Penalties for late completion of course! Yes, the dreaded penalty clause.
These past weeks, our office dealt extensively with a number of Adjudications where Subcontractors disagreed with penalties being levied against them by a Main Contractor.
In all the cases, the JBCC N/S Subcontract Agreement (N/S Agreement) was signed between the parties.
It seems that Main Contractors are unaware of the distinction between penalties and damages for the purpose of their contract with a Subcontractor.
Within the “contract data” section of the N/S Agreement, space is provided for penalties and Main Contractors often populate these with a false perception that the penalties represent amounts to be paid to the Main Contractor, by the Subcontractor in the event of late completion.
However, on closer inspection, the wording actually states that the penalties are merely used for information purposes. This is to inform the Subcontractor of the penalties that could be levied by the Employer against the Main Contractor, in the event of late completion.
In the N/S Agreement however, provision is only made for damages, under clause 30 and not penalties. A Main Contractor is therefore contractually barred from applying penalties under a N/S Agreement.
Shock and horror for the Main Contractors! I know. Do I hear the Subcontractors pulling out the site-braai equipment for a celebration? Not so fast…
So what is the difference then?
A penalty provision within a contract stipulates that one party shall pay a specified penalty when that party fails to perform on an agreed obligation within the contract. In this instance, the other party does not need to prove that they suffered any damages in order to levy such an agreed penalty. This is an important distinction and consideration under N/S Agreements.
Many Subcontractor would be in dire trouble if they did have a penalty provision with a Main Contractor. Very few Subcontractors manage their programme and extension of time claims. So in the event of delays beyond their interim completion date, a Main Contractor would be able to apply penalties even if the Main Contractor suffers no loss at all in terms of their contract with the Employer. Penalty clauses therefore bring about an automatic, agreed, contractual mechanism that triggers the penalty to be levied when the default is present, irrespective of actual losses suffered by the other party.
Damages on the other hand is different. When one party fails to perform on an agreed obligation stipulated within a contract, the other party can claim the damages they suffered as a direct result of such failure. These damages must be proven. Now, can you see the change brought about by this small distinction? If a Subcontractor in this instance, manages his programme poorly and finishes his work far beyond his contractual interim completion date, the Main Contractor can only claim damages when he suffers provable loss.
Mostly, Main Contractors do the hard yards in terms of their extension of time claims. When a Subcontractor completes his section late and no penalties are levied against the Main Contractor due to approved extensions of time claimed by him, there are no provable time-related damages or losses suffered and the Main Contractor cannot claim damages as a result of the late completion.
So the distinction between penalties and damages is very significant indeed for Main Contractors and Subcontractors alike.
In all the cases we dealt with, Main Contractors were under a false illusion that they can levy penalties against a Subcontractor under the N/S Agreement. This is not the case and Main Contractors need to take note to prevent costly determinations against them in Adjudication or Arbitration.
Subcontractors on the other hand need to take note that if a Main Contractor can prove that you are the sole cause of a late completion, they can deduct damages for the total amount of penalties levied against them by the Employer as well as any other provable costs like time-related P&G etc. Subcontractors need to manage their programs and delays constantly and keep up to date with their notifications under the required clauses of the N/S Agreement.
These documents are also important should an arbitration case arise.