Building projects are often completed late. This may be due to delay on the part of the contractor, suspension of works, non-payment or other delays caused by the employer, or circumstances outside the control of both parties. MARTIN PRESTON* takes a look at what remedies may be available in such situations.

Construction contracts require the contractor to complete work within an agreed time frame. This may be a specific date or a set time period after, for example, execution of the contract or, if applicable, the issue of a notice to proceed. If the contractor fails to complete the works by this date, it is usually required to pay a predetermined amount to compensate the employer for the losses suffered by the employer as a result of such delay.
Under English law, such damages are termed liquidated damages and are required to be a genuine pre-estimate of the losses that will be suffered by the employer should completion of the works be delayed. If they are not, then they are penal in nature and unenforceable – although the employer would be entitled, in these circumstances, to make a general damages claim against the contract (that is, prove its losses before the court or arbitral tribunal).

Under the civil codes of most local jurisdictions, the situation is slightly different. For a start, such damages are termed penalties, which are initially alarming to lawyers from England and other common law jurisdictions, which are used to “penalties” being unenforceable.

The major substantive differences between the common law and civil code position is that, under local civil codes, the amount of the penalty can be challenged by either party (rather than just the contractor, as is the case under English law) if the employer’s actual losses are more or less than the penalties that would otherwise be payable.

In other words, a court or arbitrator compares the actual losses to the amount of the penalty rather than looking at whether the penalty was a genuine pre-estimate of loss as at the time the contract was entered into. However, it should be noted that the local courts will only reduce or increase penalties if there is a substantial discrepancy between the penalty stated in the contract and the actual loss suffered by the employer.

There may be instances where delays to completion may be caused wholly or in part by the employer. For example, the contractor may be given access to the site late; non-payment by the employer may give the contractor a contractual right to suspend; or the employer may exercise a contractual right to suspend the works.

The vast majority of standard form of contracts provide for the contractor to be granted extension of time if it is delayed by an act for which the employer is responsible (or for which the employer has accepted the risk where there is an extension of time for, for example, adverse weather conditions).

Under English law and other common law jurisdictions, failure to grant an extension of time to the contractual completion date in circumstances where the employer has caused the delay renders the contractual completion date unenforceable (the so-called “prevention principle”).

Instead, time is said to be “at large” and the contractor’s obligation is to complete the works within a reasonable time. Since the contractual completion date is unenforceable, so are the liquidated damages. The employer’s remedy for the delay in these circumstances is, firstly, to demonstrate that the contractor has failed to complete the works within a reasonable time and, having done so, to prove the losses it has suffered as a result and to seek these as general damages.

Local civil codes do not recognise the prevention principle per se. That is, the liquidated damages payable by the contractor for delay are not automatically invalidated if the contractor is not granted an extension of time as a result of delays caused by the employer.

However, it is likely that the contractor will have a defence to a liquidated damages claim under the civil code if it can demonstrate that the employer is wholly or partially responsible for any delay to completion of the works. For example, Article 290 of the UAE Civil Code states that damages may be reduced or extinguished to the extent that the claimant contributed to or increased the losses covered by the damages. Therefore, any penalty payable by the contractor for delay will be reduced to the extent that that delay was caused or contributed by the employer.

The third cause of delays is those that are not the fault of either party. Such events often entitle the contractor to an extension of time under the contract. If they do not, then their treatment under common law and civil code jurisdictions is markedly different.

English law does not recognise the concept of force majeure (other than in relation to frustration, which concerns impossibility of performance, rather than delayed performance) and the prevention principle only applies to delays for which the employer was responsible, not delays which are the fault of neither party.

Therefore, if the contractor is delayed by an event that is not the fault of the employer and there is no contractual right to an extension of time as a result of such delay, the contractual completion and liquidated damages will be enforceable.

By contrast, under most civil code jurisdictions, the occurrence of a delay, which is the fault of neither party, will absolve a contractor of liability unless the contractor accepted that risk under the contract. For example, Article 287 of the UAE Civil Code provides that a party will not be responsible for losses which are beyond his control unless specifically stated in the contract.

As always, best practice is to agree the allocation of risk between the parties and to ensure that this is accurately reflected in the contract. However, in doing so, it is important to understand how the law governing the contract will impact on the interpretation of the contractual position agreed.

Gulf Construction

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