Construction delay: maximising cross-border commercial advantage

Out-Law Analysis | 08 Jul 2020 | 1:51 pm | 5 min. read

The choice of law applicable to international construction contracts can have a significant impact on issues related to claims for delay.

Careful consideration should be given when deciding on choice of law. Common and civil law legal systems treat delay issues including delay risk, extensions of time, concurrent delay, duty to mitigate delay, liquidated damages and possible relief from delay attributable to Covid-19.

Pinsent Masons, the law firm behind Out-Law, addressed these issues in detail in a recent webinar, the first in the EMEA Client Construction Briefing series. The next webinar will continue on this theme by comparing cost claims in various jurisdictions.

Delay risk and extensions of time

In both common law and civil law systems, the first step to show entitlement to an extension of time is to check the contract for explicit entitlement to an extension of time in the event of a delay event.

Common law systems offer little in addition to the provisions of the contract, with two notable exceptions: the prevention principle and frustration.

The prevention principle disallows a party from insisting on compliance with a contractual obligation when the party itself has prevented compliance. When combined with a liquidated damages regime, this principle can potentially make "time at large" - transforming the contractor's obligation to complete the works to within a reasonable time, and replacing the liquidated damages regime with actual proven damages.

Notably, South Africa takes a different approach. Under South African law, the prevention principle only applies if the act of the employer amounts to a breach of contract and renders performance impossible.

Frustration under English law may allow for obligations to be discharged when unforeseen circumstances render performance impossible, or transform the contract radically from what was envisaged. This is a relatively stringent standard compared to the civil law hardship, or "unforeseeable circumstances", principle discussed below.

Civil law systems often refer to acts of third parties, acts of prevention, force majeure and unforeseeable circumstances as events that justify non-performance of obligations. These provisions may justify non-compliance with the completion date, and may also be a defence against liquidated damages. For example, articles 273(1), 287 and 249 of the UAE Civil Code provide for relief in cases of force majeure, extraneous events and unforeseeable circumstances respectively.

French law contains similar but slightly different provisions. For example, article 249 of the UAE Civil Code providing for renegotiation for unforeseeable circumstances rendering performance excessively onerous is considered mandatory law and cannot be waived contractually. The comparable French legal concept of imprévision is not considered mandatory law, allowing parties to a contract to waive its application either expressly, or by replacing its application in the contract with a similar express hardship clause.

Imprévision enables a party to renegotiate the contract when an unforeseeable change in circumstances makes performance of the contract excessively onerous for a party who had not agreed to bear the risk. The concept was codified in article 1195 of the French Civil Code in 2016. Before this, it was only found in administrative law and only applicable to public works contracts. Imprévision is therefore only applicable to private works contracts entered into after 1 October 2016, the date when the Civil Code reforms took effect.

Concurrent delay

Concurrent delay arises when employer and contractor delays occur, and the effects are felt, at the same time. True concurrent delay is exceptionally rare. Nevertheless, there are allegations of concurrent delay in nearly every construction dispute where time is at issue.

Common and civil law legal systems treat delay issues including delay risk, extensions of time, concurrent delay, duty to mitigate delay, liquidated damages and possible relief from delay attributable to Covid-19.

The approach to concurrent delay differs within common law systems. For example, in England and Wales, a contractor would be entitled to a full extension of time but not time related costs in the event of concurrent delay. By contract, Scotland and Hong Kong have adopted an apportionment approach, under which a judge will apportion the delay between the contractor and the employer.

In civil law jurisdictions, the approach to concurrency is less certain and arguments can be made for both the 'time but not money' approach and the apportionment approach. Civil law courts will be guided by the principle of good faith, and may therefore be unwilling to apply liquidated damages for concurrent delays.

Duty to mitigate delay

Common law systems often recognise a duty to mitigate loss or damage as a general principle. Therefore where there is a duty to mitigate time-associated costs, there is not necessarily a duty to mitigate the delays themselves.

These legal obligations can, of course, be modified by contractual provisions. For example, the JBCC contract, a standard form contract popular in South Africa, imposes a duty on contractors to take reasonable steps to mitigate delays.

Civil law systems tend to have a stronger duty to mitigate due to the obligation to perform contractual obligations in good faith. The contractor's obligation to mitigate is strongest in relation to contractor delay events; however, there is still an expectation of reasonable proportional efforts to mitigate employer delays.

Liquidated damages or penalties

Liquidated damages are damages fixed by the contract which are payable in the event of a breach. The purposes of liquidated damages generally are to encourage compliance with the contract; provide certainty as to the consequences of a breach; and limit liability. In this regard, liquidated damages clauses are for the benefit of contractors and employers alike.

Common law and civil law jurisdictions take different approaches to liquidated damages.

Common law emphasises the certainty provided by liquidated damages clauses. The amount of liquidated damages stipulated in the contract will be respected regardless of the actual loss suffered. Importantly, liquidated damages clauses are also considered to be the exclusive remedy for delay unless otherwise provided for in the contract. Therefore, recovery will be limited to the amount of liquidated damages, even if the employer's actual losses are greater. The amount provided for in the contract as liquidated damages should therefore be a genuine pre-estimate of loss to avoid being held by the courts to be an unenforceable penalty.

By contrast, civil law systems embrace the punitive nature of liquidated damages clauses. In civil law jurisdictions, the liquidated damages clause is often referred to as a 'penalty' clause, and is made up of both coercive and compensatory elements.

The amount of liquidated damages in civil law systems tends to be less certain than that under a common law system. It may be possible for a judge to decrease or increase the liquidated damages to reflect actual loss, depending on the applicable law. Additionally, actual damages may or may not be recoverable on top of the liquidated damages.

Relief in respect of Covid-19

There has been much discussion on whether Covid-19 can be classed as a force majeure event. Regardless, force majeure may only entitle the contractor to an extension of time but not costs. We have therefore seen recent attempts to apply concepts such as imprévision to the Covid-19 crisis, which would allow for renegotiation of the contract to capture the lost costs element. Additionally, contractors have attempted to rely on change of law provisions in contracts to show entitlement to costs.

In the Middle East, contractors have been using some interesting arguments to capture the costs associated with Covid-19. In recent years, force majeure clauses in the Middle East have been expanded to allow recovery of standby costs for blockades. We have recently seen contractors characterising Covid-19 closures as "blockades" in order to take advantage of these recently expanded force majeure clauses in order to recover costs.

The next EMEA construction briefing will compare cost claims in various jurisdictions. To register your interest to attend, please email [email protected].