ACLN· Issue m 18

---------------Contracts ---------------

NPWC3 Clause 35.4 - Delay Cost Claims

• Philip Davenport, Lecturer, School ofBuilding,University of New South Wales.

The purpose of this article is to challenge the widelyheld benef that the last paragraph ofclause 35.4 of theNPWC conditions ofcontract can give a contractor anentitlement to claim money when time for PracticalCompletion is extended by the Superintendent.

The relevant words of c1.35.4 are:"No claim for extra costs incurred by the Contrac­tor by reason of or arising from the exercise of theSuperintendent of the power to grant or allow anyextension of time under this sub-clause shall beentertained by the Principal unless the need for theextension of time was due to any breach of theprovisions ofthe Contractbyorany aetorOOlissionon the part of the Principal, the Superintendent orthe employees, professional consultants or agentsof the Principal."

In Building and Construction Contracts 2nd. Ed.Dorter and Sharkey, 1990 express the commonly heldview thus:

"On the express words used by the draftsman,NPWC3infactgivesnoexpressrighttodelaycostsbut contains a probibition on any claim for themwhere they are attributable to the granting of theextension of time, unless the need for an extensionwas due to a breach. Nonetheless, it is submiue<lthat thebetter view is that that limitation must arisefrom an implied tenn 2ivin2 a ri2ht to such delay~..'

The emphasis has been added. Doner and Sharkeyquotenoauthority forthis implied term. Me.JusticeSmart,the flCSt judge to administer the NSW Supreme CourtBuilding and Construction List, has written a paper As­pects of Construction Industry Contracts and Disputes[1989] 5 BCL 7 in which he expresses the view that the lastparagraph of c1.35.4 gives a contractor a right to anentitlement to money. At pp.8-9 he says:

''Prolongation Claims

UnderNPWC3 the claims for extramoney fall intothese broad categories:[a] damages for breach of contract[b] Claims for extra cost for a deviation from the

construction programme directed by the su-

perintendenl, or from a directionby the super­intendent, if no construction programme hasbeenprovided. Clause 33.4provides tbatsuchclaims shall·not succeed unless the need forthe deviation or direction was due to an act,default or omission of the principal or super­intendent.

In some quarters the view was held that therehad to be some blameworthy or wrongfulconduct on behalf of the proprietor or thesuperintendent before any money was pay­able. Recently, the NewSouthWales CourtofAppeal 1, albeit on another standard form ofcontract where substantially the same wordswere used, held thatblameworthyorwrongfulconduct was not required. For example, theprincipal may for its own purposes, and tomeet its particular need, issue a direction or itmay arise from a neutral factor such as a bopafide strike 2.

[c] IJnder cJ 35 4 extra costs are payable in rela­tion toextensionoftimewhere theneedfortheextension of time was due to any breach of thecontract or any other act or omission on thepartof the principal, the superintendentor theemployees,professional consultantsoragentsof the principal. The same general commentsapply to this clause. The act or omission doesnot have to be blameworthy or wrongful. Itmay arise out of some requirement of theproprietor."

The emphasis has been added. Other writers havesimilarly interpreted clause 35.4 but it will suffice tomention one more. In an article The Prolongation CostsClaim, [1988] 4 BCL 181 D. Byrne QC at p.183 says:

"The ambivalence of the draftsman ofthe NPWC3contract towards these claims is shown by theextraordinarily oblique way he deals with them inthe last paragraph of cI.35.4.In Commonwealth v Jennings [1985] VR 586 at593; 1 BCL 252] the Full Court desaibed thispower to award prolongation costs as "an affuma­tive promise contained by necessary implication"in these words.

ACLN -Issue m

Presumably claims other than those expected maybe made and will be dealt with, not by the superin­tendent, butby theprincipal direct. The principal isgiven no guidance as to how he is to deal with them.Indeed. it is difficult to see why the decision hasbeen enbUsted to him rather than the superintend­ent."

The attraction for the contractorof the c1.35.4 claim isthat it provides scope for making money where there is noloss and it avoids the necessity of proving actual loss.Everyone knows that an extension of time cannot causeextra cost. Breach of contract or a direction to suspendworkorchange the orderofworkmaycauseextracost [andthere is provision elsewhere to recover that extra cost] butextension of the time for doing the work does not causeextra cost Refusal ofan extension of time can cause lossbut time can beextendedfor 100years withoutcausing onecent ofextra cost.

