Sub-Contract Delay and Disruption
We represent substantial specialist subcontractors on signature projects in central London and elsewhere in the British Isles.
Few major projects complete on time. The main contractor, and his subcontractors, will normally be liable to have damages deducted from their account unless they can demonstrate an entitlement to have the time for completion of the works extended. Assuming they can make a case for an extension of time, they will then seek compensation for the loss and expense they occur in having to work on the project for longer than anticipated.
The COVID-19 pandemic has brought ‘force majeure’ into the spotlight as a reason for extending the completion date of contracts. Force majeure belongs to a category of grounds for extension of time which do not also provide a basis for claiming loss and expense. Contractors (and their subcontractors) will want to establish one or more of the grounds that can be relied upon to claim both if they can.
Here are some of the recurring themes that we have seen on the projects that we have been involved in.
- Attempts by the employer (and/or main contractor) to rely upon ‘conditions precedent’ to claims for extensions of time and/or loss and expense
- Competing methodologies for assessing the critical path of the project and hence the impact of any delay events
- Suspension and/or termination of the contract, including frustration and force majeure eventsDesign issues and the effect of lack of certainty or completeness of input data from the design team
- Instructions and changes to the scope of worksInterfaces with the works of other subcontractors – which subcontractor is responsible if works must be redone because the interface does not connect up?
- Passage of fire issues – extra vigilance required for cladding post-Grenfell – different inspectors involved
- Variation of the contract as a whole – pragmatic negotiation to ensure cashflow and supply of work and materials, including at Final Account stage
Conditions Precedent
A Condition Precedent is a term in a contract which must be complied with by Party A before he becomes entitled to assert rights against Party B.
In the context of delay under a construction contract, the contractor or subcontractor will typically be required to provide notice of a claim within a short timescale of becoming aware of the facts giving rise to a claim. They will also be expected to take mitigation measures and provide further updates at regular intervals. Where this is not done, the contractor or subcontractor can lose the right to bring a claim based upon these circumstances. Such clauses are powerful weapons in the hands of the employer, who can potentially avoid liability for substantial extra costs and even add insult to injury by levying liquidated and ascertained damages against the contractor who has lost his extension of time claim.
The safest course for the contractors, of course, is to comply with these clauses for the duration of the project. In claims for extensions of time, this typically means serving a formal notice by recorded post to the employer’s or main contractor’s head office. Where loss and expense are concerned, a separate application needs to be made – it cannot always be left until the monthly applications.
The legal drafting of the clauses, however, can heavily penalise the contractor for simply not describing a problem or problems in the terms stipulated by the contract - even if they have been identified and discussed via email and in site meetings. We can help by translating the relevant events into the notices and applications required by the contract.
We would need to work closely with your project team to obtain the relevant data on a regular basis and ensure that it is communicated promptly up the contractual line. We can also help - either during the project, or at final account stage - by preparing a referral to adjudication to settle disputed extension of time and loss and expense claims. Here we will normally need to work with delay and quantum experts. We can also help with responses to referrals by the employer or main contractor which seek to obtain liquidated and ascertained damages. And as always with these sorts of disputes, we can play a part in a search for commercial solution by the parties whether as mediator, or advisor working collaboratively to negotiate a settlement.
Critical Path
The critical path - the limited number of activities which if delayed will delay all other activities or at least other critical ones - may also derail an apparently meritorious claim. On any substantial job, the contractor has several tasks he can be attending to at any one time. If he is delayed in carrying out some of these tasks, it does not therefore follow that the completion date of his works overall need be delayed.
Even while critical path analysis indicates that there has been such a delay, the employer or main contractor will then rely upon conditions precedent and demand mitigation measures or argue the delay was not correctly notified. This is a frustrating situation for subcontractors, as they will find themselves being told that they are contractually responsible for extra time and expense required which is evidently - in their mind - attributable to another party.
The instruction of a delay analyst is a substantial expense. They can produce an analysis of the critical path and give a view on the amount of delay attributable to identified events. They may also comment upon the compliance with the contract but cannot give opinions on matters of law. We can work with your chosen delay analyst to assemble a consolidated submission, where delay analysis and legal input are combined. As noted earlier we can also ensure that delaying events are properly documented. This will greatly enhance the prospects of a favourable result in the event a formal delay analysis is required.
