Does the prevention principle apply where the Employer has an absolute discretion to extend the time for completion?

The prevention principle

The prevention principle is frequently bandied about in the context of construction disputes. Put simply, the prevention principle has the effect that a party which prevents another from performing its contractual obligations cannot then require the party that was prevented to comply with the relevant obligation.

The prevention principle typically operates in the context of a construction contract to deprive an employer of the ability to recover liquidated damages from the contractor where the employer has prevented the contractor from completing the works by the contractual time for completion. In such circumstances (and absent any contracting out of the prevention principle) the time is set at large (i.e. the contractor is obliged to complete within a reasonable period of time) and there is no date from which liquidated damages can run.

The prevention principle in England and Australia

It is well established law in England that parties may choose to allocate the risk in a construction contract so that where a contractor fails to meet the notification requirements for an extension of time the prevention principle will not set time at large.[1]

It is common practice in construction contracts governed by the law of an Australian jurisdiction to include a discretionary power enabling the contract administrator/engineer to unilaterally grant extensions of time to the contractor. In his judgment in Multiplex v Honeywell, Jackson J (as he then was) considered and rejected the earlier Australian authority on the prevention principle in Gaymark Investments Pty Ltd & Anor v. Walter Construction Group Ltd,[2] where a standard contractual clause dealing with an extension of time had been amended to impose notification requirements on the contract. Despite the contractor’s failure to comply with notification requirements, the Australian courts had held that the contractor was permitted to rely on the prevention principle. This general position has subsequently been upheld by the Australian courts such that where clauses confer a power (but not an obligation) on the contract administrator/engineer to extend the time for completion, then depending on the precise language of the clause, obligations of reasonableness and good faith are generally implied having regard to the prevention principle.[3]

In England, the courts have taken a fairly nuanced approach to the application of the prevention principle. For instance, in North Midland Building Ltd v. Cyden Homes Ltd, the England and Wales Court of Appeal found that the prevention principle is not an overriding rule of public or legal policy and that a concurrent delay clause (or other suitable contractual mechanism) may have the effect of allowing the parties to contract out of the prevention principle. However, there is a strong presumption that unless there are express clearly worded terms, there is no implied term whereby parties intend for the employer to benefit from an act of prevention, with the effect that time would ordinarily be set at large.

Growthbuilt v. Modern Touch Marble & Granite

In Growthbuilt v. Modern Touch Marble & Granite, Growthbuilt Pty Ltd (Growthbuilt) as head contractor entered into four (4) subcontracts with Modern Touch Marble & Granite Pty Ltd (Modern) each containing a detailed extension of time clause which permitted Modern to submit extension of time claims for an “Act of Prevention” within a defined period after which a time bar applied.

Importantly, the clause also contained a unilateral discretionary power which empowered Growthbuilt to extend the contractual date for completion, but did not oblige it to do so with the exercise of such power being in the “absolute discretion” of Growthbuilt.

The court confirmed the long-standing Australian approach that where a clause contains a discretionary power to extend time, obligations of reasonableness and good faith may be implied having regard to the prevention principle (and the precise language used). However, the court distinguished these authorities from the present case because the unilateral power to grant an extension of time to the time for completion was expressed to be an “absolute discretion” for the benefit of Growthbuilt.

As the discretionary power was described as “absolute” and there were no fetters in the contract as to how that discretion could be used, the court held that the prevention principle did not arise and noted that such an obligation cannot be imposed on parties where so doing would be inconsistent with the express terms of the contract.

Implications

It is critical that contract drafters pay very close attention to the terms of an extension of time clause to ensure that the express terms of the contract actually reflect the intended contractual risk allocation.

Notwithstanding that the Australian courts will in appropriate circumstances imply an obligation to exercise a discretionary power to extend the time for completion in a reasonable/good faith manner, it is clear that they will not do so where that would be inconsistent with the agreed terms (which is also consistent with the position under English law) and that granting the contract administrator/engineer the ability to unilaterally extend the time for completion as an absolute discretion is likely (subject to the precise provisions of the contract) to deprive the contractor of the ability to rely on the prevention principle where the contract administrator/engineer declines to exercise that discretion in the contractor’s favour.

References:

Growthbuilt v. Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290

Multiplex Constructions (UK) Limited v. Honeywell Control Systems Ltd (No 2) [2007] EWHC 447

Gaymark Investments Pty Ltd & Anor v. Walter Construction Group Ltd [1999] NTSC 143

North Midland Building Ltd v. Cyden Homes Ltd [2018] EWCA Civ 1744

Peninsula Balmain Pty Ltd v. Abigroup Contractors Pty Ltd [2002] NSWCA 211

Probuild Constructions (Aust) Pty Ltd v. DDI Group Pty Ltd [2017] NSWCA 151

[1] Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] EWHC 447 (TCC); Steria Ltd v Sigma Wireless Communications Ltd [2008] B.L.R. 79.

[2] [1999] NTSC 143

[3] Peninsula Balmain Pty Ltd v. Abigroup Contractors Pty Ltd [2002] NSWCA 211; Probuild Constructions (Aust) Pty Ltd v. DDI Group Pty Ltd [2017] NSWCA 151.