Delay Costs, Delay Damages & The Prevention Principle

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What Can I Do During a Construction Delay?

Delay Costs vs Delay Damages

Contractors are often faced with various obstacles delaying the critical path of a construction programme. Often, those obstacles and delays are the result of actions of the principal, their employees or agents.

One of the most discussed issues in construction litigation is how a contractor may seek costs and damages arising from the delay caused by the principal and avoid the imposition of liquidated damages for failing to adhere to the construction programme and practical completion.

A principal to a construction contract is obliged to allow full and unrestricted access to the site and is required to make available as much as is required for the works to be performed under the relevant construction contract. A failure to do so may amount to a substantial breach: Carr v J A Berriman Pty Ltd (1953).

No Automatic Right to Delay Damages at Common Law

At common law, there is no automatic right to delay damages, as damages can only be recovered if they can be proven to be damages arising from a breach of contract. The automatic provision of delay damages can only occur if the contract specifically provides (most commonly liquidated).

Accordingly, there must be a sufficient nexus between the loss actually suffered and the event giving rise to the delay, as the loss must flow from the breach.

Distinguishing Delay Costs from Delay Damages

This is distinguished from delay costs, whereby a contract will provide for the recovery of costs expended in the absence of a breach but where delay has been experienced.

Typically, construction contracts will provide entitlement to further time in the event of a delay, and further, an express right to the costs and expenses arising by reason of the delay.

Entitlement in Absence of Contractual Right

In the absence of an express entitlement, the aggrieved party would need to rely on compensation via the general law in the form of a cause of action for breach of contract (i.e. the failure to provide sufficient access to the site).

Forms of Delay Costs Under Contracts

Where delay costs are available, they will typically be in the form of:

Agreed (or liquidated damages); and/or
In the form of reimbursement for costs incurred.

Where liquidated damages apply, the need to quantify the damages via a breach of contract at general law is removed.

Liquidated Damages Must Be a Genuine Pre-Estimate

In circumstances where liquidated damages arise from delay, those damages need to be a genuine pre-estimate of the damage resulting from the delay and owing to the initial breach. The nexus between act/omission and loss is essential. If they are not, the provision may be set aside as a penalty.

When Time Becomes “At Large”

Where a construction contract does not provide an express entitlement to further time in the event of delay caused by the principal, time will be “set at large.”

What is the Prevention Principle?

Under the general law, a principal to a construction contract cannot hold the contractor to a specified completion date if the principal has prevented the contractor from completing by that date by act or omission.

Instead, time becomes at large, and the obligation to complete the project by the specified date is replaced by an implied obligation to complete within a reasonable time. The same principle applies between the main contractor and sub-contractors.

Generally, the prevention principle operates to prevent liquidated damages clauses from being enforceable by the party responsible for a breach or an act/omission causing a delay.

To avoid the operation of the prevention principle, most construction contracts and sub-contracts include provisions for an extension of time (EOT).

There is a strong argument that EOT clauses exist for the protection of both parties to a construction contract or subcontract, and that if a contract provides for an extension of time owing to acts of prevention by the principal, then the principle will not apply: Multiplex v Honeywell (2007) BLR 195 TCC.

Turner v Co-ordinated Industries (1994) 11 BCL 202 (Turner)

The Court held that the prevention principle will not apply if:

The contract includes any provision that entitles the contractor to an EOT when the principal breaches the contract;
In the absence of such a clause, the principal’s actions must cause actual delay for the prevention principle to apply; and
One must determine the overall effect of the principal’s action. A small actual delay by the principal does not allow other delays by the contractor to be eradicated.

What are Prolongation and Compensable Delays?

In addition to an EOT, a contractor may be entitled to the associated costs and expenses arising by reason of delay or prolongation. Where a contract does not provide such express entitlement, the contractor would need to prove its entitlement via a general law cause of action (breach of contract) or an act of prevention by the other party.

The default entitlement of the contractor to prolongation under most standard forms is causes for which the other party is liable. This is defined as a “compensable delay.”

Therefore, a prolongation claim is one where a party to a contract is entitled to additional costs which arise as a result of a compensable delay.

Compensable delays affect the critical path and give rise to an entitlement to EOT, subsequently leading to the entitlement to recovery of prolongation costs.

Examples include:

a variation or change order, or
a site instruction requiring additional costs

…which would not have arisen if those instructions were not issued by the head contractor.

This is separate from a claim for disruption where certain events occur causing delay but do not trigger an EOT, and from excusable delay such as Force Majeure or inclement weather.

In essence, the prolongation claim must be:

Compensable
Affecting the critical path
Delaying completion of works

How Does an Apportionment for Concurrent Delay Work?

Australian Courts have tempered the prevention principle where delays are contributed to concurrently by both parties (see Trollope & Colls Ltd v North West Metropolitan Hospital Board [1973] 1 WLR 601).

In Turner, it was held that the prevention principle applies only where the principal has caused the actual delay, and that the delay must be assessed in “all circumstances of the case.”

A contractor cannot rely solely on the prevention principle if it could not have completed its obligations on time regardless of the principal’s actions.