Extension of Time in Construction Contracts
The construction contracts are generally prepared as per Fédération Internationale des Ingénieurs-Conseils (the FIDIC) red books 1987 and 1999, yellow book and silver book contract forms specifically in UAE to deliver projects. The legal provisions applying to such contracts are UAE Civil Code, Federal Law No. 5 of 1985 as amended. The construction contracts are governed inter alia by Articles 872 to 896 and contractual provisions depending on its consonance with laws.
This Article accentuates the entitlement of the contractor/subcontractor to “Extension of Time” (the EOT) under construction contracts. Just as liquidated damages are meant to discourage contractors from undue delay in completion of projects and entitle the employer (which is a misnomer for owner) for compensation, Extension of time can be considered an encouraging clause to claim for any undue delay caused in the completion of construction due to events which are not attributable to the contractor. In sum, EOT clauses are embedded into contracts on the notion that no party should gain from its own breach or default.
The important clauses and/ or principles to be considered when dealing with this subject are completion time, preventive principle, time bar clause, time at large, the extension of time clause and liquidated damages clause. For the sake of commercial certainty, the completion date is usually found in contracts and these are effectively based on practical considerations of the project. Accordingly, the contractor is under the legal obligation to comply with the agreed time- limit and handover the project. Time being of the essence in contract, failure by the contractor to handover within the agreed time-frame could trigger a claim for liquidated damages from the employer. However, the wide range of activities and circumstances may lead to the uncertainty of completion of the project as it is difficult to be accurate about completion in mammoth projects due to reasons ranging from force majeure, variations, the supply of labor, delay in procuring materials etc. by a party or parties to contract. The preventive principle is the common law principle applied to protect contractors (from potential claims involving liquidated damages against them) from the delay caused by the act of employers who prevent (deliberately or otherwise) timely
completion of project work(s). The result of such principle is to have an extension of time clause so as to prevent the employer from being incapacitated to extend completion time and potentially to enable the contractor to establish that the completion time has become at large. Hence it is in the interest of not only contractor but also of the employer to have an EOT clause. As “Time at Large” means the contractor escapes the liquidated damages clause and his obligation is now to complete within a reasonable time.
Generally speaking, construction contracts provide for a clause whereby contractors may be allowed to extend the date of completion in the event that a notice is served to the employer consistent with the provisions of the contract. Failure by the contractor to meet notice requirement could entail a claim against the contractor for liquidated damages. The construction contract providing for a clause on extension discussed above is also referred to as “Time Bar clause”. These notices become the condition precedents to the claim of EOT.
The circumstances giving rise to the entitlement of EOT are as follows:
1. Employer’s Acts of delay:
Preventive principle aim at safeguarding contractors from potential claims for liquidated damages for the delay caused on account of acts of the employer. In the context of the United Arab Emirates, the corresponding provisions for safeguarding contractors can be found under Article 247 of the UAE Civil Code which reads as under:-
“In contracts binding upon both parties, if the mutual obligations are due for performance, each of the parties may refuse to perform his obligation if the other contracting party does not perform that which he is obliged to do.”1
This Article works against the employer and entitles the contractor for EOT against the acts of delay attributable to the employer for breach of its obligation to work in good faith while performing his contractual obligation. Another provision of the UAE Civil Code which has the effect of preventive principle is Article 287 which reads out as under:-
“If a person proves that the loss arose out of an extraneous cause in which he played no part such as a natural disaster, unavoidable accident, force majeure, act of a third party, or act of the person suffering loss, he shall not be bound to make it good in the absence of a legal provision or agreement to the contrary.”
In the context of the above Article 287, we can note that the limitation imposed by this Article has the legal effect only and only in cases where parties have no agreement to the contrary. F This covers all external reasons that are not caused by contractor subject to the contrary being agreed in the contract terms.
Payment mechanisms in construction contracts are regulated by and based on generally accepted business customs. These may include – bank guarantee(s), bonds, or payments by employers on the installment basis. These payments may effectively be linked to construction milestones requiring contractors and qualified engineers to submit their timesheets in an agreed form and timeline. To protect larger interests of employers, contracts also have defects liability clauses in construction contracts. The defects liability clause has the legal effect of employers retaining an agreed percentage of contract consideration.
Speaking of payments and accepted business customs, contractors and sub-contractors may also be paid on ‘pay when paid’ basis which is generally referred to as a “back to back” contract arrangement.
Under this scheme, the contracts between contractors and sub-contractors mirror the clauses found in the contract signed between employers and contractors. In the United Arab Emirates, the Muqawala form of contracts falls under the above scheme. In absence of any such provision, the law lays down under Article 885 and Article 891 of the UAE Civil Code to this effect as follows:-
“The employer shall be obliged to pay the consideration upon delivery of the property contracted for unless there is an agreement or a custom to the contrary.” “A sub-contractor shall have no claim against the employer for anything due to him from the first contractor unless he has made an assignment to him against the employer.”
Back to back payment terms provide advantages to the main contractor. For instance, the entitlement of subcontractor for EOT may not provide EOT to the main contractor from employer thereby exposing the main contractor to double liability in absence of back to back payment term. The double liability includes granting EOT to the subcontractor and paying liquidated damages to the employer at the same time. In view of the judgment the lumpsum contracts have to be executed as per the agreed plan and are not subject to variation as the intention of the law is to protect the employer who is a person with little technical experience. However, the court held that the same does not apply between contractor and subcontractor as they both have equal technical aptitude and know-how.
Article 247 of the Civil Code is also relevant when speaking of payments. Thus unpaid contractor can slow down or even suspend the work lawfully with maintaining entitlement to EOT as delayed payment leads to delayed completion and does not render the contractor liable.
