A subscriber recently asked us what was meant by the “net basis” (as opposed to the “gross basis”) for calculating an extension of time due to a contractor under a construction or engineering contract. This is just one part of the issues that surround concurrent delay in construction contracts and this post uses a simple example to identify the net basis and gross basis for an extension of time.
A building contractor and employer have entered into a building contract, governed by the law of England and Wales. Although the principles discussed in this Ask the team apply more widely than to JCT contracts, for the sake of simplicity when using common terms, assume that the contract is an unamended (but formally executed) JCT Design and Build Contract, 2011 edition.
The Works are not divided into Sections, and the Date for Completion of the Works is Friday, 27 July 2012. The parties have agreed liquidated damages (LDs, also known as LADs). No extensions of time have been granted and the Completion Date has not changed. (There are no contractual reasons why the Completion Date should change.)
The Contractor is in culpable delay and reports to the Employer’s Agent that it expects to achieve practical completion of the Works on Friday, 10 August 2012. On Monday, 30 July 2012, on behalf of the Employer, the Employer’s Agent serves a Non-Completion Notice and notifies the Contractor it may withhold or deduct LDs.
On Friday, 10 August 2012, before practical completion, the Employer’s Agent instructs a Change, which (for the sake of simplicity) the parties agree will take the Contractor one week to complete. The Contractor gives any required notice with regard to that delay and the Employer’s Agent formally confirms the revised Completion Date as Friday, 3 August 2012. Once again, the Employer’s Agent serves a Non-Completion Notice and notifies the Contractor it may withhold or deduct LDs.)
On Friday, 17 August 2012, the Employer’s Agent issues a Practical Completion Statement (which confirms that practical completion was achieved on that day).
The gross basis
The Contractor could argue that any extension of time, to alter the Completion Date, must take account of the fact that the Change was instructed on 10 August, after the original contractual Date for Completion.
That is, the Contractor could argue that the extra week it takes to carry out the Change runs from 10 August to 17 August, and therefore it has not completed the Works late. In other words, the Contractor could argue that the Employer’s Agent has got its dates wrong.
This is the gross basis: the Contractor claims that the extension of time for the Change must take into account the date the Change was requested, and count on seven days from there. On this basis, the Contractor would argue that it is not liable for LDs.
The net basis
The Employer’s Agent would argue that it has looked at the contractual Date for Completion and assessed a fair and reasonable later date for the Completion Date. The parties agreed that the Change would take seven days to implement, so 3 August 2012 (seven days after 27 July) it is.
This is the net basis: the extension of time looks at the time added by the Relevant Event (here, the Change). In the circumstances described in this example, the fact that the Change was instructed when the Contractor was in culpable delay, after the Date for Completion, is not relevant. On this basis, the Contractor will be liable for LDs for the period between the revised Completion Date and the date of practical completion (3 August to 17 August 2012).
Perhaps unsurprisingly, case law supports the net basis approach. While it is possible to imagine many circumstances that would make the assessment of a fair and reasonable extension of time more complex in practice, if a Relevant Event occurs when the Contractor is already in culpable delay, the Contractor is only entitled to have the Completion Date fixed at a later date to the extent that the Relevant Event actually causes a delay.
More specifically, in Balfour Beatty v Chestermount Properties (1993) 9 Const LJ 117, the court held:
“The underlying objective is to arrive at the aggregate period of time within which the Contract Works as ultimately defined ought to have been completed having regard to the incidence of non-contractor’s risk events and to calculate the excess time if any, over that period, which the Contractor took to complete the Works. In essence, the Architect is concerned to arrive at an aggregate period for completion of the contractual works, having regard to the occurrence of non-contractor’s risks events and to calculate the extent to which the completion of the Works has exceeded that period…”
The court specifically rejected the gross basis approach, as it did again in 2011 in Adyard Abu Dhabi v SD Marine Services.
The paint on the door
An old analogy against the gross basis argument refers to the “paint on the door” (or, in Adyard v SD Marine, the paint on the wall).
Assume a contractor has six months to build a house. After many delays, for which the contractor is solely responsible, it is about to complete after one year (six months late). On the day before the contractor will finish the works, the employer hands the contractor a tin of paint and says:
“I’ve changed my mind. Please can you paint the front door this colour.”
The contractor obliges, the works finish one day later than they would have done, and the contractor asks for an extension of time of six months and one day, to take account of the last minute colour change.
In fact, on the net basis, the contractor should be entitled to only one more day: it was solely responsible for the six months of preceding delay.