New uncertainty over extension of time claims

Mechanical and electrical engineers may be dragged into expensive disputes because of the decision in City Inn Ltd v Shepherd Construction Ltd, which has led to uncertainty about how contract administrators should assess extension of time claims.

Most building contracts provide for the contractor to be awarded an extension of time if a relevant event has caused a delay in completion. In City Inn, the court was asked to decide whether a contractor is entitled to an extension of time if a delay is caused both by a relevant event and by an event for which the contractor is not entitled to an extension of time.

After Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd and Royal Brompton Hospital NHS Trust v Hammond and Others (No 7), it seemed this situation would be rare as the courts decided the key question is which event caused the delay as a matter of fact.

For example, a contractor might claim an extension of time for late instructions (relevant event) in circumstances where it also had a shortage of labour (not a relevant event). If late instructions stopped work before the shortage of labour occurred and continued to stop the work until after the shortage had been resolved, the contractor would be entitled to an extension of time for the entire time the instructions had been outstanding, even though it had insufficient labour for some of that period. This is because the contractor could not have proceeded even if it had sufficient labour and so the shortage could not have caused the delay.

By contrast, if the shortage of labour halted the work before the instructions were required to progress the work, the contractor would only be entitled to an extension of time for delay caused by the late instructions once the contractor had sufficient labour to proceed. Late instructions could only have delayed completion once the contractor had sufficient labour.

In the unlikely event that the shortage of labour and the late instructions started to delay work at the same time, and for exactly the same period of time, the contractor would be entitled to an extension of time for the full period of the delay.

In City Inn, however, the judge disagreed. Instead, he said the contract administrator must consider the “relative significance of the events” and grant such an extension of time as he or she considers “fair and reasonable”.

Contract administrators must weigh the ‘relative significance of events’ and grant such extension of time as they consider ‘fair and reasonable’

The judge indicated that the contract administrator should take into account:

• the degree of culpability involved in each of the events – this relates to the seriousness of any default on the part of either party;

• the significance of each event in causing the delay – this includes the length of delay caused by each event and the significance of the delay for the works as a whole.

City Inn is a Scottish decision but was based on a JCT standard form of contract and the English courts are likely to follow it. The case gives contract administrators discretion to award extensions of time that appear to be fair and reasonable instead of extensions of time merely based on which event occurred first. However, uncertainty as to how the discretion should be exercised will lead to disputes.

Although most disputes will be between employers and contractors, consultants may find themselves pursued where it is alleged that their incomplete or late design caused a delay. For example, if a project is held up as a result of late production of design information by a mechanical and electrical engineer, the employer would usually be able to bring a claim for the costs of the delay against the engineer. Alternatively, if the engineer has been novated to the contractor, it is likely that the contractor would seek to recover from the engineer any liquidated damages it had to pay.

As a result, the costs of disputes generated by the current uncertainty will be borne by consultants as well as by employers and contractors.