Understanding the Employer's Entitlement to Liquidated Damages When there is Sectional Completion

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Monday, April 05, 2021 / 01:00PM / By Osinachi Nwandem (Associate, AELEX) / Header Image Credit: Aelex

 

 

It is a common practice for parties in large commercial construction projects to agree to complete works in sections or phases. Completion of works in sections enables the employer to take over parts of the works while construction continues on other parts1. We can see an example in a project for the construction of several buildings which incorporates a sectional agreement requiring the contractor to complete several units in sections. Based on this arrangement, the employer can take over the completed buildings rather than waiting for the contractor to complete all the buildings. Interestingly, this could be beneficial to the employer as the employer may opt to sell the completed buildings to recoup its building costs.

 

Where parties agree to complete works in sections, the parties will include a sectional completion provision as an express term of the contract2. Sectional completion refers to a provision within a construction contract which allows parties to set different completion dates for different sections of the works3.

 

Also, and as is the case in most construction contracts, it is possible that the contractor's delay could prevent completion of a section on the agreed date. Where this occurs, the employer's obvious response will be to trigger the liquidated or delay damages provision in the contract. Yet, the employer must take a pause and ensure that the sectional completion provision of its contract is clear and well-defined before laying claims for liquidated or delay damages.

 

Put in simple words, for an employer to validly claim liquidated damages against the contractor where the contract provides for sectional completion, the sectional completion provision must be clearly defined and identifiable in the contract. The English court approved this requirement in the case of Vinci Construction UK Limited v. Beumer Group UK Limited4.

 

 

Facts of Vinci's case

In Vinci Construction UK Limited5, Vinci (main contractor) and Beumer (subcontractor) entered a subcontract on the 8th of November 2012 wherein Vinci employed Beumer to undertake the designing, manufacturing, fabrication, supply, delivery, offloading, installation, testing, commissioning and user training regarding baggage handling system works at the South Terminal of Gatwick Airport, London6. Both parties based the subcontract on the NEC Engineering and Construction Subcontract 3rd edition although with bespoke amendments made by the parties7. The subcontract broke completion of the works into several sections. Among these sections included:

"Section 5-Baggage-Subcontract completion: 12 May 2015

Section 6-Remaining Works-Subcontract completion: 27 May 20158"

The subcontract provided for payment of liquidated damages if Beumer does not achieve any of the sectional completion dates9.

 

When Beumer eventually delayed completion of section 5 and section 6, Vinci claimed liquidated damages for the delay and disputes arose. The parties then referred the dispute to adjudication10.

 

Beumer argued that the scope of works under section 5 and section 6 were conflicting and that it was difficult to ascertain with certainty which aspect of the delay fell within section 5 or section 6. Because of this, Beumer sought to declare the sectional completion dates and liquidated damages provisions void and unenforceable11.

 

At the High Court, the court noted that the subcontract had defined the scope of work for each of the sections. The court further noted that while section 5 covered works necessary to provide new operational baggage system, Section 6 covered works necessary to remove redundant facilities and provide infrastructure following the completion of the new operation baggage system at the Airport's terminal12. These works were distinct and ascertainable. For this reason, the court held that the works falling within section 5 and section 6 were sufficiently identifiable and certain so that the sectional completion and delay damages provisions are operable and enforceable13.

 

 

Identifying a clear sectional completion provision in a contract - the Clarity Test

From Vinci's case discussed above, three ingredients help determine whether a sectional completion provision of a contract is well-defined and identifiable. A sectional completion provision will pass the test of clarity if upon review of the contract, the employer can answer the following questions in the positive:

 

(a)  Does the sectional completion provision clearly define the scope of work for each section?

The scope of work for each section should be distinct and not in conflict with other sections. In Vinci's case14, the court rejected Beumer's application to declare the sectional completion agreement and liquidated damages provision void and inoperable as the scope of works in section 5 and section 6 were sufficiently recognizable and certain15.

 

(b)  Does the sectional completion arrangement provide a date for completion of each section?

The contract must provide completion dates for each section. In the English case of Liberty Mercian Limited v. Dean & Dyball Construction Limited16, all the five sections provided dates for completion:

"Section 1 - 10 February 200617; section 2 - 7 April 200618; section 3 - 3 May 200619; section 4 - 3 November 200620 and section 5 - 3 November 200621".

 

When section 1 was delayed by 8 weeks, the contractor sought an extension of time. However, Liberty's architect granted an extension of time of only 4 weeks22. Liberty's architect showed that a culpable delay of 4 weeks was attributable to the contractor for section 1, hence the extension of time of 4 weeks. Also, the developer deducted £48,000.00 because of the culpable delay23.

 

The court rejected the contractor's argument that there was no defined date for completion of the sections as an ordinary reader would have had no difficulty in concluding that the contract clearly defined dates for each section24. This, therefore, bound the contractor to pay liquidated damages for failing to complete each of the sections within the agreed dates.

 

Sometimes, employers may decide to fix the date of commencement of a section upon the conclusion of a previous section. This method implies that a contractor's delay in the 1st section cascades down to other sections25, hence, the reason it this method is called the 'cascading effect26'. The English court in Liberty Mercian Limited v. Dean & Dyball Construction Limited27 endorsed cascading effect.

