Summary and implications
The reality during a project is that events will arise which may delay completion.
Those delay events may constitute events for which the employer is responsible under the contract. Without an extension of time (“EoT”) mechanism capable of addressing that delay event, the employer would lose its right to deduct liquidated damages.
The responsibility for delays is a common problem in construction and gives rise to great uncertainty and friction between the parties. An extensive retrospective review of what actually happened takes time, and will only increase the friction and uncertainty.
Consistent with its underlying objective, NEC3 requires the parties to resolve all such issues as they rise and does so by adopting a distinctive approach as follows:
- an express contractual preference for a timely but theoretical projection of delay to the date on which the contractor planned to complete the works in lieu of a wait and see approach to retrospectively assess what delay (if any) has actually occurred to the contractual completion date; and
- the use of the contractor’s planned completion date as the benchmark to assess an EoT as distinct (as is common to most other forms of contract) from the contractual completion date.
Origins and Purpose
The basic legal principle was set in 1902 when a court ruled that an employer cannot insist that a contractor finishes its works by a fixed date if it was the employer which prevented the contractor from achieving that date. This is known as the prevention principle.
When that principle is overlaid with:
a) the commercial necessity for a fixed completion date combined with a right to deduct liquidated damages in the event the contractor runs late;
b) a flexibility to instruct changes to the scope of the works as they proceed; and
c) a contractor’s requirement to re-allocate risks to the employer which would otherwise fall to the contractor, e.g. bad weather, fire, flood, etc., then it becomes clear that the key purpose of an EoT mechanism is twofold namely to: (i) confront the prevention principle head-on by providing a basis for extending time in the event that a delay occurs which is the responsibility of the employer and in doing so protects the employer’s right to liquidated damages; and (ii) to re allocate risks to the employer which would otherwise be the responsibility of the contractor.
Basic Approach to an Extension of Time
Two points of caution: (i) the correct approach to an EoT will vary from contract to contract, and (ii) the position in Scotland may be different to the position in England and Wales.
Nevertheless and taking a JCT type approach in England and Wales, the following propositions can be derived from case law:
a) it is a question of fact whether a particular event causes actual delay to the contractual completion date;
b) in defending an EoT claim, an employer is entitled to say; (i) it did not cause delay because the work affected was not critical and/or (ii) the true cause of delay was something else;
c) on all but the simplest of projects some form of critical path analysis is necessary to establish criticality, i.e. which activities, if delayed, have the capacity to cause delay to the completion date;
d) before the delay impact of an event can be assessed, the parties must confront all delays and delay events which have occurred up to that date;
e) an impressionistic assessment of an EoT under the guise of ‘fair and reasonable’ is not good enough. What is required is a logical analysis of the impact of an event and for that analysis to be undertaken in a methodical way; and
f) if the event makes no difference by reason of a pre-existing delay which is the contractor’s responsibility, then no EoT would be due.
The NEC approach
Consistent with NEC3’s overall objective to manage and resolve issues as the works progress, NEC3 takes a quite different approach as follows:
a) the parties are to act in a spirit of mutual trust and cooperation;
b) the submission and acceptance of a programme;
c) the regular updating of the programme to reflect actual progress and the impact upon the completion date;
d) the parties must given early warnings of delays as soon as they become aware of them;
e) to seek to address those delays;
f) to seek to pre-agree the time and cost consequences of compensation events; and
g) to use the programme to project the theoretical impact of a delay event.
Accordingly, the key distinctions of the NEC approach are:
a) an express contractual preference for a timely but theoretical projection of delay to the date on which the contractor planned to complete the works in lieu of a wait and see approach to retrospectively assess what delay (if any) has actually occurred to the contractual completion date;
b) the use of the contractor’s planned completion date for which to assess an EoT in place of the contractual date;
c) the need to pre-agree or pre-assess an EoT before a compensation event is implemented.
This de-linking of theory from reality can be problematic because it will always give rise to an EoT which:
a) is inadequate because the actual delay incurred by the contractor is greater than the theoretical projection calculated from the accepted programme and, as a result, a compensation may have the effect of increasing the contractor’s exposure to liquidated damages; or
b) over compensates the contractor by granting an EoT in circumstances where there was no actual delay at all, or an EoT which is significantly greater than the delay actually incurred and as a result, gives rise to significant delay costs to the employer.
Nevertheless, it is clear that NEC3 considers that its primary objective of timely certainty by resolving issues as they arise to be worth the price of disregarding reality and adopting such a theoretical approach.