REUTERS | Tobias Schwarz

Time for assessment of delay damages against sub-contractors

Many of you reading this will no doubt at some point have visited the Rolls Building in London, the home of the Chancery Division, the Admiralty and Commercial Courts, and the TCC. It was opened by the Queen in December 2011, but it would have been open somewhat earlier if the project had not been delayed. The main contractor, Carillion, blamed its sub-contractors (including Emcor) for the delay. In April 2016, Miss Recorder Nerys Jefford QC (as she was then) heard a trial of two preliminary issues.

Carillion v Emcor at first instance

We are only concerned with the first preliminary issue, which was about when an extension of time granted under the sub-contract (a DOM/2) was to commence:

“On the assumption that EMCOR is entitled to an extension of time pursuant to clause 11.3 of the EMCOR Sub-Contract (as amended) by fixing such revised or further revised period or periods for the completion of its Sub-Contract Works, does the EMCOR Sub-Contract (as amended) require:

(a) that such revised or further revised periods are added contiguously to the end of the current period, so as to provide an aggregate period within which EMCOR’s Sub-Contract Works should be completed (as contended for by EMCOR); or

(b) that such revised or further period or periods are  fixed in which EMCOR can undertake its Sub-Contract Works, which are not necessarily contiguous but which reflect the period for which EMCOR has in fact been delayed and is entitled to an extension of time (as contended for by [Carillion]).”

Basically, Emcor contended that the period for which it was granted an extension of time should be added contiguously to the previous completion date or, to put it in delay analyst speak, it should be “dotted-on” to the previous completion date.

Carillion argued that the extension of time granted to Emcor should reflect the period during which Emcor was actually delayed.

Before looking at what the court decided, I think it would be useful to apply the parties’ arguments to a practical example. I will do this on the basis of whole months to make things easier:

  • Imagine that a sub-contractor’s completion date is 31 December 2015, but that it does not complete its works until 30 April 2016 (that is, there is a critical delay of four months). Of that four-month delay, the delay in March and April 2016 was caused by relevant events, which means the sub-contractor is entitled to an extension of time of two months, and it is in culpable delay for the other two months.
  • On Emcor’s case, the two month period should be added contiguously to the completion date of 31 December 2015, resulting in a revised completion date at the end of February 2016, and meaning that it was in culpable delay in March and April 2016.
  • On Carillion’s case, the sub-contractor is entitled to an extension of time for March and April 2016, meaning that it was in culpable delay for January and February 2016.

Carillion v Emcor in the Court of Appeal

At first instance, Miss Recorder Nerys Jefford QC agreed with Emcor, which led to Carillion’s appeal to the Court of Appeal on the grounds that:

  • The court erred in interpreting the natural meaning of clause 11.3.
  • The authorities cited, including Balfour Beatty v Chestermount, provided no support for the court’s interpretation of clause 11.3.
  • The court’s interpretation of clause 11.3 does not accord with commercial common sense.

In the Court of Appeal, Jackson LJ agreed that the natural meaning of the words used in clause 11.3 is that the extension of time should be contiguous. Therefore, he rejected the first ground of Carillion’s appeal.

The authorities, including Balfour Beatty v Chestermount

In terms of the authorities, many of you might assume that Emcor’s case was on point with Chestermount, as I did initially. To refresh your memories, in Chestermount:

  • The completion date was 9 May 1989.
  • A group of variations delayed Balfour Beatty between February and July 1990.
  • The architect granted an extension of time to September 1989 on the grounds that the variations had caused four months’ delay.
  • Balfour Beatty argued that it was entitled to an extension of time from 9 May 1989 to late 1990.
  • Colman J rejected Balfour Beatty’s argument and said that the extension of time should be for the actual period of delay caused by the variations, and that this should be added contiguously to the previous completion date as the architect had done.

Jackson LJ pointed out (as Recorder Jefford QC had also done), that in Chestermount both parties were arguing that the extension of time should be contiguous, and this common ground was also reflected in more recent decisions. None of the authorities dealt with Carillion’s case that there should be an intervening period during which the main contractor or sub-contractor was liable for delay and, in this respect, Jackson LJ said that Carillion was correct in its assertion that the authorities did not support Emcor’s case.

However, Jackson LJ also said that the judge at first instance was:

“… right to say that those authorities support Emcor’s argument as to how a reasonable person with the parties’ knowledge of the background would understand clause 11.3.”

