- INTRODUCTION
Most of the projects, especially in construction contracts, face with delay and variety of disruptions and proving this delay is not easy for the parties since these projects are too complex with lots of activities and details.1 In large construction projects, time schedules usually cover a huge volume of activities which are overlapping and running concurrently.2 These factors cause uncertainty and thus, construction projects do not proceed with the contractual completion date.
Disputes arising from the construction contracts, usually become subject to the ICC, LCIA or Ad hoc arbitration cases. A large portion of the construction contracts, specifically the ones whose parties are located in different countries, involve arbitration clauses in their dispute resolution provision and thus, these disputes are resolved through ICC, LCIA or Ad hoc arbitration. According to the ICC statistics, in 2019, there are 211 cases arising from the disputes within the sectors of construction/engineering and 140 cases for energy disputes which generated the largest number of ICC Arbitration cases and, as in previous years, it corresponds to approximately 40% of the ICC workload.3
Delay in completion of the works has commercial consequences for both employers and contractors. Depending on the terms of the contract and the jurisdiction where the governing law of the contract is subject to, employers generally claim for liquidated damages for the delay and contractors generally claim for an EoT to extend the time for the completion of the works and to request additional payment in respect of the extended period by claiming that they performed their works accordingly with the contract and the delay occurred is not resulted as a consequence of their fault.
In case of a delay which could not be reasonably foreseen at the time of signing of the contract, the contractor shall be granted with EoT which relieves the contractor from liability of damages such as liquidated damages to be calculated based on the days between the original completion date and the actual completion date.4
However, EoT could not be given in each delay event. Almost all of the parties to the construction contracts agree on a fix date which the works must be completed with the purpose of achieving the commercial certainty and the liquidated damages to be paid to the employer in the event of delay of works. If there is no fix date for performance agreed by the parties in the contract, in common law, the contract will be required to be performed within a reasonable time.
In countries where civil law is applicable, agreements usually involve contractual penalty provisions under which the contractors are obliged to pay a fixed amount in case of delay, without considering the actual damage. If there is a contractual penalty in a contract, it means that regardless of whether there is a damage or not, if the contractor fails to complete the project on time, the penalty shall be paid by the contractor.
In this Article, we will first explain the term "EoT" and circumstances under which EoT can be requested by the contractors. Subsequently, in Delay Damages Section, we will define liquidated damages and contractual penalty and focus on the differences between these two terms. Finally, we will give examples from Turkish law practice on these issues.
- EXTENSION OF TIME
If the project is delayed because of a situation which effects the completion date, the contractor may be granted an EoT and the "New Completion Date" shall be decided. By changing the completion date, it gives the contractor a longer time to complete the work. It is necessary to establish the cause of the delay and the time of delay while deciding for an EoT. Generally, contractor would show that the delay was caused by the reasons which are the responsibility of employer or delay caused by a neutral event that neither the contractor nor the employer is factually responsible. 5 This is usually done by a written notice which identifies the relevant event that caused the delay to the Contract Administrator.
There are usually two types of delay which are under the responsibility of employer, in respect of which the contractor entitled to claim an EoT;6
- Delay caused by the employer's breach of contract, or a breach of obligation,
- Delay occurred even though employer lawfully instructs the contractor to perform additional works and contractor followed those instructions
Neutral events also cause contractor to claim for EoT. Force majeure events such as adverse weather, fires, floods and third-party interventions can be listed as examples of neutral event. In case of a neutral event, it is depending on the parties to decide whether neutral event causes contractor to claim for EoT or not. Since there are no rules stating that one party or other assume risks of the neutral event that causes delay of completion of works, if parties, under the contract, agree on applying EoT in case of neutral event occurs, then contractor may claim for EoT. Otherwise, the contractor will be deemed to accept the risk of that event occurring and will not be excused from completing the works by the contractual completion date due to the occurrence of this natural event.7
In order to apply for an EoT, there should be a new program for completion of the works and a new completion date prepared by the contractor, which contains a proper program updates, revisions, definitions of the delay, identifications of the concurrent delays, contractual basis for the entitlement and evidence of delay.8After this planning process, the contractor shall submit a completed EoT claim application to the employer, which includes all above-mentioned facts and documents. The purpose of submitting an EoT application, is to reduce or avoid liquidated and ascertained damages that could otherwise arise and/or establish an entitlement to monetary compensation during the extended period.9
For instance, according to the FIDIC rules, if the contractor decides that the works will be delayed by the delay events listed, the contractor shall be granted an EoT. The delay events listed under Article 8.4 of the FIDIC are;
- Variations
- Exceptionally adverse climatic conditions
- Unforeseeable shortages in the availability of personnel or good caused by epidemic or governmental actions
- Any delay, impediment or prevention caused by or attributable to the employer or to his or her personnel; and
- Events that entitle the contractor to an EoT under any of the other clauses of the contract.10
If the contractor has no fault or is only partly blamed for the delay, the EoT mechanism would reduce or avoid the liability to pay damages in the case of delay. 11
For example, in Octoesse LLP v Trak Special Projects Ltd [2016] case, Justice Jefford stated that Octoesse was not entitled to deduct liquidated damages as they had agreed to an EoT after a certificate of non-completion had been given.
