In transformation projects the greater part of disputes arises from the failure to complete the new building by the agreed date. Where the contractor does not comply with the delivery timetable, a right to claim delay damages may arise in order to make good the losses suffered by the owners. In practice these losses most often take the form of rental income that could not be earned, expenses borne for temporary accommodation, or a penalty clause inserted into the contract.
However, not every delay renders the contractor liable. For damages to be spoken of, it is required that the delay originate from the contractor’s own sphere, that it not rest on a justified ground, and that the delivery period have been clearly exceeded.
Below we address, in a manner directed at practice, the conditions on which a claim for delay damages in urban transformation rests, which losses may be claimed, the cases in which a claim for damages will go unanswered, and how the litigation process runs.
The Concept of the Delivery Period in Urban Transformation
In transformation projects, the delivery period denotes the span of time within which the contractor must complete the structure and leave the independent units to the actual use of the owners. As a rule this period is expressly agreed in the construction contract in return for flats or in the urban transformation contract, and it constitutes one of the fundamental measures of the contractor’s liability. Where the period is not observed, a claim for delay damages or for a penalty clause arises, provided that its conditions are satisfied.
Agreeing the Delivery Period in the Contract
In urban transformation contracts the delivery period is generally written out expressly in days or months. In fixing that period, the scale of the project, the technical characteristics of the construction and the administrative steps that must be completed are taken into account. In practice the start of the period is most often tied to the moment at which the building permit is obtained or the demolition is completed.
- The period written in the contract: The period agreed between the parties is taken as the basis, and that provision is binding on the parties.
- The distinction between the construction period and the delivery date: In some texts not only the period envisaged for the works but also a definite delivery date is separately indicated.
What Happens if the Contract Provides No Period?
Some urban transformation contracts may make no reference at all to a delivery period. In such a case the period is determined by the criterion of a reasonable period according to the circumstances of the particular case. In making that assessment the courts take into consideration the size of the project, the number of floors, its technical characteristics and the average construction periods achieved in comparable works.
- The reasonable period criterion: It expresses, within the framework of the particular features of the case, the span of time within which the construction could be completed under ordinary conditions.
- Data relating to the project and the structure: The scale of the structure, the condition of the ground, the course of the permit procedures and the technical difficulties encountered are assessed in establishing the reasonable period.
How Is the Starting Point of the Period Determined?
Since establishing whether or not there has been a delay depends on the moment at which the delivery period began, this point is of decisive importance. In practice the start date may be expressly indicated in the contract. Where there is no such provision, as a rule the date that makes it possible actually to embark on the construction is taken as the basis.
The date of the permit: This is the starting point most frequently relied upon. In the great majority of contracts the period begins to run upon the obtaining of the building permit.
From What Moment Is a Delay Deemed to Have Arisen?
In transformation projects, delay arises as a rule where the delivery period in the contract has expired but the structure has not been left to the owners. Nevertheless, in examining the existence of a delay, the grounds for extension of time contained in the contract, the practice of provisional delivery and the actual delivery date are assessed together.
The matters that are decisive in that assessment are as follows:
- The period having expired: If the independent units have not been left to the owners although the span of time envisaged for delivery has come to an end, a delay is deemed to have arisen.
- Taking grounds for extension into account: Where there are grounds for extension envisaged in the contract, such as force majeure, administrative obstacles or disruptions originating from the owners, the periods corresponding to them are deducted from the calculation of the delay.
- The distinction between provisional delivery and actual delivery: The structure becoming usable and the independent unit beginning to be used in fact by the owner is most often regarded as the moment of delivery. Delivery transactions completed only on paper, by contrast, do not in every case eliminate the delay.
- Calculation of the period of delay: It is arrived at by taking as the basis the interval between the date on which delivery ought to have been made and the actual delivery date. The calculation both of delay damages and of the penalty clause is built upon that period.
Under What Conditions May Delay Damages Be Claimed?
In transformation projects, delivery having been delayed is not on its own sufficient for a claim for damages to be made. The arising of liability depends on the delay originating from the contractor’s own sphere, on the delivery period in the contract being exceeded, and on the owner having suffered a loss on that account. In addition, whether grounds for extension envisaged in the contract or facts constituting force majeure exist in the particular case is also separately examined.
Delay Arising from the Fault of the Contractor
If the failure to complete the construction on time proceeds from the contractor’s technical, financial or organisational inadequacy, damages may be claimed. The inability to find financing, the failure to secure the necessary labour or materials, working otherwise than in accordance with the project, or the failure to organise the work properly may be cited as examples of such inadequacies and give rise to the contractor’s liability.
