Consequences of the contract - extension of time or penalty?

Background

A property management company (the Client) and a construction contractor (the Contractor) entered into agreements in 2018 regarding two construction projects on properties owned by the Client.

This summary will only address one of the construction contracts. This contract concerned the construction of a new school on a pre-cast foundation slab. The installation of the foundation slab was later included in the project through an additional order. The project was primarily a execution contract where the Client was responsible for the design and the Contractor for the execution. The general conditions AB 04 applied to the project. It is undisputed in the case that the Client granted the Contractor an extension of the contract period until December 6, 2019.

In summary, the issues appealed from the district court and reviewed by the court of appeal were the Contractor's right to Alterations and Additons and Hindrances, and the Client's right to delay liquidated damages and compensation for rectifying the part of the project concerning control systems and property automation (the control project). The parts affecting the Contractor's right to a time extension and the Client's right to liquidated damages are discussed below.

Regarding ground measures

The Contractor claimed the right to additional compensation for performed ground measures as these constituted Alterations and Additions and also caused Hindrances in the project that entitled the Contractor to a time extension.

The construction contract did not directly mention ground measures. However, the administrative regulations stated that land to be used should be restored, and the construction documents indicated that the execution of earth fill around the entrance and geothermal installation should be included. In the additional order concerning the foundation slab, it was stated that the additional work included casting a slab on the ground, including 150 mm of gravel, and rough fill against the slab of 30 m3. The issue in the case was whether the Contractor performed more work than what was stipulated in the construction contract and the additional order concerning the foundation slab, and whether the Contractor was thereby entitled to additional compensation.

It was undisputed in the case that orders for Alterations and Additions 37 and 46 had been made. Furthermore, the Contractor argued that an order for ground measures on a running account was made "on indication," as the Contractor received sketch documents for the ground measures on January 22, 2020, and through a "Question/Answer" document prepared on January 30, 2020.

Regarding the ordered Alterations and Additions, the court of appeal found that it was not proven that the Contractor performed the work ordered in Alterations and Additions 37 and 46.

Regarding other ground measures for which the Contractor requested compensation, the court of appeal concluded that it was not proven that the Client ordered the ground measures either through sketch documents or "on indication." Nor could the "Question/Answer" document be considered an order for the alleged ground measures.[1] It could not be determined to what extent the work performed exceeded the Contractor's contractual obligations, making the work non-compensable, except for work concerning a ramp to the entrance slab where the court of appeal determined that the Contractor was entitled to compensation of 30,201 SEK.[2] 

Hindrances

In addition to ground measures, the Contractor claimed the right to compensation and time extension for Hindrances due to late construction documents, late changes and unanswered questions, drying time of the concrete, and Hindrances related to the control project.

Regarding the late construction documents, the court of appeal found that the Contractor had already been granted a time extension in the project and that nothing had emerged to justify further time extension for the Contractor.

Regarding late changes and unanswered questions, the court of appeal determined that the Contractor could not specify the background to the alleged obstacle and also did not show how it affected the company's ability to complete the project.

In the part concerning the drying time of the concrete, which was mainly significant for when floor on the entrance level could be laid, the court found that the Contractor could have influenced the drying time of the concrete by following the contractual conditions on construction method and control. Furthermore, the court found that the work dependent on when floor could be laid was limited to a few weeks of work. The Contractor had thus not shown that the drying time of the concrete constituted an obstacle.

Regarding the control project, the parties disagreed on who had the design responsibility for the control project. This question was crucial for assessing whether the Contractor was hindered in its execution. Based on the technical description and the functional requirements stated in this document, the court determined that the Contractor was responsible for the design. The Contractor was then found not to have shown that the control project caused Hindrances attributable to the Client.

Regarding liquidated damages

As stated above, the Contractor could not show that it had the right to a time extension due to Alterations and Additions or Hindrances, which shifted the assessment to the Client's right to liquidated damages.

In the case, the Client had granted an extension of the contract period until December 6, 2019. The Client took the project into use on June 11, 2020, and the final inspection of the project took place on September 15, 2020.

Summary Conclusion

The decision highlights the importance for a contractor to demonstrate that Alterations and Additions has been ordered and executed, as well as how Hindrances affects the contractor's ability to meet the completion deadline. Furthermore, the contractor must present satisfactory documentation for their costs. The contractor bears the burden of proof to verify all work performed and, where applicable, must show how Alterations and Additions or Hindrances have impacted the completion time. If the contractor fails to meet these requirements, they risk losing their right to compensation and their right to an extension of time, as well as facing a liquidated damages claim against them.

[1] The court of appeal determined that the order could be considered to include the replacement of stormwater pipes and the addition of drainage pipes, but the Contractor did not claim that these works constituted compensable Alterations and Additions.

[2] The district court had, in this part, determined that the ground measures constituted a change order and awarded the Contractor compensation for the ground measures amounting to 956,310 SEK, as well as a time extension for the work until March 15, 2020. In the court of appeal, one of the judges dissented and assessed that it was proven that the Client had ordered relatively extensive ground measures during December 2019 and January 2020, which entitled the Contractor to a time extension and payment for the relevant parts.