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22 Dec 2017

Basic principles

There are two basic principles to remember about timing:

  1. time is virtually always of the essence of a construction or works contract; and
  2. the contractor almost always takes the risk of liability for delayed completion of works.

Interesting legal implications flow from these two basic principles.

Implication: Time bars apply strictly

The first legal implication is that the agreed time for completion or date of completion is generally fixed unless it is varied by agreement.

Watch out, because in most construction and works contracts, including the Australian Standard forms of contract, strict time limits apply to the steps that need to be taken for a contractor to claim and be granted an extension of the time to completion.

There is a reason for this: the head contractor and superintendent need to be notified as soon as possible of any event that is likely to delay the works, so that they can notify their principal (and so on, up the contractual chain) and take necessary steps to avoid or minimise any resulting loss or damage.

Changes to the Australian Consumer Law (found in Schedule 2 of the Competition and Consumer Act 2010 (Cth)) that took effect on 12 November 2016 may make it harder for principals to impose time bars on contractors that are not reasonably necessary to protect the principal’s commercial interests.

Courts are generally reluctant to allow contractors to have more time to complete the works if they do not comply with those requirements strictly.

Avoiding Time Barring through Back-to-Back contracting

Because it is so important to meet time bars under a construction contract, proper back-to-back delay and timing clauses are essential. Some subcontracts try to deal with this by saying:

  1. every time the word “principal” is used in the head contract, it is to be substituted with the word “head contractor”; and
  2. every time the word “contractor” is used in the head contract, it is to be substituted with the word “subcontractor”.

These sorts of provisions will often not work in practice.

Here is a simple case study, to illustrate the point:

The principal (‘A’) engages the head contractor (‘B’) to build a power station. The head contractor (‘B’) in turn engages subcontractor (‘C’) to perform earthworks.

Under the head contract, B has to notify A of events that have caused or are likely to cause a delay in the performance of B’s works (which include C’s earthworks).

The subcontract simply provides for all of A’s rights and obligations under the head contract to apply to B and for all of B’s rights and obligations under the head contract to apply to C.

It follows that C has the same notice obligations to B, regarding qualifying causes of delay, as B has to A, under the head contract.

This means that C must notify B and B must notify A, of a delay event, within 28 days after it happens.

What happens, then, if C waits until the end of the 28th day after a particular delay event to notify B of it?  In that event, B will have no time at all to give the same notice to A.  It will follow that B, perhaps through no fault of its own, may be in breach of its notice requirement under the head contract.

Careful back-to-back drafting will take account of this by, in this example, giving C only 14 days from the date of a delay event, to give the required notice to B.

Liquidated damages: introduction

It is generally quite easy for a head contractor or principal to get compensation for loss or damage caused by delayed completion of construction works, absent any agreed variation or extension of time.

However, working out the amount of compensation that is owed to a principal for losses caused by delayed completion of works and proving which particular event caused which particular delay, is usually very difficult and expensive.

To get around this, lawyers have developed a concept called “liquidated damages”. Liquidated damages are basically amounts of compensation at a pre-agreed fixed rate per day, for delayed completion of works.

Liquidated damages are an effective way to avoid much of the complication and expense otherwise involved in proving precisely how much the principal has lost as a result of the contractor’s delayed completion and precisely which events caused what parts of the overall delay.

Contractors should be aware that under many of the Australian Standard forms of contract, contractors are subject to unlimited liability including on account of liquidated damages. You should seek legal advice to help contain and manage this exposure.

As effective as they are, liquidated damages can be challenged in the courts as unenforceable. There are two reasons for this:

  1. the doctrine of penalties; and
  2. the prevention principle.

Liquidated Damages and the doctrine of penalties

The doctrine of penalties basically says that contracting parties are not free to impose penalties for breaches of contract. They are only able to agree compensation that does not penalise or punish either party. Principals should not be allowed to constantly recover a windfall from the contractor’s breach. The purpose of the liquidated damages clause is to save the parties (and taxpayers) the time and expense that would otherwise be involved in proving in court how much per day the principal has lost as a result of the contractor’s delays. Because of this, the rate of liquidated damages must represent a genuine pre-estimate of the loss that the principal expected to suffer as a result of the contractor’s delays, at the time when they made the contract.

Liquidated damage and the prevention principle

A liquidated damages clause may also be unenforceable because of the prevention principle. The prevention principle applies when the principal has done something or failed to do something that has caused part or all of a delay in carrying out the works.

If the principal prevents the contractor from completing its scope of works on time (even if what the principal has done or not done has only contributed in a minor way to the overall delay), then the contractual date for completion will no longer apply (that is, time will be “set at large”). This means that the contractual date for completion will no longer apply and it will be left to a court or arbitrator to assess when the works should have been completed in the circumstances. In that case:

  1. the liquidated damages clause will have no effect at all; and
  3. the principal will be left to prove that the works were delayed past a reasonable completion date and how much has been lost as a result.

Overcoming the prevention principle through extension of time

There is an exception to this rule. Basically, the courts have said that if:

  1. completion of works is delayed; and
  2. the principal has caused or contributed to that delay; but
  3. the principal has extended the time for completion; and
  4. that extension of time is enough to cover the whole of the delay that was caused by the principal,

then, for any additional delay over and above the extended time for completion, the contractor remains liable to pay liquidated damages to the principal.

If no extension of time, or an insufficient extension of time, is granted to the contractor, then the time to complete the works will still be “set at large”.

Causation issues

It can be hard to work out each party’s contribution to a delay event. Where there are several overlapping delay events, experts are often needed to work out which events caused which parts of a contractor’s delay. However, most contracts do provide a way to deal with these issues.

Whether and how the contractual provisions apply will depend on the precise circumstances of any delay event. You should seek legal advice about how the contract provisions apply and how to deal with causation issues arising from a delay event.

What if the principal has prolonged the contractor’s works?

There may be occasions where it is the contractor, rather than the principal, that is entitled to be compensated for the delayed progress of its works. This kind of compensation is often known as “prolongation costs”.

Where “prolongation costs” are available to a contractor, it is generally because the principal has engaged the contractor’s services without first ensuring that the site was ready to receive the contractor’s work. In that event, the contractor may have to pay for plant and equipment hire, labour hire, wages, salaries, overheads etc., during idle time, which is obviously unproductive for the contractor.

Many construction contracts say that the contractor can be compensated in these circumstances.

Contractors who believe they may be entitled to prolongation costs should seek legal advice.

*This is general information only, and does not constitute specific legal advice. Please consult one of our experienced Legal Team for specific advice relevant to your situation.

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