Time Bar Clauses and Prevention Principles
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KEYWORDS: |
NEC3, Clause 61.3, Notice, Liquidated Damages. |
One of the Contractor’s main obligations under NEC3 is to do the work so that Completion is on or before the Completion Date (NEC3 Clause 30.1). The situation considered in this paper is an event which is a breach of contract by the Employer which delays Completion so that the Contractor does not complete by the Completion Date.
NEC3 provides the Contractor with a contractual remedy for breaches of contract by the Employer through Section 6. The contractual machinery of compensation events allows the Completion Date to be changed to take into account the delay caused by the breach of contract (NEC3 Clause 65.3 or 65.4 depending on the Main Option).
NEC3 Clause 61.3 states that the Contractor is not entitled to a change in the Completion Date if he does not notify a compensation event within eight weeks of becoming aware of the event. If the Contractor fails to give the required notice then the contractual machinery does not operate and the Completion Date is not changed, unless the Employer waives the requirement. The Contractor will then be in default of the main obligation to complete on or before the Completion Date.
The issue then is whether the Employer is entitled to damages for the Contractor’s default in not completing on or before the Completion Date. The difficulty is that the default arises because of the combination of two events:
It is necessary to distinguish the Contractor’s right to have the Completion Date changed and the Employer’s right to damages. The legal analysis must concentrate on the nature and legal effect of the Contractor’s failure to give the notice specified under the contract.
It is assumed in this paper that Clause 61.3 satisfies the requirements for a clause to be condition precedent to entitlement (In Bremer Handelgessellschaft mbH v Vanden Avenne Izegem PVBA [1978] 2LLR109 HL Lord Wilberforce said that there were three factors that determined whether a notice condition was a condition precedent (i) the form of the clause itself; (ii) the relation of the clause to the contract as a whole; and (iii) general considerations of law.).
The first matter to consider is whether the absence of notice deprives the Contractor of any remedy for the Employer’s breach of contract.
The principle of construction is that clear words are necessary to rebut the presumption that a contracting party does not intend to abandon any remedies for breach of the contract arising by operation of law Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] (1976)1BLR73 HL, although Lord Diplock described it as a principle of law. In that case it was decided that there was a presumption that the parties to a building contract do not intended to exclude or curtail the right of set-off. It was held that a contractor has a right of set off in relation to a subcontractor unless expressly restricted or withdrawn by the terms of contract.
That presumption may be rebutted by the terms of the contract.
The application of the principle is seen in the recent case of Chattan Developments Limited v Reigill Civil Engineering Contractors Limited [2007] EWHC 305 (TCC). Ramsey J held that whether the parties had excluded the right of damages for delay was a matter of interpretation of the contract and that in a written contract the necessary clear intention could usually be derived from the terms as a whole. He gave as an example Temloc Ltd v Errill Properties Ltd [1987] 39BLR34 CA where an express term to exclude unliquidated damages was not necessary, since the terms of the contract showed that the parties had intended to apply liquidated damages even if “£nil”. He held that in the case before him of an oral contract the facts were that the parties had intended to exclude all damages in their discussions so there was no need for written express reference to exclusion of damages.
By similar reasoning NEC3 operates to exclude the Contractor’s remedy of unliquidated damages for breach of contract by the Employer. NEC3 Clause 63.4 expressly provides that the contractual rights are the only rights in respect of compensation events. The compensation events are listed in NEC3 Clause 60.1 and include all breaches of contract by the Employer. In Strachan & Henshaw Ltd v Stein Industrie (UK) Ltd [1998] 87BLR52 it was held that Clause 44 under an MF/1 form was effective to make the contractual remedies exhaustive of the parties rights, obligations and liabilities. It follows that NEC3 Clause 63.4 is effective as an exhaustive remedy clause.
The reasoning may be extended to the situation where the Contractor itself excludes contractual remedies for breach of contract by failing to give the required notice. If the intention of the contracting parties to exclude the remedy of damages for breach of contract is enforced when based on agreement at formation of contract, then so should a provision in which the parties agree that the right to compensation is left to the discretion of the injured party when the breach occurs.
On the basis that NEC3 Clause 63.4 is effective as an exhaustive remedy clause, then the practical effect of Clause 61.3 is that the Contractor’s remedy for breach of contract is excluded only if he does not give the necessary notice within the specified period after the Contractor becomes aware of the event. Clause 61.3 does not exclude the Employer’s liability altogether but simply limits the liability to contractual compensation, which in turn is circumscribed by the notice requirements.
As demonstrated above the failure of the Contractor to give notice means that he deprives himself of a remedy for the Employer’s breach of contract. The second matter to consider is whether the failure of the Contractor to give notice means that the Contractor has also lost the opportunity to avoid liability under the terms of the contract by similar reasoning to that in Mackay v Dick [1881] 6AC251 HL.
