Clifford Chance

In this Clifford Chance Construction Group blog, London partner Ed Bretherton assesses the manner in which delay liability might be allocated in a termination scenario.

Often, a lender's counsel's first port of call when analysing construction contracts on project/development-financed deals is the compensation on termination mechanism. One of the critical issues on termination (assuming construction is completed by other contractors after termination) is what a contractor's liability should be for delays it causes to the project.

A reminder

The UK Court of Appeal looked at three potential outcomes in Triple Point Technology, Inc v PTT Public Company Ltd [2019] EWCA Civ 230, each of which was backed by a handful of cases:

• Option 1 – delay liquidated damages (DLDs) are not applicable at all in a scenario where the works are late and incomplete and the contract is terminated. Instead, a general damages claim may be available, subject to any contractual terms fettering such a claim, e.g. an exclusive remedies provision or an economic loss exclusion.
• Option 2 (the prevailing view) – DLDs will apply to any period of culpable delay up until termination, but not afterwards. Afterwards, a general damages claim may be available on the same basis as above.
• Option 3 – DLDs continue to apply post termination until the works are completed by replacement contractors.

In Triple Point, the Court decided that Option 1 (and not the prevailing view) was the correct position, based on the language of the contract in question. Different language in the contract would have led to a different outcome, but the Triple Point language was very similar to that used in a number of standard form construction contracts.

Triple Point only applies where the DLD mechanism assumes that the contractor completes the works. In the Triple Point contract, DLDs would cease accruing "when PTT accepts the [delayed] work [from the contractor]". The wording in bold was not in the contract, but was implied by the Court.

It is not a huge leap to extend Triple Point's likely application to the ubiquitous (in the UK) JCT Design and Build Contract 2016 – DLDs run from when the completion deadline is missed until "the date of practical completion of the works [by the contractor]". Here, the wording in bold is my own, as I think that is what a Court would say it means.

Similarly, the internationally ubiquitous FIDIC 1999 Silver Book has DLD liability running "for every day which shall elapse between the relevant Time for Completion and the date stated in the Taking Over Certificate". (It is interesting to note that the FIDIC 2017 Silver Book, switches to Option 2-type drafting, with DLD liability expressly continuing until termination.)

The market's reaction

We have seen the construction industry react in one of two main ways to Triple Point. Either parties are:

• accepting the Triple Point implications and doing nothing – I can understand this from an owner-developer's perspective; the prospect of enhanced general damages recoveries may seem appealing in a termination scenario, particularly in markets like the UK development sector where it is still unusual for construction contracts to contain blanket waivers of liability for economic losses, and DLD rates typically sit well below the levels of actual anticipated loss. Unlike with a claim for DLDs, however, developers would be put to proof on causation and quantum of loss and so could end up recovering much less than the pre-baked DLD amounts. Contractors face the opposite problem; or
• drafting expressly for the formerly prevailing view (i.e. following Option 2 and FIDIC 2017). I am, in fact, seeing this as the more popular approach, but it does leave parties with the slightly unsatisfactory prospect of a liquidated claim and an unliquidated claim being applied in parts to the same delay and the usual hurdles for establishing each would apply.

A third way?

I wonder if the better approach could be to move into line with Option 3. Each of Options 1 and 2 come with uncertainty as to what will be recoverable in a culpable delay scenario. No-one in the industry likes uncertainty in that regard – it's why we have DLDs in the first place. So why not consider imposing a DLD-concept over the entire period of culpable delay, whether before or after termination, until completion? Not only would that create certainty, it could also crystallise claims early enough to facilitate timely calls on bonds and guarantees which might otherwise expire prior to completion.

I accept that there are potential issues with this approach, including that:

• contractors are unlikely to accept any risk in connection with unnecessary post-termination delays by developers in reprocuring the works, or by replacement contractors in completing them. That understandable concern could be addressed by an independent expert determining at the point of termination (potentially on an interim basis) the overall delay to completion, allowing a reasonable period for any reprocurement or supply chain remobilisation; and
• contractors might still challenge any determinations of extension of time entitlements, but unlike with Options 1 and 2, there would be no ability to challenge the determination based on causation arguments, and greatly reduced ability to challenge the amount of damages claimed (other than on the traditional grounds, e.g. because the DLD rate is held to be a penalty).

Option 3 may not be the position adopted by any of the most common international standard forms, but we often see (indeed, help parties draft and negotiate) an Option 3 approach on project financed construction deals across the international construction industry.

It is, however, unusual for the construction industry to shift an established position on liability allocation. Moreover, one may take the perfectly rational view that termination is highly unlikely on construction projects except in cases of insolvency (where recovery is likely to be limited to bonds and guarantees in any case) and that, if it does happen, the application of Triple Point could provide sufficient protection, subject to there being no contract terms which would prevent or erode recoveries.

Personally, I find the relative certainty of Option 3 quite appealing. Let us know what you think.