Causing or contributing to a Specified Peril - employer's or contractor's risk?
This article was produced by Nabarro LLP, which joined CMS on 1 May 2017.
Whenever an employer and contractor use a standard or design and build JCT building contract in the current market for a commercial development, the issue of the contractor causing or contributing to a relevant event and the consequences of this are heavily negotiated.
The standard position in the JCT contracts is that this is the employer’s risk, as the occurrence of a relevant event no matter the cause will entitle the contractor to an extension of time. However, most employers view this as an unfair position, particularly where the relevant event was caused or contributed to by the contractor’s (or the contractor’s Persons) negligence or breach of contract. If the contractor negligently burns down the building, an employer will argue (with some merit) that the contractor should be responsible for the delay damages suffered by the employer, for example the loss of rental income from commercial tenants that may be required to repay any debt finance used by the employer to pay for the Works.
In response, the contractor will contend (also with some merit) it cannot accept this risk for Specified Perils (a relevant event) because of the difficulty in insuring against the employer's delay damages arising from the occurrence of such perils. As an uninsurable risk, the contractor might not be able to pay delay damages from its balance sheet for the substantial period that it may take to reinstate the Works without this having a serious detrimental impact on its business.
With two seemingly valid and opposing views, how do the parties cut through this issue?
1. Cap on delay damages
The first compromise is for this to be the contractor’s risk, but with a cap on delay damages so that the contractor’s liability for such losses is quantifiable and can be adequately priced by the contractor during the tender process.
2. Sub-cap on delay damages
If an agreed cap on delay damages is still too high for the contractor, the parties could negotiate a sub-cap on delay damages in relation to delays caused by Specified Perils.
3. Delay in start up insurance
The employer could also accept this risk and back it off against a delay in start up insurance policy. However, the premium and excess or deductible will be additional costs to the employer and it could be more difficult for the employer to claim such losses from an insurer than against the contractor, particularly if the delay damages are liquidated in the building contract.
4. Extension to CAR insurance policy
The employer might further be willing to accept this risk if it is possible to extend the cover available under the CAR policy to delay damages arising from the occurrence of a Specified Peril. This will have an impact on the premium and be an additional cost to whichever party is responsible for taking out and maintaining this policy under the building contract. The party insuring this risk will also have to pay any excess or deductible. However, given the substantial amount of delay damages that could arise from the complete destruction of a building, these additional costs might be well worth incurring.
Depending on which of the above options the parties agree, further considerations may arise. For example, if the employer agrees a cap or sub-cap on delay damages, it may be reluctant for such damages to contribute towards any overall cap on the contractor's liability. Similarly, if the employer has to pay for delay in start up insurance or an additional premium on the CAR policy, this will increase the overall cost to the employer of awarding the building contract to the contractor, giving the contractor’s competitors a potential commercial edge during the tender process. If it is an employer's risk backed off against insurance, the parties could also agree that the contractor pays any excess or deductible in the event of a claim.
In any case, this issue will no doubt continue to crop up during contractual negotiations between employers and contractors for the foreseeable future.
