Luke Hung[1]
I. Mechanisms for handling the delay and extension of a construction period
From small private construction projects to large infrastructure projects, the completion schedule of a project is the main concern of the project owner. If the project is not completed in time for use by the owner, it may cause substantial economic loss to the owner. In order to protect the owner’s rights and interests, the construction contract usually provides for a “delay penalty” mechanism, which is based on a certain amount (usually a certain percentage of the total contract price or a fixed amount) multiplied by the number of days the project is overdue, in order to urge the contractor to maintain the progress of the project and avoid delays, and the owner is also exempted from the effort to proof the reasonable reduced compensation of the contract or damage so incurred.
However, there are many factors that cause delays in construction, and it is difficult to exclude them completely beforehand. In addition to factors attributable to the contractor, other factors that are not attributable to the contractor or are attributable to the owner often occur, such as force majeure, weather conditions, discrepancies between geological drilling or geological data and site conditions, stoppage of work requested by the owner, change of contract requested by the owner, delay in the owner’s performance of the required collaboration obligations such as the provision of drawings, instructions, sites, etc. These are all common factors for project delays. It is unfair to the contractor to be subject to a delay penalty based on the original completion date of the contract despite the aforementioned circumstances.
In order to protect the contractor, Article 507 of the Civil Law stipulates: “If an action of the proprietor is necessary for the execution of the work and the proprietor fails to do it, the contractor may fix a reasonable deadline and notify the proprietor to perform the action within such deadline. If the proprietor fails to perform the action within the deadline specified in the preceding paragraph, the contractor may rescind the contract and request a compensation for the injury arising therefrom.” Therefore, when the owner fails to perform the collaboration obligation to the extent that the completion of the project is affected, the Civil Code grants the contractor the basis to terminate the contract and claim compensation.
However, in a typical construction case, if the owner exceeds a certain period of time in performing the collaboration obligation, it will usually only delay the progress of the project, not make it impossible to proceed. What the contractor actually needs is more time for construction work (to avoid delay penalty or the owner’s claim for damage), not rescission of the contract and a claim for damages. On the other hand, from the owner’s standpoint, if a contractor is allowed to readily rescind a contract simply because of any delay in the performance of the owner’s collaboration obligations; it may also result in substantial losses to the owner. Therefore, the Civil Code alone cannot solve the problem of delays that often occur in construction cases.
Under such circumstances, the construction contract is equipped with the mechanism of “extension of time, or EOT” which stipulates that when there is a reason for an extension of the construction period as stipulated in the contract which is not attributable to the contractor, the contractor shall apply to the owner for the extension of the construction period within a certain period of time by attaching relevant supporting documents, and the delay penalty will be exempted after the owner has reviewed the application and agreed to the EOT. Take the Model Contract (revision dated January 14, 2020) issued by the Public Construction Commission as an example. This Model Contract provides: “If the contractor needs to extend the construction period during the term of the performance in any of the following circumstances (for reasons not attributable to the contractor) which affect the activity of the critical path in the network diagram , the contractor shall notify the procuring agency in ____ days (specified by the procuring agency when the tender is conducted; and if it is not specified, it should be 7 days) after the occurrence or disappearance of the incident, and apply to the procuring agency in writing for an extension of the construction period by attaching relevant evidence in ____ days (specified by the procuring agency when the tender is conducted; and if it is not specified, it should be 45 days). The procuring agency may, after considering the circumstance, agree in writing to extend the term of performance without calculating the delay penalty…” These contractual terms and conditions may be considered for reference in order to reasonably allocate the risks of construction delay between the owner and the contractor. Such clauses are also essential terms of a construction contract (hereinafter, the “Construction Extension Clauses”).
II. Criteria for construction extension
When the aforementioned Construction Extension Clauses are referenced, it can be concluded that the criteria for construction extension can be roughly divided into “reasons for EOT” (one of the following circumstances (and not attributable to the contractor)), “necessity of EOT” (which is warranted since the activity of the critical path in the network diagram is affected), and “notification obligation” (the procuring agency should be notified within ____ days after the occurrence or disappearance of the accident…and evidence should be included within _____ days…to the written application to the procuring agency for an extension). Therefore, when the event that affects the construction period occurs, the contractor must meet the aforementioned requirements before the owner can review and grant the EOT in accordance with the contract.
1. Reasons of EOT
As a matter of principle, as long as the reasons are not attributable to the contractor and the other criteria for the extension of the construction period are met, the contractor should be equitably granted an adjustment of the construction period. These extension reasons may be divided into (1) reasons not attributable to either party, such as force majeure, weather conditions, geological factors beyond expectation, etc.; and (2) reasons attributable to the owner, such as the owner’s failure to fulfill its collaboration obligations, the owner’s instructions for contractual changes, stoppage of work, or interface responsibilities incurred by the owner’s assignment of another related contractor, etc. In general, most of the construction contracts will include the above-mentioned specific circumstances in the Construction Extension Clauses to reduce disputes, and will also use “other causes not attributable to the contractor, as determined by the owner,” to generally stipulate them.
However, it should be noted that when the contractor can be held responsible for the occurrence of the extension causes, the contractor certainly cannot claim an extension of the construction period on such basis if, for example, it is subject to the following circumstances: the contractor violates the contractual requirements and is requested by the owner to stop work in accordance with the contract, or the contractor is ordered by the competent authority to stop work for violation of relevant laws and regulations, or the cause of the extension pertains to the work that the contractor is obligated to perform under the contract (e.g., the contractor is assigned to perform the relevant construction and management procedures under the contract, or the contractor is responsible for all work required from the beginning to the completion of the construction under a turnkey contract).
