Delay damages vs delay costs – same same but different

I’ve lost count of the meetings, teleconferences and email exchanges that I’ve had with contractors (and their solicitors) in which this topic has been debated healthily, albeit resulting in an agreement to disagree.

Put simply, many contractors seek to amend standard contracts to provide broad circumstances in which they may claim delay damages or delay costs and, more often than not, these two terms are used (or at least understood by some to be used) interchangeably.

At common law, there is no automatic right to delay damages.  As with all damages claims, delay damages can only be recovered if they can be proven to be damages resulting from a breach of contract.  As regards a construction project, the contractor must show that the loss it suffered arose naturally from the principal’s breach, or may ‘reasonably be supposed to have been in the contemplation of both parties’ at the time the contract was entered into.  Delay damages can only be recovered automatically when a contract specifically allows.

On the other hand, delay ‘costs’ are, if given the ordinary meaning of that word, the expenditure of time or labour necessary for the attainment of something.  The important distinction is that most construction contracts provide for the recovery of costs expended by a contractor (including those related to time), in the absence of an act of breach by the principal or head contractor (as applicable).

The current Australian Standard suite of contracts has perhaps contributed to some of the confusion and consequent misconceptions within the industry on this subject.

Clause 34.9 of AS 4000-1997 and AS 4902-2000 provide that, where an extension of time has been granted, the contractor is entitled to ‘delay damages’ for every day falling within an extension of time for a ‘compensable cause’.  A compensable cause means an act, default or omission of the superintendent, the principal or its consultants, agents or other contractors (not being employed by the contractor).  It also includes any causes listed in Item 31 of Part A of the annexure to the contract.  In other words, the contractor may claim damages, even when there is a neutral cause of delay (ie no breach by the principal), if the contract so allows.  It is because of this drafting and, in particular, the use of the word ‘damages’ other than in the context of a breach of contract that has led many contractors to believe that they should be entitled to delay ‘damages’ for every time-related cost under the contract (such as variations, suspension and latent conditions to name a few).

This issue is further complicated by the drafting in clause 36 (variations).  Clause 36.2 (proposed variation) provides that the superintendent may direct the contractor to provide details of any time related costs in respect of a proposed variation.  Because the superintendent has a discretion as to whether or not it will direct the contractor to provide such information, such information may not have been provided when a variation is valued under clause 36.4.  Consequently, it is unclear if the superintendent is to consider time related costs when valuing a variation under clause 36.4.

When you consider that the drafting in clause 34.9 provides that every day the subject of a ‘compensable cause’ (which includes any act of the superintendent, including directing the contractor to perform a variation), this means that it is possible, in some circumstances, for the contractor to be entitled to ‘double dip’ by claiming delay ‘damages’ pursuant to clause 41.1, in addition to its time related costs under clauses 36.2 and 36.4.

In light of the above, there is some merit in contractors arguing for variations to be included as ‘compensable causes’, however in practice, this simply substitutes one problem with another.  In my experience, the problem is best addressed by amending (for example) clause 36.4 to expressly include time related costs, and clause 34.9 to operate only where 36 does not.  Ideally, the definition of ‘compensable cause’ should be amended to relate only to breaches by the principal.  As long as the contract uses the word ‘damages’, it is only natural that they arise in relation to a breach of contract.  This, of course, raises red flags to contractors and protracted negotiations often ensue.  Such amendments however are not aimed to allocate risk, but to simply enable the contract to operate as intended.

Thankfully, the draft AS 11000 (issued for public comment in January this year) goes some way to clarifying this issue.  For the first time, the contract includes a clause dealing with delay damages (clause 37.22) and a clause dealing with delay costs (clause 37.23).  Relevantly, the contractor’s entitlement to delay damages is limited to ‘acts of prevention’ by the principal (which is not limited to breach, but does expressly exclude variations).  Accordingly, the contractor is entitled to claim ‘delay costs’ as part of its variation claim.

While the draft AS 11000 still applies delay ‘damages’ quite broadly, the new drafting should enable amendments narrowing that application to acts of breach to be less controversial to contractors.  This is because contractors have traditionally (and understandably) only taken issue with these type of amendments to seek to preserve their entitlement to claim time related costs for variations, latent conditions and principal suspension, not to actually claim ‘damages’ for breach of contract.