Frustration and Force Majeure
A contract is frustrated if performance is rendered impossible or so radically different from what was originally contracted for that it would be unfair to enforce the contract. The COVID-19 pandemic has brought attention to this doctrine and to force majeure, which is not part of the English common law but is included under standard forms of contract. The sudden introduction of social distancing, self-isolation, furlough, sanitising of bodies and materials, border controls, and greatly enhanced duties of care for the health of staff on the frontline made the performance of construction contracts almost impossible, or at least radically different, for a time.
Frustration releases the parties from performance of their obligations. It is not therefore a very desirable outcome for either employer or contractor who has been through a time consuming and expensive procurement process. Indeed, one of the rationales for having express extension of time provisions in a contract is to anticipate events which could otherwise be relied upon as frustrating events.
Force majeure, as its French name suggests, is a civil law concept. Under French law, the party relying upon it must show that (i) they had nothing to do with the event occurring, (ii) the event could not have been foreseen, and (iii) the consequences of the event could not have been prevented. The term has no such definition under English common law, however, and must be interpreted in its contractual context. The pandemic has helped to bring into focus in English law what was hitherto quite a vague concept: It is an event, rather than a type of contractual performance.
Contracts often seek to anticipate frustrating events and acts of prevention by the employer or the main contractor, and expressly put them at the risk of the subcontractor. For the subcontractor, this seems like giving with one hand and taking away with the other; for their lawyers, it seems to nullify the extension of the time provisions and thereby the employer’s protection against claims that the contract has been frustrated.
The consensus which seems to have emerged about the COVID-19 pandemic is that it was a force majeure event under standard form construction contracts, but that it did not render performance impossible or radically different so as to frustrate these contracts. Contractors could therefore expect more time to complete their works, but no extra money for doing so. The discussion became academic in many cases because the employers closed their sites for a time whilst they worked out how to deal with the new reality.
The contractors of course did incur additional costs and wanted to be compensated for them. In some cases, the pressure upon them was so great that they had to suspend and ultimately terminate their involvement. Others wanted to do so, but stopped short of this for fear of committing a repudiatory breach of contract.
We can help in situations like these by producing a narrative of the progress of the project which meets the requirements of the contract. This can sometimes be done retrospectively, but is best done contemporaneously. We can flag up if circumstances have arisen which would justify suspending work or terminating the contract, and document any such steps in a way that will withstand legal scrutiny.
Design Input Data
Our clients often work under design and build contracts. If there is specialist subcontractor, this entails producing a design for their works which fits with the overall design concept for the structure, and in particular deals with any interfaces with other specialist subcontractors’ works. In the programme for the works, there is an amount of time allowed for the design to be finalised, after which procurement of appropriate materials, manufacture of units, transportation and installation on site are scheduled.
If the design process is part of the contracted works, then it is not complete at the time of entering into the contract. A process is instead provided for to move from a design concept to solution which incorporates the contractor’s own specialist input.
This process normally involves the main contractor and the employer’s design team assigning statuses to design drawings submitted by the specialist subcontractor to indicate whether the plan can proceed. The contractor is expected to reissue his drawings taking into account any issues raised. The difficulty he often faces, however, is that not everyone who is required to sign off the drawings sends in their comments at once. As result, the contractor must choose between waiting until all comments are in, or re-issuing drawings only for them to be adjusted when another set of comments arrives from another source. A contractor who has worked with incomplete or obsolete data will generally want a variation instruction.
The overall programme for the contractor’s works may include an ‘ultimate design freeze’ date. This is the date by which the contractor has assumed that the design is settled and the rest of the project can proceed. Some parts of the contract works may be able to proceed to procurement and beyond without the entire design being complete, but others may not. A mutual ‘blame game’ may then ensue. The main contractor will list drawings which are short of the required status and demand re-submission of these within a few days. The subcontractor will point to missing design input data, which has prevented him from completing the drawing.
Whilst all this is certain to cause some disruption to the original contract programme and additional design team hours, its impact upon the completion date of the main contract and the subcontract works may not be immediately calculable. It is therefore essential to have a system in place that will tell the story of the design development drawing by drawing and will record the work done on each and the circumstances in which it was done. Without this, both the employer and the contractor will recall points at which the other held up the production of the drawing, and each will hold the other wholly responsible. We can help put in place and monitor such a system.
Instructions
These are often presented as ‘directions’ by the employer or contractor to minimise the likelihood of a claim for extra time or money. They are only such, however, if they answer a question about the work the subcontractor has contracted to do - not if they alter the scope of that work. In the latter event, the direction will amount to a variation.