In Mackay v Dick a contract for the sale of a digging machine was subject to a condition precedent that it should be shown to be capable of excavating a given quantity of clay in a fixed time at a defined site. The rights and obligations of the parties were each defined by the test. If the machine failed the test, the buyer was entitled to return the digger within two months. The buyer escaped liability for the price. If on the other hand the test demonstrated the capability of the machine then the seller was entitled to the price and the buyer was obliged to pay.
The buyer did not co-operate in carrying out the contractual test by providing the necessary facilities for the test but purported to reject the digger nevertheless. The seller sued for the price and obtained judgment.
There are two principles stated in Mackay v Dick one by Lord Blackburn and the other by Lord Watson, but both lead to the same result that the seller was entitled to be paid the price and the buyer must keep the machine.
The basis of Lord Blackburn’s proposition of law was that there was an implied term of cooperation and the buyer was in breach of that obligation. That proposition of law has been recognised and applied in many cases (For example Chandler Bros Ltd v Boswell [1936] 3AllER179, Mona Oil Equipment and Supply Company Ltd v Rhodesia Railways Ltd [1949] 83LLRep178, Percy Bilton v Greater London Council [1982] 20BLR8 HL, LB Merton v Stanley Hugh Leach Ltd [1985] 32BLR51 and Davy Offshore v Emerald Field Contracting [1991] (QBD) 55BLR39.). He held that because of the buyer’s default the buyer can never be in a position to call upon the seller to take back the machine, on the ground that the test had not been satisfied. The effect of the buyer’s failure to cooperate in satisfying the test, which was condition precedent to the seller’s right to payment, was that the seller was entitled to be paid even though the machine may not have satisfied the requirements of the contract.
The judgment in Mackay v Dick was under Scots Law but the principle was considered to be equally settled under English Law in Colley v Overseas Exporters [1921] 8LLR127. It was observed by McCardie J that the property in the digger had passed to the buyer so that the payment of the price was solely dependent upon the condition imposed by the clause as to the test.
In Mackay v Dick the buyer had to rely on the contract in order to avoid liability to pay the price and to get the seller to take the machine back, but could not do so because of its own default. As observed by Devlin J in Mona Oil Equipment and Supply Company Ltd v Rhodesia Railways Ltd [1949] 83LLRep178 there was no question of the buyer preventing the seller from claiming payment but instead the buyer prevented itself from escaping from the liability to pay.
It is arguable that the implied term of cooperation in Mackay v Dick does not apply to the situation in this paper, but even if not the reasoning is still relevant. In NEC3 it is the Contractor that must rely on the contract in order to avoid liability for failure to achieve Completion by the Completion Date. He must elect to operate the contractual machinery and so change the Date of Completion. If he cannot do so because of his failure to give the appropriate notice, then he has deprived himself of the opportunity to avoid liability. His failure will prevent him escaping liability for the delay and he will have to accept the consequences in the same way as the buyer was required to accept the machine and pay the price.
In Mackay v Dick a party failed to escape liability because his breach of an obligation of cooperation led to a condition precedent not being fulfilled. As a matter of principle it is difficult to see why a failure to exercise a right should place a party in a better position. If the operation of the condition precedent depends upon the exercise of a discretionary contractual right then the condition should not be made ineffective when a free choice has been made not to exercise the right.
The third matter to consider is whether the failure of the Contractor to give notice means that he can no longer rely on the Employer’s breach of contract to avoid liability for his failure to complete by the Completion Date under NEC3 Clause 30.1.
The Contractor’s failure to exercise a discretionary contractual right by not giving notice under NEC3 Clause 61.3 may be regarded as a waiver of the breach of contract by the Employer, if in the circumstances the failure can be regarded as an unequivocal representation.
It is always open to a party to waive a condition which is inserted for his benefit Hoenig v Isaacs [1952] 2AllER176 CA and to waive a breach of contract Charles Rickards v Oppenheim [1950].
Waiver does not require the other party to have acted in reliance on the representation since it is only the position and conduct of the party said to have waived his rights which is relevant. There are two types of waiver (Glencore Grain Ltd v Flacker Shipping Ltd (The “Happy Day”) [2002] EWCA Civ 1068):
It is suggested that if the failure to give notice under NEC3 Clause 61.3 is to be regarded as a waiver, then it is waiver by election.
Usually the election applies when there is an entitlement to alternative rights which are inconsistent with each other. The doctrine has however been applied in an insurance case to the decision by the insurer whether or not to accept a claim made in default of a condition precedent. In Kosmar Villa Holidays plc v The Trustees of Syndicate 1 2 4 3 [2007] EWHC 458 (Comm) Gross J held that the doctrine of election applied when there had been a failure to satisfy a threshold procedural requirement for making claims, contained in a condition precedent. He held that there was no reason why the insured should be other than free to choose whether to reject the claim or to accept it, notwithstanding the failure.
