The prevention principle: a new approach needed by Australian courts

The prevention principle is a legal maxim which provides that a party cannot take advantage of its own wrong in enforcing a contract. In construction contracts, in the absence of an appropriate EOT regime, the prevention principle can be enlivened so that a principal on a construction project cannot hold a contractor to a completion date if an act or omission of the principal makes that completion date difficult or impossible to comply with. The principal cannot recover liquidated damages where it itself caused or contributed to the delay.

A properly drafted EOT regime can avoid activating the prevention principle because time will be extended to allow for the principal’s delay, which preserves both the EOT and liquidated damages regimes.

However, time is rarely extended for principal-caused delays in practice. If the pre-conditions for EOT cannot be complied with and the principal (or superintendent) has not exercised their unilateral or reserve powers to extend time, there is, in our view, no effective mechanism to extend time. Therefore, the parties should be left with their ordinary remedies - general damages and time being set at large for completion.

Australian jurisprudence on the prevention principle over the past 40 years has focussed on whether the contract contains the capacity for relief from prevention, rather than whether relief has been granted. This has had the result that principals now regularly recover liquidated damages in respect of periods of delay that they have caused.

It is time for a rethink, and for the law to more properly reflect the principles which underpin construction contracts so that fairer outcomes can be achieved, and disputes diminished. This will require contractors putting forward these arguments in project correspondence and in disputes, should they arise. The courts, meanwhile, should shift their focus back to whether time has in fact been extended for principal-caused delays. Given the decisions of intermediate appellate courts in Australia, it will fall to the High Court to return the application of the prevention principle to its original foundations.

The origins of the prevention principle

The prevention principle has formed part of English law for centuries. The leading case of modern times is the 1970 case of Peak Construction (Liverpool) Ltd (Peak) v McKinney Foundations Ltd (McKinney). In that case delays by the principal, the Liverpool Corporation (Liverpool), in providing instructions to Peak, the contractor, delayed the works. Liverpool deducted liquidated damages from Peak who sought to recover these amounts, and others, from McKinney, its piling subcontractor. The EOT clause in the contract did not provide relief for Liverpool’s delay.

The court found that the prevention principle operated to ensure that Liverpool did not benefit from its own delay. Time was set at large with McKinney’s obligation becoming one to finish the works within a reasonable period of time. The judges held that the EOT clause did not cover the delay caused by the Liverpool – and that if it did, the extension would have to be granted. 

It is clear at this point that, in the absence of both the contract containing the ability to extend time for the principal’s delay and that extension in fact being granted, the prevention principle will be activated where there is a delay caused by the principal.

However, since the early 1980s, courts in Australia have consistently taken the approach that if a contract contains a mechanism which can meet the prevention caused by the principal, then that is sufficient to exclude the operation of the prevention principle regardless of whether that relief is granted. The thinking has been that if the contractor had the right to claim an EOT but failed to do so, it should not be allowed to resort to the prevention principle to avoid liquidated damages.

The problem

This reasoning has led to construction contracts where:

• the procedural requirements for an entitlement to an EOT have become burdensome and difficult to comply with, with non-compliance usually expressly prohibiting the contractor from receiving the extension; and
• the superintendent’s reserve power to use its discretion to grant an EOT being drafted in such a way to make it difficult to exercise, and the contractor having no right to call for its exercise.

For example, it is now common to see EOT regimes that require multiple notices for one event with detailed information and regular updates required. Time frames for notices are typically tight – in some cases within 48 hours of the event. Any non-compliance disentitles the contractor from receiving an EOT. Compliance with these regimes is unreasonable and impractical. It is as if these excessively onerous EOT regimes are designed by principals with the desired outcome being that the contractor misses a notice or time bar and thereby its entitlement to an EOT.

At the same time, principals on major projects often appoint a large team of lawyers to administer the contract: their job is to identify and rely on every non-compliance by the contractor, no matter how trivial. Contractors commonly find themselves supplementing their delivery teams with legal teams as well, yet still find themselves in positions where a substantial delay has been caused by the principal but they are prevented from being granted an EOT by a small, technical non-compliance with the notice requirements, which are a precondition to their entitlement to an EOT. Some conditions precedent may be impossible to comply with, such as demonstrating actual delay at the time of submitting a required notice.

The idea that the superintendent’s reserve power can offer an alternative route to meeting and addressing the principal’s delay now often rarely holds true in practice. This power is often drafted in such a way to ensure the contractor is not granted an EOT. As a result, the contractor is required to pay liquidated damages for principal-caused delay, and will also make no recovery for its delay costs.

How has this been applied by the courts?

The 2021 judgment in Growthbuilt Pty Ltd (Growthbuilt) and Modern Touch Marble & Granite Pty Ltd (Modern) is consistent with this line of authority.

The contract in this case allowed Growthbuilt to exercise the reserve power in its “absolute discretion” and stated that Growthbuilt was under “no obligation” to extend. The judge interpreted the wording of the clause to confer a discretionary power to extend without any obligation being imposed on Growthbuilt to exercise that power.  Her Honour went on to say that any alternative interpretation would be inconsistent with the express terms of the contract itself.

This reasoning is consistent with the judgment in an earlier case, 2008’s Hervey Bay (JV) Pty Ltd v Civil Mining and Constructions Pty Ltd – but is, in our view, incorrect. In both cases, the court found that the prevention principle was not enlivened, as the reserve power contained in the contract provided a contractual mechanism for relief from the principal’s delay. But this reasoning leads to absurd outcomes: the drafting of the unconstrained unilateral power to extend time creates an illusion of capacity for relief, when in practical effect the “absolute discretion”, unconstrained by a duty to act fairly and reasonably, means that the EOT mechanism is not always effective. That cuts across the very purpose of the prevention principle, and allows the principal to insist on the performance of a contractual obligation when it itself is the cause of the non-performance – while taking the benefit of liquidated damages brought about by its own delay.

What happens now?

The pivotal question should be: what should be the effect of the principal or superintendent failing to exercise the reserve power?

A proper reading of the old authorities and a correct application of the prevention principle would result in the principal’s right to liquidated damages being lost where the EOT regime has failed to result in the contractor actually receiving an EOT to address the principal’s delay, because the contract contains no effective EOT mechanism. The principal would then be left to seek general damages. It should not be the case that a technical non-compliance with an EOT notice requirement ends up double penalising the contractor by way of imposition of liquidated damages and no right to recovery of delay costs.

The current jurisprudence concerning the prevention principle undermines the vice it seeks to protect. The industry would benefit from a situation where the reserve power provided real world relief to the contractor. Such a position would more properly reflect the basis and essence of the prevention principle – that a party cannot benefit from the harm it causes.   

Only the High Court can address this matter. That can only be done if contractors start to contend that a failure to exercise the reserve power in the case of principal-caused delay has the result that, in light of there being no effective EOT mechanism, the prevention principle is activated, time is set at large and the right to liquidated damages is lost.

Co-written by Tom Saggio of Pinsent Masons