A recent TCC decision has considered an anomaly which occurs in traditionally drafted construction contracts where (i) liability for delay is unliquidated; and (ii) the contractor becomes entitled to an extension of time for an event occurring after the contractual date for completion has passed (i.e. during a period of contractor culpable delay). Such a position arises most commonly on sub-contracts and can result in the sub-contractor being absolved of liability for delay or having its liability unfairly increased. This appears to be the first decision of an English court to have considered the issue.

The problem

Construction contracts will ordinary permit a contractor to claim an extension of time for events occurring after the contractual date for completion has passed. For variations or other acts of prevention by the employer, such an entitlement is necessary to avoid time becoming “at large” through the operation of the “prevention principle”. Other more neutral events, such as adverse weather or force majeure, may also be claimable unless they are specifically confined to occurrences prior to the contractual date for completion. 

The potential for such entitlements to arise during a period of contractor culpable delay means that the period for which a contractor is in breach of contract may change. For example, if the contractual date for completion is 31 December, a delayed contractor will initially breach the contract on 1 January. If, however, the employer instructs a variation on 15 January which requires an extension of time of 31 days a simple addition of 31 days to 31 31 December would mean that the contractor is no longer in breach of contract until 1 February. What therefore has happened to the 14 days for which the contractor was in breach of contract from 1 January to 14 January? Can the employer still claim losses attributable to this specific calendar period of breach, or must it restrict its claim to losses flowing from delays after 31 January? 

Such a scenario poses no difficulties for a contract with a liquidated damages clause. The damages due to the employer are fixed and will therefore be the same regardless of which specific periods of time the contractor is found to be in breach of contract for. Where liability for delay is unliquidated, however, the employer’s entitlement to damages can be significantly affected by the precise period for which the contractor is found to be in breach of contract.

Carillion Construction Ltd v Woods Bagot Europe Ltd

Carillion entered into a building contract for the construction of the Rolls Building in London, the present home of the TCC among other courts (the “Main Contract”). The Main Contract incorporated the terms of the JCT Standard Building Contract with Contractor’s Design 1998 edition with bespoke amendments. Carillion subsequently entered into an M&E sub-contract with EMCOR Engineering Services Limited (“EMCOR”) on the terms of the JCT DOM/2 form of sub-contract 1981 edition with bespoke amendments (the “Sub-contract”). 

The project was delayed by some 10 months from the originally fixed dates for completion. Carillion eventually commenced proceedings against EMCOR (and others) in the TCC (by now situated in the new Rolls Buildings) claiming damages due to delays in carrying out the Sub-contract. The Sub-contract permitted Carillion to recover “any direct loss and/or expense” suffered as a result of EMCOR’s delay. Carillion sought to recover liquidated damages which had been levied against it under the Main Contract as well as its own costs of delay. 

EMCOR argued that it was entitled to extensions of time. An issue arose as to whether any extension that EMCOR may prove to be entitled to should be added contiguously to the existing period for performance of the Sub-contract works or whether, in the case of events post-dating the contractual date for completion, it should be a fresh discontinuous period within which EMCOR would cease to be liable for delay. 

Carillion noted the unfairness which could arise if EMCOR were entitled to a contiguous extension of time for events post-dating the contractual date for completion. For example, if 60 days were added to the contractual date for completion due to a variation occurring 50 days after the contractual date, EMCOR will have initially been in breach of contract for 50 days, but would now be absolved of its liability for that period. The period for which it would be in breach of contract would now be 60 days later (all things being equal). By that time, it may be that a different sub-contractor is the primary cause of delay to the Main Contract. Carillion would then have no recourse for impacts to the Main Contract works caused by EMCOR’s original 50 days of delay. Carillion therefore argued that a fresh discontinuous period of time should be allowed in such circumstances, meaning that EMCOR would remain in breach of contract for the initial 50 days after the contractual date for completion, but would cease to be liable for delays resulting from the following 60 days. 

The court disagreed with Carillion’s interpretation, noting that the natural meaning of the Sub-contract and the way in which extension of time provisions are commonly operated in the construction industry is to extend the original period for completion by a contiguous period. The court placed emphasis on wording of the DOM/2 form which referred to “extended period or periods” for completion and to delays“beyond the expiry of the period or periods” stated in an Appendix to the Sub-contract. The court did not accept that the reference to “periods” in plural could refer to discontinuous periods for completion of a single set of work. Rather, this was intended to refer to circumstances in which the Sub-contract works, which have to fit with the Main Contract works, might have more than one period provided for their execution on site.

Whilst the court acknowledged that this interpretation might have the effect of relieving a sub-contractor of liability to an extent that does not truly reflect the consequences of his breach, that issue could only influence the interpretation of the clause to a very limited extent. Given that the argument created a distinction between responsibility for delay and contractual liability which could not be drawn from the terms of the Sub-contract the argument did not hold sway. 

Conclusions and implications

The court’s decision highlights a significant potential exposure for parties to construction contracts which allow claims for unliquidated damages in relation to delay. An entitlement to an extension of time arising delay after the contractual date for completion may result in delay related losses incurred by the employer or main contractor being unrecoverable from the contractor or sub-contractor. Other scenarios may result in greater losses being recoverable from the contractor or sub-contractor than might properly be attributed to their delays. As noted above, the court accepted that these potential outcomes were real, but found that the wording of the extension of time provision before it did not permit any special allowance to be made for such cases. 

A right to claim unliquidated damages for delay is most commonly included in sub-contracts to avoid the difficulties of agreeing an appropriate rate for liquidated damages. A simple pass-through of liquidated damages applicable under the main contract (with or without an addition for the contractor’s own costs) is likely to over-compensate the contractor where two or more sub-contractors are responsible for a given period of delay. A lesser sum risks under-compensating the contractor where a sub-contractor is the sole cause of a given period of delay. A provision which seeks to apportion an overall liquidated figure derived from the main contract raises additional factual difficulties in assessment which liquidated damages clause are intended to avoid. The simplest solution is often to provide for an unliquidated right to claim damages for delay. This is the approach adopted by the old JCT DOM/2 form and remains the approach in the current suite of JCT sub-contracts. 

Contractors and sub-contractors in particular should be aware of the potential anomaly which arises on such an approach and consider whether special drafting is required to remove the anomaly. Such drafting might provide for discontinuous extensions of time, as argued for by Carillion, or provide for other means of apportioning the total delay related losses suffered by a main contractor among those sub-contractors actually responsible for all or part the delay. 

References:

Carillion Construction Ltd v Woods Bagot Europe Ltd & Ors [2016] EWHC 905 (TCC) (28 April 2016)