Time is money

The recent decision in Carillion vs Emcor and Aecom rather serves to emphasise the peculiar differences and complexities of the subcontractor relationship compared to that of employer and main contractor. In particular that comes to the fore when one is considering the vexed issue of extensions of time and responsibility for delay.

The position under a main contract has been essentially established without challenge since the decision in Balfour Beatty Ltd vs Chestermount Properties Ltd back in 1993. Any extension of time is, to put it simply, tagged on to the then current completion date. So, if the project is a year late and the contractor is in culpable delay for that year then, when a variation taking two weeks is instructed, that two weeks is added on to the then current completion date (which will be a year earlier).

Of course nothing much turns on the fact that the time is added to a date long since passed if, as is frequently if not almost always the case, the main contract provides for a set amount of liquidated damages per day or week for delay. The time has a value per period and that is the same whenever the delay occurs.

If you had 10, 20 or 30 subcontractors on a project how could you possibly know the genuine losses any one might create for you as a main contractor?

However, subcontracts are not normally drafted with liquidated damage clauses. One reason for that lies in the history behind liquidated damages from the old Dunlop Pneumatic Tyre case of 1914, that the damages had to be a genuine pre-estimate of loss. If you had 10, 20 or 30 subcontractors on a project how could you possibly know the genuine losses any one might create for you as a main contractor? You cannot know in advance if all, some or none of the other subcontractors will be delaying you for all or some portion of the delay period. This rationale probably remains valid under the new Cavendish Square test of legitimate commercial interest.

So a practise developed on sound commercial grounds for main contracts to contain liquidated damage clauses; and for subcontracts to contain a liability for general damages (termed under the DOM subcontract as “loss and expense”).

The facts in the Carillion case are complicated but in simple terms the issue was whether any entitlement Emcor had to an extension of time was to be added to the then current completion date for their works? Or, as Carillion said, allocated to the actual time window, or windows when the delaying event occurred. Obviously the Carillion approach requires more analysis. It is not enough to simply say “that variation will take two weeks” or that hindrance or delay for which the main contractor is responsible will take two weeks. For Carillion’s analysis, it is necessary to go a stage further and work out where and when that delay actually occurred.

Carillion argued that to properly assess the losses caused by the periods for which the subcontractor is in delay, it is necessary to allocate the time correctly. Otherwise all the entitlements to time are simply artificially added on to the original completion date. One example given was a 100 days for the subcontract works which are then in delay by a further 50 days. If at that point a variation taking 50 days is instructed, adding it to the then current completion date means the subcontractor is not responsible for losses until day 150. However, by that date the works of others may be in delay and/or causing the main contractor delay and losses so the subcontractor avoids any responsibility. Carillion said it was fairer to hold the subcontractor responsible for the delay from days 100 to 150 and then not responsible for the 50 days of variation work from day 150 to day 200.

Carillion argued that to assess the losses caused by the periods for which the subcontractor is in delay, it is necessary to allocate time correctly

Despite the long history of subcontracting this issue had not previously been before the courts.

Emcor relied on Chestermount, and a series of cases thereafter, in which that case had been referred to as confirming the position. Carillion said Chestermount was a main contractor case and the position here under a subcontract was different. The court concluded that the terms of the subcontract were such that the ordinary and proper meaning to give to the relevant clauses was the Chestermount approach (of adding to the then current completion date). The court could not find any support in any of the subclauses of the subcontract for the concept of awarding periods or chunks of time (and therefore by deduction deciding periods of culpability).

Indeed the wording of the subcontract all suggested the machinery was intended to operate to vary a single date not to establish separate periods for the works to be completed in.

The judgment in Chestermount effectively acknowledged that the varied completion date may well not be the date when the works are in fact completed.

There is a commercial bargain by which a process is established to hold the balance between the parties. It may have its rough edges and unusual consequences in unusual circumstances but the court in Carillion drew on the recent Arnold v Britton & Ors case in the Supreme Court where it was found “commercial common sense” is not to be used to retrospectively “rewrite the parties’ bargain”.

So if the bargain drafted between the parties is to bolt the time on, then that is the deal. However, much later on that might look harsh on one or other party. If you don’t want these consequences then a more sophisticated and potentially costly “allocation” form of subcontract is required.

James Bessey is a partner in the construction team of Blake Morgan