18 Jul 2013

Symposium of legal experts considers responsibility for delay in the global construction industry

by Doug Jones

There are many practical steps parties can take to ensure delays are kept to a minimum.

TalklawGlobal's recent online symposium sought the opinions of experts in construction law on the reasons for delay in construction projects, chaired by Doug Jones. The experts were asked four questions by Alstom's Chief Counsel, Gas Business (and Clayton Utz alumnus) Stuart Connor. Doug's answers are below.

Question 1: How can customers and contractors get quick and fair decisions on extension of time claims and avoid the culture of reflex rejection of claims?

As construction lawyers we are routinely faced with disputes arising out of extension of time claims. Where assessment of extension of time claims is left to the parties or their appointed representatives, the subjective judgments made during the assessment are open to the criticism of lack of independence. If this subjectivity could somehow be removed, it is likely that many time-related disputes could be resolved more fairly and efficiently and avoid the risk of a wholesale rejection of claims.

One way of achieving this is to pass on the responsibility for assessing claims for extensions of time to an independent person or body such as an independent certifier or a Dispute Avoidance Board. Where a dispute arises in relation to a claim for an extension of time, expert determination in accordance with a prescribed timetable is commonly used. It is fundamental in all cases that the decision-maker has, or has access to, appropriate expertise and experience in programming and design and construction of the Project in issue.

However, these processes by themselves will not universally provide efficient and accurate resolution of extension of time claims. To my mind there are other factors which could significantly contribute to this goal.

It would also help if a greater degree of objectivity could be introduced to contractual tests for the assessment of extensions of time. The inclusion in a contract of a properly drafted, objective test for entitlement to an extension of time is an essential first step. In some cases it may also be appropriate to specify the delay analysis or analyses to be adopted when making and determining claims for extensions of time. This would assist in overcoming one of the most common sources of dispute in delay analysis, namely debates between experts about the most appropriate method.

Certain contract administration measures can also assist parties to obtain faster and fairer decisions. In my view, one key step to minimising extension of time disputes is putting in place systems in contract administration which will promote clarity in respect of communications between the parties. In the event of disputes, such processes should also assist in ensuring that claims are able to be assessed objectively. For example, the use of a database for project communications and agreement between the parties that only communications made through that database can be taken into account under the contractual mechanism for assessing extension of time claims is likely at least to avoid disputes as to whether a delay event was notified and what information was communicated in respect of it.

Another key source of dispute in relation to claims for extensions of time is the accuracy, currency and achievability of programs relied upon. Systems which promote updating of programs and access by all parties to data used to create and update programs, would improve prospects of agreement on the appropriate program for assessing the impact of a delay event. A system which uses an agreed program may be possible in some circumstances. One way to encourage this type of approach may be to prescribe the information which may be considered by an assessor when determining claims for extensions of time.

Question 2: Is the law in your jurisdiction clear on whether contractors are entitled to an extension of time for concurrent delay? What do you think – should they?

The question of whether or not contractors are entitled to an extension of time for concurrent delay is unfortunately not a straightforward one. There is no one answer which is appropriate for every project and every contract. However, in my view, an appropriate guideline for considering cases of concurrent delay is that a Principal should not be entitled to liquidated damages for delay periods caused by it. This would appear to be more equitable given that liquidated damages are intended to compensate a Principal for late completion which is the responsibility of the Contractor.

While this issue is ultimately a question of contractual risk allocation and drafting, there are a number of complicating methodological issues associated with assessing causation and, where the contract provides for apportionment, how to apportion responsibility for concurrent delay periods.

Take the example of two events occurring, each of which independently would cause delay to completion, where the periods of delay are contemporaneous and co-extensive and the Contractor is entitled to an extension of time in respect of one of them. In this case some contracts may provide that the Contractor is not entitled to an extension of time. It may be difficult to assess the relative impact of different causes of delay, but in my view it is appropriate to attempt to do so to avoid the Principal recovering liquidated damages where it has caused delay.

