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Analysing delay in Hong Kong: When Theoretical Delay is just not Enough

The analysis of delay resulting from events for which the employer bears the time associated risk (“Employer Risk Events”) and the calculation of the resulting entitlement to an extension of time (“EOT”) is at the heart of many common law construction disputes around the world. Hong Kong is proving to be no exception.

The Society of Construction Law Delay and Disruption Protocol (the “Protocol”) recommends that applications for EOT should be made, and dealt with as close in time as possible, to the delay event that gives rise to the application. The Protocol also recommends that EOT should be granted to the extent that the Employer Risk Event is predicted, to prevent the contractor from completing the works by the then prevailing completion date. These ideals are also encoded in many of the standard forms of construction contract wordings, including Hong Kong’s Standard Form of Building Contract, Private Edition – Without Quantities, 1986 1st RICS Edition (the “Standard Form Contract”).

However, the decision of Justice Reyes in Leighton Contractors (Asia) Limited v Stelux Holding Ltd is authority for the proposition that, at least insofar as the Standard Form Contract is concerned, the Hong Kong courts will be reluctant to find that delay should be predicted on a purely theoretical basis. Rather, predicting delay calls for consideration of the delay likely to actually result from the Employer Risk Events by reference to the as-built state of the work.

Facts of the case

In this case, the contractor sought leave to appeal an arbitrator’s decision primarily in connection with the application of Clause 23 of the Standard Form Contract (“Cl. 23”), which relevantly provides:

1. "Upon it becoming reasonably apparent that the progress of the Works is delayed, or is likely to be delayed, the Main Contractor shall forthwith give written notice to the Architect of the material circumstances including the cause or causes of the delay …
2. If, in the opinion of the Architect, upon receipt of any notice, particulars and estimate given by the Main Contractor under sub-clause (1) of this Condition, the completion of the Works is likely to be or has been delayed beyond the Date for Completion …

then the Architect shall so soon as he is able to estimate the length of the delay beyond the date or time aforesaid make in writing a fair and reasonable extension of time for completion of the Works.” [emphasis added]

Contractor’s primary argument

The contractor’s first argument at arbitration was that the employer caused critical and actual delay to the works by its late provision, via the Architect, of the tender information required to award certain superstructure and electrical sub-contracts. The arbitrator accepted that this tender information was provided later than it should have been according to the original contract programme. The contractor then argued that it was entitled to an EOT as it:

1. had been “delayed” in its work under Cl. 23(2); and
2. had fulfilled the written notice requirements of Cl. 23(1) and 23(2)(f).

The arbitrator determined that no actual delay had resulted from the employer’s later than originally envisaged provision of the tender information because at both:

1. the date upon which the tender information was originally intended to be provided under the original contract programme; and
2. the date the tender information was actually provided,

the contractor was still constructing the substructure works and had yet to commence construction of the basement slab, let alone reached the point of awarding the superstructure or electrical sub-contract works.

The arbitrator therefore rejected the argument that the so-called “late” provision of the tender information actually delayed the award of the subcontracts or commencement of those sub-contract works. Justice Reyes agreed that this was a reasonable conclusion for the arbitrator to have reached on the facts.

Contractor’s alternative argument

The contractor’s alternative argument was that Cl. 23 did not limit its entitlement to an EOT to circumstances in which completion of its work had actually been delayed.

The contractor argued that, by differentiating “delay” from “likely delay”, and making both types of delay a good basis for an EOT, Cl. 23(1) and (2) required the tribunal of fact to stand in the shoes of the Architect at “time slices” throughout the history of the project, and to look prospectively to determine if the late provision of the tender information was likely to cause delay to its completion of the work. It was irrelevant if, with hindsight, the late tender information did not actually cause delay to completion of the work.

The arbitrator rejected the contractor’s alternative argument as giving rise to an EOT entitlement on two bases:

1. first, the reference to the contractor receiving “in due time, necessary instructions…” (in this case the subcontract tender documents) pursuant Cl. 23(2)(f), required consideration of what information was actually necessary at the time that the information was being both requested by the contractor and provided by the employer. This was not to be determined by reference to the original contract programme, or even a “time slice” delay analysis. Rather, it should be determined by reference to the state of the work as it existed at the time the information was being requested by the contractor, and also provided by the employer. Because the contractor was still involved in the substructure works at both of these dates, the tender documents were neither “necessary” when requested by the contractor, nor out of “due time” when provided by the employer. Therefore, no EOT was due to the contractor in these circumstances; and
2. secondly, the fact that Cl. 23(2) required “likely delay... to the Date for Completion”, meant that a causal link must be demonstrated between the employer having provided the tender documents later than originally envisaged, and any potential delay arising from that fact. Given the significant delay that existed in the substructure works as of the date that it was originally envisaged that the tender documents would be provided, it was not possible to discern any delay that was likely to flow by virtue of the tender documents not having been available at that time.

Summary

Whilst the arbitrator was prepared to look prospectively from the shoes of the Architect at the time the tender information was sought by the contractor and provided by the employer to determine if an EOT was due, she was not prepared to do so without taking account of the actual state of the work at those times. The arbitrator was foremost concerned with when the tender information was actually needed by the contractor (i.e. “necessary” as described in Cl. 23(2)(f)) to award the sub-contracts, which could only be judged by reference to the actual state of the work as it existed at the time the information was provided.

Justice Reyes held that the arbitrator’s conclusion that the contractor was not entitled to an EOT was “probably right”, and refused leave to appeal.

Implications of the case

The effect of Justice Reyes’ decision in Leighton Contractors (Asia) Limited v Stelux Holding Ltd is that theoretical delay is unlikely to be a sound basis for an EOT, at least under the Standard Form Contract and other contracts with similar provisions. Perhaps the decision also demonstrates the courts’ reluctance to support the view that purely theoretical delay gives rise to an EOT entitlement, save for the clearest wording to that effect. One might ask whether, absent clear wording, an objective observer would view the parties as having bargained that purely theoretical delay should form the basis of an EOT entitlement where the on-site facts demonstrate that actual delay has not occurred, and is not likely to occur.

Therefore, contractors operating under the Standard Form Contract and other similarly worded contracts in Hong Kong should be aware that to succeed on an application for EOT they must show that actual delay to the work either has occurred, or is likely to occur by reason of Employer Risk Events. Architects should be aware that they should take account of the actual state of the work when considering whether to grant an EOT.

It is also worth noting that this decision does not contradict the Protocol recommendations. The Architect can still deal with an EOT application as close as possible to the alleged delay event, although the position may need to be reconsidered more than once as the works progress where that delay event continues. The Architect is still able (and indeed should) carry out a prospective assessment of EOT entitlement, but based on the actual state of the works that exist at the time. The result should be an analysis based on actual prospective delay, rather than theoretical prospective delay.

Cannonway wishes to thank Cameron Hassall and Clifford Chance LLP for contributing this article. All rights reserved to Clifford Chance. This article is not a substitute for detailed advice on specific transactions and problems and should not be taken as constituting legal advice on any issue discussed. Clifford Chance is a major international law firm with offices in business centres around the world.