'If the Contractor fails to complete the Works or a Section by the relevant Completion Date, the Architect/Contract administrator shall issue a certificate to that effect. If an EoT is made after the issue of such certificate, the extension shall cancel that certificate and the Architect/Contract Administrator shall where necessary issue a further certificate.'12
Similarly, in the Henry Boot Construction Ltd v Malmaison Hotel Ltd (1999) case, the court commented that where those competing causes for delay were of equal causes then employer should consider it fair and reasonable and grant an EoT. EoT clauses assure that the contractor would not bear sole liability for delays which have been caused by himself and the employer.13
Most of the construction contracts establish grounds for the contractor to pay delay damages in case the completion date of the work delays. However, according to the Option X7.2 of the NEC 3 Contract prepared by UK Institution of Civil Engineers, if the completion date is changed to a later date after the damages have been paid, the employer repays the overpayment of damages to the contractor.14 This means, if the completion date changed to a later date, contractor shall not be liable for the delay damages.
In case where both contractor and employer are responsible for the delay occurred, contractor may separate the portion of the excusable delay and may be entitled for EoT with partial compensation for the damages occurred due to the contractor's fault.15
The application of EoT mechanism varies in different countries. For example, in England and Wales, a contractor would be entitled to a full EoT in such circumstances, but not time-related costs, on the other hand, in Scotland and Hong Kong, tribunal allocate the delay and its financial consequences between the contractor and the employer.16
- DIFFERENCE BETWEEN LIQUIDATED DAMAGES AND OTHER CONTRACTUAL PENALTIES
In case a contractor shall not be granted for EoT, employer may claim for liquidated damages. Generally, most of the construction contracts contain provisions regarding the liquidated damages regulating the allocation of damages in case of a delay. Liquidated damages are payable by the contractor to the employer with the intention of compensating the loss or damage that the employer is likely to suffer as a consequence of the delay. Employer may also claim for contractual penalty, if it is agreed by parties in case of delay of works, even employer did not incur any actual damages.
- Liquidated Damages
Contracts usually involve a provision for the contractor to pay liquidated damages to the employer in case where the works would not be completed in the actual completion date. Liquidated damage provisions are often used in construction contracts to compensate the employer for delay.17
Liquidated damages are not a penalty as they are pre-established damages which are prescribed at the time of the execution of the contract. They are often determined as a fixed daily, weekly or monthly monetary amount. In some cases, there may be more complicated methods where the works are more detailed. Common liquidated damages are set forth a fixed amount of money which the contractor will be responsible to the employer for each unexcused day of delay beyond the agreed date.18 The main purpose of liquidated damages is to establish the employer's right for damages caused by the contractor in case of failure to complete the work by the agreed date.19 Liquidated damages are used to estimate damages in case of non-performance and are due only if the employer can demonstrate the existence of damage. Liquidated damages must be reasonably proportionate to actual damages occurred, because in certain cases courts refuse to enforce the amounts of penalty for breach of contract.20 In some jurisdictions, for example, in Swiss Law, liquidated damages are not regulated by the law. However, principle of freedom of contracts allows parties to agree on liquidated damages in case there are damages caused by the breach of the contract.
If there are no liquidated damages set out in the contract, employer may apply to the courts for unliquidated damages which are the damages that has not been pre-agreed. Unliquidated damages allow for recovery of losses that are impossible to estimate with any certainty.
- Contractual Penalty
There are also penalty clauses in the construction agreements in order to penalize the contractor for the delay of works. Penalty clauses differ from liquidated damages in terms of the purpose of the claim and the burden of proof. As the name indicates, the main purpose of the penalty clause is to penalize the contractor. Liquidated damages are for encouraging the performance of the contractor and compensating the damages instead of penalizing. With regard to burden of proof, employer do not need to prove that the delay of works caused by the contractor's fault in order to claim for penalty. The contractual penalty must be written in the contracts and a specific amount of penalty shall be determined by the parties in case there is non-performance or breach of the main obligation such as delay, violation of duty of omission, etc.21 Contractual penalty removes the employer's obligation to prove its damages and allows to determine precise penalty amount.