3. Variations/ Additional work in scope and nature of work
Variations are common to the construction industry. FIDIC based contracts also provide for broad variation clauses to accommodate the rights and interests of parties concerned. Whilst FIDIC form of contracts are generally relied upon as templates by construction professionals, parties are an absolute discretion to amend and modify these clauses to best fit and suit the requirements of the project and/or the parties. The effect of variation clause may impact several considerations but it certainly has an impact on pricing in most cases. Under the fabric of Islamic sharia, the emphasis is placed on the term ‘gharar’ which prohibits loss to one of the parties and unjust enrichment to other thereby giving rise to ‘extension of time’ to recover additional charges.
The variations have several impacts on the EOT. The variations which may lead to uncertainty and loss to other party and unjust enrichment of other can be considered to be prohibited as per Islamic principle of “gharar” and hence entitling EOT for recovering additional charges. Article 887 of the Civil Code dealing with lumpsum muqawala contracts provides as under:-
“(1) If a muqawala contract is made on the basis of an agreed plan in consideration of a lump sum payment, the contractor may not demand any increase over the lump sum as may arise out of the execution of such plan. (2) If any variation or addition is made to the plan with the consent of the employer, the existing agreement with the contractor must be observed in connection with such variation or addition.”
The condition imposed in Article 887 implies amending the remuneration and the completion time as per the variation and observing the terms of the contract in relation to the variation. If the variation has caused the critical delay in its work schedule the contractor may be entitled to EOT provided it is notified in a timely manner. The contractor can also raise the dispute in the manner stated in the contract for dissatisfaction on engineer’s assessment of invoice raised, quality and quantity or reasonable rates of such variation.
4. Actual loss
The contracts may have pre-determined value for damages however as the court has right under Article 360 part 2 to adjust the compensation to be equal to actual loss the contractor can be impliedly said to have been granted EOT for the delay which did not cause any loss to the employer.
5. Other reasons entitling EOT
The various other reasons that are considered by the courts for granting EOT are stated as follows:
Article 249 of the Civil Code considers unforeseeable exceptional events that have public nature occur and renders performance of the obligation arduous although being possible but in a way threatening the obligor with severe loss. In such event, the judge may reduce the oppressive obligation to a reasonable level if justice so requires, and any agreement to the contrary shall be void. This prevents the contractor from unreasonable events or factors that may affect its performance or completion of the project. This effectively saves the contractor from to weighing each party’s interest, as a rule of public policy. It is pertinent to note that this is different from the case of force majeure. In fact, this Article defines a borderline between force majeure and unforeseen contingencies.
Consequences following force majeure are stated under Article 273 of UCC. The Article has two parts one automatically cancels the contract in case of force majeure rendering the performance impossible. The second part of the Article states that in case of partial impossibility or temporary impossibility that part of the contract shall be extinguished and obligator has right to cancel the contract on informing the oblige.
In case of defaults of the subcontractor, the contractors are acquitted of their liability in delays. Though it is not specifically laid down in provisions, the judges (Dubai Court of Cassation, 266 of2008 decided on 17 March 2009) consider the fact on the case to case basis as relieving from delay liabilities attributable to a subcontractor as preferred by the Engineer or the Employer.
FIDIC form entitling EOT for cause of delays
The FIDIC forms considers various factors such as Change in the amount or nature of extra or additional work, any cause of delay referred to in the FIDIC Red book 1999 conditions such as stated under (i) clause 4.7 - Delays that result from inaccurate plot reference point and levels; (ii) 8.4(d) - unpredictable shortage of material and manpower caused by epidemic or actions of government (iii) 8.5 - unpredictable Delays caused by Authorities provided that the Contractor has diligently abided by its procedures (iv) 10.3 - Employer’s Prevention of the Contractor’s to conduct the Completion Test (v) 13.7 - Modification for any increase or decrease in cost resulting from changes in Laws (vi) 17.4 Employer’s risks’ consequences (that cause loss or damage to the documents of the contractor or his works or goods) (vii) 19.4 - Force Majeure.
The other causes of delay considered for entitling EOT under FIDIC 1999 red book inter alia are exceptionally adverse climatic conditions, any delay, impediment or prevention by the employer and other special circumstances which may occur, other than through a default of or breach of contract by the contractor or for which he is responsible. The specific provisions provided under FIDIC are under subclauses such as 6.4 for delayed drawings, 12.2 for unforeseen conditions or physical obstructions, 36.5 for delay in certain tests requested by engineer, 69.4 which entitled EOT for delays which are resultants of reduced speed of works or suspension due to non payments, 40.2 for delays due to suspension instructed by engineer and 42.2 delays in giving possession of the site.
It is pertinent to note that the condition stated in the contract such as written notice, instructions in writing, procedural requirements stated in the contract and so on need to be complied with for claiming EOT. The judgments passed on this subject are uncertain, wide-ranging and diverse as the facts of the case and judge’s discretion are of enormous consideration.
General clauses which are rendered vague and ambiguous due to poor drafting provide room for interpretation. This principle is clearly laid down in Article 265 of the Civil Transactions Code:
“(1) if the wording of a contract is clear, it may not be departed from by way of interpretation to ascertain the intention of the parties.
(2) If there is scope for interpretation of the contract, an inquiry shall be made into the mutual intention of the parties without stopping at the literal meaning of the words, and guidance may be sought in so doing from the nature of the transaction, and the trust and confidence which should exist between the parties in accordance with the custom current in dealings”
In view of the fact that most of the construction contract disputes are predominantly due to payments resulting from EOT or liquidated damages. Express terms need meticulous drafting expressing clear intentions of parties.