Discretionary EOT clauses: how much discretion do you really have?

Andrew McCormack.

Andrew McCormack.

In a recent decision (1) which will be of interest to those undertaking construction and infrastructure projects, the New South Wales (NSW) Court of Appeal decided that a Principal must exercise its discretion to grant an extension of time (EOT) to the date for practical completion, even where the EOT claim was submitted out of time.

Background

Probuild subcontracted DDI Group to perform renovation works under an amended AS4303-1995 contract.

The adjudicator refused Probuild’s claim to apply liquidated damages (LDs) for a 144-day delay to practical completion (which arose from further works being performed pursuant to Probuild’s directions) on the basis that it would be “totally inconsistent and unreasonable”(2) to allow this claim when the delay was caused by Probuild’s own conduct.

The key issue

Probuild argued it was denied procedural fairness in the adjudication because the adjudicator invoked the ‘prevention principle’ without first notifying the parties of this intention.

In deciding that Probuild had not suffered any procedural unfairness(3), the Court helpfully discussed how the prevention principle interacts with a Principal’s/Superintendent’s discretionary power to grant an EOT.

What is the prevention principle?

The ‘prevention principle’ applies when one party causes delay to the other party’s contractual performance(4).

In a construction contract, this can result in the contractual date for practical completion being “set at large” (i.e. the obligation becomes to complete the work in a reasonable period of time).

LDs will not accrue (as there is no certain date by which completion must be achieved) unless the contract provides a mechanism (e.g. an EOT clause) for setting a new (extended) date for practical completion(5).

The decision in Probuild

The Court found no breach of natural justice and concluded that the adjudicator had sufficiently responded to the parties’ submissions(6), which were underscored by opposing views as to whether the Principal’s discretion was fettered by the operation of the prevention principle.

The Court held that Probuild was obliged to act fairly and honestly and was therefore required to exercise its discretion to grant an EOT in these circumstances, because of (7):

  • the underlying rationale of the prevention principle; and/or
  • an implied duty of good faith.

Probuild may extend the Principle from Peninsula Balmain

In the case of Peninsula Balmain(8), the NSW Court of Appeal held that the discretion to grant an EOT must be exercised fairly and impartially particularly where, as was the case in Peninsula Balmain, the contract expressly requires the Principal/Superintendent to act in that manner(9).

Interestingly, the Court’s judgement in Probuild does not refer to any express contractual provision that qualified Probuild’s discretion in this manner.

Whilst the decision follows the principle in Peninsula Balmain, the finding of an implied duty of good faith as an alternate basis for the Court’s conclusion goes further than the Peninsula Balmain position.

Can the application of Peninsula Balmain be avoided?

Peninsula Balmain was not followed in Hervey Bay(10).

In that case, the Court found that there was no obligation for the Superintendent to allow a late EOT claim(11) because the discretionary power was expressly to be exercised “in [the Superintendent’s] absolute discretion and without being under any obligation to do so”(12).

Similarly, in CMA v John Holland(13), John Holland (as Head Contractor) was entitled to reject a late EOT claim (and was not required to exercise its discretion to grant an EOT), even though its preventing conduct caused the delay giving rise to the EOT claim.

The Court found no scope to apply Peninsula Balmain as the subcontract “weighed heavily in favour of John Holland”(14).

The subcontract’s discretionary EOT procedure strongly indicated that the discretion was exercisable only for the benefit of John Holland.

In particular:

  • clause 10.13 expressly excluded “any principle of law or equity (including the (‘prevention principal’) [sic]” which rendered the Date for Practical Completion unenforceable(15);
  • under clause 10.14, “John Holland may at any time, and for any reason whatever…extend the time for Practical Completion”(16); and
  • clause 10.15 allowed John Holland to unilaterally grant an EOT in its absolute discretion “without affecting any rights or attracting any obligations’’(17) in contrast with standard form clauses (and similar to the clause in Probuild) which describe the discretion as exercisable “at any time…for any reason”(18).

The single judge in the Western Australia Supreme Court hearing the case found that no duty of good faith could be implied into the particular contract(19).

Some practical tips

1. It is in both parties’ interests to have a well-drafted EOT clause

This will provide certainty and clarifies delay-risk allocation.

It can assist in avoiding costly disputes as to the Date for Practical Completion.

2. Where there is an express term requiring the Principal to act “honestly and fairly”, the Court will require the discretion to be exercised in favour of granting an EOT to the Contractor where it is fair to do so

Even without this term, the Probuild decision indicates that the Court can still imply a duty of good faith which may lead to the same result, as long as that is not inconsistent with the express terms of the contract(20).

3. Seek through clear drafting to preserve the Principal’s discretion

The clauses in John Holland were sufficient to exclude the application of the prevention principle and any implied duty of good faith(21).

However, it must be acknowledged that the effect of such a clause can be to enable a Principal to claim LDs for a delay caused by its own preventative conduct (in apparent contradiction of the prevention principle).

It therefore remains to be seen whether, in future cases, an appellate Court might yet be willing to find an implied duty of good faith which requires the Principal to exercise its discretion to grant an EOT, even where the contract contains clear drafting of the sort used in John Holland.

The authors would like to acknowledge the assistance of Magan Goh in preparing this article.

 

For more information on Corrs Chambers Westgarth’s legal services click here.

References
1.  Probuild Constructions v DDI Group Pty Ltd [2017] NSWCA 151.
2.  Probuild Constructions v DDI Group Pty Ltd [2016] NSWSC 462 [22].
3.  Probuild Constructions v DDI Group Pty Ltd [2017] NSWCA 151 [131].
4.  SMK Cabinets v Hili Modern Electrics Pty Ltd [1984] VR 391, 395.
5.  Spiers Earthworks Pty Ltd v Landtec Projects Corporation Pty Ltd (No 2) [2012] WASCA 53 [49].
6.  Probuild Constructions v DDI Group Pty Ltd [2017] NSWCA 151 [140].
7.  Ibid [128].
8.  Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 270.
9.  See for example clause 23 in the unamended AS2124-1992.
10. Hervey Bay (JV) Pty Ltd v Civil Mining and Constructions Pty Ltd [2008] QSC 58.
11. Ibid [39]-[40].
12. Ibid [16].
13. CMA Assets Pty Ltd v John Holland [No 6] [2015] WASC 217.
14. Ibid [272].
15. Ibid [266].
16. Ibid [268], [429].
17. Ibid [430].
18. See for example, clause 35.5 of AS2124-1992 or clause 34.3 of AS4902-2000.
19. CMA Assets Pty Ltd v John Holland [No 6] [2015] WASC 217 [432].
20. Probuild Constructions v DDI Group Pty Ltd [2017] NSWCA 151 [128].
21. For example, providing that “any principle of law or equity (including the ‘prevention principle’) which might render the Date for Practical Completion unenforceable and render liquidated damages penal shall not apply”.

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