NEC4 revisions on liquidated damages and payment provisions

A second set of amendments to NEC4 were recently published (30 October 2020). The substantive changes are driven by two relatively recent judgments, one on the right to recover liquidated damages for delay post termination and the other on what is needed for a final date for payment provision to be Construction Act-compliant.

To understand these main amendments, it is necessary to remind ourselves of what these cases decided.

On liquidated damages, the Court of Appeal judgment in Triple Point Technology vs PTT Public Company [2019 EWCA Civ 230 ] surprised many. It concerned enforceability of liquidated damages in a contract terminated before the contractor had completed the works (see Building article by Matthew Taylor and Aidan Steensma, 3 May, page 44).

The liquidated damages clause provided that the IT contractor (Triple Point) should be liable to pay 0.1% of undelivered work per day of delay from “the due date for delivery up to the date PTT accepts the work”.

The prevailing view (and that applied in the Technology and Construction Court judgment in Triple Point) had been that liquidated damages were recoverable up to the point of termination, to the extent that the contractor was in culpable delay at that point. This is on the basis that termination did not affect rights that had accrued as at termination. While subject to the precise wording of the liquidated damages clause, this was the general starting point.

The latest amendment stops the application of liquidated damages at the ‘date on which the project manager issues a termination certificate’

After termination, the prevailing view was that these damages were not recoverable as the contractor was no longer under an obligation to complete the works. Instead, post termination, there was an obligation to pay general damages resulting from breach of contract including any further delay caused by employing another contractor.

So, if the works were three months beyond the completion date as at termination, the contractor would be liable for three months of liquidated damages plus general damages for any further delay caused by employing another contractor.

In the Triple Point contract, the delay damages were described as applying up until completion – that is, when PTT accepted the completed work. Sir Rupert Jackson, who gave the leading judgment, found that these delay damages did not apply at all where the contractor could never hand over the completed work. He found that PTT was not without its remedy but that this remedy was for damages at large, not sums fixed in advance, in other words, liquidated.

So where does that leave NEC4? NEC4 (option X7), like many standard forms, provided that liquidated damages for delay would be recoverable between completion and the date on which the client/employer takes over the works. Applying the Triple Point decision to this clause would make it ineffective as the client would never take over the contractor’s works.

The latest amendment stops the application of liquidated damages, in a termination situation, at the “date on which the project manager issues a termination certificate”. So, where there is termination this amendment preserves the employer’s right to claim liquidated damages but only up to the date of this termination certificate. However, a termination certificate is only issued by the project manager where he agrees that there is a valid termination reason. How often, if ever, do both parties agree on termination? Although under NEC4 an employer may terminate for any reason, it is likely that the grounds for such termination will be challenged as would the issuing of a termination certificate. So, what then for the liquidated damages provision? Will the question of whether and when such a certificate should have been issued have to be determined first? Before liquidated damages can be applied at all?

Has this amendment jumped the gun? We await the outcome of the appeal in Triple Point to the Supreme Court (heard on 20 November). Should it reverse the Court of Appeal decision, has this amendment introduced an unnecessary and potentially troublesome layer of complexity?

The second amendment relates to the final date for payment where the type of contract used requires submission of an invoice

The second major NEC4 amendment relates to the final date for payment in a contract where the type of NEC contract used requires submission of an invoice. These contracts include the professional services contract, the term service contract and the design, build and operate contract. It follows the TCC decision in Rochford vs Kilhan [2020 EWHC 941], which implied parts of the Scheme for Construction Contracts into the payment terms. This was because of uncertainty as to what the contract provided for by way of timing of interim payment applications and thus the due date and the final date for payment of each.

The final date for payment under the contract was stated to be 30 days from invoice. However, the contract was found not to provide any certainty as to when the invoice was to be issued. Therefore, there was no ascertainable final date for payment and the Scheme was implied. So far, so good. What about the judge’s “obiter” comments as to whether calculating a period of time from the date of an invoice can ever fix a final date for payment? She stated that she accepted “with some diffidence” the argument that while a due date can be fixed with reference to an invoice, a final date has to be “pegged to the due date” and be a set period of time, not an event or mechanism. On the basis of that comment, the NEC amendment introduces a revised clause for some of its forms that the final date for payment is seven (or as otherwise agreed) days after the due date – without reference to an invoice. Was this needed? Are the obiter comments to be relied upon?

Lindy Patterson QC is a barrister, arbitrator and adjudicator at 39 Essex Chamber