However, where the delay periods are not contemporaneous but overlap, the first delay may be a prior operative cause of delay, meaning that the second delay was not on the critical path until the first delay has ceased, Some commentators are of the view that if the Contractor is responsible for the first cause of delay, then it will not be entitled to an extension of time even if the second event would have delayed the project, but for the first delay. Although this approach has theoretical appeal, it seems inequitable that a Contractor should have to pay liquidated damages for a period of delay which would have occurred whether or not the first event occurred. In this case apportionment may be appropriate based on an assessment of the relative nature and effect of each cause during the overlapping period.

These comments are general only, and there is no reason why a contract for a project could not specify that a Contractor has priced the risk of delays by the Principal and that it will be liable to pay liquidated damages for certain specified delays caused by the Principal. Such an approach may be appropriate where works are to be performed in any operating facility or alongside Principal works. However it would be impractical and commercially unfeasible to price the risk of a Principal either wilfully or recklessly causing delay to Contractor works.

Question 3: Who owns the float? Is this issue clear under your governing law, and how should the law treat it?

Ownership of the float is usually dependent on interpretation of contractual provisions, rather than overriding principles of the governing law.

The three most common scenarios are set out below:

  • the Contractor owns it because the Contractor develops and owns the program and if work is planned and carried out in a way that allows for a float, then arguably the Contractor should be entitled to the benefit of that float; or
  • the Principal owns it because the value of the float forms part of the contract price; or
  • neither party owns it and it can be used on a first come first serve basis.

Each of these possibilities has its own merits. However, at common law, where no express agreement to the contrary exists, the float is not owned by either party. This of course raises concerns that contractors will prefer not to allow for a float in preparing their programs or, if they do, they will make every attempt to bring extension of time claims early to ensure there is sufficient float available.

The parties' intentions in respect of ownership of the float should be addressed expressly when drafting construction contracts. Such clauses can avoid disputes arising during the course of the project or they can minimise the incentive to claim extensions of time prematurely for the purpose of using up the float first.

Question 4: In relation to Time Bars, in your country, can a contractor pay delay liquidated damages, even though the customer caused the delay, merely because it missed a notice requirement?

Notification requirements are designed to provide timely information to the Principal about the project, including information about possible delays.

Notification requirements will often be coupled with time bars which provide that claims made after the times prescribed will be barred. The approach taken will depend on whether the parties intended for the notice provisions to be strictly applied and whether non-compliance with those provisions was a condition precedent to obtaining an extension of time. Interpretation of the relevant contractual clauses as well as analysing the communications between the parties will be necessary to identify the parties' intentions.

For Principals, it will often be important to have a time limit on when a Contractor may claim an extension of time, as the Principal will likely have a similar time bar in place on its ability to claim an extension under its upstream contracts.

However time bars can lead to a Principal asserting that a Contractor is liable to it for liquidated damages for a period of delay caused by the Principal, due to an administrative failure to notify within the prescribed time.

The authorities on this issue in Australia have been the subject of much debate. Reliance has been placed on Turner Corp v Austotel (1994) 13 BCL 378 in support of the proposition that a Principal is entitled to liquidated damages in these circumstances. However, in my view the weight of authority suggests that the Principal cannot recover liquidated damages relating to a period of delay caused by it. This position will perhaps gain further support from the High Court's decision in Andrews v Australia and New Zealand Banking Group Limited [2012] HCA 30. In that case, the High Court held that a clause can be a penalty even if it is not triggered by a breach of the contract. This principle could be applied to a time bar which seeks to deny a perfectly good entitlement due to a failure to comply with a procedural requirement to give notice within a prescribed period.

If should be cautioned that this principle could leave a Principal with a time risk that it is unable to mitigate. For instance, due to its contractual arrangements upstream, a Principal may be unable to obtain an extension of time in respect of an extension given or obtained by its Contractor for a claim made after the time prescribed by the contract.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.