What do you do when your contractor is in delay, but a key part of the works is substantially complete and could be used? You don’t have all the technical documents, such as your as-built programmes and operating manuals, and the tests haven’t been fully completed yet. Despite this, the needs of your business are pressurising you to use what is, after all, a substantially ready asset.
We are often asked to advise in such situations and our response is always the same: early take-over of part of the works (which is to be distinguished from sectional completion) is not a decision that should be taken lightly. Contrary to common practice, it should be carefully considered, as it carries many risks.
Key areas of concern for any employer considering early take-over include:
- Liquidated and ascertained damages (LADs) for delay
The employer will not be entitled to LADs for delay for the part of the works it takes over early, from the time when it took over those works, unless the contract expressly provides otherwise. This is the general rule, even if tests have not been fully completed and technical documents have not been provided.
- Defects liability period
The defects liability period for the part of the works taken over is likely to commence from the date of take over. This means that there will be different defect liability periods for the different parts of the works. This may impact upon the timing and release of retentions, where part of the retention may now need to be released earlier than the rest. It may also affect the maintenance of the works. For example, where the employer has engaged a third party to maintain plant or equipment, the commencement date of that contract may have been aligned with the end of the defects liability period. That maintenance contract may need to be revised if there are now different defect liability periods.
To the extent that the relevant works still need to be tested, that testing will have to take place during the defects liability period. Often, such tests are carried out when the works are considered complete and before take-over, although different standard forms provide slightly different performance testing regimes. In a performance-based contract, the performance tests and the performance criteria which the works as a whole must achieve are key elements of the contract. For some types of contract, reliability testing may be a critical part of the performance testing regime (for example, in relation to complex automated systems of the type used in distribution centres). In others, the performance testing regime may need to include a longer term commissioning period because the performance of the plant in question can only be tested in appropriate climatic conditions (for example, wind turbines). In these circumstances, contracts often include performance-related LADs which may be levied in the event that the works fail to perform within the limits set out in the contract.
There is a substantial risk that, if the contractor fails any of the tests, it will argue that it was the employer’s incorrect use of (or interference with) that part of the works taken-over that caused it to fail, which may in turn jeopardise the employer’s ability to claim performance LADs under the contract for any resulting under-performance of the works as whole. This risk generally militates against early take-over of part of the works in these circumstances.
The risk of the works passes to the employer upon take-over. The employer should therefore ensure that it has the appropriate insurances in place before it takes possession of the relevant works.
When parties enter into construction contracts, it is not usually envisaged that the employer will take-over part or parts of the works early, before completion tests and possibly also performance tests have been successfully passed and technical documents handed over. Projects that set down detailed contractual provisions for take-over and performance testing do so for a good reason. They are typically complex process plant contracts and tend to be performance based, rather than purely work based. To take on a process or system before the performance/reliability of that process or system has been tested undermines the entire protection and ethos of the agreed contractual provisions. This creates many challenges, both legal and practical, and should therefore be considered carefully on a project by project basis before deciding whether or not it is appropriate to take the plunge!