31^st October 2018

Issues

The law does not allow an employer to recover liquidated damages where the delay is caused by the employer. This is the basic tenet of the Prevention Principle.

But what happens if the delay was caused by 2 or more effective cause of delay that have approximately equal causative potency, i.e. concurrent delay? Will the contractor be entitled to extension of time in the event the contractor and employer each caused one of the delaying events? Or will this depends on how the contract is worded?

Taking it a step further, can parties contract out of the prevention principle and/or effect of concurrent delays? Will such “contracting out” clause be valid or upheld by the Court?

The validity of such a clause is the central question in the Court of Appeal case of North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744 decided in July 2018, where Lord Justice Coulsen briefly revisited the laws on prevention principle and concurrent delays.

Exclusion of Concurrent Delay Clause

The clause that was called into question in this case is contained in the Extension of Time (“EOT”) clause itself:-

“2.25.1 If on receiving a notice and particulars under clause 2.24:

.1       any of the events which are stated to be a cause of delay is a Relevant Event; and

.2       completion of the Works or of any Section has been or is likely to be delayed thereby beyond the relevant Completion Date;

.3       and provided 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;

then, save where these Conditions expressly provide otherwise, the Employer shall give an extension of time by fixing such later date as the Completion Date for the Works or Section as he then estimates as to be fair and reasonable.”

 [Emphasis added]

Prevention Principle & Extension of Time Clauses

In determining the validity of the EOT clause that excluded concurrent delay caused by the Employer, Coulson LJ briefly revisited the laws on prevention principle and the origin of EOT clauses:-

“10. In the 19th Century, the courts concluded that it was wrong in principle for an employer to hold a contractor to a completion date, and a concomitant liability to pay liquidated damages, in circumstances where at least a part of the subsequent delay was caused by the employer. Thus, in Holme v Guppy (1838) 3 M&W 387, the defendant failed to give possession of the site for 4 weeks following execution of the contract. Parke B found that there were clear authorities to the effect that “if the party be prevented by the refusal of the other contracting party from completing the contract within the time limited he is not liable in law for the default…

12. As a result of these decisions, construction contracts began to incorporate extension of time clauses, which provided that, on the happening of certain events (which included what might generically be described as ‘acts of prevention’ on the part of the employer), the date for completion under the contract would be extended, so that liquidated damages would only be levied for the period after the expiry of the extended completion date. Such clauses were not, as is sometimes thought, designed to provide the contractor with excuses for delay, but rather to protect employers, by retaining their right both to a fixed (albeit extended) completion date and to deduct liquidated damages for any delay beyond that extended completion date.”

In a nutshell, EOT clauses are incorporated so that the Employer retains the right to extend time (for delays caused by the Employer) and to impose liquidated and ascertained damages (“LAD”) for delay beyond the extended completion date.

However, Coulson LJ noted that narrowly drawn EOT clauses may not serve the purposes envisaged by such clauses:-

“13. The problem was that many extension of time clauses tended to be narrowly drawn. Although that was again seen as a benefit to the employer, in fact it was not. That is graphically illustrated by the decision of the Court of Appeal in Peak v McKinney (1970) 1 BLR 111. In that case, McKinney were responsible for defective foundation piling. When they finally came back to carry out the necessary remedial work, it took just 6 weeks to complete. However, the overall delay to the works was 58 weeks because, prior to the remedial works being carried out, Liverpool Corporation had delayed in deciding what they should do and how the problem should be rectified. There was an extension of time provision but it was limited, and the only relevant sub-clause referred to delays as a result of “any other unavoidable circumstances”. The Court of Appeal held that the delay resulting from the Corporation’s indecision could not be said to have been an unavoidable circumstance. There was therefore no basis on which time could be extended as a result of the delays for which the Corporation were responsible and, in consequence, the Court found that time was set at large and no liquidated damages could be levied.”

Due to the effects of the prevention principle, EOT clauses progressively became more complex.

Coulson LJ also referred to the landmark case of Multiplex Constructions (UK) Limited v Honeywell Control Systems Limited (No.2) [2007] BLR 195 and highlighted the importance of that judgment on the prevention principle:-

“15. The decision of Jackson J in Multiplex is important because, at paragraph 56, he derived three propositions from the authorities which neatly summarise the ambit and scope of the prevention principle in the following terms:

“(i)     Actions by the employer which are perfectly legitimate under a construction contract may still be characterised as prevention, if those actions cause the delay beyond the contractual completion date.

(ii)     Acts of prevention by an employer do not set time at large, if the contract provides for an extension of time in respect of those events.

(iii)    Insofar as the extension of time clause is ambiguous, it should be construed in favour of the contractor.”

Concurrent Delay

As the appeal concerns the validity of a clause that excluded concurrent delays caused by the Contractor for the purposes of computing EOT, Coulson LJ also took the opportunity to note the following:-

“16. Although in one sense of tangential relevance to this appeal, it is also necessary to say something about concurrent delay. In Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm), Hamblen J (as he then was) said:

“A useful working definition of concurrent delay in this context is ‘a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency‘ – see the article Concurrent Delay by John Marrin QC (2002) 18(6) Const. L.J. 436.”

