It Pays to Make Haste When a Delay Damages Provision Is in Place

Nov 23, 2016 Lars Altman

There is no time like the present when a contract for the construction of a vessel contains a delay damages provision. Generally, this provision will award a buyer a hefty credit for every day after an agreed date of completion that a vessel is not ready for delivery. However, the delay damages provision usually includes a caveat along the following lines: The builder is not responsible for any delay that is not solely due to its own actions. This caveat can be followed by a force majeure clause, which acts to further identify the types of events which would not contribute to delay for the purposes of calculating delay damages, like hurricanes, earthquakes, political revolutions, and strikes.

The delay damages clause is usually included when a buyer sets plans that require his or her newly built vessel to be ready by a certain date or for an event. While this provision provides protection for a buyer, it can create complications if it isn’t accounted for properly.

Imagine a contract clause that awards a buyer $2,500 of credit for every day after an agreed-upon date that a yacht is not ready for delivery. It is now 60 days after the contracted-for date of completion. In this scenario, the buyer had insisted on the delay damages clause because she had planned on cruising with her children and grandchildren a month after the contracted completion date. She is a very busy woman, as are her children, and they had all purposefully carved two weeks out of their schedules for this cruise. Understandably, you have an angry buyer that now believes she is owed a $150,000 reduction from the final purchase price. Also understandably, you now have a builder that is increasingly worried about the reduction in its profit on a project in which it has invested significant time,space, labor and material resources. With these competing interests and grievances present, the stage is set for an unpleasant encounter.

Here, a builder protecting its own interests will point to all change orders that modified the original contract. For instance, the builder informs the buyer that a change in the brand of a washer and dryer unit added two weeks of delay. Because this change from the original plan was due to the buyer, and not the builder, the builder asserts that the two weeks should not be included in the final delay damages calculation.

In return, a savvy buyer may argue that while it is possible that it took two weeks for the new washer and dryer to arrive, the builder could have been working on other parts of the yacht during this time. Perhaps the two parties come to an amicable agreement that a total of three days’ delay can be attributed to the change order. On the other hand, an assortment of similar disputes might lead the parties to engage in an arbitration proceeding, which could cost the parties even more than the amount in dispute. An attorneys’ fees clause in the contract might mitigate this, but that is a subject for a separate discussion.

The illustration above shows how a fair and useful provision between the parties can lead to future expenses, and thereby grief, if the parties are not careful in considering this provision. Where delay damages are on the line, or in any relationship involving the construction of a vessel, it is good practice for a builder to include to include the estimated delay in any change orders to a vessel’s construction. This way, the parties can review this delay, and the buyer can determine if a change is worth the amount of time added to the project. If a buyer feels that the estimated delay is inflated, she can discuss this fact with the builder, and the two can come to a fair estimate before relations have soured and six figures are on the line.

As a quick aside, it is also good practice to include increases in total weight and other factors relevant to a particular contract into change orders. Again, none of this is meant to deter two parties from using a delay damages provision, which can be a very fair and useful risk management tool. Just keep in mind that when delay damages are on the table, dot your I’s, cross your T’s, and time is of the essence.

*The information offered in this column is summary in nature and should not be considered a legal opinion.