Pursuing and defending delayed project claims

In April, analysts at Barbour ABI identified 4,253 UK projects with a combined value of £67.7 billion that had been delayed or withdrawn as a result of the pandemic. Although this figure has now fallen as a result of sites re-opening, it illustrates the importance of actively and carefully managing the financial consequences of delay.

This guide is the third in a series from the specialist infrastructure lawyers at Pinsent Masons.

Delay on a construction project is a matter of importance for both the contractor and the employer. A contractor will incur additional costs in maintaining a site presence that might not be recoverable; and an employer will suffer lost revenue from the delayed completion of the asset.

Where a project is delayed, one or other of the parties will have to shoulder the burden of that late completion in financial terms. Depending on the wording of the contract and the jurisdiction, the employer may be entitled to claim liquidated or general damages for delayed completion. The contractor may be entitled to an extension of time to excuse the late performance, and possibly also to its costs associated with that delay.

Having the appropriate project controls and procedures in place to identify the prospect of delay and then manage its effects is essential. The NEC suite of contracts, for example, places the Accepted Programme at its very core and the various associated provisions within those contracts which deal with early warning and risk management have been shown to have a positive effect in identifying and managing the causes and effects of delay.

That said, not many anticipated the full effects and impact that the Covid-19 pandemic would have on live projects and it remains to be seen how the industry will react to, and deal with, so many late projects. Even as things begin to return to normal, projects may continue to be delayed due to the impact of the early shutdown of projects; labour, plant and material supply issues; and the additional burdens of 'new normal' methods of working.

The legal obligation to complete

Before considering how the parties to a construction contract might deal with delay or the prospect of delay, it is worth addressing the legal nature of the contractor's obligation to complete the project by the agreed date.

The starting point is that late completion caused by the contractor will amount to a breach of contract giving rise to a possible claim by the employer for damages. If the employer has made the requirement to complete by the agreed date a condition of the contract, late completion would give rise to an entitlement to terminate.

Extensions of time

In both common law and civil code jurisdictions, the starting point when determining whether a contractor is entitled to an extension of time for completion – and relief from delay damages - is to check the express terms of the contract.

Where the contractor can establish a contractual ground for the extension then, subject to having given effective notice and being able to demonstrate causation, it ought to be entitled to an extension of time. It may also be entitled to associated loss and expense.

Whether there is a contractual entitlement to extend time for the effects of the pandemic is something that will need to be considered on a case by case basis. This might involve a consideration of the scope of any contractual force majeure provision and whether the specific impacts of the pandemic are caught by the definition. If they are, then performance is generally excused for the duration of the circumstances giving rise to the force majeure.

In common law jurisdictions, force majeure is a creation of contract. If there is no contractual provision for force majeure, the contractor will not be entitled to additional time to complete save for two specific exceptions:

• the prevention principle – which prohibits a party from insisting on compliance with a contractual obligation if that party has itself prevented compliance with it. For example, if there is no contractual basis for an extension of time but the contractor is prevented from completing by the required date by the employer, time might then be set 'at large' so that the contractor is then required to complete within a reasonable period of time and the employer's entitlement to liquidated damages is lost; and
• frustration – which may allow a party to be discharged from its obligations where performance has become impossible due to unforeseen circumstances. However, it is of narrow application and is difficult to establish: see our Out-Law guide to frustration of English contracts and Covid-19.

In civil code jurisdictions, applicable codes may contain provisions which justify non-compliance with the contractual completion obligations or provide relief from liquidated damages in certain prescribed circumstances, regardless of the existence of a contractual force majeure provision. For example, the UAE Civil Code expressly provides for relief in the event of force majeure, extraneous events and unforeseeable circumstances. It is always worth checking if the applicable law alters or supplements the contractual position.

For contractors: is the delay excusable?

Once it is satisfied that the delay is 'excusable' and there is a contractual entitlement to an extension of time, the contractor should:

• check and comply with contractual requirements for notices, particularly where these are expressed as a condition precedent;
• consider whether the delay is critical or non-critical to completion – in other words, whether it will just cause activity delay and disruption, or whether it is expected to delay overall completion or some other milestone date in respect of which relief from liability to pay delay damages is required;
• check whether there is sufficient 'float' in the contract programme to allow the delay to be absorbed without a critical delay to completion. This is likely to require a prospective assessment of the construction programme, and underlines the need to ensure that programmes are regularly updated – for example, the obligation to regularly update the Accepted Programme in an NEC contract ought to assist with determining whether programme float can absorb an otherwise critical delay;
• establish whether there is a causal connection between the delay event and the critical delay to completion. This is likely to depend on the availability and quality of the contractor's records, witness evidence and expert critical path analysis. If a causal connection cannot be established, the claim is likely to be considered a global or total cost claim and therefore more open to challenge;
• identity and use a suitable and defensible method of delay analysis. The analysis should be grounded in the facts – hence the need for quality records – and should not be overly theoretical. It should also reflect how the contract deals with delay and the need to re-programme and mirror what actually happened, even if the contract requires a prospective assessment to be provided in support of a claim to extend time;
• consider the guidance in the second edition of the Society of Construction Law (SCL) Delay and Disruption Protocol;
• have you mitigated the delays? Common law jurisdictions generally recognise a principle to mitigate loss or damage. However, subject to any contractual provisions to the contrary, whilst there may be a duty to mitigate time-related costs there is not necessarily a duty to mitigate the delays giving rise to them; and
• consider the jurisdiction in which you are operating to see if the applicable law provides additional relief from performance. This may also influence the treatment of issues such as concurrency and the duty to mitigate, which may be of a higher standard due to the requirement for good faith.

For employers: non-excusable contractor delay

If the contractor is in culpable delay, the employer should consider:

• whether any contractual requirements have been complied with, and whether any contractor claims for an extension of time which may reduce your entitlement to liquidated damages have been dealt with adequately;
• whether your entitlement to liquidated damages is enforceable. If the liquidated damages are "extravagant and unconscionable" in comparison to the greatest loss that could conceivably be shown to result from the contractor's breach, then the provision may be open to challenge. The jurisdiction in which you are operating may be relevant to this question, because common law and civil code systems approach this issue differently;
• whether the liquidated damages expressed in the contract are intended to be an exhaustive remedy for the contractor's delay so that, regardless of your actual losses, recovery will be capped by the amount of the liquidated damages;
• careful consideration should be given to the availability of liquidated damages in circumstances where the employer is considering terminating the contract. If the contractor has not been given the opportunity to complete delayed works because the contract has been terminated, a liquidated damages provision might fail in those circumstances;
• is there concurrency? In England and Wales, a contractor would be entitled to a full extension of time in such circumstances, but not time-related costs. In contrast, Scotland and Hong Kong have adopted an 'apportionment' approach, where a tribunal will apportion the delay - and its financial consequences - between the contractor and the employer. Again, the position may be different in civil code jurisdictions where the application of the requirement for good faith may mean that liquidated damages are not available for concurrent delay; and
• does the contract displace the conventional position so that the contractor recovers loss and expense, as well as recovering an extension to the completion date, during the period of concurrency?

If the contractor is in excusable delay, consider whether an instruction to accelerate should be given. A careful assessment will need to be made of the additional costs that this will generate compared to the costs of completing late.