Ifan arbitrator or court will award extra cost becausetimehasbeenextendedorshouldhave been extended, thenthe contractor can make a windfall. Since an extension oftime cannot cause extra cost, the problem is to assess the"extra cost" which is sought under cl.35.4. Here theHudson Formulafills the gap. Ifa courtor arbitrator can bepersuaded that the Hudson Formula quantifies an actualloss, the contractor can recover without proofof any loss.

Like the c1.35.4 claim, the Hudson Formula has nobasis in law or logic but a well known English text writerpromoted the formula and contractors and arbitrators nowgenerally consider that it has legitimacy. A critical analy­sis of the formula will be found in the paper The TwoHudson Formulas, P. Davenport [1991] 18 AustralianConsbUction Law Newsletter 14.

What happens in practice is that the arbitrator looks atthe extensions of time which were or, in the Arbitrator'sopinion, should have been granted, hears so called evi­dence on what were the Contractor's estimated overheadsand profit and applies the formula to come up with anamount. The process is straight forward and avoids thedifficulty ofassessing aetualloss, calling expert witnessesand production of accounting records. It makes "proof'easy.

While the writers quoted above, with the exception ofMr. JusticeSmart, see problems with their interpretationofcl.35.4, they have glossed over the problems. Why? It issubmitted that the reason might be that they see that infairness the contractor should be recompensed for extracosts where the extra costs are brought about by thePrincipal or the Superintendent but, with respect, it issubmitted that they may not have appreciated that else­where in NPWC3 there is ample provision for recom­pense. Hence they have read into c1.35.4 an implicationthat is arguably quite unnecessary.

To see that in order to give business efficacy to theContract or to be fair to the Contractor, it is not necessaryto imply into cl.35.4 ofNPWC3 a term that the Principalwill pay moneys to the Contractor when time is extended,it is submitted that it is only necessary to look at the

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Australian Standard General Conditions of ContractAS2124-1986. They are a redraft of NPWC3 but theycontain no equivalent of the last paragraph of cl.35.4 and

, yet it is not suggested that they are any less fair to theContractor than NPWC3.

Ifjudges, QueensCounseland textwriters tell contrac­tors that cl.35.4 gives them an entitlement to extramoney,they canhardly be blamed for trying toobtain the windfall.The same words were in the first and second edition of theNPWC conditionsanddate from 1973but itwas only in the1980's that claims under cl35.4 for money became popu­lar.

An example may serve to illustrate the reason whyc1.35.4doesnothave themeaning contendedby thewritersquoted above. Assume that a contractoragrees to build 10houses for $100,000 each. Assume that the Contractorplanned to build then sequentially. Assume thateach takesone month to build and that at the end of month 7, due towage rises, there is a 10% increase in the cost ofbuildingahouse. Assume that the endofmonth 5, the Superintend­ent ordered a variation, namely the building of an extrahouse [no.11].

Clause 40.2 of NPWC3 deals with valuation of thevariation. There are two possibilities. One is that the valueis determined by agreement. The other is that the value isdetermined by the Superintendent If the parties agree onthe value for the variation, that should be the end of thematter. However, the writers quoted above are apparentlyunder the impression that ifan extension of time is grantedfor the variation, the contractor is entitled, in addition tothe agreed value for the variation, an amount under clause35.4 because time was extended.

The Contractorcouldelect to buildhouseno.ll beforeor after month 7. At the time of ordering a variation, theSuperintendent might determine a value under c1.4O.2 of$100,000 but if the work is done after month 7, theSuperintendent must make a new determination because,due to increases in wage rates, a reasonable valuation forthe coosbUction ofno.ll would be $110,000. C1.42.4 ofNPWC3 permits revaluation.

If the Contractor elected to build the house before theincrease in wage rates, a reasonable value for the variationis $100,000 even though house no.7 will now be built inmonth 8 instead of month 7 and attract the higher wagerates. It is arguable that the additional cost of buildinghouse no.7 has not been caused by the variation but is anindirect result of the decision of the Contractor about theorder in which the Contractor would carry out the work.

Hadthe costofbuilding fallen 10% at the endofmonth7 instead of rising, the amount payable for the variationwould be $100,000 or $90,000 depending upon whetherthe worlc was carried out before or after the end of month7. If house no.ll was built in month 7, the cost to theContractor of building house no.7 would be $90,000 andthe Contractor would receive a $10,000 windfall. TheSuperintendent would not be entitled to take that intoaccount in valuing the variation.

