Can you contract out of the prevention principle?

08 August 2018

In the Court of Appeal (CA) decision in North Midland Building Ltd v Cyden Homes Ltd [2018], the TCC judgment at first instance has been unanimously upheld. The CA considered the extent to which parties are able to decide where the risk will lie if concurrent delay arises.



Background

In summary:

  • In 2009, Cyden appointed North Midland to design and build a house and associated buildings under a JCT Design and Build 2005 contract with bespoke amendments (the Contract).
  • The amendments to the standard wording included the addition of a bespoke clause 2.25.1.3 stating that any award of an extension of time would be (amongst other things) subject to the following provisos – "…that (a) the Contractor has made reasonable and proper efforts to mitigate such delay; and (b) any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account…".
  • The works were delayed and a dispute arose about the extension of time due to North Midland. Proceedings were commenced in due course in relation to the effect of clause 2.25.1.3 in terms of concurrent events causing delay.

The Dispute

North Midland contended that:

  1. the effect of Clause 2.25.1.3(b) was to make time "at large" (see below) where the contractor had a claim to an extension of time for a delay caused by a Relevant Event where that delay was concurrent with another delay for which the contractor was responsible; and
  2. in such circumstances, the contractor must complete within a reasonable time and liquidated damages would be void.

North Midland's alternative argument (in relation to point 2 above) was that, regardless of the court's conclusion on clause 2.25.1.3(b), the liability on the part of the contractor to pay liquidated damages "fell away" (by which was meant: was invalid or became ineffective) if there was an act of prevention (ie an act causing delay for which Cyden was responsible).

This argument was made with reference to "the prevention principle": if delay to the planned completion date has been caused by the employer, then the contractor cannot be bound to that completion date. Additionally, in this scenario, if the contract does not provide for that delay, then the original completion date is no longer effective and time is "at large", which means that the contractor must complete within a reasonable time.

At first instance, the Technology and Construction Court (TCC) refused to make the declarations sought by North Midlands, stating that the prevention principle did not arise here as the case was purely concerned with the correct construction of clause 2.25.1.3(b).

Mr Justice Fraser confirmed that the meaning of the clause was "crystal clear" - "… The parties agreed that … if the contractor were responsible for a delaying event which caused delay at the same time as, or during, that caused by a Relevant Event, then the delay caused by the Relevant Event "shall not be taken into account" when assessing the extension of time…".

In short therefore, the TCC held that the effect of clause 2.25.1.3(b) was to allocate the risk of concurrent delay to the contractor.

Court of Appeal

On appeal, North Midland set out three grounds, as detailed below. Lord Justice Coulson delivered the Court of Appeal's unanimous decision.

Ground 1:

Was clause 2.25.1.3(b) contrary to an overarching principle of law (the prevention principle) and therefore of no effect?

Court of Appeal's finding on Ground 1:

North Midland's contention was rejected by the CA which held that the prevention principle is not an overriding rule of public or legal policy and that in any event, it has no clear connection with the issues that may arise from concurrent delay.

Agreeing with Mr Justice Fraser, the CA found the clause to be unambiguous - ie where there was concurrent delay, the liability for that would rest with North Midland, and that period would not be taken into account in the calculation of any extension of time. In deciding to include clause 2.25.1.3(b), the parties had effectively contracted out of the effect of the prevention principle.

Ground 2:

Even if clause 2.25.1.3(b) was effective, there was an implied term which would prevent Cyden levying liquidated damages

This was not an argument that had been raised in the TCC.

North Midland put this contention like this: it would be bizarre if Cyden could recover liquidated damages for a period of delay for which it was responsible. It was a matter of causation ie that in such circumstances, it could not be said that the liquidated damages flowed from a delay for which North Midland was responsible.

Court of Appeal's finding on Ground 2:

The CA rejected this argument. The express terms of the contract relating to the entitlement (or not) to extensions of time were inextricably linked to the liquidated damages provisions. The term argued for by North Midland would contradict these express terms of the Contract, and so could not be implied into the Contract.

The CA also stated that the effect of clause 2.25.1.3(b) was not in any way uncommercial or unreal.

Ground 3:

The precise ambit of concurrent delay

This issue was raised by Cyden who argued that if North Midland was correct on Grounds 1 and 2, Cyden could still defeat the argument based on the prevention principle as (Cyden argued) where there is concurrent delay, it could not be said that the employer had actually delayed the contractor at all.

As North Midland was not successful on Grounds 1 and 2, the CA did not need to address this issue.

Commentary

The CA has confirmed its agreement with the unequivocal judgment at first instance in the TCC.

Subject to clear wording, this means that the common practice of seeking to avoid the possible effect of the prevention principle using bespoke amendments (such as clause 2.25.1.3(b) in this case) does in principle achieve its intended purpose.

Being in a position where time is "at large" is obviously undesirable from the employer's perspective and this can be avoided through careful drafting at the outset.

If you have finalised contracts in place:

  1. Check the provisions on delay and damages to see where that leaves you commercially if concurrent delay arises.
  2. Don't panic if there is no wording in your contract to exclude the effect of the prevention principle, as true concurrency is rare. Cited with approval by the CA here, the standard definition of concurrent delay is that by John Marrin QC[1]: "a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency'. The chances of demonstrating "approximately equal causative potency" are not high. In any event, knowing your contractual position on concurrency, or even spotting potential uncertainty arising from the contract wording (should true concurrency arise) places you in a stronger position to take steps to minimise your risk.

For those in the construction industry, it is to be noted (perhaps with some irony) that the CA's view was that "Under the JCT standard forms (ie without the bespoke amendments added here), a contractor's entitlement to an extension of time in circumstances of concurrent delay is not entirely free from doubt." The discussion will continue.

If you have any queries on this or related topics, please contact Michael O'Shea.

Footnotes:

[1] John Marrin QC, Concurrent Delay (18 Const LJ No. 6 436, 2002)


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