Jordan ... it is essential to provide for an extension for owner acts of prevention.

We return this month to one of our favourite topics: delay to construction works. Delay and disruption are the biggest drivers of construction disputes globally. Our thinking in this area continues to develop, often as a result of new court decisions.

One recent court decision in Singapore is highly relevant to contracting practice which is still relatively common in the Gulf region. That is the exclusion, as far as possible, of contractor entitlements to extensions of time. Of course, project owners worldwide seek both speed and certainty of delivery programmes, but sometimes we get a reminder of the dangers in overdoing it.

The dispute began like this: Crescendas Bionics Pte Ltd engaged Jurong Primewide Pte Ltd as a contractor to build a biomedical sciences facility on a business park. In fact, the parties only got as far as signing a letter of intent. This letter included a period of 18 months for required completion of the works, plus a rate (and a cap) for delay liquidated damages, but no provisions for time extensions.

In the end, completion was delayed by a total of 334 days. In the usual way, each of the parties submitted that they were not responsible for any of the delay and blamed the other for all of it. The Singapore Appeal Court decided that the contractor was responsible for 161 days and that the remainder (173 days) was caused by the owner. Once it was established that the owner was responsible for any part of the overall delay, and there was no provision for time extension for this, the Prevention Principle was brought into play. This principle directs that an owner cannot hold a contractor to a specific time for completion and cannot require liquidated damages to be paid for lateness when the owner itself has caused any part of that delayed completion.

Owner “acts of prevention” can be breaches of the contract, such as late access; or they can be legitimate actions. Regardless of breach or motive, the crucial point is that such acts make it impossible for the contractor to complete on time. Without any mechanism in the contract to extend the time for completion, time becomes “at large” meaning that the liquidated damages are inoperable, the contractual date for completion is unenforceable and the contractor is required only to complete within a reasonable time.

So how do we calculate a “reasonable time”? In the above case, the court emphasised that this is a question of fact and that neither party should be advantaged by their own delay. The conduct of each party in causing the delay and the sufficiency of the original time allowed in the contract are also factors.

Interestingly, the court decided that the agreed 18-month period was a reasonable time – and then they simply added the owner’s contribution to the overall delay, so the contractor was to pay general damages for the remaining 161-day delay. At first glance, the outcome here looks similar to what would have happened if the contract had included time extension provisions, but the calculation could have gone in a different direction, especially if the court had decided that the agreed time to complete was not a reasonable time.

Then comes the calculation of delay damages. These are general damages, so they aim to compensate the owner for its actual losses arising from the delayed completion. Again, general law principles will apply, such as recoverability of types of losses, causation and remoteness of loss.

Finally, does the agreed cap on liquidated damages apply to the general delay damages? The court decided that it did not. It recognised that, in agreeing liquidated damages, the parties are taking into account considerations other than compensation for actual losses, so it is not appropriate to apply to cap damages calculated in a different way. This seems logical although a recent English judgment goes the other way.

“Time at large” is widely seen as the ultimate “get out of jail” card for contractors when there is delayed completion. However, there is still going to be a date to complete and there are still damages for not meeting it: they just need to be worked out, and actual damages are usually a lot more than agreed rates of liquidated damages.

Real uncertainty is introduced when “time at large” comes into play. Parties agree time extension and liquidated damages provisions largely to avoid the uncertainties (and the associated dispute costs) of having to apply general law principles.

So, even when an owner wants to allow no other grounds for entitlement to an extension of time, it is essential at least to provide for an extension for owner acts of prevention.

 

* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.