Australia: Prevention principle restated: Contractors be aware - Owners, head contractors and local governments be wary

Last Updated: 17 August 2017
Article by Murray Thornhill

Introduction: the prevention principle in a nutshell

An owner who prevents a contractor from performing its contract may not make any claim for the non-performance.

This is known as the "prevention principle".

The prevention principle may be simple to recite in words but as the cases that have applied it over the past few decades show, it is not so simple in its application.

The most recent application of the prevention principle by a court of precedent was in in NSW Court of Appeal's decision in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151. As we shall see, the net effect of court decisions in this area highlight the need for careful contract drafting with the help of experienced construction lawyers, to avoid unintended consequences on either side of a liquidated damages claim.

How the prevention principle was applied in Probuild

In the case of Probuild:

  1. a plasterboard subcontractor sought adjudication of its final payment claim;
  2. the head contractor raised a contractual set-off for delayed completion of variation works directed after the subcontractor had practically completed its original scope;
  3. the subcontractor argued that the head contractor had prevented practical completion by the contractual date for completion by directing additional works after the original scope had been completed (on time);
  4. the head contractor argued that it was the subcontractor's failure to notify of the delay and to claim an extension of the time for completion that had caused it to be in breach rather than the head contractor's direction of additional works;
  5. the subcontractor counter-argued that the head contractor, knowing its direction of additional works after the contractual date for practical completion must inevitably lead to delay, should have exercised its unilateral power to extend the time for completion;
  6. the adjudicator agreed that the head contractor should have unilaterally extended the time for completion in these circumstances, finding its reliance on the delay caused by its own direction in these circumstances to have been unfair and unreasonable;
  7. the head contractor applied to the NSW Supreme Court to review and quash the adjudicator's decision to refuse to set off its claimed liquidated damages against the subcontractor's payment claim;
  8. the NSW Supreme Court refused the head contractor's application;
  9. the head contractor appealed against the NSW Supreme Court's refusal to overturn the adjudicator's rejection of the liquidated damages claim and found that both the adjudicator and the Court reviewing his decision were correct.

The duty of good faith implied in the Courts' application of the prevention principle

Both the Supreme Court and the Court of Appeal followed the reasoning in previous cases dealing with the application of the prevention principle to a contract that gives an owner, head contract or superintendent, a discretion to extend time unilaterally (that is, without a valid extension of time claim by the contractor. Those cases are:

  1. Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211;
  2. Spiers Earthworks Pty Ltd v Landtec Projects Corp Pty Ltd (No. 2) [2012] WASCA 53; and
  3. 620 Collins Street Pty Ltd v Abigroup Contractors Pty Ltd (No 2) [2006] VSC 491.

As the Court of Appeal observed in Probuild, each of these cases recognised an implied obligation in construction contracts, to exercise the owner/head contractor's unilateral power to extend the contractual time for completion reasonably and in good faith. This means that an owner or head contractor may lose its right to claim liquidated damages for delayed completion of works under a construction contract where:

  1. the works were delayed by an act of the owner (such as directing additional works after the contractor has completed the original scope within the original time for completion;
  2. the owner knows that its own act has prevented the contractor from completing its contractual scope (as varied by the owner) by the contractual date for completion;
  3. the owner has the power under the contract to extend the time for completion in order to accommodate the delay caused by its own act of prevention;
  4. in such circumstances, the owner, acting in good faith, should exercise this unilateral power to extend time;
  5. but the owner chooses not to extend time in good faith and instead, claims liquidated damages for the delay that it caused the contractor to incur.

Lessons for contractors

A contractor who is:

  1. defending a liquidated damages claim; or
  2. refused payment by an owner seeking to set off its liquidated damages claim, may defeat the owner's right to liquidated damages if:
    1. the owner has prevented the contractor from completing its contractual scope of works on time;
    2. the contract gives the owner to extend the time for completion of the contractor's works unilaterally;
    3. the owner, acting in good faith, should exercise that power; and
    4. the owner does not exercise that power.

Lessons for owners, head contractors and local government

It may be tempting for owners, head contractors and local governments to delete the unilateral power to extend the contractual time for completion altogether.

This would be a mistake, however, because of a precedent case called Gaymark Investments Pty Ltd v Walter Construction Group Ltd (1999) 16 BCL 449, [1999] NTSC 143. In that case, the owner was denied liquidated damages after having deleted all standard-form provisions for extensions of time and replaced them with a complex and onerous regime that would have been very difficult for the contractor to meet. The Court interpreted this to mean that the owner had chosen to give up its opportunity to rescue its liquidated damages entitlement through unilateral extensions of time and instead, allow that entitlement to be lost because of any act of prevention. So in that case, deleting the unilateral extension of time clause actually backfired on the owner.

Gaymark has been widely criticised but no court has ever overruled it. In these circumstances, we consider the better approach to overcoming the prevention principle to be very careful drafting, by an experienced construction lawyer, that expressly excludes any duty to take the contractor's interests into account, in good faith, when deciding, as an owner, head contractor or local government principal, whether or not to grant an extension of time unilaterally.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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