Ifthe Superintendentdireeted that the additionalhousebebuiltbefore otherhouses then there wouldbea direction

ACLN • Issue #1.2.

with respect to the order of work. The direction would ineffect be to postpone construction ofbouses 6 to 10. Ifthedirection caused the construction ofbouse 7 to occurafterthe increase in wage rates where except for the direction,it would have been constructed before the increase, theContractor could claim the additional costofconstructingbouse 7. The Contractor's entitlement would arise underboth clause 33.4 and 34.5 ofNPWC3.

Clause 33.4 reads:"Extra CostsThe Contractor sball not be entitled to any extracost resulting from-[a] a deviation from a construction programme

directed by the Superintendent pursuant tosub-clause 33.2; or

[b] adirection givenby theSuperintendentpursu-ant to sub-clause 33.3;

unless the need for the deviation or the directionwas due to an act, default or omission of thePrincipal or the Superintendent.

Clause 34.5 reads:"Cost or SuspensionThe extra cost, if any, of completing the Worlcsincurredby theContraetorbyreason ofanysuspen­sion under sub-clause 34.2 or sub-clause 34.3 sbalIbe bomeorpaid forby theContractor PROVIDEDHOWEVER. that if the suspension is due to an act,defaultoromissionofthePrincipaloran employee,professionalconsultantoragentofthe Principal theContractor sball be entitled to payment of theamount ofany extra cost ofcompleting the Worksincurred by bim that is attributable to sucb an act,

default or omission."

Clause 34.2 provides that wbere suspension of thewbole or any part of the work becomes necessary becauseof an act, default or omission of the Principal or anemployee or professional consultant or agent of the Prin­cipal, the Superintendent sball order the Contractor tosuspend progress. Ifan order to vary the worknecessitatespostponementofsomeotherwork then carryingoutof thatwork is suspended for the period of the postponement andthe right recompense for any additional cost lies underclause 34.5

Even if the direction of the Superintendent did notexpressly order that worlc on houses 6 to 10 be postponedbut postponement was a necessary consequence of com­pliance with the direction, the Contractor could recoverunder those provisions.

There are two quite separate claims. One is for thevalueofthe work involved in the variation. Theotheris forthe extracosts ofcompleting other work consequent upona direction with respect to the order of work.

The total work will take 11 months because there arenow 11 houses. There should be an extension of time forPractical Completion. However, the Contractor is notentitled to "prolongation costs" or "extra overheads" forthe extramonth. The Contractor bas a right under cl.40.2

to the reasonable value of the additional worlc [wbicb ofcourse includes a component for overheads] when it isperformedand bearing in mind the actual costofperform­ance.

If the direction to vary the work necessarily causes asuspension ofother work and as a consequence the costofcompleting the otherwork is increased then that extracostis recoverable underc1.33.4or 34.5 but the extracost is notthe cost of 1 month's overheads. The overheads for theother work would have been incurred anyway. It is only ifthere is some extra cost that a claim can be made.

Contractors frequently claim that because the contractperiod was extended by one month, an entitlement liesunder cL35.4 for an extra month's overheads and profitusing the Hudson FOI'Dllila. If the Contractor's overlleadsand profit at the time of tendering were 15%, the Contrac­tor would be paid the price of the variation [$100,000 or$110,000 depending upon when the worlc was performed]plusanother$15,000. This $15,000 isa windfall and bearsno relation whatsoever to actual extra costs. The price ofthe variation already includes the tendered rate for profitand overheads.

In thatexample, the Contractor would also be entitledunder c1.33.4 to the extra cost, ifany, of consttucting theother bouses as a consequence ofbaving to delay work onthose houses to build house no.ll. That extra cost is notoverheads. They remain constant. It is the extra cost of$10,000 for labour for house no.7 which is now con·structed in month 8 rather than month 7.

Ifanextensionoftime wasclaimedbutnotgranted, thealleged implied term in c1.35.4 would not assist the Con­tractor. Similarly, if the Contractordoes not wish to applyfor an extension of time [e.g. because the Contractor basanotherprojectwhich the Contractorwisbes to commenceon completion of the contract or because the worlc can becarried out concurrently with other worlc], the allegedimplied term undercl.35.4 will notassist theContractor torecover extra costs. Fortunately for Contractors. entitle­ment undercll.33.4 and 34.5 is independentofthe grantof

I an extension of time.Now let us examine the lastparagraph ofc1.35.4 to see

what it does mean. The paragraph commences:"No claim for extra costs incurred by the Contrac­tor by reason ofor arising from the exercise of theSuperintendent of the power to grant or allow anyextension of time under this sub-clause sbalI beentertained by the Principal..."