2. Necessity of EOT
In the actual implementation of the project, it is inevitable that the aforementioned causes of construction extension will occur. However, it should be noted that since the progress of the project is usually not a single path of work, especially in case of a project with a relatively complex network diagram, many work items are likely to be carried out in parallel within a certain period of time. Therefore, the delayed work may still have time to spare and not immediately affect the completion date. To wit, as long as the delay does not bring the entire project to a complete halt, the occurrence of a construction delay will not necessarily affect the completion date (to the extent that warrants a EOT). Conversely, there may be a certain work item for which there is no spare time left, and if such work item is delayed, the construction period will still be affected even though other work items can continue. Therefore, when a cause of construction extension occurs, it is still necessary to determine whether the cause has an impact on the construction period and therefore meet the criteria of “Necessity of EOT.”
At present, a “network diagram” or a “critical path method” is used in most of the engineering practices for schedule management. A critical path method refers to the schedule planning based on the construction period and sequence of each work under the project, so that the work can be completed on the scheduled date. A network diagram is usually set before the construction commences to serve as the basis of schedule control. Once the network diagram of a project is set, the path that takes the longest time can be identified among the work paths. Since the duration of the longest path is the same as the total duration, there is no spare time left for each work item on that path (such redundant time is also called “float time”). Hence, the combination of the work items on such path constitutes is known as the “critical path,” with each individual work item along the path referred to as a “critical activity.” Since there is no time margin (floating time) for all items of work on this critical path, any delay in any of the items of work on the essential path (critical activity) will directly delay the completion date. It is only then that there is a need to extend the construction period.
Currently in practice, the court also accepts the view of this engineering practice. Please refer to the reasons for the 100-Jian-Shang-96 Decision rendered by the Taiwan High Court in 2011: “A critical path is also known as a key path and is the longest time path formed by connecting a series of construction items in the ‘critical path diagram for expected progress’ for construction planning. If there is no float time for each construction item on the critical path, this means that there is no time margin for each item on the path, and if an item on the path is delayed by other factors, not only will the entire construction schedule will be delayed, but also the item will serve as the basis for determining if the construction extension should be granted.” This specifically and comprehensively depict the definitions of the “network diagram,” “critical path,” and “critical activity” and indicate how to determine if construction extension should be granted.
Therefore, unless the cause of extension has resulted in a complete stoppage of the construction, the contractor may not directly assert a claim merely based on the number of days a specific work item is affected by a certain cause of delay. But rather, the actual impact of the delay on the completion date shall be evaluated according to the critical path diagram prepared for the performance of the construction and specifically based on a critical path method in order to meet the contractual “requirement for a construction extension since the work on critical path depicted in the network diagram has been affected.”
3. Notification obligation
According to the mechanism of EOT, the owner should examine whether the reasons, period and impact of the EOT proposed by the contractor are reasonable and comply with the provisions of the contract. In order to ensure that the owner can effectively and reasonably examine the claim for extending the construction period, avoid the loss of evidence and information, and even respond to the impact caused by the construction delay in advance, it is necessary for the contractor to provide the necessary information in time for the owner’s review in order to find a reasonable solution. In particular, when the owner is responsible for coordinating the interface between different contractors, the contractor’s immediate notification of the cause of extension is critical to the owner’s assessment of how to coordinate the interface and provide a proper EOT.
Therefore, most Construction Extension Clauses require the contractor to notify the owner and apply for an extension within a certain period of time after the causes of extension occur to ensure that the owner can grasp the reasons for the EOT and have sufficient time to examine the impact on the construction period as soon as possible. This is known as the “notification obligation” for EOT. In other words, if the contractor fails to notify the owner and apply for an EOT within the contractual period after the causes of construction extension occur, the contractor fails to meet the “notification obligation” for EOT and further loses the right to apply for an extension.
Currently, the courts and arbitrations in practice currently take a more lenient view of the preclusion effect of a contractor’s failure to perform the notification obligation. However, some courts still held: “In view of the fact that this article requires the contractor to apply for an EOT within a period of time actually to facilitate the parties to grasp the statute of limitations and to collect evidence for the purpose of identifying the responsibility for EOT. This is not supposed to enhance the responsibility of the contractor, and the five-day application period stipulated in this contract is expectable and appropriate without major disadvantages or restrictions on the exercise of rights…The Appellant’s assertion that Article 10 of the contract at issue, which provides that an application to extend the construction period shall be made within five days after the reasons for the extension occur or disappear, and that the Appellee may decline the application beyond such period is invalid is obviously unacceptable” (compare the 103-Jian-Shang-Keng-(1)-28 Decision of the Taiwan High Court). Therefore, in the event the reasons for construction extension take place, the contractor is still required to comply with the notification obligation pursuant to the Construction Extension Clauses.
III. Conclusions
In light of the complexity and uniqueness of construction projects, it is difficult to determine who should be responsible for a construction delay and whether a construction extension should be granted based on the cause of a single event alone, and the impact of such event on the critical path diagram should also be considered. Therefore, when an event occurs that is sufficient to affect the project schedule, the consolidation and analysis of important information such as the progress of the project at that time, the actual work items affected, and work items on critical path, etc., are of paramount importance to the assessment of the project and affect the owner’s assessment of the construction extension. Therefore, a construction contract should certainly specify the reasons for an extension, notification obligations and the necessity of extension to facilitate the control of the construction schedule and to reduce or limit the scope of disputes over the extension of the construction period.
[1] The author is a lawyer at Lee, Tsai & Partners. However, the contents of this article merely reflect personal opinions and do not represent the position of the law firm.