KEY GENERAL CLAUSES IN EPC CONTRACTS
Delay and Extensions of Time
The Prevention Principle
As noted previously, one of the advantages of an EPC Contract is that it provides the project company with a fixed completion date. If the contractor fails to complete the works by the required date they are liable for DLDs. However, in some circumstances the contractor is entitled to an extension of the date for completion. Failure to grant an extension for a project company caused delay can void the liquidated damages regime and 'set time at large'. This means the contractor is only obliged to complete the works within a reasonable time.
This is the situation under common law governed contracts due to the prevention principle. The prevention principle was developed by the courts to prevent employers i.e.: project companies from delaying contractors and then claiming DLDs.
The legal basis of the prevention principle is unclear and it is uncertain whether you can contract out of the prevention principle. Logically, given most commentators believe the prevention principle is an equitable principle, explicit words in a contract should be able to override the principle. However, the courts have tended to apply the prevention principle even in circumstances where it would not, on the face of it, appear to apply. Therefore, there is a certain amount of risk involved in trying to contract out of the prevention principle. The more prudent and common approach is to accept the existence of the prevention principle and provide for it the EPC Contract.
The contractor's entitlement to an extension of time is not absolute. It is possible to limit the contractor's rights and impose pre-conditions on the ability of the contractor to claim an extension of time. A relatively standard extension of time ("EOT") clause would entitle the contractor to an EOT for:
- an act, omission, breach or default of the project company;
- suspension of the works by the project company (except where the suspension is due to an act or omission of the contractor);
- a variation (except where the variation is due to an act or omission of the contractor); and
- force majeure
which cause a delay on the critical path and about which the contractor has given notice within the period specified in the contract. It is permissible (and advisable) from the project company's perspective to make both the necessity for the delay to impact the critical path and the obligation to give notice of a claim for an extension of time conditions precedent to the contractor's entitlement to receive an EOT. In addition, it is usually good practice to include a general right for the project company to grant an EOT at any time. However, this type of provision must be carefully drafted because some judges have held (especially when the project company's representative is an independent third party) the inclusion of this clause imposes a mandatory obligation on the project company to grant an extension of time whenever it is fair and reasonable to do so, regardless of the strict contractual requirements. Accordingly, from the project company's perspective it must be made clear that the project company has complete and absolute discretion to grant an EOT, and that it is not required to exercise its discretion for the benefit of the Contractor.
Similarly, following some recent common law decisions, the contractor should warrant that it will comply with the notice provisions that are conditions precedent to its right to be granted an EOT.
We recommend using the relevant clauses provided in Appendix 1.
You will note that in the suggested EOT clause, one of the subclauses refers to concurrent delays. This is relatively unusual because most EPC Contracts are silent on this issue. For the reasons explained below we do not agree with that approach.
A concurrent delay occurs when two or more causes of delay overlap. It is important to note that it is the overlapping of the causes of the delays not the overlapping of the delays themselves. In our experience, this distinction is often not made. This leads to confusion and sometimes disputes. More problematic is when the contract is silent on the issue of concurrent delay and the parties assume the silence operates to their benefit. As a result of conflicting case law it is difficult to determine who, in a particular fact scenario, is correct. This can also lead to protracted disputes and outcomes contrary to the intention of the parties.
There are a number of different causes of delay which may overlap with delay caused by the contractor. The most obvious causes are the acts or omissions of a project company.
A project company often has obligations to provide certain materials or infrastructure to enable the contractor to complete the works. The timing for the provision of that material or infrastructure (and the consequences for failing to provide it) can be affected by a concurrent delay.
For example, the project company is usually obliged, as between the project company and the contractor, to provide a transmission line to connect to the Facility by the time the contractor is ready to commission the Facility. Given the construction of the transmission line can be expensive, the project company is likely to want to incur that expense as close as possible to the date commissioning is due to commence. For this reason, if the contractor is in delay the project company is likely to further delay incurring the expense of building the transmission line. In the absence of a concurrent delay clause, this action by the project company, in response to the contractor's delay, could entitle the contractor to an extension of time.
