial, so that the Official Referee's court could make a sensible assessment of how much of the 58 weeks of delay was caused by McKinney. More importantly, however, the Court of Appeal held that Peak was not entitled to pass down to McKinney liquidated damages which Peak had paid without demur to the Corporation. Peak were simply not liable to pay any such liquidated damages to the Corporation in the first place. The main contract allowed the architect to certify extensions of time for additions to the works, strikes, force majeure or "any other unavoidable circumstances". These provisions did not permit an extension of time to be granted for the employer's failure to promptly authorise and instruct the investigations and remedial works. Such a failure was clearly avoidable. Since time could not be extended, the liquidated damages provisions could not be applied. It is a curious consideration that, until Amendment 4 was issued in January 2002, the standard JCT forms did not clearly provide that the contractor would be entitled to an extension of time under a 'catch-all' provision dealing with any breach or act of prevention on the part of the employer. In the absence of Amendment 4, in circumstances such as these, the liquidated damages provisions would still fail.
CJ-0239
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