Like other judges dealing with concurrency, I gratefully adopt that definition.”

Whilst there appears to be “potential” differing opinions on the effect of such concurrent delays, Coulson LJ declined to resolve the differing opinions as his Lordship deems the same unnecessary for the disposal of the Appeal:-

“18. For reasons which will become apparent below, it is unnecessary to resolve this potential difference of opinion on this appeal. For present purposes, these authorities are relevant only of the possibility that a contractor may be entitled to an extension of time for the whole period of concurrent delay (even where the work could not have been completed any earlier than it actually was because of the contractor’s default), which has led employers to introduce the sort of bespoke amendment on which this appeal turns.”

The Appellant relied on 2 principle grounds to invalidate the EOT clause, i.e.:-

(i) The EOT / exclusion of concurrent delay clause offends the Prevention Principle;

(ii) There is an implied term that prevents the employer from recovering LAD for delays which the employer is responsible for.

The Court of Appeal rejected both grounds and found that the EOT / Exclusion of Concurrent Delay clause is valid and enforceable.

The Court of Appeal rejected the 1st ground (Prevention Principle) premised on 5 reasoning. The first 4 reasons are:-

(a) The prevention principle is not an overriding rule of public or legal policy;

(b) The prevention principle is not engaged here because there is no contravention of either principle (i) or (ii) identified in Multiplex;

(c) The prevention principle has no obvious connection with the separate issues that may arise from concurrent delay;

(d) Clause 2.25.1.3(b) was designed to do no more than reverse the result in Henry Boot and Walter Lilly. The contracts in those 2 cases allocate the risk of concurrent delay on the employer, clause 2.25.1.3(b) allocates the same risk on the contractor.

The first 4 reasonings are premised on the basis that the exclusion of concurrent delay clause is not connected to the prevention principle. However, Coulson LJ went further in the 5^th reason to state that even if the said clause is connected to the prevention principle, the said clause is an agreed terms and parties can contract out of some or all of the effects of prevention principle:-

“36.    The final reason for my rejection of Ground 1 is perhaps the most important of all and applies even if I was wrong, and clause 2.25.1.3(b) was somehow connected with the prevention principle. Clause 2.25.1.3(b) was an agreed term. There is no suggestion in the authorities noted above that the parties cannot contract out of some or all of the effects of the prevention principle: indeed, the contrary is plain. Salmon LJ’s judgment in Peak v McKinney, set out at paragraph 33 above (and in particular the passage in bold), expressly envisaged that, although it had not happened in that case, the parties could have drafted an extension of time provision which would operate in the employer’s favour, notwithstanding that the employer was to blame for the delay.”

As for the 2^nd ground, i.e. implied term to prevent recovery of LAD, Coulson LJ rejected the same premised on the following 5 reasonings:-

(a) In the absence of any suggestion of a penalty, the liquidated damages provision must be taken to be a valid and genuine pre-estimate of anticipated loss caused by the delay;

(b) The EOT provisions are inextricably linked to the LAD provisions and given that close linkage, there can be no basis for arguing for a result in respect of LAD that is different to the result in respect of EOT provision, which had been held valid;

(c) As clause 2.25.1.3(b) is a valid and effective clause, it expressly permit the employer to levy LAD for periods of concurrent delay. In those circumstances, any implied term which sought to take away that entitlement would be contrary to the express terms of the contract;

(d) Such an implied term would not satisfy the officious bystander test or the business efficacy test;

(e) The result of upholding the exclusion of concurrent delay for purposes of computing EOT is not in any way uncommercial or unreal.

Effect of Decision

In upholding parties’ bargain to contract out of the effect of concurrent delay in the EOT clause, the Court of Appeal gave full recognition to the parties’ autonomy to contract freely, even to the extent of contracting out of some or all of the effects of the prevention principle.

To this end, the English courts recognises that a construction contract is a detailed allocation of risk and reward and as such, parties must be bound by such agreement made.

“…A building contract is a detailed allocation of risk and reward. If the parties do not stipulate that a particular act of prevention triggers an entitlement to an extension of time, then there will be no implied term to assist the employer and the application of the prevention principle would mean that, on the happening of that event, time was set at large. But it is a completely different thing if the parties negotiate and agree an express provision which states that, on the happening of a particular type of prevention (on this hypothesis, one that causes a concurrent delay), the risk and responsibility rests with the contractor.”

Whilst this is an English case, it nevertheless has persuasive force in Malaysia.

As such, it is of paramount importance that construction contracts ought to be carefully and properly drafted if parties intend to use a bespoke contract.

Similarly, any modification to the standard forms of contract needs to be carefully considered, especially in relation to provisions such as the EOT clause, as failure to insert an act of prevention as a relevant event for EOT may result in time being set at large.

Conversely, if parties freely agree to exclude some or all of the effects of the prevention principle, the Court will hold parties to its bargain.

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