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COMMENT: Who bears the risk of concurrent delay?

Fri 06 Oct 2017 by David Foxwell

COMMENT: Who bears the risk of concurrent delay?
Mike Stewart: "decision has important implications for contracts in the offshore sector covering the construction of structures such as oil platforms, drilling rigs, floating production and storage units, and offshore windfarms"

A recent decision from the English courts means that parties can contract out of responsibility for concurrent delay. Mike Stewart*, a partner with Wikborg Rein explains why the ruling has direct relevance to the offshore oil and gas and offshore wind industries.

The prevention principle has been part of English law for nearly 200 years. In the construction and offshore sectors, it is normally taken to mean that, where the employer has prevented the contractor from completing its work by the contract completion date, the employer cannot deduct liquidated damages from the contractor.

The basic rationale is that the employer should not be able to take advantage of the non-fulfilment of the completion date, where the employer has prevented the contractor from fulfilling that date. The prevention principle has largely informed the view taken by English law towards concurrent delay, which can be summarised as follows:

Where ‘employer risk events’ and ‘contractor risk events’ occur sequentially but have concurrent effects, any ‘contractor delay’ should not reduce the extension of time to which the contractor is entitled as a result of the ‘employer delay’.

But what happens if the parties agree upon an extension of time clause which ‘contracts out’ of the prevention principle by expressly making the contractor responsible for concurrent delay? Will the contractor be able to rely on the prevention principle as grounds for obtaining an extension of time?

This issue was discussed in the recent decision of North Midland Building Limited v Cyden Homes Limited [2017] – and the answer is a resounding ‘No’. Although the decision arises from a land-based construction project, it will be of direct relevance to any offshore construction or shipbuilding contract.

The following scenario is well-known in the construction and offshore sectors:

  • The employer fails to provide some key design information to the contractor, and the contractor says this failure is causing delay to the progress of its work.
  • The contractor fails to mobilise on time, and the employer says that the late design information cannot be causing any delay because, even if this information had been provided on time, the contractor did not have sufficient resources to progress its work to complete on time.

Here, the employer is alleging that there are ‘concurrent’ delays occurring, in the sense that the effects of the employer's breaches and the contractor's delays are being felt at the same time.

If the contract contains a ‘traditional’ extension of time clause (such as, for example, the one found in Clause 8.4 of the FIDIC Conditions of Contract), the employer’s breaches will entitle the contractor to an extension of the contract completion date. In these circumstances, the contractor will be entitled to an extension of time for the period of delay caused by the employer risk event. 

It will not be open to the employer to argue that it does not have to grant an extension of time because the contractor would have missed the contract completion date because of its own delays. This is because, if the employer deducted liquidated damages in these circumstances, this would contravene the ‘prevention principle.’ To put it another way, the employer prevented the contractor from completing its work by the completion date, so cannot benefit from this act of prevention by deducting liquidated damages.

Many extension of time provisions in construction and offshore contracts now contain language along the following lines: ‘The completion date shall not be extended to the extent that the delay would nevertheless have been experienced because of concurrent delays for which the contractor is responsible. This is sometimes called a concurrent delay ‘carve-out’, which makes the contractor responsible for concurrent delay.’

In North Midland Building Limited, the contract contained a broadly similar clause.  The contractor argued that the clause was not enforceable, because making the contractor liable for concurrent delays would be contrary to the prevention principle. 

The judge rejected this argument and, having agreed how the risk of concurrent delay should be allocated, said that it was not open to the parties to seek to argue otherwise.

The allocation of responsibility for concurrent delay in any construction project is a commercially significant matter, potentially worth millions of dollars. Prior to the North Midland Building Limited decision, it was often argued that, under English law, clauses which made the contractor responsible for concurrent delay were unenforceable because they were contrary to the prevention principle. Those arguments will now be hard to sustain.

The court’s approval of such clauses will probably increase their popularity with employers. Where they are used, they will reverse the conventional approach that the contractor should be entitled to an extension of time, despite its own culpable concurrent delay.

In commercial terms, this decision brings the wording of extension of time clauses into sharp focus. Where there is an express allocation of concurrent delay, the contractor will bear the risk of such delays and should price for the work accordingly.

This has important implications for contracts in the offshore sector covering the construction of structures such as oil platforms, drilling rigs, floating production and storage units, and offshore windfarms, which will typically contain a date by which construction must be completed.

The question of who bears the risk of achieving (or missing) that completion date is of critical importance, since the cost overruns on these projects can total many millions of dollars. The decision in North Midland Building establishes the enforceability of clauses rendering the contractor responsible for concurrent delay, an issue that was previously in doubt.


*Mike Stewart is a partner at Wikborg Rein's London office and is part of the firm’s construction practice. He focuses on complex, high value disputes arising out of major energy and infrastructure projects

 

 

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