Concurrent delay is dealt with differently in the various international standard forms of contract. Accordingly, it is not possible to argue that one approach is definitely right and one is definitely wrong. In fact, the 'right' approach will depend on which side of the table you are sitting.
In general, there are three main approaches for dealing with the issue of concurrent delay. These are:
- Option One – the contractor has no entitlement to an extension of time if a concurrent delay occurs.
- Option Two – the contractor has an entitlement to an extension of time if a concurrent delay occurs.
- Option Three – the causes of delay are apportioned between the parties and the contractor receives an extension of time equal to the apportionment. For example, if the causes of a 10-day-delay are apportioned 60:40 project company : contractor, the contractor would receive a 6 day extension of time.
Each of these approaches is discussed in more detail below.
(i) Option One: Contractor not entitled to an extension of time for concurrent delays.
A common, project company friendly, concurrent delay clause for this option one is:
"If more than one event causes concurrent delays and the cause of at least one of those events, but not all of them, is a cause of delay which would not entitle the Contractor to an extension of time under [EOT Clause], then to the extent of the concurrency, the Contractor will not be entitled to an extension of time."
The most relevant words are bolded.
Nothing in the clause prevents the contractor from claiming an extension of time under the general extension of time clause. What the clause does do is to remove the contractor's entitlement to an extension of time when there are two or more causes of delay and at least one of those causes would not entitle the contractor to an extension of time under the general extension of time clause.
For example, if the contractor's personnel were on strike and during that strike the project company failed to approve drawings, in accordance with the contractual procedures, the contractor would not be entitled to an extension of time for the delay caused by the project company's failure to approve the drawings.
The operation of this clause is best illustrated diagrammatically.
Example 1: Contractor not entitled to an extension of time for project company caused delay
In this example, the contractor would not be entitled to any extension of time because the Contractor Delay 2 overlaps entirely with the Project Company Delay. Therefore, using the example clause above, the contractor is not entitled to an extension of time to the extent of the concurrency. As a result, at the end of the Contractor Delay 2 the contractor would be in 8 weeks delay (assuming the contractor has not, at its own cost and expense accelerated the Works).
Example 2: Contractor entitled to an extension of time for project company caused delay
In this example, there is no overlap between the contractor and Project Company Delay Events. The contractor would be entitled to a two week extension of time for the project company delay. Therefore, at the end of the Project Company Delay the contractor will remain in six weeks delay, assuming no acceleration.
Example 3: Contractor entitled to an extension of time for a portion of the project company caused delay
In this example, the contractor would be entitled to a one week extension of time because the delays overlap for one week. Therefore, the contractor is entitled to an extension of time for the period when they do not overlap i.e., when the extent of the concurrency is zero. As a result, after receiving the one week extension of time, the contractor would be in seven weeks delay, assuming no acceleration.
From a project company's perspective, we believe, this option is both logical and fair. For example, if, in example 2 the Project Company Delay was a delay in the approval of drawings and the Contractor Delay was the entire workforce being on strike, what logic is there in the contractor receiving an extension of time? The delay in approving drawings does not actually delay the works because the contractor could not have used the drawings given its workforce was on strike. In this example, the contractor would suffer no detriment from not receiving an extension of time. However, if the contractor did receive an extension of time it would effectively receive a windfall gain.
The greater number of obligations the project company has the more reluctant the contractor will likely be to accept option one. Therefore, it may not be appropriate for all projects.
(ii) Option Two: Contractor entitled to an extension of time for concurrent delays
Option two is the opposite of option one and is the position in many of the contractor friendly standard forms of contract. These contracts also commonly include extension of time provisions to the effect that the contractor is entitled to an extension of time for any cause beyond its reasonable control which, in effect, means there is no need for a concurrent delay clause.
The suitability of this option will obviously depend on which side of the table you are sitting. This option is less common than option one but is nonetheless sometimes adopted. It is especially common when the contractor has a superior bargaining position.
(iii) Option Three: Responsibility for concurrent delays is apportioned between the parties
Option three is a middle ground position that has been adopted in some of the standard form contracts. For example, some standard construction contracts adopt the apportionment approach. For example:
When both non qualifying and qualifying causes of delay overlap, the Superintendent shall apportion the resulting delay to WUC according to the respective causes' contribution.