By contrast, in cases where there are causes lying outside the contractor — such as the acts of official authorities, the decisions of judicial bodies or obstacles originating from the owners — a claim for damages may not always be accepted.
Exceeding the Delivery Period in the Contract
If the delivery date has been expressly indicated in the contract and that date has been allowed to pass without a justified ground, the legal basis for a claim for damages is established. The period is most often tied to the obtaining of the building permit or to a particular calendar day.
For that reason, in establishing a delay the starting point in the contract and the provision relating to the period are examined first.
The Owner Having Suffered a Loss
For damages, it is required that the owner have suffered a concrete loss. In practice that loss most often consists of economic losses arising in the form of rental income that could not be earned, rent for temporary housing, removal and storage costs, or interest on a loan taken out.
In determining the amount of the loss the courts as a rule take comparable rents and the duration of the delay as the basis. The existence and the amount of the loss are established, where necessary, by way of an examination by a court-appointed expert.
A Penalty Clause or Delay Damages Clause in the Contract
If the parties have agreed a penalty clause to be paid in the event of delay — for example an amount equivalent to the monthly rent — that sum may be claimed without proof of the loss being separately required. That said, where the penalty clause agreed remains excessively high, a reduction by the court is possible.
Even where the contract contains no such clause, the actual loss in fact suffered by the owner may be claimed under the general provisions.
Important warning: Failing to enter a reservation of rights, to the effect that the rights arising from the delay are reserved, when the immovable is taken into possession may put claims for damages at risk.
Cases in Which Delay Damages Cannot Be Claimed
Delivery having been delayed does not in every case give rise to liability in damages. Where the delay does not originate from the contractor, where situations regarded in the contract as a justified ground have materialised, or where the owner has caused the disruption by their own conduct, it may not be possible to make a claim for damages. For that reason, in every file the cause of the delay and the question to whom liability may be attributed are examined separately.
Force Majeure and Unavoidable Events
Events that cannot be foreseen in advance and that develop beyond the control of the parties, such as an earthquake, flood, fire or epidemic disease, are regarded as force majeure. Where the construction activity stops or slows down on account of such events, the contractor’s liability may not arise.
Long-term administrative prohibitions, decisions of a general character suspending construction and similar extraordinary situations may also eliminate a claim for damages.
Suspensions Arising from an Administrative Act or a Court Decision
Where administrative and judicial developments such as municipal acts, the annulment of the permit, an amendment made to the zoning plan, a stay of execution decision or a court judgment have caused the construction to stop or to slow down, the resulting delay is most often not attributed to the fault of the contractor.
In such cases the time that elapses may be assessed within the scope of the grounds for extension of time regulated in the contract.
Disruptions Caused by the Owners
The owners’ failure to discharge their own obligations may likewise eliminate a claim for damages. The failure to vacate the immovable on time, the failure to give the required signatures, the failure to draw up a power of attorney, or the inability to reach decisions relating to the project are examples of this situation.
Since in such cases liability for the delay cannot be attributed to the contractor, it may not be possible to make a claim for damages.
Grounds for Extension Expressly Regulated in the Contract
In urban transformation contracts it is often expressly agreed that the delivery period will be extended if particular situations materialise. Unfavourable weather conditions, official permit procedures taking longer than expected, problems experienced in infrastructure, or extraordinary disruptions arising in the supply of materials may be listed in contracts as grounds for extension.
Where these situations materialise, damages cannot be claimed for a period equal to the extension envisaged in the contract.
The Owner Beginning to Use the Immovable in Fact
If the independent unit has become fit for use and the owner has begun in fact to enjoy the immovable, an allegation of delay may not meet with a response in every case. Where the structure is in fact in a usable condition, the mere fact that the formal delivery transaction has not been completed may not suffice on its own to justify a claim for damages.
How Are Delay Damages Calculated?
In transformation projects the amount of damages is, as a rule, arrived at by reference to the duration of the delay and the economic losses suffered by the owner over that period. In making the calculation, the provisions of the contract, the characteristics of the immovable, comparable rents in the area and the length of the delay are weighed together. The methods most frequently relied upon in practice are calculation on the basis of the rent, application of the penalty clause in the contract, and establishing the loss by reference to market value.
Calculation on the Basis of the Monthly Rent
The most widespread method is to take as the measure the rental income of which the owner has been deprived during the period of delay. On this approach a monthly amount is established by reference to comparable rents in the area in which the immovable is located, and the figure arrived at is multiplied by the period of delay to reach the total damages.
