IS AN EMPLOYER STILL ENTITLED TO DEDUCT PENALTIES IF IN FACT HE SUFFERS LITTLE OR NO LOSS AS A RESULT OF THE LATE COMPLETION OF THE WORKS?
Where a material term of a contract provides that the works must be completed by a certain date (or an extended date), then failure to complete by the due date is a breach of contract.
Such a breach could give rise to the injured party claiming such damages as he can prove he has suffered as a result.
The assessment of the amount of the damages however is a most difficult question of fact.
To avoid this difficulty the parties to a contract often agree at the time the contract is made on a sum on money which is to be paid to the injured party in the event of breach.
Such an agreement is a "penalty stipulation" and is defined by the Conventional Penalties Act (1962) as:
"a stipulation.............whereby it is provided that any person shall, in respect of an act or omission in conflict with a contractual obligation, be liable to pay a sum of money.........either by way of penalty or as liquidated damages".
An example of such a penalty stipulation is Clause 30.0 of the JBCC Series 2000 Principal Building Agreement which states that:
"Where the contractor fails to bring the works or sections thereof to practical completion on the date or dates stated in the schedule or revision thereof in terms of 29.0, the contractor shall be liable to the employer for the penalty per calendar day for noncompletion of the works or each section thereof at the rate stated in the schedule. The principal agent shall calculate the penalty due from the date or revised date in terms of 29.0 up to and including the actual date of practical completion of the works or section thereof or cancellation in terms of 36.3"
Such a clause is valid and enforceable and the Employer is entitled to the penalty irrespective as to whether or not he has suffered any loss as a result of such late completion. If the penalty is expressed as an amount per day, then the penalty may be deducted for every day after the day the works were to have been completed until such time as they are brought to practical completion or alternatively the contract is terminated, whereafter the Employer may have a claim for damages for any uncompleted portion of the works.
However the Conventional Penalties Act (1962) also provides in Section 3 that wherever a person seeks to enforce a penalty and it appears to the Court that the penalty is out of proportion to the prejudice suffered, the Court may reduce the penalty to such extent as it may consider equitable in the circumstances.
The words, ‘out of proportion to the prejudice' do not mean that the penalty must be outrageously excessive. The penalty would be reduced if it has no relation to the prejudice, if it is markedly, not infinitesimally, beyond the prejudice, if the excess is such that it would be unfair to the Contractor not to reduce the penalty.
Such an application to the Court would have to be motivated by the Contractor who would bear the onus of proving that the Employer had suffered little prejudice compared to the penalty applied.
It is a matter entirely within the discretion of the Court which will only interfere if, bearing in mind that an object of a penalty clause is to compel the Contractor to implement his obligations by providing harsh consequences should he default, it nevertheless is of the opinion that the penalty is unduly severe to the extent that it offends against a sense of justice and equity.
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