Introduction

Delay damages are a central feature of construction contracts, designed to address the financial consequences of late completion. The enforceability of such provisions has been the subject of extensive judicial consideration, with the courts distinguishing between valid liquidated damages and unenforceable penalties. Within the NEC4 Engineering and Construction Contract, secondary option X7 establishes the framework for the operation of delay damages. Similar clauses exist in most of the other NEC4 main and subcontract long form contracts.^[1] This article examines the legal basis, operation, and practical implications of delay damages under Option X7, with reference to established principles of contract law.

The legal nature of delay damages

A contractor who fails to complete the works by the due date is liable to the employer for damages for breach of contract. Such damages may be liquidated, if a specific rate is stipulated in the contract, or unliquidated (general damages), if left to be assessed after the breach. Secondary option X7 provides a contractual mechanism for liquidated damages, although the ECC does not use this terminology.

The principle that liquidated damages are enforceable is long established. In Dunlop^[2], the House of Lords held that a sum specified as liquidated damages must represent a genuine pre-estimate of loss. More recent decisions have refined the test, holding that a damages clause will be unenforceable if it is out of all proportion to the employer’s legitimate interest in performance.^[3] Liquidated damages, when valid, generally act as an exclusive remedy.^[4]

In construction contracts, the prevention principle means that an employer cannot enforce liquidated damages where their own acts or omissions have caused delay, unless the contract provides an effective mechanism for granting an extension of time. In Peak,^[5] The Court of Appeal held that where the employer was responsible for part of the delay and the contract did not contain an operative extension of time clause, the contractual completion date ceased to apply and time was set ‘at large.’ This meant the contractor’s obligation was only to complete within a ‘reasonable time’ and the employer lost the right to enforce liquidated damages. The employer could only claim general damages if the contractor failed to complete within a reasonable period, assessed on the facts.

Secondary Option X7

X7.1 - Liability for delay damages

Clause X7.1 provides that the contractor pays delay damages at the rate stated in the contract data for each day from the completion date until the earlier of:

• completion,
• the date of take over and
• the issue of a termination certificate.

Unlike some standard forms, the ECC requires the project manager, not the client, to make deductions as part of the assessment of amounts due. This eliminates the client’s discretion to withhold or waive damages, potentially giving rise to disputes if the project manager fails to apply deductions. The ECC also omits certain conditions precedent commonly found in other contracts, such as a requirement for certification of delay or notice of intention to deduct. The absence of such formalities may simplify administration, but reduces flexibility in managing the client’s position.

In October 2020, and following the Court of Appeal decision in Triple Point, ^[6] clause X7.1 was amended to clarify that delay damages cease not only upon completion or client takeover, but also when a termination certificate is issued by the project manager. The Supreme Court later reaffirmed the principle that upon termination, the contract's liquidated damages provisions may cease to operate, but the innocent party is entitled to claim unliquidated damages for breach at common law.^[7]

X7.2 – changes to the completion date

Clause X7.2 protects the contractor in the event that a later assessment moves the completion date to a later time. Where damages have been paid, the client must repay any overpayment together with interest, assessed from the date of payment to the date of repayment This provision reflects the principle that damages should only compensate actual loss, and prevents the client from retaining sums not properly due.

X7.3 – partial take over

Clause X7.3 makes provision for a reduction of damages following partial take over. Where the client takes over part of the works before overall completion, delay damages are reduced from that date. Take over is described in clause 35.2 as being when the client ‘begins to use’ the works unless the use is for a reason stated in the scope or to suit the contractor’s method of working. The project manager assesses the benefit to the client of taking over part of the works, expressed as a proportion of the benefit of taking over the whole of the works. This approach departs from the conventional broad brush rule which bases reductions on the value of the works taken over. However, the project manager’s assessment of reduced damages may introduce uncertainty with the evaluation of the benefit being open to argument.^[8]

Sectional Completion X5

Although Option X7 does not expressly refer to sections, the contract data provides for delay damages to apply to sections if Option X5 (sectional completion) is used stating in X5.1 that ‘each reference and clause relevant to the works, completion and completion date’ also applies to any section of the works.

Prevention and Time-Bar Clauses

The operation of X7 must also be considered in relation to the prevention principle (see above). Where delay is caused by the client but no extension of time is granted due to failure by the contractor to notify the compensation event within eight weeks of becoming aware of the event,^[9] there is a risk that the client will still seek to apply delay damages. In this scenario it is not difficult to see why a contractor would mount a legal challenge on the basis of the prevention principle which precludes a party from benefiting from its own breach.

Practical Considerations

If the client wishes (liquidated) delay damages to apply to the contract, secondary option X7 must be chosen as the core clauses of the NEC4 ECC are silent on such matters. The rate of damages must also be clearly stated in the contract data.  A failure to include a rate could raise difficult questions. In Temloc,^[10] the Court of Appeal held that a rate of ‘NIL’ excluded general damages.  A blank rate or ‘n/a’ entry will also cause uncertainty and may leave the client without a remedy for late completion.^[11] However, there is no general legal rule stating that general damages cannot be recovered when the contract specifies that liquidated damages are zero.^[12]

Parties may agree on caps or nominal sums for delay damages. Such provisions are enforceable if they are commercially justified but may be at risk if they are disproportionate to the client’s interests. A cap on liquidated damages linked to a specified period after the completion date applies only within that timeframe. However, if the delay extends beyond it, the client may be entitled to general damages unless the contract states otherwise. NEC contract users should also note that when option X7 applies, any caps on liability agreed under secondary option X18 exclude delay damages.

Including delay damages may provide the client with some financial protection and possibly motivate the contractor to complete the works on time to avoid the imposition of damages. However, a more positive and effective contract mechanism could be adopted by using secondary option X6, which incentivises the contractor by paying a bonus for achieving early completion.

Conclusion

Delay damages under secondary option X7 reflect a balance between certainty of remedy and compliance with common law principles. The enforceability of such clauses depends on their proportionality to the client’s legitimate interest and their consistency with the prevention principle. Careful drafting and contract management are therefore essential to ensure the contractual mechanism functions as intended and disputes are avoided. The choice of X7, and the rate of damages specified, requires particular attention, as omissions or ambiguities may leave the client without an effective remedy. Clients should also consider including a bonus for early completion by using secondary option X6 as a positive incentive.

David Hunter

September 2025

^[1] Secondary Option X7 is not included in the Alliance Contract (ALC), Term Service Contract (TSC) or Design Build and Operate Contract (DBOC).

^[2] Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79

^[3] Cavendish Square Holdings BV v Makdessi [2015] UKSC 67 and Parking Eye Ltd v Beavis [2015]

^[4] Julian Bailey, Construction Law (3rd edn, Informa Law from Routledge 2020) vol 2, para 13.139.)

^[5] Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd [1970] 1 BLR 111

^[6] Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230.

^[7] Triple Point Technology Inc v PTT Public Co Ltd [2021] UKSC 29.

^[8] Brian Eggleston, The NEC4 Engineering and Construction Contract A Commentary (3rd edn, Wiley Blackwell 2019) 41.

^[9] NEC4 ECC clause 61.3

^[10] Temloc Ltd v Errill Properties Ltd (1987) 39 BLR 30.

^[11] Silent Vector Pty Ltd t/as Sizer Builders v Squarcini [2008] WASC 246. Note this is an Australian case.

^[12] Julian Bailey, Construction Law (3rd edn, Informa Law from Routledge 2020) vol 2, para 13.141.