A recent case involving Carillion has demonstrated the complexities around extension-of-time clauses in contracts.
The decision in a recent case handed down from the Technology and Construction Court, in relation to its own premises, has thrown into sharp relief the need to consider whether the extension of time mechanics in orthodox construction contracts are always appropriate.
It also highlights differences between how loss and expense claims for prolongation claims and extension of time claims are assessed.
In the commercial world, a purchaser of construction services of any tier expects his supplier to perform by a target date or dates and to be able to recover his losses should such dates be missed for reasons which are at the supplier’s risk.
More often than not, the purchaser liquidates his damages and these are set in a construction contract. However, the nature of the transaction may mean those liquidated damages are not always set at the same rate.
The rates may vary (up or down) depending upon the length of the day, or they may vary depending upon the season (think retail) to reflect more closely the purchaser’s exposure to losses, and thus be commercially justifiable without adding a significant risk premium to the contract.
How the liquidated damages are set will usually be driven by the ultimate end-user of the project, which in the commercial office world would be the developer anticipating the demands of his target market or, where pre-let, the tenant itself.
A scenario to consider
Imagine a scenario where a chain of contracts have been entered into involving tenants, developers, contractors and subcontractors to complete a commercial office by a fixed date (subject to extensions of time), where the rate of liquidated damages – which we will assume is the same rate across all contracts – starts off at a higher rate before decreasing with the effluxion of time.
In our scenario, the project is in delay but the subcontractor has a claim for an extension of time due to an event that only arises after the project was already in critical delay, and for which the contractor cannot get an equivalent extension from the developer.
In this scenario, the reason for the initial delay to the project was the subcontractor’s failure to perform on time, and results in the contractor being exposed to liquidated damages at the higher rate.
Case in point
The recent case of Carillion Construction Limited v Woods Bagot Europe Ltd and others  EWHC 905 (TCC) decided that the subcontractor’s extension of time will be awarded contiguously (in effect, retrospectively) from the prevailing target date that had already been missed.
In our scenario, this would mean the subcontractor would be relieved in whole or part from his liability for liquidated damages for delay at the higher rate, and the rate of liquidated damages which the contractor could recover from the subcontractor would be much smaller than his own exposure, meaning the contractor would have to fund the difference.
The alternative analysis – whereby extensions of time could be awarded in windows and not necessarily contiguously from the prevailing target date, which would involve taking into consideration when the effects of the delay event were actually experienced – was thrown out of the window based on the orthodox extension of time drafting.
The better approach, although the contract would need to allow for it, would be for the assessment to be undertaken and the extension of time awarded as from the time the effects were actually experienced.
This is similar to the prevailing view on how loss and expense claims for prolongation should be assessed.
Gordon Anderson is partner and head of the London construction team at Irwin Mitchell