Commercial common sense

It is the commercial common sense points that I think are the most interesting. As we all know, in Arnold v Britton Lord Neuberger said:

“While commercial common sense is a very important factor to take into account when interpreting a contract, a court should be very slow to reject the natural meaning of a provision as correct simply because it appears to be a very imprudent term for one of the parties to have agreed, even ignoring the benefit of wisdom of hindsight.”

Relying on Arnold v Britton, Recorder Jefford QC was persuaded not to depart from the natural meaning of clause 11.3.

Carillion argued that this was contrary to commercial common sense because Emcor may be exempted from liability under clause 12 during a period when Emcor was in culpable delay, but would be liable to Carillion during a period when Emcor was not in culpable delay. Clause 12 provided that:

“Failure of the Sub-Contractor to complete on time

12.1 If the Sub-Contractor fails to complete the Sub-Contract Works within the period or periods for completion or any revised period or periods as provided in clause 11, the Contractor shall so notify the Sub-Contractor in writing within a reasonable time of the expiry of that period or those periods.

12.2 On receipt of the notice referred to in clause 12.1 the Sub-Contractor shall pay or allow to the Contractor a sum equivalent to any loss or damage suffered or incurred by the Contractor and caused by the failure of the Sub-Contractor as aforesaid.”

Carillion said that the loss it suffered during the two periods was unlikely to be the same, and therefore one or other party would gain a windfall benefit.

Applying Carillion’s argument to my practical example, it was saying that on the basis of the TCC’s interpretation, the sub-contractor would be:

  • Exempt from liability in January and February 2016, when it was in culpable delay.
  • Liable in March and April 2016, when it was not in culpable delay.

However, the main contractor’s costs might be considerably more in January and February 2016 compared to March and April 2016.

Jackson LJ said that:

  • Emcor was unable to suggest any convincing answer to Carillion’s argument but, nevertheless, in practice, the system of awarding extensions of time contiguously has worked satisfactorily.
  • The issue does not arise in respect of main contractors because their liability to employers is normally a fixed rate of liquidated damages and, as such, it was irrelevant whether the extension is contiguous or not.
  • Even though clause 11.3 may give rise to anomalies, that was not a reason to depart from the natural meaning of the words used.

Carillion’s appeal was therefore dismissed.

Implications of Carillion v Emcor

In reality, I’m not overly surprised by the outcome of the appeal. If Carillion’s interpretation had been accepted, it begs the question of how the revised completion date could be determined.

However, I do think the judgment raises some interesting questions. In particular, applying the Court of Appeal’s findings to my practical example, the sub-contractor could be liable to the main contractor for any delay damages incurred from the beginning of March 2016 onwards, but does this mean that the sub-contractor’s claim for its own prolongation costs should be for January and February 2016?

I raise this question because, despite always finding that extensions of time should be contiguous (regardless of whether I am considering a main contract or a sub-contract), I have always assessed prolongation costs in respect of the actual period of delay. Turning again to my practical example, while I would award a contiguous extension of time up to the end of February 2016, I would assess the sub-contractor’s loss and expense as the actual prolongation costs incurred in March and April 2016. I have never come across an argument that prolongation costs should be for the contiguous extension of time period, and my approach is consistent for the SCL Delay and Disruption Protocol, which states at paragraph 3.20 of the draft 2nd edition:

“Liability for compensation must first be established by showing that the prolongation has been caused by an Employer Risk Event. Once it is established that compensation for prolongation is due, the evaluation of the sum due is made by reference to the period when the effect of the Employer Risk Event was felt, not by reference to the extended period at the end of the contract.”

Applying the SCL’s approach to the assessment of the sub-contractor’s prolongation costs and the Court of Appeal’s approach to the assessment of the main contractor’s delay damages to my practical example could result in both the sub-contractor and the main contractor being awarded their costs for March and April 2016 (subject obviously to the main contractor demonstrating that the sub-contractor’s delay had delayed the main contract). Some might argue that this in itself defies commercial common sense, but the counter argument is that this is what would happen if my practical example was in respect of a main contract. In that case the employer would be entitled to liquidated damages for March and April 2016, and the main contractor would be entitled to its prolongation costs for the same period.

I’m sure this is not the last we have heard of this case, and I wait for the next instalment with baited breath.

MCMS Ltd Jonathan Cope

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