General Principles

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).  

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.

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.

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).

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

(a) Agreed (or liquidated damages); and/or

(b) 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.

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.

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”.

Time “at large” and 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.

In order to avoid the operation of the prevention principle, most construction contracts and sub-contracts include provisions for an extension of time.

There is a strong argument that extension of time 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.

In Turner v Co-ordinated Industries (1994) 11 BCL 202 (Turner), the Court considered circumstances where under the contract, the contractor was entitled to an extension of time if the principal breached the contract.

The Court said that the prevention principle did not apply and listed three considerations to make before the prevention principle will apply:

(a) If the contract includes any provision that entitles the contractor to an EOT when the principal breaches the contract, then time cannot be set at large by the principal’s breach of contract;

(b) In the absence of such a clause, the principal’s actions must cause “actual” delay for the Prevention Principle to apply; and

(c) One must determine what the overall effect of the action of the principal was. A small actual delay by the principal does not allow other delays by the contractor to be eradicated from consideration on the basis of the prevention principle.

Prolongation and compensable delays

In addition to an extension of time, 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 are variation or change order or 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 a delay but do not trigger an EOT. It is also distinct from an “excusable delay” such as a Force Majeure event such as inclement weather.

In essence, the prolongation claim must be compensable, affect the critical path and delay the completion of works.

Apportionment for concurrent delay

Australian Courts have moved to temper the “prevention principle” in circumstances where there is a concurrent contribution to delay by two parties to the contract (see Trollope & Colls Ltd v North West Metropolitan Hospital Board [1973] 1 WLR 601).

The courts are now prepared to contemplate that a party to a contract that has been prevented from fulfilling its contractual obligations by the conduct of another party cannot rely upon the failure by that other party if it could not have complied with its contractual obligation in any event (Turner).

In Turner, it was decided that the “prevention principle” should apply in circumstances in which the principal (or party causing the prevention) has caused the actual delay and that it was not sufficient that the principal caused the delay to the completion of the work.

The principal’s delay must be judged in “all circumstances of the case” and may allow some relief to the contractor.

We’re here to help

Whatever the terms of the contract, determining a contractor’s right to make a claim can still be a complex process.  

Should you or your business need assistance concerning any matters discussed here, don’t hesitate to contact our building & construction team for a consultation.