A “Modern Touch” Approach to the Prevention Principle and Liquidated Damages

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

On 26 March 2021, the Supreme Court of New South Wales gave judgment about a contract dispute between the contractor (Growthbuilt) and a subcontractor (Modern Touch Marble & Granite Pty Ltd) (Modern) arising from delays in relation to four subcontracts.

Growthbuilt terminated each of the subcontracts claiming that Modern had failed to complete the subcontract works on time and claimed that the subcontractor was required to pay liquidated damages under the contract.

The Court was asked to consider two issues:

• whether the prevention principle (i.e., default on the part of the head contractor) operated to prevent it recovering liquidated damages from the subcontractor;
• whether the liquidated damages clause in the subcontract was unenforceable as a penalty.

THE CONTRACT- KEY TERMS

The contract provided that:

• an extension of time for delay could be claimed by the subcontractor where the head contractor was responsible for any delay;
• the subcontractor to make any claim for an extension of time within 5 days of the act of prevention; and
• the Subcontractor will not be entitled to any EOT to the Date for Completion for any other reason, event or circumstance.

In addition, the Contract provided that the contractor may in its absolute discretion at any time and for any reason, without prejudice to its rights or the Subcontractor’s obligations under this Subcontract, extend the Date for Completion, but the contractor is under no obligation to extend, or to consider whether it should extend, the Date for Completion.

WHAT HAPPENED?

Modern had not claimed any extensions of time under the subcontracts.

Modern argued that:

• the head contractor was prevented from claiming liquidated damages because it was obliged to extend the dates for completion under the contract; and
• the liquidated damages claimed were a penalty and were not enforceable.

FINDINGS- WHETHER THE PREVENTION PRINCIPLE OPERATED

The essence of the prevention principle is that a party cannot require another party to perform a contractual obligation where that party itself has caused the other party’s non‑performance.

In the context of a construction contract, the prevention principle may preclude recovery of liquidated damages for delay caused by the principal contractor.

The Court approved the decision in Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151 that the:

: … operation of the prevention principle can be modified or excluded by contract.”

The Court’s findings were:

• A contractor who fails to exercise its right under the contract to seek an extension of time may negate the effect of preventing contract by the principal so that the prevention principle does not operate to set time at large.
• Whether it will depend on the proper construction of the contract itself.
• There was no room for a finding of a reasonableness or good faith obligation on Growthbuilt in deciding whether to rely on the last part of the clause that provides that the head contractor is under no obligation to extend time for completion or consider whether to extend time.
• Growthbuilt had an absolute discretion to extend the dates for completion for any reason, however Growthbuilt was under no obligation to exercise that discretion, or even consider doing so.
• Modern’s right to extensions to the Dates for Completion due to prevention arose through compliance with the extension of time procedures in the contract.
• The wording of the particular subcontracts modified the application of the prevention principle, so that the subcontractor was precluded from arguing that delays caused by Growthbuilt obliged it to extend the dates for completion, or that time for performance under the subcontracts had been set at large in answer to the liquidated damages claim.

WHETHER THE LIQUIDATED DAMAGES PROVISION OF THE SUBCONTRACT WAS A PENALTY?

With respect to the issue of liquidated damages; one of the subcontracts involved subcontract works for the supply and installation of kitchen and laundry benchtops and splashbacks, cladding to walls and works to the pool, for a lump sum of $60,500.

The Date for Commencement was February 2016 and the Date for Completion was April 2016. The contract provided that the subcontractor was liable to pay liquidated damages at the rate of $3,500 per calendar day.

On 30 August 2016 Growthbuilt emailed Modern stating that it hereby terminates each of the four subcontracts because it failed to complete the subcontract works in accordance with the Dates for Completion despite numerous allowances and notices of completion having been provided.

FINDINGS IN RELATION TO LIQUIDATED DAMAGES

In dealing with the question of whether the liquidated damages provisions were a penalty under the Contact; the Court said that:

• The evidentiary onus of proving that a subcontract is a penalty rests with the party alleged to be in breach.
• The key question to be determined is whether the subcontractor has adduced sufficient evidence of “proved circumstances” to satisfy it, on the balance of probabilities, that the sum stipulated by clause 12 should be characterised as “extravagant, out of all proportion or unconscionable” and operated as a penalty.
• Whether a particular provision is punitive or penal in character, is not whether the sum stipulated would be considered to be merely disproportionate compared to the likely damage, but whether it has been demonstrated to be extravagant or unconscionably disproportionate.
• It was not open to infer from the direct evidence as a whole, that $3,500 per calendar day was out of all proportion, extravagant or unconscionably disproportionate to the greatest loss that the head contractor could conceivably have suffered in the event of delay, or that it was purely punitive in character.
• The Court noted that the trade works on the Putney project to be completed sequentially, and it may be expected that at the time the subcontract was entered into, the contractor anticipated that a delay by the subcontractor would have caused delay to other trades and to the completion of the Putney project building works overall.
• Furthermore, a commercial builder, such as the head contractor, also had a commercial interest in the Putney project being completed as soon as possible and on time.
• The longer it was involved in the project, the more cost there would be to it, even if it was only in the value of the loss of opportunity to undertake other work using the resources it had deployed on the Putney project.
• Bearing that in mind, the Court found that it was objectively reasonable for the contractor to have considered the possibility of delay and provide for a contractual remedy in its subcontract with the subcontractor, based on a daily rate whereby the total payment increased with the inconvenience and cost to its business from the ongoing delay.
• The Court also noted that the subcontractor agreed that the amount of liquidated damages payable was a genuine pre-estimate of the head contractor’s damages.

While this agreement is not conclusive, it was something which was not irrelevant in the context of the dispute, where the subcontractor had already signed up to carry out further works under two further subcontracts with the head contractor for other sites.

OUTCOME

The Court was satisfied that the subcontractor was liable to pay liquidated damages under clause 12 of the subcontract for the period following the dates for completion, up to and including 30 August 2016.

The Court entered judgment in favour of the contractor against the subcontractor company in the sum of $1,126,000.00, and judgment in favour of the contractor against the second defendant, Mr Khouri, the subcontractor’s sole director in the sum of $886,395.60 (pursuant to a personal guarantee given by the director).

KEY TAKE-AWAYS

While the Court sided with the head contractor based on the wording of the contract which by which Growthbuilt had an absolute discretion to extend the dates for completion for any reason, it was under no obligation to exercise that discretion, or even consider doing so.

To that extent, the decision may be limited based on its facts.

However, the decision does contain important principles.

Firstly, the case highlights the importance for contractors to assess the risk of delay in contract delivery and possible exposure to a claim for liquidated damages.

Secondly, where delay occurs and the head contractor has an absolute discretion to extend the date for completion or is under no obligation or even an implied obligation to exercise that discretion, or even consider in doing so, the prevention principle will be modified.

This means that in the absence of a general provision giving a contractor an absolute discretion to extend the date for completion, there is an implied obligation on the contractor to act reasonably and in good faith in exercising its contractual power provided this is consistent with the terms of the relevant contract.

Thirdly, in assessing damages which may arise from delays, the onus of proving that the subcontract is a penalty rests with the party resisting a claim for damages. They must establish that the amount was extravagant or unconscionably disproportionate.

The case also highlights the need for contracting parties not to gloss over clauses of the contract such as liquidated damages provisions without understanding the risks associated with those clauses before a contract is signed.

[ A “modern touch” approach to the prevention principle and liquidated damages]

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