Construction contracts are expensive and risky. The cost for each day that the contractor is on site can be very high. Whether it be for an apartment block, shopping centre or a power station the employer received no return on its capital until the project is completed, which is partially completed if that is possible.
There are many more factors preventing a contract from being completed in time than there are that facilitate early completion. Issues may include:
Delays in plant and material deliver
Late delivery of drawings/information
Earth moving machinery breakdown
Shortage/breakdown of cranes
Lack/shortage of resources
Delays by authorities in providing infrastructure services – water/electricity/roads
Lack/shortage of skills
While many forces contribute to late completion of the project, there is very little that facilitate early completion. It’s a little like a commercial air flight. There are many factors that can contribute to late departure. It would be very unusual for a flight to depart early.
Each day a contract is delayed can be very expensive because the employer would have to pay for all the labour on site, cranes, trucks, cranes, scaffolding materials and so forth. As a result, the employer would want to know as accurately as possible the exact period of the duration of the contract and the completion date. He would expect the contractor to make a commitment to that date and demand damages if the contractor is able to meet that date. This obviously places the contractor at high risk. The wise employer would allow for some contingency time which obviously he would not declare to the contractor. The wise contractor would also allow for some contingency time which it would not declare to the employer. Nevertheless, construction contracts notoriously complete late and often far exceed the predicted cost. Not only does the employer have to bear the additional costs of the project running late, it also loses out and the revenue stream it would earn once the contract is completed.
Consequently, employers insert a penalties or damages clause in the construction contract for late completion of the project. These are not the same things.
Damages are notoriously difficult to ascertain. Contractors furthermore also require some certainty regarding the risks they would carry in the event of late completion. What happens in jurisdictions outside of South Africa is that the contractor and the employer agree to some pre-estimate of the damages which are usually calculated in increments of time and an agreed maximum amount. These are known as liquidated damages liquidated assessed damages.
In South Africa penalties in lieu of liquidated damages, penalties are permitted. The advantage to penalties is that it avoids the complexity of attempting to assess likely damages and lengthy negotiations what damages are likely to arise. Instead of assessing damages the parties agree to the contractor paying the penalty, usually assessed as a fixed daily percentage for each day of delay, up to a total as an agreed percentage of the total contract amount.
One can think of a penalty as being a fine being late as compared to a true estimate of damages. Penalties are not permitted in English law, but they are permitted in Roman Dutch law. Although South Africa is a Roman Dutch law jurisdiction it has historically been significantly influenced by English law, and still is for that matter, which resulted in some disagreements between various parties as to whether penalties or liquidated damages should apply in South African law. The matter was finally settled by the publication of the Conventional Penalties Act No. 15 of 1962.
In terms of The Conventional Penalties Act either penalties or liquidated damages may apply, but not both. The act has been much amended in the interim period and little of the original provisions shall apply. Significantly, the act still provides that penalties and liquidated delay damages cannot both apply to the same contract. The act does not talk of costs or damages but of the project prejudice party may suffer. Prejudiced is deemed to be a much wider concept than costs. Another significant revision that is also being retained in the act is that in the event that the penalties far exceed the prejudice suffered by the employer it may approach the court for relief. The Contractor however has to prove that the penalties far exceed the prejudice suffered by the employer.
A penalties or LD clause also serves the contractor because it limits it liability for damages.
Which brings us to the contract completion date.
In a recent adjudication in a dispute, between a main contractor and the subcontractor, I came across the following term in the subcontract agreement:
“The subcontractor should note that time is strictly of the essence and that any delays beyond the agreed completion date will be subject to severe penalties at the rate of 1% per six-day period up to a maximum of 15% of the tendered contract value”.
In Christie’s The Law of Contract the author states as follows: “When we say time is of the essence of a contract, we mean that failure to perform by the time specified must be regarded as a breach of such magnitude as to justify the other party in cancelling the contract”,
So, when is time of the essence in a contract? The simple answer is time is of the essence when it is stated to be of the essence as in the above-mentioned contractual clause. A necessary condition is that a date for completion of the contract is stated in the contract. Stating a period of time that not fixing an end date will not serve as time being of the essence. The mere inclusion of a date for completion makes time of the essence and it is not necessary to state it as such.
It is worth noting at this point that the employer cannot unilaterally extend the time to completion. So, if a completion date cannot be obtained by the contractor because of delays by the employer, such as late delivery of drawings or providing late access to site, an interesting conundrum arises.
In English law, with the prevention principle applies them the contractor has the defence that it was prevented from completing in time as a result of the employer’s defaults. In the event that the employer has caused the delay causing the contractor to continue working beyond the completion date time is said to be at large. The contractor only has to then complete in a reasonable time.
In Roman Dutch law jurisdictions, the prevention principle is not accepted. The contract date remains the contract date regardless of who causes the delay. It is worth noting at this point that the is a contractual obligation on the employer to ensure it does its part in completing the contract by the completion date. It is not solely the contractor’s obligation.
Putting aside delay damages for the moment, the consequence is that if the contractor does not complete on time and it is the cause of the delay the contract automatically terminates. Which may not necessarily be to the employer’s advantage because obtaining a replacement contractor to complete the works could be very expensive. In most construction contracts provision is made for contractors to give notice of delay and apply for extensions of time to completion. The Principal Agent/Project Manager/ Engineer may be well advised to grant such extension of time, regardless of who caused the delay where in his/her considered opinion neither party would be served by termination of the contract.
Most construction contracts however do have either a penalties or liquidated damages provision. So, going back to the above-mentioned contractual clause:
“…that time is strictly of the essence and that any delays beyond the agreed completion date will be subject to severe penalties…” a further conundrum arises. If time is of the essence in the contract it should terminate on the completion date and penalties/liquidated damages would be of no consequence. Furthermore, what exactly is the employer’s intention? Does it want the contract to terminate if the completion date is exceeded or does it want damages?
Disclaimer: The purpose of this series of articles is to explain aspects of construction contracts which should be of interest to contacts managers/project manager/principal agents/engineers and the like, and they express the views of the writer. They are not intended to be authoritative although the reader may be guided to consult the appropriate authorities. Concepts as explained here must always be read in the context of the applicable contract, and professional advice sought where relevant.