The attitude towards contractual penalty in civil law is different from the common law approach. In civil law, the contractual penalties are allowed in order to encourage the performance of contractual obligations. Moreover, courts in civil law countries permits the reduction of the amount if it is excessive compared to the actual damage.22 However, in common law contractual penalty clauses are prohibited based on the principle of just compensation.23 With respect to the law applied by the common law courts, because of the public policy prohibiting liquidated damages designed to punish the non-performer, penalty clauses shall not be enforceable.24 According to this approach, liquidated damages are for compensating the actual damage, instead of penalizing the contractor.
- TURKISH LAW PRACTICE
Under Turkish Law, employer may claim for the liquidated damages in accordance with Article 118 of the Turkish Code of Obligations (the "TCO"). Moreover, pursuant to Article 119 of the TCO, employer may also claim for the damages as a result of the unexpected cases. Finally, according to Article 123 of the TCO, employer may choose to give an appropriate time for contractor to complete the works. If contractor cannot complete the works at the end of this extended period of time, employer may claim for;
- Performance of the works and delay damages or;
- Damages caused by the non-performance of the works or;
- Rescission of a contract. 25
Contractual penalty is also regulated under the TCO in Articles 179 to 182. According to this, the parties may agree for a penalty when a primary obligation is not fulfilled. It is noteworthy that even if the employer has not suffered any losses, the contractual penalty must be fulfilled. Therefore, employer does not have to prove its damages. If the damages exceed the agreed penalty, employer has to prove the existence of the exceeding portion of the damages.26
With regard to the EoT, there is no specific provision under the TCO, but in practice, Court of Cassation has several decisions on this issue. Court of Cassation states that "Indeed, if extra works apart from the ones expressed in the contract or project have been performed, since Respondent can request EoT for these works, the time needs to be given in order for the performance of the extra works should be calculated through the examination of experts and the decision should be given by deducting the determined period from the delay period."27
In this point of view, while calculating the liquidated damages arising from the delay period of the performance of the main contract, the time given with regard to the EoT should be taken into consideration.
Another Court of Cassation decision also stipulates whether the extended time should be considered while calculating the liquidated damages. In this decision Court decided that;
"...with regard to the liquidated damages deduction, to determine the date that the subcontractor shall deliver the construction after adding the time given as extension for the extra works to the time specified in the contractand to decide according to the conclusion of the calculation of liquidated damages as from this date."28
- CONCLUSION
In conclusion, since, in practice, many of the construction projects cannot be completed within the original completion date due to the delays occurred, there are financial consequences of delay which affect both contractor and employer that may result in additional costs or economic loss.29
Contractors may avoid the delay damages by proving that they are not responsible for the events which caused the delay. In this situation, the contractor may be granted an EoT and complete the work until the final date of the new completion date and may not be held liable for the damages that caused by the delay. The purpose of EoT is to relieve contractor of liability for damages for delay for scheduled completion date to the extended completion date and to establish a new completion date.30 Contractor should successfully prove that they are not liable for delays or that the delays occurred are justified and compensable. In order to do this, contractor should demonstrate that the delay is not based on events under its control and is ascribable to the employer's requests, actions or to other justified reasons."31 A claim for EoT is often submitted with a revised time schedule including how and to what extent the claim events have affected the construction works.32 If there is no base for contractor to claim for EoT, contractors are obliged to pay the damages occurred arising from the delay event.
On the other hand, contractual penalty can also be agreed by the parties in case of a breach of the contract by both parties with the intention of penalizing the party violating the provisions of the contract. Unlike liquidated damages, contractual penalty can be payable even though there is no damage occurred by the delay event at all. However, in common law, contractual penalty cannot be applied to the contracts due to the just compensation principle and thus, in countries where common law is applied, parties are only obliged to pay the amount that can compensate the damage occurred by the delay event.
