Failure to give written notice of delay properly may expose a party to liquidated damages for late completion. The first instance decision in Steria Limited v Sigma Wireless Communications Limited provides useful guidance on whether giving written notice can ever be a condition precedent to an entitlement to an extension of time, and the form such a notice should take.
The judgment also addresses the issue of whether a liquidated damages clause amounts to a penalty or not. This case goes a step further than that of Multiplex Construction v Honeywell Control Systems . In this case the entitlement to liquidated damages was directly linked to the condition precedent.
Having contracted for the provision of a computer-aided mobilisation and communications system, Sigma sub-contracted part of that contract to Steria. Sigma paid the vast majority of the sum due under the sub-contract but refused to pay the final tranche of 5% (now claimed by Steria). It contended that as Steria delayed in completing the sub-contract works, it was entitled to liquidated damages under the sub-contract or general damages for losses which it incurred as a result of the delay.
Notice - a condition precedent?
One area of substantial dispute was the proper construction of the extension of time provision in the sub-contract (clause 6.1) and whether or not the requirement for giving written notice of delay was a condition precedent to an extension of time. The judge held that the phrase in clause 6.1, “provided the Sub-Contractor shall have given within a reasonable period written notice to the Contractor of the circumstances giving rise to the delay”, was clear.
The sub-contractor must give written notice within a reasonable period from when it is delayed. Uncertainty about whether notice was given within a reasonable period of time did not make the clause unclear in its meaning and intent. It was clearly a condition precedent - no notice within a reasonable time, no entitlement to an extension of time.
The judge continued that if there is genuine ambiguity as to whether or not notification is a condition precedent, then the notification should not be construed as being a condition precedent. Such a provision operates for the benefit of only one party, i.e. the employer, and deprives the other party (the contractor) of rights which he would otherwise enjoy under the terms of the contract.
The judge also stated that the clause need not include some express statement that unless written notice is given within a reasonable time, the sub-contractor will not be entitled to an extension of time. This was an individually negotiated sub-contract between two substantial and experienced companies with a clearly worded requirement that should not fail due to the absence of such an express statement.
What should a notice say?
In this case, Steria’s obligation to give notice of the circumstances giving rise to the delay could not be extended to include a requirement that the notice must make it clear that it is a request for an extension of time under clause 6.1 or to include a requirement that it gives an assessment of the delay. Both would involve reading into the clause words which were not there.
However, the judge did not accept that only a notification that particular relevant circumstances had occurred was sufficient. Steria must have notified Sigma that:
(a) identified relevant circumstances had occurred; and
(b) those circumstances had caused a delay to the execution of the sub contract-works.
Can written notice extend beyond communications by letter, fax and/or email to minutes of meetings and/or to delivery of pleadings?
Importantly, the judge held that written notice must emanate from the sub-contractor. An entry into a minute of a meeting prepared, for example by project managers, which recorded that there had been a delay and that as a result the sub-contract works had been delayed was not enough to amount to a valid notice under clause 6.1.
The essence of the notification was that the contractor must know that the sub-contractor was contending that relevant circumstances had occurred and that they have led to a delay in the sub-contract works. While, in principle, service of a statement of case by the sub-contractor in which notice was given could be effective, the question would always be whether or not it was given within a reasonable period if that is a requirement of the clause in question.
Ultimately, on the facts of this case, the judge held that Steria was entitled to an extension of time because the reasons given had resulted in delay (as required by clause 6.1) and the written notice had complied with clause 6.1.
The prevention principle
Steria raised a further argument (although the point did not arise for decision). If Sigma had caused delay to completion by its own breaches of contract (and had Steria failed to give notice), time for completion is set “at large” (i.e. Steria is entitled to a reasonable time to complete). This is because of the principle preventing a contractor from benefiting from his own breach of contract. If no notice under clause 6.1 had been given, Sigma could potentially claim liquidated damages from Steria for late completion of the works even though the reason for late completion is entirely due to the failings of Sigma.
However, the judge held that contractual terms requiring a contractor/sub-contractor to give prompt notice of delay served a valuable purpose. Such notice sometimes enables matters to be investigated while they are still current and gives the employer the opportunity to withdraw instructions when the financial circumstances become apparent.
If that were not so then a contractor/sub-contractor could disregard with impunity any provision making proper notice a condition precedent. The judge could see the commercial difficulties of an argument which would result in the contractor/sub-contractor being better off by deliberately failing to comply with the notice condition than by complying with it.
Clause 6.1 also conferred a right on Steria to recover “all extra costs incurred in relation to [the delay] together with a reasonable allowance for profit”. Could the prevention principle allow Steria to obtain these benefits even if it had not complied with the condition precedent in the notice? The judge held that it could not as this too would involve Steria obtaining a benefit from its own breach (failing to comply with the notice provisions in clause 6.1).
The penalty issue
There was a substantial dispute between the parties as to whether or not clause 7.1 of the sub-contract was a valid liquidated damages clause or an invalid penalty clause.
The judge held that there was no substantial discrepancy between the liquidated provisions of the sub-contract and the level of damages likely to be suffered by Sigma so as to make the clause a penalty. Furthermore, clause 7.1, objectively considered as at the date the contract was entered into, was not intended to be deterrent rather than compensatory. This was a commercial contract entered into between two substantial and experienced companies with knowledge of the difficulties that can occur where after the event one party seeks to recover general damages from the other for delay.
The judge also rejected the submission (although thought it ingenious) that if the notice requirement was a condition precedent, the liquidated damages clause was penal because it required liquidated damages to be paid, not because of a sub-contractor delay but because of a breach of the notice requirement.
He held that the only relevant issue is whether or not the sub-contractor has completed the works by the completion date or extended completion date. If he has not then he is liable to pay liquidated damages. The reason why he failed to complete the works in time (i.e. because of his own failure or because he failed to give notice on time) is irrelevant. As the reason is irrelevant, the prevention principle does not come into play.
Finally, the judge rejected an argument that there was a fundamental inconsistency in the liquidated damages clause. Under clause 7.1 Steria was liable to pay “the percentage (stated in the Sixth Schedule) of the Sub-Contract Value of that part of the Sub-Contract Works as cannot in consequence of the delay be put to the use intended for each week between [the] time for completion and the actual date for completion”.
It was argued that there was no provision in the sub-contract under which the sub-contract value of a particular task in Schedule 6 could be ascertained. Therefore, the liquidated damages provision was so inconsistent that it failed for uncertainty. The judge held that it was his task to construe the sub-contract in a way which made commercial sense and which did not frustrate the overall object of the sub-contract.
He held that Schedule 6 identified the sub-contract value applicable to each task, and in doing so avoided what might otherwise have been the difficult and expensive task of ascertaining the sub-contract value after the event when the parties were in dispute. While this process may have been rough and ready, the judge said it was not unjust. If the parties had decided to select this method for calculation of the amount of liquidated damages, the court would not subject it to unduly legalistic scrutiny.
Although clause 7.1 was not struck down, the majority of the claims for liquidated damages failed for other reasons and Steria was entitled to judgment in the majority of the amount claimed.