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With no notice, a contractor can miss a right to extension

LAW

The prevention principle is designed to prevent a party from bene. ting from its own wrongdoing but, if a contract requires a notice of delay to be served by a contractor, things can be more complicated, writes Catriona Dodsworth

IT IS an established principle of law that a party to a contract cannot benefit from its own wrongdoing.

This so-called 'prevention principle' was outlined within the context of a liquidated damages claim in the 1970 case of Peak Construction (Liverpool) Limited v Mckinney Foundations.

In effect, the prevention principle means that a contract that entitles the client to recover liquidated damages for a contractor's delay should also entitle the contractor to an extension of time where a breach by the client has contributed to that delay.

This was, essentially, the position in the Peak Construction case. But the court accepted that this basic position could be altered by what the parties had agreed in the contract.

This is not unusual: construction contracts invariably contain widely drafted extension of time clauses. The client will usually be able to grant extensions of time while preserving its right to recover liquidated damages where no extension of time is due.

Sometimes the contractor is required by the contract to serve notices to claim an extension of time.

Many contracts provide that failure to give such notices within the specified timescales will mean that the contractor loses its right to an extension.

So what is the position when an employer causes a delay but the contractor fails to serve the required notice to claim an extension of time? Will the court allow the client to contract out of the prevention principle and recover liquidated damages if the contractor then fails to meet the completion date?

In the 2002 Scottish case of City Inn v Shepherd Construction, that is exactly what happened.

The court upheld the parties' right to contract out and the employer was entitled to recover liquidated damages even though the contractor was prevented from meeting the completion date by an instruction given by the employer's representative.

The contractor had lost its right to claim an extension of time for this delay by failing to serve the appropriate notices.

The background to this case was that City Inn had engaged Shepherd to construct a hotel in Bristol.

Shepherd was contractually required to give notice within 10 days of an architect's instruction if it considered that the instruction would cause delay to completion. If it failed to comply with these notice provisions, Shepherd would not be entitled to an extension of time.

In the event, Shepherd failed to give the requisite notices in response to an architect's instruction and then, not surprisingly, failed to complete the works by the completion date.

Shepherd challenged the clause removing its right to an extension of time. It argued that the amount of liquidated damages the client could claim for late completion was simply a penalty to be paid by Shepherd for its failure to give notice. It was not a genuine pre-estimate of the client's loss.

This argument was rejected by the court, which found that, under the terms of the contract, the contractor had a choice.

It could give a notice seeking an extension of time or it could undertake the architect's instruction without requesting an extension of time.

The availability of this option meant that failure to give notice could not amount to breach of contract. Even if it did amount to breach, it was not certain that this would result in payment of liquidated damages because it is possible that the contractor might still complete on time, despite the instruction.

The Scottish court was clearly prepared to accept that parties were free to regulate the circumstances under which the contractor would be entitled to an extension of time.

The prevention principle did not, in this case, stop the employer recovering liquidated damages despite the delay being caused by his instruction.

Contrast this approach with the 1999 Australian case of Gaymark Investments v Walter Construction Group. Here, the Supreme Court of the Northern Territory upheld an arbitrator's earlier finding that, despite what was agreed within the terms of the contract, the prevention principle applied.

The contractor's obligation was to complete within a reasonable time and the employer was not able to recover liquidated damages.

Gaymark had engaged Walter as main contractor for the construction of a hotel, retail and office complex in Darwin.

The contract required Walter to give notice within 14 days of any event giving rise to delay.

Thereafter Walter was required to submit particulars of its claim for an extension of time within 21 days.

If it did not do so the employer's agent would have no power to grant an extension of time.

Walter failed to serve the notice or the particulars required and disputes arose with Gaymark.

In reaching its decision the court looked in detail at the terms of the contract. In particular, it looked at the clause that denied the employer's representative the power to grant an extension of time if the contractor failed to meet the notice requirements.

The Australian court applied the prevention principle and held that the completion date in the contract no longer applied, the contractor had to complete within a reasonable time and the employer was not entitled to recover liquidated damages.

It remains to be seen how these cases will be interpreted by the English courts but I'd bet on the City Inn v Shepherd approach.

Key points

The prevention principle says that the party in breach cannot benefit from its own wrongdoing.

Parties can contract out of the prevention principle.

The parties can agree that notice of a claim is a condition precedent to securing an entitlement even in the event of a breach by the other party.