In assessing each EOT the Superintendent shall disregard questions of whether:
a) WUC can nevertheless reach practical completion without an EOT; or
b) the Contractor can accelerate, but shall have regard to what prevention and mitigation of the delay has not been effected by the Contractor."
We appreciate the intention behind the example clause and the desire for both parties to share responsibility for the delays they cause. However, we have some concerns about this clause and the practicality of the apportionment approach in general. It is easiest to demonstrate our concerns with an extreme example. For example, what if the qualifying cause of delay was the project company's inability to provide access to the site and the nonqualifying cause of delay was the contractor's inability to commence the works because it had been black banned by trade unions. How should the causes be apportioned? In this example, the two causes are both 100% responsible for the delay.
In our view, an example like the above where both parties are at fault has two possible outcomes. Either:
- the delay is split down the middle and the contractor receives 50% of the delay as an extension of time; or
- the delay is apportioned 100% to the project company and therefore the contractor receives 100% of the time claimed. The delay is unlikely to be apportioned 100% to the contractor because a judge or arbitrator will likely feel that that is 'unfair', especially if there is a potential for significant liquidated damages liability.
In addition, option three is only likely to be suitable if the party undertaking the apportionment is independent from both the project company and the contractor.
Exclusive remedies and fail safe clauses
It is common for contractors to request the inclusion of an exclusive remedies clause in an EPC Contract. However, from the perspective of a project company, the danger of an exclusive remedies clause is that it prevents the project company from recovering any type of damages not specifically provided for in the EPC Contract.
An EPC Contract is conclusive evidence of the agreement between the parties to that contract. If a party clearly and unambiguously agrees that their only remedies are those within the EPC Contract, they will be bound by those terms. However, the courts have been reluctant to come to this conclusion without clear evidence of an intention of the parties to the EPC Contract to contract out of their legal rights. This means if the common law right to sue for breach of EPC Contract is to be contractually removed, it must be done by very clear words.
The main reason for a contractor insisting on a project company being subject to an exclusive remedies clause is to have certainty about its potential liabilities. The preferred position for a contractor will be to confine its liabilities to what is specified in the EPC Contract. For example, an agreed rate of liquidated damages for delay and, where relevant, underperformance of the Facility. A contractor will also generally require the amount of liquidated damages to be subject to a cap and for the EPC Contract to include an overall cap on its liability.
Project company's perspective
The preferred position for a project company is for it not to be subject to an exclusive remedies clause. An exclusive remedies clause limits the project company's right to recover for any failure of the contractor to fulfil its contractual obligations to those remedies specified in the EPC Contract. For this reason, an exclusive remedies clause is an illogical clause to include in an EPC Contract from the perspective of a project company because it means that the project company has to draft a remedy or exception for each obligation - this represents an absurd drafting position. For example, take the situation where the EPC Contract does not have any provision for the recovery of damages other than liquidated damages. In this case, if the contractor has either paid the maximum amount of liquidated damages or delivered the Facility in a manner that does not require the payment of liquidated damages (i.e., it is delivered on time and performs to specification) but subsequent to that delivery the project company is found to have a claim, say for defective design which manifests itself after completion, the project company will have no entitlement to recover any form of damages as any remedy for latent defects has been excluded.
The problem is exacerbated because most claims made by a project company will in some way relate to performance of the Facility and PLDs were expressed to be the exclusive remedy for any failure of the Facility to perform in the required manner. For example, any determination as to whether the Facility is fit for purpose will necessarily depend on the level and standard of the performance of the Facility. In addition to claims relating to fitness for purpose, a project company may also wish to make claims for, amongst other things, breach of contract, breach of warranty or negligence. The most significant risk for a project company in an EPC Contract is where there is an exclusive remedies clause and the only remedies for delay and underperformance are liquidated damages. If, for whatever reason, the liquidated damages regimes are held to be invalid, the project company would have no recourse against the contractor as it would be prevented from recovering general damages at law, and the contractor would escape liability for late delivery and underperformance of the Facility.
