Lindahl holds regular contract law breakfasts at which we discuss interesting legal cases. One question we have recently highlighted is whether a penalty for delay should be adjusted if the client continues to use the building throughout the building contract period.
AB 04 and ABT 06, chapter 5, section 3 states that penalties for delay must be adjusted to a reasonable extent when the client prematurely uses the contract work for its intended purpose or if the client has obtained a not insignificant economic benefit from putting it to another use.
In renovation or maintenance contracts, it is not uncommon for the client to intend to use the building or facility throughout the building contract period. According to the wording of the provision, the penalty for delay should thereby be subject to adjustment.
Developments in case-law
The matter was examined in the Svea Court of Appeal judgment of 24 October 2014 in case T 10728-14. The contract related to renovation of facades at Stockholm Palace, which was used during the building contract period. The District Court that first heard the matter concluded that the renovation was mainly for cosmetic purposes and that the contract work could not be considered to have been put to use by or have benefited the client before the scaffolding had been removed. Therefore, no adjustment was appropriate. However, the Court of Appeal never examined the question of adjustment due to its being prematurely put to use because the contractor withdrew this objection.
In a judgment handed down on 22 February 2020, the matter was re-examined by the Göta Court of Appeal in Case T 504-19, i.e. whether the contract work was put to use and the penalty should therefore be adjusted. The contract work related to painting on terraced houses containing residential apartments with the apartments being inhabited throughout the building contract period. The Court of Appeal took into consideration the fact that the purpose of the contract work was to carry out technical maintenance and aesthetic improvement of the terraced houses and also that the contract work would be carried out with the residents remaining in the houses and that the delay must have caused major disruption to the residents of the area. The Court of Appeal therefore considered that the client could not be considered to have put the contract work to use for its intended purpose or have derived substantial benefit from putting it to another use, so the penalty was therefore not adjusted.
Developments in case law indicate that the adjustment provision cannot be appropriate in contract works in which the client continues to make use of the building throughout the building contract period. One possible explanation may be that the use of the building as such must be separated from the use to which the purpose of the contract works, such as painting of the facade, is put. Another possible approach is for the adjustment provision in Chapter 5, section 3 not to be considered applicable at all to contract works where the building is intended to be used throughout the building contract period. However, it is difficult to draw any general conclusions on the basis of the legal cases referred to above.
Tips for clients and contractors
There is still a degree of uncertainty as to what reasoning parties should adopt regarding adjustment provisions in contract works where the client maintains continuous operation or puts the building to use throughout the building contract period. Many clients and contractors are unaware of the risks associated with this lack of clarity.
It is not uncommon at the calculation stage, before submitting a tender, for contractors to take for granted that the adjustment provision limits the contractor’s exposure to risk in the event of a delay and thus assume that a penalty for delay will always be adjusted in such a case. However, current case law indicates that adjustment is not always appropriate and the contractor should therefore allow for this.
For precautionary reasons, the clients should also consider introducing a separate regulation of the adjustment clause in Chapter 5, section 3 to ensure that the penalty for delay is not automatically adjusted because the client intends to use the building during the building contract period.