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Prevention, Good Faith and an Extension of Time

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

In the June 2017 decision of Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 15, the Court of Appeal dealt with a challenge to a determination by an Adjudicator who had rejected a claim for liquidated damages.

The Court of Appeal found that the head contractor was not entitled to liquidated damages for periods of delay it had caused, even though the subcontractor had not made a timely claim for an extension of time.

The case is of particular interest because it deals with the uncertainty surrounding extension of time clauses and how the prevention principle applies to contracts which include a provision for the unilateral extension of time.

In what would be regarded as a new and significant development, the Court also said the obligation to extend time could be based on an implied duty of good faith.

The decision of the Court of Appeal has some important implications for both Principals and Contractors.

The Facts

The Appellant, Probuild Constructions (Aust) Pty Ltd (Probuild), was the Head Contractor for the renovation of the Tank Stream Hotel in Hunter Street, Sydney.

DDI was engaged by Probuild to carry out subcontract works related to the renovation.

The Subcontract:

  • provided that DDI could seek an extension of time for delays including delays caused by a variation to the Subcontract.
  • gave a discretionary power to Probuild to extend time even though DDI was not entitled to or had not claimed an extension of time.

The date of Practical Completion was 28 May 2015- 144 days late.

DDI made a payment claim for $2.1 m under the Building and Construction Industry Security of Payment Act 1999 (the Act) which included variation claims which DDI contended that Probuild directed it to undertake after the Date for Practical Completion.

Probuild provided a payment schedule and claimed a set off against the payment claim for liquidated damages in the sum of $2.2m.

Probuild argued that:

  • the liquidated damages claim was based on the failure by DDI to complete the works by the Date for Practical completion
  • DDI was not granted nor entitled to an extension of time.

DDI made an application for adjudication under the Act.

What did DDI argue in the Adjudication Application?

In the Adjudication Application, DDI’s arguments included that:

  • Probuild instructed DDI to depart from the Subcontract construction program
  • Probuild was clearly aware of the delays by reason of the revised construction programs it issued.
  • Probuild’s liquidated damages claim was unreasonable.
  • the liquidated damages claim was an invention of convenience.

What did the Adjudicator say?

The Adjudicator:

  • rejected the claim by Probuild for liquidated damages;
  • said that it was “totally inconsistent and unreasonable” for Probuild to be directing DDI to perform significant additional work under the Subcontract after the original Date for Practical Completion and then make a claim for liquidated damages; and
  • was not satisfied that Probuild was entitled to a liquidated damages claim for the total 144 days.

The challenge by Probuild

Probuild challenged the determination in the Supreme Court on the grounds that:

  • the determination was infected by a denial of procedural fairness; and
  • that the adjudicator rejected the liquidated damages claim on bases which neither party had:
    • notified to the other; or
    • contended for; and
    • which the adjudicator had not notified the parties.

Trial judge

The Trial Judge:

  • dismissed the Probuild summons;
  • held that there was no denial of procedural fairness; and
  • found that the adjudicator had “dealt with Probuild’s argument as made”.

The Appeal

Probuild appealed the decision of the Trial Judge on the following grounds:

  • that Trial Judge erred ;
  • the Adjudicator relied on the on the prevention principle to reject the liquidated damages claim; and
  • the Adjudicator had not notified the parties of his intention to rely on the prevention principle in breach of the fundamental requirement of natural justice.

Principle issue

The principle issue on appeal was:

  1. whether the adjudicator applied the prevention principle and, if so;
  2. whether in doing so the Adjudicator had denied Probuild procedural fairness.

The Court of Appeal dismissed the appeal.

What did the Court of Appeal say?

The Court of Appeal said that:

  • the essence of the prevention principle is that a party cannot insist on the performance of a contractual obligation by the other party if it itself is the cause of the other party’s non-performance;
  • Probuild had a discretionary power under the contract to extend the time for completion even if DDI was not entitled to or had not claimed an extension of time;
  • Probuild was obliged to exercise the discretionary extension of time power conferred by cl 41.9 honestly and fairly having regard to the underlying rationale of the prevention principle;
  • It was open to the Adjudicator to find that Probuild had failed to establish its liquidated damages claim; and
  • the Court of Appeal agreed with the adjudicator’s reasoning in rejecting the liquidated damages set-off and held that Probuild was obliged to exercise its discretionary power to extend time either:
    • honestly and fairly, having regard to the underlying rationale of the prevention principle; or
    • alternatively on the basis of an implied duty of good faith in exercising the discretion.

Some implications of the case

It is not uncommon for standard form contracts to include extension of time provisions for delays including delays by owners as well as a unilateral right allowing the owners representative to exercise a discretion to extend time even if there has been no claim for an extension of time by the contractor.

This unilateral right was considered in Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd1 followed in 620 Collins Street Pty Ltd v Abigroup Contractors Pty Ltd2 where the Courts held:

  • where the contractor failed to make a valid claim for an extension of time
  • the independent certifier was obliged to exercise the unilateral extension of time power for the period of delay caused by the owner.

This was because of an express contractual obligation for the independent certifier to act honestly and fairly in the administration of the contract.

The Probuild decision expands this principle in at least two ways:

  1. Probuild suggests that a party to a construction contract may now be obliged to exercise its discretion to extend time because of an implied duty of good faith.

Although the Court of Appeal did not expand on the extent of this duty, it seems clear from the decision that the Court will be prepared to find a duty to act in good faith in the exercise of contractual discretions.

The willingness by the Court to imply such a duty is a significant development in what has been an unsettled and developing area of law.

  1. The Court also said that the discretion is to be exercised having regard to the “underlying rationale” of the prevention principle that a party cannot rely on a breach of contract that it has caused.

Contrast with CMA Assets v John Holland

The result of Probuild can be contrasted with the result in CMA Assets Pty Ltd –v- John Holland Pty Ltd3 (CMA Assets) which dealt with similar issues but with a completely different outcome.

We dealt with CMA Assets in our April 2016 newsletter “Out of time, out of luck, its all in the timing.”

In CMA Assets; the Supreme Court of Western Australia found that John Holland was entitled to apply liquidated damages even though John Holland was the cause of the delayed completion CMA.

The key difference between CMA Assets and Probuild is that in CMA Assets:

  1. the discretionary power to grant EOTs was drafted to only be exercisable in the absolute discretion; and
  2. the contract of John Holland was amended to expressly exclude the prevention principle.

What DOES Probuild means for Owners?

For Owners; Probuild highlights the need to make sure that the discretionary clause is amended to:

  • provide that there is no requirement for the discretionary power to be exercised in favour of or for the benefit of the contractor and;
  • to otherwise exclude the operation of the prevention principle:

The Contract in Probuild did not contain these amendments.

Had these amendments been included the contract; the position of DDI would have been very different.

What DOES Probuild mean for contractors?

For contractors Probuild confirms:

  • The need to understand the effect of discretionary clauses to extend time at the time that contract terms are negotiated;
  • the importance of complying with the contractual requirements for claiming extensions of time especially if entering into contracts with a discretionary EOT clause which can only be exercised in favour the principal.

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1 [2002] NSWCA 211

2(No 2) [2006] VSC 491

3 [2015] WASC 217