The prevention principle – pitfalls for principals

The prevention principle is a long-established English common law doctrine. In practical terms, the principle dictates that a party to a contract may not enforce a contractual obligation against the other party where it has prevented that party from performing that obligation. This ensures that a party is not entitled to take advantage of its own default.

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In order to achieve commercial certainty in a construction contract context, the parties to a contract will agree on a fixed completion date of the construction works. Where completion is delayed beyond the completion date, the contractor is usually liable to pay liquidated damages (LDs) to the principal at the rate agreed in the contract. The prevention principle means that if the principal prevents the timely completion of the project in any way, it loses both the right to claim LDs from the contractor and the right to rely on the agreed completion date. This is the case unless an extension of time (EOT) is granted for a delay caused by:

  • an event stipulated in the description of events under the contract for which the contractual power to extend time is available; or
  • the principal.

The prevention principle may be triggered when the contract does not provide for an EOT when the principal (or someone for whom the principal is responsible) causes a delay.

This article discusses the various consequences to the principal if the prevention principle is upheld and the importance of clear drafting to prevent its unintended application.

Acts of prevention by the principal
The principal’s actions (or inactions) capable of triggering the prevention principle include:

  • lawful acts (such as increasing the scope of works without permitting further time for the completion of the contract); and
  • wrongful acts (such as failure to prepare the construction site or give timely access to or possession of the site, failure to obtain the required consents and approvals or failure to deliver machinery to be erected by the contractor).

The acts of parties for whom the principal may be responsible (such as the engineer to the contract, the project manager or the architect) are treated as the principal’s acts or omissions.

The principal’s risks
The principal is exposed to two key risks if the prevention principle is upheld.

First, the principal is unable to enforce the fixed date for completion in cases where completion is prevented by its action or inaction and where there is no mechanism in the contract to extend and reset the date for completion (or that mechanism becomes inoperable). As the date for completion is no longer the due date, the contractor would be released from its obligation to complete by a specific date.

This can have various consequences – in particular on the time for completion of a project. Effectively, time is rendered “at large”, which means that the express obligation to complete the works by the completion date is replaced by an implied common law obligation on the contractor to complete the works within a “reasonable time”, which is inherently uncertain. The principal’s right to LDs is lost as there is no fixed completion date.

Second, LDs for delay cannot be imposed once time is “at large” (and in the absence of provisions in the contract). While the principal still retains the right to claim common law damages for the contractor’s failure to complete within a reasonable time, these damages are more onerous to calculate and prove than straightforward LDs.

“Extensions of time” (EOTs) benefit both parties
The role of an EOT provision is to extend the time for completion. When the contractor is granted an EOT for a matter falling within the principal’s control, this has the effect of resetting the time for completion, which serves to keep the prevention principle at bay. It also preserves the principal’s right to LDs for delays that are the contractor’s responsibility.

As this right is regarded as being for the benefit of the principal, there must be an express power in the contract to grant the EOT for a principal’s delay. For this reason, EOT clauses are construed against the principal. So unless the EOT clause clearly covers principal-caused delays, it will be taken so as to exclude them.

The engineer to the contract or the principal’s representative is contractually-obliged to consider the EOT within the time stated in the contract (or, if there is no such provision, within a reasonable time). The principal’s representative’s powers to grant such EOT should also be expressed clearly in the contract.

From the contractor’s perspective, an EOT reduces the risk of the contractor being liable for LDs for delays in the construction works. But in some situations, the interests of the contractor will be better protected by forgoing an entitlement to an EOT. Instead, the contractor could argue that the prevention principle applies, thus giving it the opportunity to complete within a reasonable time, rather than completing by a revised fixed date.

Strict condition precedent clauses for granting of EOT
Time bar provisions are commonly used as conditions precedent in the enforcement of the contractual right to an EOT. Time bar provisions ensure that delay and cost are minimised, and also that records and correspondence justifying the EOT request can be gathered contemporaneously. This is important, considering the difficulty in attempting to prove causation of delay.

If the contractor fails to notify the principal within the specified time (where the contract provides for an EOT for a principal-caused delay and there is a strict notice requirement as a condition precedent), then failure by the contractor to comply would on its face disentitle it to an EOT. However, an alternative argument has been advanced that the EOT mechanism is disabled, thereby triggering the prevention principle and rendering time at large. The LDs regime would also be disabled.

