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Legal update on construction law - August 2016

15 August 2016

Prolongation in construction contracts

Delays are common in construction contracts and unfortunately projects are often finished after the agreed completion date. This may reflect the fact that contract durations tend to be optimistic, especially if a tender process is involved.  When a delay occurs, a contract will generally provide for liquidated damages to be paid by the contractor to the principal.  However if the delay is attributable to the principal and the contractor is entitled to an Extension of Time (EOT), liquidated damages will not be available for that period and the contractor may make a claim for prolongation costs against the principal. 

'Prolongation' refers to a claim for damages by a contractor for the additional costs it has incurred as a result of delay, such as hire of plant, additional labour costs, off-site overheads and loss of profits. Claims for loss of off-site overheads and loss of profits are not claims for actual loss, but rather for loss of opportunity to undertake new work because the contractor is engaged for a longer time than initially contracted for.  Claims for lost profits are often rejected on the basis that they are too remote.  There is no single formula by which the courts quantify the loss associated with prolongation claims, as they are dependent on the facts of each case.

There is however a general obligation on the contractor to mitigate its loss, where possible. In Taylor Woodrow International Limited v Minister of Health (1978) 19 SASR 1, the South Australian Supreme Court held that where a delay occurs, a contractor has an obligation to act reasonably and "do everything he can to minimise the potential loss or expense"; for example, discharging workmen if it is viable. 

For a prolongation claim to be successful, the delay must have been caused by an act or omission of the principal or a third party for whom the principal is responsible. Delays for which the principal is responsible could include failure to give possession of the site within the agreed timeframe, late issuing of instructions, failure to obtain the necessary permits within the necessary timeframe, or the ordering of extra works. 

In the case of delays caused by the principal and the contractor (concurrent delay), the New Zealand courts have not yet determined the approach to be taken in assessing such delays. One approach would be for the contractor to separately identify the costs caused by the principal's delay as opposed to costs associated with its own delays.  In City Inn Limited v Shepherd Construction Limited [2010] CSIH 68; 2011 SC 127 (a Scottish case) it was held that where the cause of delay is the concurrent fault of the principal and contractor, prolongation costs should be apportioned and reduced in relation to delays caused by the contractor. 

Ordinarily, prolongation costs will only accrue from additional expenses incurred after the agreed completion date, meaning such a claim is dependent on the completion date being delayed from that which was agreed to in the contract. Most written construction contracts, including NZS 3910:2013, require the parties to expressly specify a time for completion.  Where no completion date has been specified, a contractor's claim for prolongation costs will be uncertain. 

Prolongation claims relate to delay, and should be distinguished from claims for disruption. If the project is disrupted by the principal but the programmed completion date remains unchanged, the contractor can still claim the loss and expense it has incurred as a result, if the disruption has resulted in it having to adopt inefficient working methods.  This is generally a claim for the cost of the lost productivity. 

The recent English cases of Van Oord UK Limited, Sicim Roadbridge Limited v Allseas UK Limited [2015] EWHC 3074 (TCC) and RWE Npower PLC v Alstom Power Limited (2009) WL 5641217 show that the courts are commonly faced with conflated claims for loss and expense due to prolongation and disruption, which can require separation.  However, in practice, the distinction may be less relevant as claims for disruption and delay to the completion date (caused by the principal) often go hand-in-hand. 

In summary, if a contractor is able to establish:

  • default on the part of the principal

  • that it has incurred actual loss and expense as a direct result

  • that it is not recovering under any other provision of the contract

  • there is no provision in the contract preventing such recovery,

it may be entitled to an EOT and prolongation compensation for loss and expense actually incurred.


Charging orders under the Construction Contracts Act 2002 - infrastructure projects

The developers of infrastructure and the owners of land through which the infrastructure is built may be surprised to find that the land in question can be the subject of a charging order if an adjudicator determines that the contractor is owed money for the infrastructure it has built and the owner is an "associate" of the developer.

For infrastructure utilities, much of the land that is traversed by the infrastructure is permitted through an easement or an encumbrance over the land. The definition of "construction site" is any estate or interest in land on which the contractor carries out the construction works.  The developer's easements may be caught by this definition, and a charging order issued over those lands.

In order for a charging order to be issued under the Construction Contracts Act 2002 (the Act), the contractor's notice of adjudication must seek the adjudicator's approval for the issuing of a charging order over the construction site. It must be served on the developer, and if the owner of the land that forms part of the construction site is an "associate" of the developer, the owner must also be served and given the opportunity to participate in the defence of the contractor's claim as a party (although not necessarily as a respondent). 

As part of its adjudication claim, the contractor should identify how each land parcel is part of the construction site and who the owners of those lands are. The Act defines "owner" as meaning the owner of the construction site.  This captures the owners of any land across which the infrastructure is being laid or on which any non-residential buildings are being erected and any land that is being used as a staging place for storage or other operation that forms an integral part of the construction work. 

Associations with the developer are defined in section 7 of the Act, which range from very close associations, such as where the developer is a company and the landowner is its director, to wider ones depending on the interrelationships and business dealings between the parties. Some of the associations potentially construed under section 7 might not have been contemplated by Parliament if it assumed the associated owner would always derive a benefit from the construction works.  However, "associate" may also capture persons acting altruistically in allowing access on and across their land in a spirit of cooperation to provide a community with needed infrastructure.  Such a situation may be assisted by the adjudicator as it is for the adjudicator to determine whether the owner of the land is jointly and severally liable to pay (along with the respondent/developer) the amount claimed in the adjudication.

The power to approve the issuing of a charging order is not lightly given. Where the contractor seeks a charging order, only an authorised nominating authority may nominate someone suitably qualified with appropriate experience and expertise to be the adjudicator.  Clearly this mechanism is intended as a protection to ensure proper exercise of the power.

If the adjudicator's determination grants the charging order, the contractor may then apply to the District Court to have the determination entered as a judgment. This provides a further opportunity for the developer and any other party adversely affected by a charging order to defend its position, but the primary defence under the Act is for payment of the debt in full.  The associated owner may appeal to the District Court for a review of the determination and the dispute would be re-heard but the adjudicator's determination remains binding in the meantime unless the District Court decides otherwise.

If the determination is entered as a judgment, the Registrar of the District Court must immediately issue a charging order in respect of the construction site, which is registered against the title of the land. Although the construction site may affect only a small part of the land, the charging order will apply to the whole title.  The charging order restrains the owner of that estate or interest in land from dealing with that land pending payment of the contractor's debt in full.  If any part of the debt remains unpaid, on the basis of the charging order the contractor could apply to the District Court for an order to sell the construction site to recover the amount owing to it (section 96A of the District Courts Act 1947).

This situation creates risks for an associated land owner whose relationship with the developer needs to be carefully evaluated if the land owner intends to permit use of its land for construction purposes. A facilitating owner would be wise to consider this risk and take measures to protect itself.  For example, before granting approval an owner might require the developer to obtain agreement from the contractor and its subcontractors not to seek a charging order over certain titles.