 

The brief facts of Liberty Mercian Limited28 are that the developer engaged the contractor to carry out the construction of 4 retail units. The contract incorporated the JCT Standard Form of Building Contract, 1998 edition, 2003 revision29. The contract equally included a sectional completion agreement for the project. The contract provided details of sectional completion in the appendix wherein the contract was to be completed in five sections30. The sectional completion provision provided for the date of commencement of section 2 to be 'upon completion of Section 1'. Similarly, section 3 was to begin upon completion of section 2. Section 4 was to begin upon completion of section 3 and section 5 was to begin upon the conclusion of section 431.

 

The developer's architect found the contractor to have caused four weeks of culpable delay in Section 1. As a result, each of the subsequent four sections was similarly delayed by four weeks. The developer then sought to impose liquidated damages for 20 weeks of delay32. The court found that there was nothing 'unfair' with the contractor having to pay liquidated damages for a "cascading" delay from Section 1 to the subsequent four sections of the works33. The court concluded that from the express terms of the contract, the parties would have been aware that a period of culpable delay in the 1st section would cascade to delay in subsequent sections.

 

(c)  Does the sectional completion arrangement include an amount to be paid as liquidated damages for each section?

In Vinci's case34, the subcontract had set out delay/liquidated damages for each section:

"Section 1 - 19,000.00 Euros/calendar day; Section 2 - 23,000.00 Euros; Section 5 - 22,500.00 Euros; Section 6 - 17,000.00 Euros. 35"

 

Similarly, in Liberty Mercian Limited36, the sectional completion provision in the contract provided for an amount payable as liquidated damages for each section:

"Section 1 - 12,000 Euros; Section 2 - 1,500.00 Euros (in addition to Section 1); Section 3 - £2,000.00; Section 4 - 7,000.00 Euros; Section 5 - 1,000.00 Euros (in addition to the section 4)" 37.

In both cases, the court validated the sectional completion provisions and enforced the employer's claim for liquidated damages.

 

 

When the clarity test fails

If the sectional completion provision in the contract passes the clarity test, then the employer can validly seek payment of liquidated damages in event of a contractor's delay. However, where the sectional completion provision fails the clarity test, this means that the sectional completion provision is unclear. The arbitral tribunal or court will prevent the employer from triggering its entitlement to liquidated or delay damages and will hold the sectional completion and liquidated damages provision as inoperable and void. This was the position in the case of Taylor Woodrow Holdings Limited & Anor v. Barnes and Elliott Limited38.

 

In Taylor Woodrow Holdings Limited39, Taylor (employer) engaged Barnes (contractor) to carry out design, refurbishment works of a park40. They based the contract between the parties on the JCT contract 1998 edition. The contract provided that completion of the works will be in six sections. The contract equally provided for payment of liquidated damages if the contractor cannot complete the construction of a section by the completion date for such section41.

 

When disputes as to delays ensued, parties went to arbitration. The issue before the arbitration tribunal amongst others was whether the liquidated damages provision is valid or void for being uncertain, hence inoperable. Upon a careful study of the contract, the tribunal observed that there was nowhere in the contract dividing the works into 6 sections or even defining the scope of each of the alleged six provisions. The tribunal agreed that the liquidated damages provision was void and inoperable, as there was no mechanism throughout the contract ascertaining that works were to be completed in sections42.

 

The High court agreed with the tribunal stating that where the contents of any section cannot be ascertained under the contract, there will be no basis for triggering the employer's entitlement to liquidated damages as this entitlement is void and unenforceable.

 

 

Note to Employers

Although several construction contracts include liquidated or delay damages provisions as a remedy to the employer for delays because of the contractor, it will be prudent for the employer to confirm that its sectional completion provision passes the clarity test discussed above before bringing a claim for liquidated or delay damages.

 

For employers negotiating construction contracts with an offer that the contractor completes works in sections or phases, the tests discussed above will be of an immense guide when drafting the contract.

 

 

 

Footnotes

1.    Iwan Jenkins, 'The 3 Minute Guide: What Is Sectional Completion?' (Hugh James, 2016) accessed 10 February 2021.

2.   'Sectional Completion In Construction Contracts' (Designingbuildings.co.uk, 2020) accessed 11 February 2021.

3.   Jenkins (n 1).

4.   (2017) EWHC 2196 (TCC)

5.   Ibid

6.   Ibid, para 2

7.   Vinci Construction UK Limited (n 4) para 3

8.   Ibid

9.   Ibid, para 5

10.Ibid, para 7

11. Ibid, para 44

12. Ibid, paras 55 and 56

13. Ibid, para 63

14. Vinci Construction UK Limited (n 4)

15. Ibid, paras 44 and 63

16. (2008) EWHC 2617 (TCC)

17. Ibid, para 5

18.Ibid

19. Ibid

20.      Ibid

21. Ibid

22.      Ibid, para 9

23.      Ibid

24.      Ibid, para 20

25.      Issaka Ndekugri and Michael Rycroft, The JCT Standard Building Contract Law and Administration (2nd edn, Routledge 2009) (27).

26.      'Liquidated Damages' (Pinsentmasons.com, 2011) accessed 12 February 2021.

27.      Liberty Mercian Limited (n 16)

28.      Ibid

29.      Ibid, para 4

30.      Ibid

31.     Ibid

32.      Ibid, para 9

33.      Ibid, para 32

34.      Vinci Construction UK Limited (n 4)

35.      Ibid, para 26.

36.      Liberty Mercian Limited (n 16)

37.      Ibid.

38.      (2004) EWHC 3319 (TCC).

39.      Ibid.

40.      Ibid, para 3.

41.     Ibid, para 21.

42.      Ibid, para 12

 

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