Delay Damages

The definition of completion in the construction industry does not normally mean entire completion of the work; rather the definition allows for practical completion of the works but for minor defects that do not materially impact upon the employer’s ability to use the works.

A contract must always have a date for completion of performance by both parties. If the contract itself fails to state one, the common law (that is the law that fills in the blanks) will give a reasonable time for performance, to be calculated by the court in all of the relevant circumstances.

Step one is of course to confirm if the original deadline for completion still applies. Here we look to both extensions of time (for example due to variation of the contract by the employer creating a varied work scope that will take the contractor longer to complete) and disruption (by which a cause that is not the contractor’s risk in the contract delays or disrupts his work).

In both cases, we amend the original deadline (using the contractual mechanism or giving a reasonable time in the absence of an express method) to arrive at the varied deadline for completion.

But what if the contractor then fails to complete on time, even by this varied date?

Generally, time is not described as being “of the essence” to a construction contract, such that the contract does not terminate for that delay, but rather delay damages are paid. As an aside:

• Time can expressly be declared to be of the essence; or
• It can become of the essence (generally when the delay has already become intolerable and a further, reasonable and final deadline is imposed).

For this discussion, however, let us assume that time is not and never becomes of the essence.

If the contractor has missed his (varied) deadline, the employer is thus entitled to delay damages. These can be either liquidated or unliquidated:

• Unliquidated damages require the employer to perform a reflective and meticulous reconstruction of his actual losses resulting from the delay. These can include both direct loss, such as still having his project team on site and indirect, such as a delay to his income because his new property is not open and trading. This is not an exercise that the employer is likely to relish; &
• Perhaps given the evidential burden of proving his actual loss, the industry thus turns to liquidated damages. These rely upon a genuine pre-estimate of what the employer’s losses might be, such estimate being made before the contract is signed. Once a delay actually occurs it then does not matter what the employer’s actual loss is (be it higher or lower), he is simply paid at the liquidated rate.

The contractor’s only chance to retrospectively challenge the rate of liquidated damages is to prove that they are a punitive rate, which could never have reflected the employer’s likely actual loss. Such challenges are thus both rare and difficult to prove; as one must ask why a contractor signed up to what he now calls a punitive rate in the first place.

An added layer of difficulty arises if one then factors in concurrent delay; that is two sources of delay; one of which is the contractor’s risk and the other of which is the employer’s risk:

• The legal idea is that one event of delay has two causes, for which the two parties are respectively liable; &
• The wider industry idea is that there are two events of delay that impact upon the programme at the same moment in time, for which the parties are respectively liable.

Both kinds produce intense disputes. In the legal idea, the courts look for the dominant cause of the single event of delay and apportion blame to that dominant cause. Concurrency is thus when no dominant cause can be found.

Practically, however, what is likely to be the outcome is that the contractor:

• Gets an extension of time to cover the period in which the employer delays him (so he does not pay delay damages); but
• Is not paid prolongation costs for the plant, manpower and machinery, etc. that he needs on site anyway as a result of his own delay.

If we can assist you in any way, or if you simply want to discuss the needs of your construction and engineering project, we would be delighted to meet with you either in our office or at your office to discuss your issues. Please contact us at any time.