The latest in our dos and don’ts series looks at how employers on major infrastructure projects try to protect themselves from the consequences of late completion
From a commercial perspective, delayed completion of any major infrastructure project (such as a PFI project or a power station/process plant project) will result in loss of revenue for the project company and the inability to meet debt service obligations. It will also incur additional costs, for example extension of insurance cover and other overheads. There may also be financial consequences for late completion under the project agreement. So what remedies are available to the project company under the construction contract for late completion?
Most construction contracts impose general obligations on the contractor to carry out the works “regularly and diligently” and to proceed with “due expedition” and “without delay”.
However, these provisions will not guarantee completion by the contractual completion date as it will be difficult for an employer to demonstrate a breach of these general obligations with any certainty. From an employer’s perspective, do supplement these with the following provisions:
Payment terms should be structured such that the contractor is incentivised to complete the works as efficiently as possible. This may include milestone payments, cash retentions and, in circumstances where completion on time is critical, a bonus for early completion.
- Liquidated damages
The payment of liquidated damages (LDs) is the traditional remedy for completion after the specified completion date. In the construction context, LDs are rarely struck out as a penalty. However, there are numerous instances where LD provisions have been held to be unenforceable because they simply do not work or they have been found to be void for uncertainty. Make sure that the LD provisions are clear and logical. Include a worked example in the contract as this should identify any problems before the contract is entered into and demonstrate how the mechanism operates. In addition, do include a provision allowing the project company to claim general damages if the LD provisions are held to be unenforceable.
- Termination for prolonged delay
The amount of LDs payable is usually capped in PFI/power projects and often stated (or if not stated, implied) to be an exclusive remedy for delay in completion. Do include an express right to terminate if completion has still not been achieved when the cap has been reached and make sure that this right is expressly preserved (that is, don’t rely on the general “proceed regularly and diligently” provisions). Otherwise there will be much less of an incentive on the contractor to complete the works and the project company will be entirely uncompensated for the further period of delay.
In addition, don’t forget about the project agreement. This will often provide for a long stop date - a date upon which the contracting authority will be entitled to terminate the project agreement if “completion” under that agreement is not achieved by a particular date. Termination of the construction contract needs to be triggered well before this date in order to give the project company an opportunity to appoint a replacement contractor and avoid triggering termination under the project agreement, although this will be difficult to achieve in practice.
- Time bar clauses
It is standard under all construction contracts, bespoke and standard form, for the contractor to be entitled to an extension of time for any delay caused by a breach or failure by the employer in order to preserve the contractual remedies for late completion (the “prevention principle”).
On major projects, time bar clauses have also become standard. These provide that the contractor must notify the employer of a delay event, including an employer delay event, within a specified time period, as a condition precedent to its entitlement to an extension of time. In order to take effect as a condition precedent the clause must be drafted properly. Do make sure that the clause clearly states a specific time for delivery of the notice; and that the entitlement to an extension of time will be lost in the event that the notice is not given.
Does this offend against the “prevention principle” where the delay is caused by a breach or failure of the employer? The general view is that it doesn’t. The contractor loses its entitlement to LDs as a result of its own breach of contract (failure to comply with the notice provisions) and not because of the employer’s breach or failure.
A delayed project will inevitably be costly for the project company and its contractor. However, if the various obligations, procedural requirements, rights and remedies relating to delay and late completion are clear and concise, this may at least avoid or minimise long and costly disputes.
Jancyn Gardiner is a knowledge development lawyer at Berwin Leighton Paisner