As mentioned previously, EOT clauses are regarded as being for the principal’s benefit by retaining the right to LDs. However, by making such entitlement conditional on the strict notice requirements to be complied with by the contractor, the risk of principal-caused delay then appears to shift to the contractor.

In Turner Corp v Austotel Pty Ltd (1997) 13 BCL 378, a contractor argued that failure to satisfy the condition precedent would render the granting of an EOT impossible, thereby invoking the prevention principle and jeopardising the LDs regime. The Supreme Court of New South Wales firmly rejected the argument on the basis that the contractor remained liable for LDs while losing its entitlement to EOTs if it failed to comply with the strict notice requirements.

In Gaymark Investments Pty Ltd v Walter Construction Group Limited (1999) 16 BCL 449, the Supreme Court of the Northern Territory took the opposite approach. In Gaymark, the reserve power provision was deleted during the drafting stage. The contractor failed to comply with the mandatory EOT regime. In the absence of a discretionary EOT provision, there was no mechanism to address the principal-cased delay. As a consequence, the prevention principle was enlivened and the owner lost the right to LDs. This case has been criticised, given that the contractor was effectively entitled to rely on the prevention principle to avoid the effects of its own failure to give notice of a claim for additional time.

The more recent English decision of Multiplex Construction (UK) Limited v Honeywell Control Systems Limited (No.2) [2007] EWHC 447 posed a direct challenge to the legitimacy of the decision in Gaymark. In Multiplex, Jackson J acknowledged the role of the EOT notification regime and said that “contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose”. The Court in Multiplex remarked that a simple failure to comply with a notification condition precedent to an EOT would not set time at large. Jackson J also noted that Gaymark had been a matter of some debate, stating: “[I]f Gaymark is good law, then a contractor could disregard with impunity any provision making proper notice a condition precedent. At his option the contractor could set the time at large.”

Multiplex indicates a move towards the more robust application that mere non-compliance with notice requirements and time bars in EOT provisions alone will not enliven the prevention principle.

In New Zealand, it has not yet been decided whether a breach of the notification requirements may result in a disentitlement to an EOT. However, in H & H Contractors Ltd v Leighton Contractors Ltd & Or [2013] 1 NZHC 2225, the Court made it clear that a party making a claim against the other party must adopt a strict approach to timeliness and contractual procedures. This suggests that the courts may be more inclined to follow the Multiplex approach.

Importance of clear drafting
In an attempt to overcome the prevention principle, contracts commonly include two mechanisms to extend and reset the fixed completion date. The first mechanism provides for EOTs for principal-caused delays to be granted upon satisfaction of a condition precedent, usually the submission of the EOT claim within a defined time. For example, clause 20.1 of the FIDIC standard form of contract requires that the notice be “given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance”.

In case the first mechanism fails, those alert to the Gaymark principle may wish to include a reserve clause as a second provision where the completion date can be reset at any time and for any reason. For example, clause 35.3 of AS4300/1995 provides:

“Notwithstanding that the Contractor is not entitled to or has not claimed an EOT, the Superintendent may at any time and from time to time before the issue of the Final Certificate by notice in writing to the Contractor extend the time for Practical Completion for any reason.”

This clause is commonly referred to as a “reserve clause”. It serves to protect the principal’s entitlement to LDs in the situation where the contractor gives up on an EOT entitlement, or was not entitled to an EOT due to the delay in making an EOT claim. A reserve clause may be unattractive to those wishing to rely on a strict condition precedent and may not be so important if Multiplex is followed by New Zealand courts.

In the absence of clear authority in New Zealand, the parties should include clear terms in the contract that expressly exclude application of the prevention principle. Short of this, the parties need to clearly express their true intention in relation to which party takes the risk for principal-caused delay where the contractor fails to comply with the notice requirement of the EOT clause. The notice requirements should be clearly expressed and capable of being complied with by the contractor.

Conclusion
The operation of the prevention principle is complex and not without controversy. In Multiplex, Jackson J noted that Gaymark had been widely criticised and raised significant doubt as to whether the decision represented the law in England.

The approach that the New Zealand courts will adopt is unclear. It remains to be seen whether, in cases of principal-caused delay, failure to notify under an EOT clause will leave time at large. However, in H & H Contractors Ltd, it was clear that a party making a claim should take a strict approach to timeliness and adhere closely to the procedures set out in the contract. This suggests that the courts may be more inclined to follow the Multiplex approach. Regardless, in order to avoid the application of the prevention principle, principals and contractors need clear and unambiguous EOT provisions that address principal-caused delays and allocation of risk between the parties.

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