During phase 1 of the arbitration procedure in relation to Mall of Scandinavia, the remit of the arbitration panel included having to establish the content in a penalty clause concerning delayed access to shop premises. The parties had differing views on how the parties' agreements and construction contracts should be interpreted in relation to the date of taking possession of the shop premises.
During the contract period, the parties had signed a supplement to the construction contract that would represent the parties' consensus in issues where disagreements had arisen, including in issues concerning right to time extension, deviations from contractual requirements and penalties.
The disputed penalty clause in the supplementary contract had the following wording
"The purchaser and the tenants shall gain access to the respective premises for execution of their own works no later than at the times indicated in [annex]. At the times indicated, the works shall be completed in accordance with [annex].
[...]
If access cannot take place at the times indicated in [annex], unless the cause of the delay is such that entitles the Contractor to a time extension, penalties for the respective unit shall be paid at the amounts indicated in [the construction contract] for each commenced calendar day for which access is delayed."
ABOUT PENALTIES
Within the framework of AB 04/ABT 06, which constitutes the standard conditions for construction contracts, the penalty has a specific meaning. The regulations surrounding penalties have the aim of protecting all parties and ensuring fairness in connection with any delays or faults in the contract. Penalty clauses regulate a predetermined amount that shall be paid due to breach of contract. The penalty functions as a means of ensuring that the contract is executed according to plan and on time. It is a financial incentive for the contractor to keep to the time schedule and a protection for the purchaser against losses due to delays. If a contractor falls behind with its work, the purchaser can demand payment of the agreed penalty. A contractual penalty can also have the benefit that lengthy investigations or negotiations on the damage's size can be avoided.
What is usually regulated is the size of the penalty, how it will be calculated. These details are clarified in the commission agreement. AB 04/ABT 06 also addresses the duty of notification, which means that the contractor must inform the purchaser if there is a risk of delay. If this is the case, the parties have the possibility of discussing the situation and potentially adjusting the time schedule or the penalty.
INTERPRETATION OF THE PENALTY CLAUSE
The purchaser claimed in the arbitration that a penalty should be paid if access to the shop premises could not take place on the agreed dates. According to the purchaser, access was contingent on the contractor fulfilling its contractual undertakings concerning completion of the shop premises on the agreed date in accordance with the contract documents.
The contractor claimed that the penalty clause in the supplementary contract meant that the penalty for the shop premises should run until the date when the purchaser had gained access to the shop premises and the tenant was able to undertake its works in the premises.
The purchaser invoked the following circumstances for its interpretation of the penalty clause in the supplementary contract
- that the content of the supplementary contract should be established based on the parties' joint intentions when entering into the supplementary contract,
- that the circumstances when entering into the supplementary contract, including previous drafts, suggested that penalties should run until the date of the shop premises' completion,
- that the supplementary contract had the same meaning as the construction contract's provision on completion times, whose wording signified that penalties should run until the date for the shop premises' completion in accordance with the contract documents, and
- that the inspection provision in the construction contract, which stipulated that the inspector should assess the degree of completion of the contractor's work on the shop premises, also suggested that penalties should run until the date for the shop premises' completion.
The contractor contested that there were any joint intentions when entering into the supplementary contract and claimed the following circumstances for its interpretation of the penalty clause in the supplementary contract
- that the supplementary contract entailed a clarification of the penalty regulation in the construction contract,
- that the supplementary contract's wording suggested that there were two separate undertakings in the supplementary contract - an access undertaking that contained penalty sanctions and a completion undertaking that did not contain penalty sanctions,
- that there were also two separate undertakings according to the wording in the construction contract's provisions on completion times, and
- that the inspection provision in the construction contract suggested that penalties ran until the date for access to the shop premises.
The arbitration panel established the penalty clause's content through an overall assessment of the circumstances that the parties' invoked. The arbitration panel concluded in its assessment that the supplementary contract's wording, the circumstances prior to entering into the supplementary contract, as well as the construction contract's provisions on completion and inspection, suggested that penalties should run until the shop premises' completion in accordance with the supplementary contract and that the completion should be assessed according to the construction contract's provision on inspection.
ANALYSIS
Those of us who work with construction law are increasingly seeing a desire on the purchaser's side to want to subject elements other than completion of the entire contract to penalties. It can be a question of linking the penalty to different degrees of completion, different parts of the contract, as well as fault rectification and other types of snagging. The desire to link different actions to penalties applies in the original construction contract, but is even more common in a situation, as with Mall of Scandinavia, when for various reasons the parties enter into a supplementary agreement.
To avoid ending up in a subsequent dispute on whether the conditions for the penalty are met, it is important that the parties clearly define in the penalty provision what is required for the penalty to be incurred. In terms of completion, the critical element is whether the contract is approved at a final inspection or not, however, demarcation problems can arise when it is a question of assessing different elements in a contract that has been approved. For example, problems can arise in relation to fault rectification or when it comes to assessing the execution of parts of an already approved contract that are subject to penalties. Issues can then arise of whether the same standard applies as when assessing the approval issue or whether higher requirements are placed on completion. To avoid the demarcation issue, it can be a good idea to – as is the case in relation to the approval issue – link the element subject to penalties to an inspector's assessment. If, for example, it is a question of a rectification penalty, the parties should be able to agree that the penalty ceases when an inspection establishes that the fault has been rectified. If it is a question of completion of different parts of the contract, it should be possible to subject the different parts to an inspector's assessment, but if the parties do not want this, the parties should already regulate in the penalty provisions which requirements for completion are required for the penalty to cease.
Naturally, a clearly defined penalty provision does not constitute any guarantees against a future dispute, but hopefully, the starting position in any dispute can be easier to predict if the clause is clear and does not leave so much room for interpretation.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.