| Date | 4 June 2003 |
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| Judgment | City Inn Limited v Shepherd Construction Limited, Inner House Court of Session, 20 May 2003 |
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| The Issue | Whether a requirement for notices as a condition precedent to a contractor's entitlement to extension of time 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 the contractor's entitlement to an extension of time will generally not be construed as a penalty. |
printIn August 2001, I reported the case of City Inn v Shepherd Construction. This case has now been heard on appeal in the Inner House of the Court of Session in Edinburgh. This appeal decision presents the opportunity to examine contract clauses which require contractors to give immediate notification of claims for extension of time, with the intention that the contractor will lose its entitlement for additional time if notification is not given. Although the case was heard under Scots law, the project was in fact for the construction of a hotel in Temple Way, Bristol. City Inn was the employer and Shepherd the main contractor under a JCT 1980 Standard Form of Building Contract with certain additional and amended clauses. Delays had occurred in the completion of the works and the architect had awarded a four week extension of time. This award was disputed and an adjudicator then allowed a further five week extension of time. City Inn contested these extensions by court proceedings, claiming an entitlement to deduct liquidated and ascertained damages amounting to some £30,000 per week and the repayment of prolongation costs paid to the contractor as a consequence of the extensions of time granted. City Inn primarily argued that the extensions of time were not due to Shepherd because it had failed to comply with the requirements of the contract to give notices of the relevant delaying events. This particular point hinged upon 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 to carry out work which would require an adjustment to the contract sum or an extension of time, before executing the work, the contractor should give 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, City Inn maintained, if the contractor failed to comply with these requirements, it would not be entitled to any extension of time. Shepherd argued that it simply should not be bound by these provisions. No mention had been made of the clause during the course of the works. In each case when an instruction for additional work had been given to Shepherd, Shepherd had proceeded to execute the work without complying with the requirements of the clause and yet at no time had any objection been taken. Shepherd argued that by such conduct City Inn had waived compliance with the clause, which could not now be relied upon to deny Shepherd the extensions of time to which it was otherwise entitled. Shepherd also argued that the clause imposed a penalty upon them in such a manner that it was unenforceable. Shepherd maintained that the clause carried consequences with regard to extensions of time which arose from procedural matters rather than from their responsibility as contactors for the rate of progress of the works. What rendered the clause a penalty was that the amount of liquidated damages bore no relation to any loss caused to City Inn by any failure to give notices. On hearing these arguments in the Outer House of the Court of Session in July 2001, Lord MacFadyen refused to accept Shepherd's position. He held that the £30,000 per week remained payable by Shepherd on the basis that it was a genuine pre-estimate of the loss suffered by City Inn as a result of the delay in completion. That 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. The Appeal Court agreed with these findings. If the contractor wished to be granted an extension of time, it was bound to comply with the provisions of the additional contract clause requiring immediate notice and particulars of the delay likely to be occasioned by an instruction. That was a 'condition precedent' to the contractor's right to be granted an extension of time. If the contractor failed to take the steps specified under the additional clause, then unless the employer waived the requirements of that clause, the contractor would not be entitled to an extension of time. Although the Court of Appeal agreed with Lord Macfadyen as to the outcome of the case, it differed slightly in respect of his rationale. It was not a breach of contract for the contractor to fail to give a notice in compliance with the amended clause. Thus, the clause did not oblige the contractor to give the architect an opportunity to reconsider his instruction. If an architect issued an instruction which might eventually cause delay, the chance that the contractor might not contest that instruction and give the appropriate notice was just one of the risks that the architect took. If therefore the contractor went ahead with the work in accordance with the instruction, he did not commit any breach of contract. Nevertheless, by failing to give notice in accordance with the provisions of the contract, the contractor lost its entitlement to an extension of time.
CJ-0321
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