Footnotes
1. Guideline for preparing comprehensive extension of time (EoT) claim, Khaled Ahmed Ali Alnaas, Ayman Hussein Hosny Khalil, Gamal Eldin Nassar, December 2, 2013 (revised on January 4, 2014), HBRC (Housing and Building National Research Center) Journal p.308
2. International Construction Contract Law, Lukas Klee, First Edition, p.133
3. ICC Dispute Resolution 2019 Statistics p.15
4. What is Extension of Time (EoT)?
5. RICS (Royal Institute of Chartered Surveyors) Guidance Note on Extension of Time p.5 (effective date: 10 February 2015)
6. Construction Law, Julian Bailey, Construction Practice Series, p.837-838
7. Ibid. p.838-839
8. Guideline for preparing comprehensive extension of time (EoT) claim, Khaled Ahmed Ali Alnaas, Ayman Hussein Hosny Khalil, Gamal Eldin Nassar, December 2, 2013 (revised on January 4, 2014), HBRC (Housing and Building National Research Center) Journal p.308-309
9. Society of Construction Law, Delay and Distruption Protocol, 2nd Edition, February 2017, p.5
10. Corbett&Co International Construction Lawyers Ltd. 2018, written by Liz Slattery and Andrew Tweeddale, p.7-8
11. Extension of Time in Construction Contracts 4 June 2019
https://www.lawteacher.net/free-law-essays/contract-law/extension-of-time-in-construction-contracts-contract-law-essay.php (last accessed on 20 November 2020)
12. Liquidated Damages in Construction Contracts, 01 October 2020 https://www.designingbuildings.co.uk/wiki/Liquidated_damages_in_construction_contracts (last accessed on 19 November 2020)
13. Extension of Time in Construction Contracts 4 June 2019
https://www.lawteacher.net/free-law-essays/contract-law/extension-of-time-in-construction-contracts-contract-law-essay.php (last accessed on 20 November 2020)
14. NEC 3 Engineering and Construction Contract, April 2013, p.50
15. Guideline for preparing comprehensive extension of time (EoT) claim, Khaled Ahmed Ali Alnaas, Ayman Hussein Hosny Khalil, Gamal Eldin Nassar, December 2, 2013 (revised on January 4, 2014), HBRC (Housing and Building National Research Center) Journal p.312
16. Pursuing and Defending Delayed Project Claims, 31 July 2020
https://www.pinsentmasons.com/out-law/guides/pursuing-defending-delayed-project-claims (last access on: 19 November 2020)
17. What happens to liquidated damages for delay if a contractor or supplier does not reach completion? 18 March 2019 https://www.boyesturner.com/article/what-happens-to-liquidated-damages-for-delay-if-a-contractor-or-supplier-does-not-reach-completion (last accessed on 20 November 2020)
18. Common Sense Construction Law, A Practical Guide fort he Construction Professional, Edited by, Thomas J. Kelleher, JR., John M. Mastin, JR.& Ronald G. Robey, Fifth Edition, Smith, Currie&Hancock's, p.392
19. Gibson, R., Construction Delays Extension of Time and Prolongation Claims. 2008: Taylor & Francis. p.7
20. Common Sense Construction Law, p.588
21. Liquidated Damages or Contractual Penalty Under Swiss law, Eversheds LLP 2014,
22. Liquidated Damages and Penalty Clauses: A Civil Law versus Common Law Comparison, The Critical Path, Spring 2018, p.3
23. Enforcement of Penalty Clauses in Civil and Common Law: A Puzzle to be Solved by the Contracting Parties, Ignacio Marín García, European Journal of Legal Studies, Volume 5, Issue 1 (Spring/Summer 2012), p.82
24. Liquidated Damages and Penalty Clauses: A Civil Law versus Common Law Comparison, The Critical Path, Spring 2018, p.4
25. Articles 118, 119, 123 and 125 of the Turkish Law of Obligations
26. Articles 179-182 of Turkish Code of Obligations
27. 15th Civil Chamber of Court of Cassation, Docket No.1988/1124, Decision No. 1988/3278 dated October 17, 1988; Default of Contractor In Flat For Land Constructıon Agreement and Its Consequences, Faruk Tekdemir, Istanbul, 2018, p.69
28. 15th Civil Chamber of Court of Cassation, Docket No.2017/1365, Decision No. 2017/3427 dated October 16, 2017
29. Construction Law, Julian Bailey, Construction Practice Series, p.863
30. International Construction Contract Law, Lukas Klee, First Edition, p.206
31. Guideline for preparing comprehensive extension of time (EoT) claim, Khaled Ahmed Ali Alnaas, Ayman Hussein Hosny Khalil, Gamal Eldin Nassar, December 2, 2013 (revised on January 4, 2014), HBRC (Housing and Building National Research Center) Journal p.312
32. International Construction Contract Law, Lukas Klee, First Edition, p.399
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