LET THE PUNISHMENT FIT THE CRIME

Construction legal advicePrevention

On most construction projects there is usually a term implied to the effect that the client will not hinder or prevent the contractor from carrying out the work in accordance with the terms of the contract. This is sometimes referred to as the prevention principle and was an issue in the UK case of Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970). Defective work was discovered before practical completion had been achieved. The client was responsible for long delays due its failure to approve a scheme of remedial works. A dispute arose concerning the contractors entitlement to an extension of time. Certain essential drafting skills seemed to have been missing when the contract was drawn up in that there was no specific provision included for the granting of an extension of time when the contractor is delayed by the client.

The Court of Appeal considered this to be a fatal shortcoming. Where an act of prevention such as a delay in approving a remedial scheme causes delay it is essential that the contract includes a provision for the granting of an extension of time. In the event of a lack of such a provision the completion date falls away and the contractor is obliged to finish in a reasonable time. As a result of the completion date no longer applying the client is unable to apply liquidated damages even though the contractor may be responsible for some element of the delay to completion. Following this decision contract drafters have usually been careful to include in the extension of time clause delays by the client his employees and agents as a ground for the granting of more time to the contractor for completion.

Harsh Contract Terms

As time has gone by contract terms seem to have become harsher. Contract drafters are regularly including clauses which often unfairly financially penalise contractors and subcontractors for failing to comply with some element of procedure laid down in the contract. A favourite term which is often inserted into construction contracts is one which makes the giving of a written notice by the contractor or subcontractor a condition precedent to the right to an extension of time. There is often a time scale within which the notice must be given failing which the contractor or subcontractor will lose any right it may otherwise have to secure an extension of time. Such a clause came into the spotlight in the Australian case of Gaymark Investments Pty Ltd v Walter Construction Group Ltd. in respect of a contract for the construction of a hotel retail and office complex. The contract included a clause under which the contractor became entitled to an extension of time if delays were caused by any act or omission on the part of the Principal the Superintendent or any agent or employees of the Principal. A written notice from the contractor was required to be sent to the Superintendent within 14 days of the delay arising. The clause went on to stipulate that the contractor would only be entitled to extensions of time if it complied with the notice provisions. An amount of $6,500 per day was set out in the contract for liquidated damages. There occurred an 88 day over run due to delays caused by the Principal for which the contractor would normally have been entitled to an award of an extension of time. Unfortunately the contractor had failed to comply with the notice provisions and it was therefore argued on behalf of the Principal that the contractor lost its entitlement.

Claim and Counterclaim

The dispute was referred to arbitration and comprised a claim from the contractor in the sum of $4,900.341 for variations, delays, acceleration and disruption and a counterclaim in the sum of $565,500 in respect of liquidated damages. The arbitrator found in the sum of $1,545,059 in favour of the contractor and dismissed the counterclaim. He considered that the requirement that the delay notice be a condition precedent, applying the principle of prevention, rendered ineffective the clause under which delays by the Principal gave rise to an extension of time entitlement. This left the Principal in the position of having committed an act of prevention with no contractual procedure for dealing with the matter. The liquidated damages clause would therefore no longer apply as there was no contractual mechanism for granting extensions of time The Principal appealed against the award on the grounds that the arbitrator had got his legal interpretation wrong. It was the courts view that it would be unmeritorious to award the Principal liquidated damages where the delays were of its own making and upheld the arbitrator's award.

Second Case

A second Australian case Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd also dealt with a contractor's entitlement to an extension of time where the contractor had been delayed by an act of prevention. Under the terms of the contract the contractor was obliged to serve a written notice on the Superintendent within 28 days after the delay occurs. The contractor failed to serve a notice in respect of delays caused by variations which the court regarded as acts of prevention. It was held that the Superintendent should have awarded extensions of time even though no delay notice had been served. The contract did not expressly state that the delay notice was a condition president but helps reinforce the principle that extension of time clauses are as much for the benefit of clients as contractors and subcontractor's.

Long Term Consequences

Both these cases were heard in Australia but there is no reason to suppose that the decisions would have been any different if heard in the UK or any other country with a common law legal system. Any clause which requires a contractor to serve a delay notice as a condition precedent to the right to an extension of time will be something of an albatross as far as the client is concerned. The principal of prevention when applied following delays caused by the client will allow contractors to escape liability for liquidated damages where contractors own delays also occur. The advice to contractors where this type of clause appears in a contract will therefore be to avoid serving notices if delays are caused by the client as the provision of notice will have the effect of keeping the liquidated damages clause in play.

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