Even if the direction/instruction does amount to a change/variation, it may not cost more or take any longer than the obligation it replaces. The employer/main contractor will often suggest that it will not or should not. The onus is then on the subcontractor to explain why it must take longer and cost more money, despite all attempts to mitigate this.
We have seen assumptions made by contractors about the true impact of variation instructions which have not been proofed against the obvious challenges. The result is extra time being taken and a whole mishmash of instructions being relied upon to justify this. When the impact of these instructions is unpicked, however, there may be insufficient grounds to justify the full amount of extra time consumed, and of course by then it is too late to ‘un-use’ this time.
We can work with our clients to ensure that the real impact of instructions they are given is assessed and notified at the right time. This is normally an ongoing process as efforts to mitigate any delay to the project overall, and the subcontract works, are made, recorded, and notified. The failure to obtain a full extension of time usually leads to an exposure to liquidated and ascertained damages for the period over the completion date not covered by the extension, so complacency in this area is not to be advised.
Interfaces
These become a particular problem when the project is delayed, and the employer and main contractor are looking to put the blame for the delay on someone.
A specialist subcontractor seeking to explain his own delay may blame another subcontractor whose works interface with his own. This can put the two subcontractors in a ‘dog-eat-dog’ situation as they criticise each other’s work and provide the main contractor with ammunition against each of them. The problems are likely to be technical in nature. Expert evidence from an independent source may be needed to settle where responsibility lies.
If the problem is a fundamental one, with an impact upon a large part of the contract works, then it may be worth having the point fully settled in adjudication. We can help prepare the reference to adjudication and instruct the relevant technical experts.
Passage of Fire
This has been a hot topic since the fire at the Grenfell Tower building in West London.
For specialist cladding subcontractors, it has produced lots of extra work as non-compliant cladding has been replaced. By the same token, there have been more stringent checks on design, workmanship, and materials.
The structure may be one several contractors have contributed to. If there is an issue, the resolution may require both to work on it together. As noted in the last section, if the problem is also causing delay, then any collaboration may be strained. The required fire engineers may be difficult to find quickly and there could be a problem with the design concept. As with other subcontractor conflicts, if this is a pervasive issue affecting large parts of the works, it may be worthwhile involving independent experts and, if necessary, seeking a resolution in adjudication. We can help prepare the reference to adjudication and instruct the relevant technical experts.
Variation of the Subcontract/Final Account
The COVID-19 crisis has led to comprehensive resets of some construction contracts.
This has been with the aim of preserving cash flow for contractors and restoring some level of certainty for employers about when their projects will be complete. In chains of contracts, negotiations around the subcontracts have tended to operate within the constraints of what could be agreed between the employer and the main contractor.
The process has similarities to the early negotiation of a ‘final account’, where both employer and contractor seek to lower their exposure to claims and settle the date upon which the closing payments will be paid, and as far as possible, how much will be paid. As with any negotiation, the different sides will come to the table with an idea of where they want to get to, a bottom line, and (usually) a best-alternative-to-a-negotiated-agreement.
The process of reaching agreement after radically different positions set out by each side can benefit from a mediator’s skills. The parties’ interests will generally lie in reaching an agreement, otherwise they would not be at the table in the first place. A trained mediator can listen to the hints given by all sides in the meeting, and help to formulate proposals that will appeal to the senior decision makers on the other side. Any agreement that is reached will need to be recorded in a legal format, and the lawyers on the team can be vital here.
We can provide both the lawyer’s and the mediator’s skills to help these processes reach outcomes that the parties can live with.
Summary and Conclusions
Commercial construction contracts generally operate under industry standard terms and conditions drafted in the legal language which have been argued over and analysed in the courts. When issues arise under these contracts, it is generally sensible to have a specialist construction lawyer on side to help argue the issues in their legal context.
If the contracts need to be amended or renegotiated, then a specialist should be involved to ensure that the new drafting achieves the commercial aims set out for it. Similarly, in the management of the contract, formal notices may need to be given at various junctures to preserve contractual rights to make claims, and specialist lawyers can help to draft these.
Construction contracts generate arguments involving other areas of technical expertise, and a lawyer can instruct relevant experts to provide an opinion or a report, and if necessary refer this on to an adjudicator for a formal and binding determination.
For our clients, we can help ensure that they receive the proper payment that they are entitled to under their contract and protect them from unjust claims for payment made against them.
