Delays in the Works – Rights of the Client

Delay in completing works – whether new construction, renovation or repair – is one of the most common sources of dispute in construction contracts (contratos de empreitada), with legal consequences that can range from simple compensation to termination of the contract. The applicable regime depends, to a large extent, on what has been written into the construction contract, so the way it is drafted has a direct impact on the protection of the client (dono de obra) in the event of delay. This article forms part of the Real Estate Law area of Araújo & Associados.

When the contractor is in default

Under Article 804 of the Civil Code, the contractor is deemed to be in default (mora) when, for a reason attributable to it, completion of the works, which is still possible, is not carried out within the due time. How that default arises depends, however, on whether or not the contract fixed a specific completion date: if the contract contains a specific date, the contractor falls into default automatically from that date, without need for any notice or formal demand, pursuant to Article 805(2)(a) of the Civil Code; if the contract does not fix a specific date, it is necessary to serve a formal demand on the contractor, in writing, requiring performance, pursuant to Article 805(1). This distinction is often decisive: without a completion date written into the contract, the client may not be entitled to any legal effect of the delay until it formally serves a demand on the contractor.

Delay penalty clause – what it is and how it works

It is common, and advisable, for construction contracts to include a penalty clause for the case of delay in completing the works, typically fixing an amount for each day or week of delay. This clause has the advantage of relieving the client of having to prove the specific loss suffered, it being sufficient to demonstrate the delay and the failure to meet the contractual deadline. It is important to distinguish two types of penalty clause, with different legal effects: the delay penalty clause (cláusula penal moratória), intended to penalise mere delay, which is cumulative with the right to require completion of the works; and the compensatory penalty clause (cláusula penal compensatória), intended to replace compensation in the event of definitive non-performance, which cannot be combined with a demand for performance of the main obligation. Whether a specific clause qualifies as a delay or compensatory clause depends on the interpretation of the contract, so it is important that the wording of the clause is clear as to its purpose.

The client’s rights in the event of delay

Faced with a delay attributable to the contractor, the client generally has more than one course of action available, which are not necessarily mutually exclusive:

• Require completion of the works, keeping the contract in force and claiming, cumulatively, the compensation provided for in the delay penalty clause, where one exists;
• Claim compensation for the losses actually suffered as a result of the delay, under the general rules of contractual liability, where there is no applicable penalty clause or where the losses exceed the amount provided for in it;
• Terminate the contract, in cases where the delay becomes definitive non-performance, in particular through a formal notice (interpelação admonitória) setting a reasonable additional period under pain of the contract being deemed definitively breached, with the right to compensation for the resulting damage.

The most appropriate course depends on the client’s specific interest and on the contractor’s actual ability to complete the works. Thus, if the priority is the effective completion of the construction, it will tend to make sense to keep the contract and demand performance; if the relationship of trust with the contractor has been compromised, termination may be the more appropriate course.

Judicial reduction of an excessive penalty clause

Where the amount fixed in the penalty clause proves manifestly excessive in the light of the specific circumstances, as, for example, by comparison with the total value of the contract or with the loss actually suffered, the law allows the court to reduce it equitably, pursuant to Article 812 of the Civil Code. This possibility of reduction may be invoked by the client or by the contractor, depending on the direction of the penalty clause in question, and is applied with some frequency by the courts in disputes over delays in works, especially where the accumulated amount of the daily or weekly penalty, over a prolonged delay, reaches a disproportionate sum.

Time limits applicable to compensation for delay

Unlike rights relating to construction defects, which are subject to the forfeiture periods laid down in Article 1224 of the Civil Code, described in the article Construction defects – guarantees and time limits for claims, the right to compensation arising from delay in completing the works is not subject to those forfeiture periods, following instead the general, longer limitation rules.

Delays in the works and other related matters

Delays in the works are frequently associated with other issues in the process of building or acquiring a property – such as construction defects detected during or after execution of the works, dealt with in the article Construction defects – guarantees and time limits for claims, or clauses of the preliminary contract relating to time limits and conditions precedent associated with completion of the construction, described in the article Preliminary contract of sale – what you need to know.

About Araújo & Associados

Established in 1980, with offices in Porto and Lisbon, Araújo & Associados supports clients in situations of delay and breach of construction contracts, providing legal advice in Portuguese, English, French, German and Spanish.

Frequently asked questions about delays in the works