Fail Safe Clauses
In contracts containing an exclusive remedies clause, the project company must ensure all necessary exceptions are expressly included in the EPC Contract. In addition, drafting must be included to allow the project company to recover general damages at law for delay and underperformance if the liquidated damages regimes in the EPC Contract are held to be invalid. To protect the position of a project company (if liquidated damages are found for any reason to be unenforceable and there is an exclusive remedies clause), we recommend the following clauses be included in the EPC Contract:
"[ ].1 If clause [delay liquidated damages] is found for any reason to be void, invalid or otherwise inoperative so as to disentitle the Project company from claiming Delay Liquidated Damages, the Project company is entitled to claim against the Contractor damages at law for the Contractor's failure to complete the Works by the Date for Practical Completion.
[ ].2 If [ ].1 applies, the damages claimed by the Project company must not exceed the amount specified in Item [ ] of Appendix [ ] for any one day of delay and in aggregate must not exceed the percentage of the EPC Contract Price specified in Item [ ] of Appendix [ ]."
These clauses (which would also apply to PLDs) mean that if liquidated damages are held to be unenforceable for any reason the project company will not be prevented from recovering general damages at law. However, the amount of damages recoverable at law may be limited to the amount of liquidated damages that would have been recoverable by the project company under the EPC Contract if the liquidated damages regime had not been held to be invalid (see discussion above). For this reason, the suggested drafting should be commercially acceptable to a contractor as its liability for delay and underperformance will be the same as originally contemplated by the parties at the time of entering into the EPC Contract.
In addition, if the EPC Contract excludes the parties rights to claim their consequential or indirect losses, these clauses should be an exception to that exclusion. The rationale being that the rates of liquidated damages are likely to include an element of consequential or indirect losses.
What is force majeure?
Force majeure clauses are almost always included in EPC Contracts. However, they are rarely given much thought unless and until one or more parties seek to rely on them. Generally, the assumption appears to be that "the risk will not affect us" or "the force majeure clause is a legal necessity and does not impact on our risk allocation under the contract". Both of these assumptions are inherently dangerous, and, particularly in the second case, incorrect. Therefore, especially in the current global environment, it is appropriate to examine their application.
Force majeure is a civil law concept that has no real meaning under the common law. However, force majeure clauses are used in contracts because the only similar common law concept – the doctrine of frustration -is of limited application. For that doctrine to apply the performance of a contract must be radically different from what was intended by the parties. In addition, even if the doctrine does apply, the consequences are unlikely to be those contemplated by the parties.
Given force majeure clauses are creatures of contract their interpretation will be governed by the normal rules of contractual construction. Force majeure provisions will be construed strictly and in the event of any ambiguity the contra proferentem rule will apply. Contra proferentem literally means "against the party putting forward". In this context, it means that the clause will be interpreted against the interests of the party that drafted it and is seeking to rely on it. The parties may contract out of this rule.
The rule of ejusdem generis which literally means "of the same class" may also be relevant. In other words, when general wording follows a specific list of events, the general wording will be interpreted in light of the specific list of events. In this context it means that when a broad 'catch-all' phrase, such as 'anything beyond the reasonable control of the parties', follows a list of more specific force majeure events the catch all phrase will be limited to events analogous to the listed events. Importantly, parties cannot invoke a force majeure clause if they are relying on their own acts or omissions.
The underlying test in relation to most force majeure provisions is whether a particular event was within the contemplation of the parties when they made the contract. The event must also have been outside the control of the contracting party. There are generally three essential elements to force majeure:
- it can occur with or without human intervention;
- it cannot have reasonably been foreseen by the parties; and
- it was completely beyond the parties' control and they could not have prevented its consequences.
Given the relative uncertainty surrounding the meaning of force majeure we favour explicitly defining what the parties mean. This takes the matter out of the hands of the courts and gives control back to the parties. Therefore, it is appropriate to consider how force majeure risk should be allocated.
© DLA Piper
This publication is intended as a general overview and discussion of the subjects dealt with. It is not intended to be, and should not used as, a substitute for taking legal advice in any specific situation. DLA Piper Australia will accept no responsibility for any actions taken or not taken on the basis of this publication.
DLA Piper Australia is part of DLA Piper, a global law firm, operating through various separate and distinct legal entities. For further information, please refer to www.dlapiper.com