Delay costs and delay damages

No automatic right to delay or disruption costs

At common law there is no automatic right to delay or disruption costs. They can only be recovered automatically when a contract specifically allows.

However, delay or disruption costs can only be recovered at common law  if they can be proven to be damages resulting from a breach of the contract. In this case, 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. The legal principles on the assessment of damage are set out in the landmark case of Hadley v Baxendale (1854) 156 ER 145.

Contractual rights to delay or disruption compensation

The language that is used in contracts to allow for delay or disruption compensation can give different outcomes.

The following examples from standard form contracts illustrate this:

AS 2124-1992 (clause 36 – Delay or Disruption Costs)

Clause 36 of AS 2124-1992 deals with recovery of extra costs that have been incurred due to delay from a grant of an extension of time.  It does not address the distinction between delay cost and disruption costs, although the entitlement may include ‘extra costs for delay or disruption’. The default position is that the contractor is only entitled to extra costs for delay caused by the superintendent, the principal or its consultants, agents or other contractors. Extra costs refer to costs which are only incurred because of the delay. They exclude costs that would have been incurred anyway, even if the delay had not happened, for example, off-site overheads. Extra costs are not loss or damage (which includes things like loss of profit).

For other causes of delay, the contractor will only be entitled to claim where the event giving rise to an entitlement for delay costs is provided for in the contract’s annexure or elsewhere in the contract.

For other causes of delay, the contractor will only be entitled to claim what is provided for in the contract’s annexure or elsewhere in the contract.

AS 4902-2000 (clause 34.9 – Delay Damages)

By contrast, clause 34.9 of AS 4902-2000 provides 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’. In this sense, the contractor’s entitlement to recovery of costs is therefore linked to the earlier grant of an extension of time and subject to the event giving rise to the claim being 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 allows. It is debatable what damages means when not used in the context of breach of contract, but may include loss of profit and fixed overheads.

Fixed rates of delay costs and damages

It is common for parties to agree on fixed rates for delay costs or delay damages. Often, several rates are nominated to take account of different levels of expense (for example, there may be a crane on site for part of the time).

Care is needed in the precise language and practical operation of these agreed rates. They can produce unintended results for both parties. For example, they may exclude a head contractor from recovering its damages liability to a subcontractor where the head contractor’s breach was caused by the principal. They may also operate as caps on liability, depending on the language used.