There is no difficulty with understanding these words.They are simply a warning to the Contractor that the merefact that the Superintendent grants or allows an extensionof time for Practical Completion does not mean that theContractor can make a claim for money. The Principalwarns that the Principal will not entertain [consider] sucha claim. The Contractor will be wasting time applying.

Of course, the exercise by the Superintendent of thepower to "grant" or allow an extension of time will notcause extra cost A grant ofan extension of time is madeaftera claim by theContractor. The Superintendent is also

ACLN - Issue #22

empowered by cl.35.4 to "allow" an extension of time forany reason the Superintendent thinks fit. When the Super­intendent allows an extension of time, there is no "need"for the extension, except the act of the Superintendent indeciding to extend time.

Had theparagrapb finished there, there would presum-ably be no problem. The paragrapb continues.

"... unless the need for the extension of time wasdue to any breacb of the provisions of the Contractby or any act or omission on the part of the Princi­pal, the Superintendent or the employees, profes­sional consultants or agents of the Principal."

The Principal is in effect saying that if the need for theextension oftime was a breacb ofcontract by the Principalor an act or omission on the part of the Principal, theSuperintendent or others for wbom the Principal may beresponsible, the preceding part of the paragraph will notapply. Thatis tosay that thePrincipal will entertain aclaimwbere the Principal is in breacb ofcontract or the cause ofthe delay was an act or omission of the Principal, etc.

Where the Principal is in breacb ofcontract, it does notavail the Principal to say that the Principal will not enter­tain [consider] a claim. Nothing in the last paragrapb ofc1.35.4 says that any claim is barred. The reason wby thePrincipal will notentertain someclaims issimply that therecould be no entitlement under the contract Where theremigbt be an entitlement, the Principal will entertain [con­sider] a claim. Just as the Principal bas not said thatclaimswbicb the Principal will not consider are barred, similarlythe Principal bas not said that claims wbicb the Principalwill consider will be paid.

TheContractor'sentitlementwilldependupon whetherthe common law [in the case of breacb of contract] or aprovision of the contract [e.g. clauses 33.4,34.5 and 40.1]in the case ofany actoromission of the Principal etc. givesthe Contractor a rigbt to extra cost A court will entertaincertainclaims but that isnot to say that the courtwill awardan amount of money to the claimant Any award dependsupon a legal entitlement not upon wbether the court willentertain the claim.

There is no reason wby the last paragrapb of c1.35.4cannot be given its plain ordinary meaning. There is noreason to read into it an implication that it provides anentitlement to the Contractor for remuneration wbere theentitlement would not exist in the absence of the para­grapb. Anyone using NPWC3 would be well advised tostrike out theparagraph. This can be done withoutmakingany consequential changes or affecting the entitlement ofthe Contractor.

Footnotes1. The unidentified decision appears to be Graham Evans&: Co. Pty. Ltd v. S.P. Formwork Pry. Ltd. [1988] 5 BCL149, an appeal from Smart J. wbicb involved the interpre­tation of the subcontract SCNPWC2. The equivalent pro­vision in SCNPWC2 was quite different to the last para­grapb ofc1.35.4 ofNPWC3. The provision considered bythe Court read:

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"No claim for extra cost incurred by the Sub­Contractor by reason of or as a result of or arisingfrom the exercise by the Contractorof the power tograntorallow an extension oftime underany oftheprovisions of this clause shall be allowed by theContractor unless theneedfor the extensionoftimewas due to either:[i] any breach of the provisions of this Contract

or out ofany other act or omission on the partof the Contractor his employees or agents; or

[ti] any actoromission on the partofthe Principalthe Superintendent or the employees profes­sional consultants or agents of the Principal;

and in the lattercase then only to theextent towbicbsucb extra cost bas been included in extra costspayable to the Contractor in respect of the cause ofdelay giving rise to that extension of time underprovisions of the Head Contract"

This provision is so different that it is not worthcomparing it. It is not suggested that the Court was wrongbut simply that the Court's decision bas no relevance tocI.35.4 ofNPWC3.

2. The Court of Appeal in the Graham Evans case did notbold that an entitlement to extra cost could arise from aneutral factor. At p.155 the Court said:

"In this context, it is clear beyond doubt that thecontractor is not to be allowed extracost if the needfor the direction arose form its own request orfailure to comply with previous directions. Ifitbascaused the need for the direction then it cannotclaim extra cost. The position is the same if theneed is created by a neutral factor."

At p.156 the Court said:"If the subcontractor or bis agent's conduct or aneutral factor leads to delay then no claim is justi­fied." 0