We reported on one aspect of Alstom v YDRML in Update 1201 where we discussed the nature of the subcontract.
In this Update we discuss a second aspect of the case. Does a head contractor have a legal obligation to provide to its subcontractors full details of its works program? Such an obligation presents a dilemma for a head contractor. Ongoing disclosure of looming project delays to subcontractors might result in a rash of extension of time (“EOT”) claims by subcontractors when the head contractor is not yet sure that the superintendent for the project will grant an EOT to the head contractor.
A brief recap of the facts of Alstom follows.
Playford B power station was to be refurbished by Alstom under a turnkey head contract with Flinders Power Partnership (“FPP”). The head contract sum was $148.5 million.
The refurbishment contract involved bringing the 1950’s power station up to date. A substantial component of the works was the installation of electrical, control and instrumentation systems in order to allow remote operation of the power station. Alstom subcontracted these works to Yokogawa and Downer EDI (“YDRML”). The subcontract was for $33.88 million.
Programming of the refurbishment of operating commercial premises is always a challenge and in the case of an operational power station the challenge is significant.
Time under the Head Contract
The Head Contract between Alstom and FPP required Alstom to achieve various Milestones by set dates, subject to any EOT being granted to Alstom by FPP. Progress payments were then due to Alstom from FPP when each Milestone was reached. In turn, FPP had to show its financiers that each Milestone had been achieved in order to obtain funding for the progress payment to Alstom. For example, independent verification of the Mechanical Completion of Parts A and B of the works was the first Milestone which would allow a progress payment to pass down the chain.
Alstom sought to pass on to YDRML each of its own Milestone obligations by specifying in the subcontract that YDRML had to reach each Milestone three days early to ensure that Alstom was paid by FPP before it had to pay YDRML.
In a project of this size and complexity, there are many thousands of activities to be scheduled. A works program is produced to assist in determining the order and timing of the activities, and to enable forward planning. Generally, an activity “A” will have “predecessors” – that is one or more separate activities that must be started or perhaps even completed before activity “A” can commence. For example, if activity “A” is the pouring of a concrete footing beam, one predecessor activity would be the excavation or formwork for the beam.
Over the last two decades, software has been developed to assist in developing works programs. The agreed software for the Alstom contract was Primavera P3.
Like other programming software, Primavera has the ability to dynamically recalculate the critical path and work out the effect on a Milestone date of any delay that arises during the works. Properly used, the software is then able to predict the effect of the delay on cash flow, resources, order dates and delivery times so that even a complex project can be managed efficiently.
Most of the standard form contracts used in the construction industry date from a period when it was common to produce works programs in paper form. Historically, many head contractors provide subcontractors with extracts from the overall works program showing only the activities relevant to that particular subcontractor.
What went wrong
Due to various unexpected difficulties the Playford B refurbishment ran into long delay. Each party blamed the other for the delay. Alstom initially blamed FPP for defective coal mills, but subsequently blamed YDRML for defective control systems.
For much of the project, Alstom refused to provide to YDRML the electronic form of its Primavera program. Instead, Alstom gave YDRML extracts from its works program showing only selected portions Alstom thought were relevant to YDRML’s activities.
In the main part, the extracts omitted the time relationship links between activities and their predecessors. At the trial, it emerged that Alstom’s own works program was inadequate. The Milestone dates had been entered as fixed dates and did not alter when delays occurred.
The Court’s findings
The Court noted that there were “thousands” of activities that YDRML was unable to properly schedule without knowing the predecessors to them or when Alstom would make available the particular work area.
The Court noted three legal principles that resulted in an obligation on Alstom to provide sufficient information to YDRML to enable it to program and perform its works:
- Unless the contract expressly says otherwise, there is an implied duty to co-operate resting on both parties;
- Every commercial contract includes an implied obligation to act in good faith;
- Unless the contract expressly says otherwise, if an act by one party prevents the innocent party from performing its obligations under the contract, then the innocent party will be deemed to have performed the contract.
The obligation to cooperate and the obligation to act in good faith extended to a requirement to provide to YDRML the full electronic version of Alstom’s Primavera program, including any updated programs produced during the course of the works. Alstom’s failure to do so had prevented YDRML from performing its obligations under the contract and accordingly YDRML was deemed to have fulfilled its obligations.
Critically for head contractors, providing all delay information to subcontractors during the course of the project, might effectively invite subcontractors to ask for EOTs when the head contractor is not yet confident that the completion date will be extended by the superintendent. On the other hand, in a commercial environment of tight margins, there can be a tendency for head contractors to maximise their returns by not providing such information to subcontractors.
Most contracts require that an attempt is made to assess the impact of delays at the time that the party first becomes aware of the delaying event. In terms of fairness, this is understandable as otherwise, if entitlements to EOTs are retrospectively assessed at the end of the project, any subsequent acceleration of the works can be masked and remain unrewarded.
The three legal principles set out above may not apply in every contract, but the Alstom case marks a shift in legal thinking as to the extent of the implied obligation to act in good faith and to cooperate. In Alstom the obligations extended to require provision of an electronic version of the works program. Implied obligations can be overturned by express contract provisions.
Preventing a party from performing its contract has long been found to result in deemed performance. What sets Alstom apart from previous cases is the finding that in a project requiring a high degree of coordination, a failure to provide a works program in electronic form can be an act of prevention.