In a major new reported case, the court has given guidance on how to assess the financial impact of extensions of time on building and civil engineering projects.
What are the commercial issues?
In Carillion Construction Limited v Emcor Engineering Services Limited , the Court of Appeal recently (February 2017) considered the liability for two separate periods of delay to the project. This project was to construct the court building in London – the one in which the case was decided! One delay was caused by Carillion and the other was caused by Emcor. The major new point of interest from this case was the period for which the measure of the loss, the court decided, must be paid by Emcor.
How much the compensation is will depend upon when the financial effects are felt on the project and the project period for which the court decides the financial assessment is to be carried out. How much has to be paid for a delay is the obvious commercial issue.
The court decided that Emcor would benefit from an extension of time, but Emcor would pay less to Carillion for its culpable delay than the true costs that Emcor had caused to the project. How is this possible? In this blog, we will answer that question.
Background to the Carillion v Emcor case:
Carillion had sued two of its Mechanical and Electrical (M&E) sub-contractors that had helped build the Rolls Building on Fetter Lane, London. This building is a court building that houses the Commercial Court, the Chancery Division of the Court and the very court that initially judged the dispute – the Technology and Construction Court. The project was completed 182 days late and Carillion blamed its sub-contractors, who in turn blamed Carillion – and each other!
Carillion said that at the time that Emcor received an instruction to carry out variations to its M&E works, Emcor had already caused them to miss their target completion date for the whole building project. Carillion also said that it was commercial common sense to require Emcor to pay for the actual losses that they had caused. Namely, the ones that had happened after the instruction to vary the M&E scope of work. It is probably safe to assume this is when Carillion suffered more costs as a result of Emcor’s alleged mistakes. As a result, Emcor wanted the financial effects of any delay, for which it was responsible, to be assessed at an earlier time than the time and period of delay they had caused.
Carillion had lost in the Technology and Construction Court but were appealing to the Court of Appeal. They asked the court to decide the important preliminary principle about which was the period of time that Emcor would pay for the costs of its alleged delay, if Carillion do eventually prove that Emcor is culpable.
The answer was that, if Emcor was liable, it would pay for the financial effects for an earlier period than the actual delay they had caused. This is surprising because that does not sound like common sense. Nonetheless, for those who know what the standard construction contracts say, it is not a surprising result.
What were the legal issues debated and what was the outcome?
There were three issues the court had to decide:
What was the natural meaning of the contract conditions?
The court reviewed some very common construction contract clauses on how extensions of time work. The clauses had a common theme. They all spoke of adding the extension of time on to the date originally required by the sub-contract. Or, if previous extensions had been given, they spoke of adding the time to the new dates and not giving Emcor protection from a delay claim by an extension of time for the actual period of its alleged delay. The court decided that the clauses all required the extension of time to be added on to the date previously fixed in the contract for the completion of the M&E works. This sounds unremarkable until its effects are considered.
What this meant was that the time and period of delay which Emcor were potentially liable for would not be the time and period for which the costs would be assessed. This was because the contract clauses required the extension of time for the variations to be added to the date previously fixed. This let Emcor off the hook for the actual time and period when they were potentially responsible for a delay to the project (if Carillion were to prove its claim). Emcor would be liable to Carillion for the time after the new completion date for Emcor’s sub-contract works. The court’s decision may save Emcor money. Equally, if Carillion’s losses had been greater at the earlier time, it could have cost Emcor more money.
What do the relevant, previous court decisions say?
The court reviewed seven major court decisions in this area of the interpretation of contracts. It decided that all of them were consistent with its conclusion on the meaning of the sub-contract between Emcor and Carillion. The court commented that no one had ever previously argued in any court case that an extension of time should be assessed and given for the actual time and period of the alleged delay. Before this case, it had been accepted that the extension of time is added to the earlier completion date set by the contract.
Can the court decide the case by the application of some commercial common sense?
The court was reluctant to accept the conclusion that the financial affects had to be assessed for a period earlier than the actual period of delay. The court said that this did not make sense commercially. However, they also said that the court was not open to the possibility of deciding the case by what was commercially sensible as the parties had used contract wording that was very clear. In other words, the court could not rescue the parties from its ‘bad bargain’.
What can we learn about extensions of time from this case?
- When agreeing contracts, if you want the financial effects of an extension of time to be assessed for the actual period of time the delay happens, it is essential to say that expressly in the contract. It’s vital that you seek advice from a specialist construction and engineering solicitor when agreeing any commercial contracts.
- It is not unusual for construction contract clauses not to permit the reality of a situation to be assessed. For example, when an extension of time decision is made, the contract administrator or employer’s agent cannot usually revisit it in the light of the reality that subsequently takes place.
- Contractors and sub-contractors take risks because, whilst projects are priced in terms of how many shifts and visits to site etc. they are also priced to accept some risks. More time and more money are only given for a limited number of specific events, not simply because it took more time or more resources than planned. It is often important to be able to claim additional time and money for events beyond your control or, conversely, to pass more risk to contractors and sub-contractors. In the Carillion and Emcor case, Emcor had to amend its programme to suit the main contract programme, but there were no duties on Carillion to manage the job so as to enable Emcor to carry out its M&E works efficiently. When negotiating contracts it’s important to speak to a specialist solicitor to ensure what you agree in conversation is fully reflected in writing.
- The argument used by Carillion was unusual because the court found that no one had ever argued this in a court before. The court had a great deal of sympathy with Carillion’s argument, but the clear words of the sub-contract gave the court no scope to help Carillion achieve the common sense commercial solution.
If you would like further information on extensions of time or drafting and interpreting construction contracts, please contact Roger Allsup, Head of our Construction & Engineering team on 0161 475 7602.