In establishing the rent the courts as a rule have recourse to an examination by a court-appointed expert; in that examination the location of the immovable, its surface area, its purpose of use and the general state of the market are weighed.
Calculation on the Basis of the Delay Penalty in the Contract
If the parties have agreed a particular sum as a penalty clause to be paid in the event of delay, the calculation is made primarily on the basis of that clause. If a particular monthly rent figure or a fixed sum has been agreed in the contract, that amount is multiplied by the period of delay and the damages are arrived at in this way.
Where the penalty clause agreed is manifestly excessive, however, it is possible for the court to make a reduction as equity requires.
Recourse to the Courts and the Course of the Proceedings
A claim for delay damages is most often brought before the courts where no settlement can be reached between the parties. Before an action is brought, recourse must be had to mandatory mediation, the dispute must be taken to the court with subject-matter and territorial jurisdiction, and both the delay and the amount of the loss must be established by evidence. In the proceedings an examination by a court-appointed expert is as a rule carried out; the length of the delay and the amount of the damages are established by technical data.
The Mandatory Mediation Stage
Since claims for delay damages arising from an urban transformation contract bear the character of a monetary claim, they fall within the scope of mandatory mediation. For that reason having applied for mediation is regarded as a procedural requirement.
If the parties do not reach agreement at the mediation meetings, an action may be brought together with the final record drawn up. Where the process has not been completed, the action may be rejected on procedural grounds.
Courts with Subject-Matter and Territorial Jurisdiction
Subject-matter jurisdiction is determined according to the nature of the dispute. In practice these actions are most often heard before the Civil Court of First Instance. If one of the parties is a merchant and the dispute bears the character of a commercial matter, the Commercial Court of First Instance may have subject-matter jurisdiction.
As regards territorial jurisdiction, the following courts may arise:
- The court of the place agreed in the contract as having territorial jurisdiction
- The court of the respondent’s domicile
Statute of Limitations
Since claims for delay damages bear as a rule the character of a claim arising from a contract, the general period under the statute of limitations of 10 years applies to them.
Evidence and the Burden of Proof
The claimant must prove both the existence of the delay and the loss suffered. The evidence most frequently relied upon in this connection is as follows:
- The construction contract in return for flats or the urban transformation contract
- Examinations by court-appointed experts and technical reports
- The dates relating to the building permit and the occupancy permit
- Lease agreements and documents showing comparable rents
- Records relating to delivery and correspondence between the parties
In most files the courts have recourse to an examination by a court-appointed expert in order to determine the duration of the delay and the amount of the loss.
Interim Injunction and Securing the Claim
Where in particular there is a risk relating to the contractor’s financial position, the claimant party may request an interim injunction or a preliminary attachment in order to secure its claim.
Such requests are advanced in order to reduce the possibility that the claim awarded at the end of the proceedings cannot be collected.
Duration of the Proceedings and Appellate Remedies
How long actions for delay damages will take varies according to the nature of the file and the number of expert examinations to be carried out; in practice an outcome can most often be reached within 1–2 years.
It is possible to have recourse against the court’s judgment to the remedies of appeal and thereafter appeal on points of law. These applications may also delay the judgment becoming final.
Independent Legal Assessment
In disputes over delay damages the element that determines the outcome is most often not the amount of the damages but the ability to establish by documents on what date the delay began and to whom it may be attributed. The date of the permit, the demolition record, the building inspection records and the correspondence between the parties form the backbone of the action in this respect. Where these documents are not assembled from the outset, claims that are essentially well founded may be weakened at the expert examination stage.
Another problem frequently encountered in practice is the immovable being taken into possession without any reservation being entered. This conduct, which gives rise to a serious risk as regards rights to damages, is of a kind that can be prevented by a simple note of reservation of rights entered at the moment of delivery.
In drawing up a road map in a concrete file the following headings should be prioritised:
- Fixing the starting point of the delivery period by reference to the text of the contract and the permit records
- Reviewing the scope of the extension of time clauses in the contract and whether they have materialised
- Where there is a penalty clause, assessing whether separate proof of the loss is required
- Having comparable rents researched before the action is brought so that the amount claimed is set realistically
- Examining whether a reservation of rights was entered at delivery and its effect on the claim
- Making the mediation application within the time limit so that the procedural requirement is fully satisfied
Independent Legal provides advisory and litigation services at every stage of the process, from examining the contract to collecting the claim, in delay disputes arising from construction contracts in return for flats and from urban transformation contracts.