On this reasoning, the Contractor may elect to accept the Employer’s breach by waiving his right to operate the contractual machinery. If he does so he cannot later rely on the breach which he has waived to escape liability for failure to achieve Completion by the Completion Date not only because of waiver but also by operation of NEC3 Clause 63.4.
The fourth matter to consider is whether the proposition of law in Alghussein Establishment v Eton College [1988] 1WLR587 HL prevents the Employer recovering damages for the Contractor’s failure to complete by the Completion Date under NEC3 Clause 30.1, when the delay was caused by the Employer’s breach.
In Alghussein Lord Jauncey who gave leading judgment stated that it was well established by a long line of authority that a contracting party will not in normal circumstances be entitled to take advantage of his own breach as against the other party. His review of the authorities showed that the older cases referred to the proposition of law as a universal principle of law.
Lord Jauncey referred to the judgment of Lord Diplock in Cheall v Association of Professional Executive Clerical and Computer Staff [1983] 2AC180 HL. In that case Lord Diplock referred to a rule of construction that it was presumed that it was not the intention of the parties that either party should be entitled to rely on its own breach of his primary obligations to bring the contract to an end. Importantly the rule was considered to be subject to the contract containing clear express provisions to the contrary. Lord Diplock stated that the rule of construction was paralleled by the rule of law that a contracting party could not rely upon an event brought about by his own breach of contract as having terminated a contract by frustration.
Although all the previous authorities involved cases of avoidance, Lord Jauncey extended the proposition to continuing contracts. He stated the proposition in the general terms that a party seeking to obtain a benefit under a continuing contract on account of his breach was taking advantage of his own wrong.
Lord Jauncey observed that an absolute rule of law would make unnecessary any detailed consideration of the provisions of the contract. However importantly he preferred to start by considering the effect of the principle as embodied in a rule of construction.
Having done so, Lord Jauncey then examined whether the contract contained clear express provisions to contradict the presumption. He found there was no such term in that case.
Lord Jauncey was in no doubt that the weight of authority favoured the view that in general the principle was embodied in a rule of construction rather than an absolute rule of law. He recognised however that there might be situations such as self-induced frustration where an absolute rule existed (The proposition of law has been viewed as a rule of construction in subsequent cases including Glencore International AG v Metro International Inc [2001] EWHC 490 (Comm) and Mohammad Jafari-Fini v Skillglass Ltd [2007] EWCA Civ 261.).
It follows that the proposition in Alghussein is not an absolute rule of law in the situation described in this paper, but a rule of construction. The following are the clear express terms in a contract based on NEC3 which contradict the presumption.
The above terms show a clear intention of the parties that the Employer might be entitled to rely on its own breach in order to obtain a benefit. The entitlement has been left to the discretion of the injured party, the Contractor. When he becomes aware of the breach of contract the Contractor has the option whether to give notice under Clause 61.3. If the Contractor fails to do so then his failure crystallises the Employer’s right to rely on its own breach in order to obtain a benefit.
Whether the Employer will obtain any substantial remedy in unliquidated damages raises issues of causation that are not examined in this paper.
On the other hand, if NEC3 Option X7 is part of the contract then the Employer will have an automatic contractual remedy of defined delay damages for the Contractor’s failure to complete by the Completion Date. On the above analysis the proposition in Alghussein does not prevent the Employer being paid the rate stated in the contract.
The fifth matter to consider is whether the contractual mechanism of changing the Completion Date and the application of liquidated damages under Option X7 survives in the situation where the mechanism is not operated because of the Contractor’s failure to give notice.
There are a number of Australian and Scots cases which have examined the issue (The Australian cases include Turner Corporation Ltd v Austotel Pty Ltd [1997], Gaymark Investments Pty Ltd v Walter Construction Group Ltd [1999] and Décor Ceilings Pty Ltd v Cox Construction Pty Ltd (No 2) [2005]. The main Scots case is City Inn Ltd v Shepherd Construction Ltd [2003]), but the analysis below is based solely on the principles evident from cases in English Law. (Other cases which deal with the prevention principle include Dodd v Churton [1897] 1QB566, Wells v Army v Navy Co-operative Society Ltd [1902], Trollope & Colls Ltd - v- North West Metropolitan Regional Hospital Board [1973] HL, Rapid Building Group Ltd - v - Ealing Family Housing Association Ltd [1984] 29BLR5, Davy Offshore Ltd v Emerald Field Contracting Ltd [1992] 55BLR1, McAlpine Humberoak v McDermott International (1) [1992] 58BLR1 and Inserco Ltd v Honeywell Control Systems [1996]).
In Holme v Guppy (1838) 3M&W387, the Contractor agreed to carry out carpentry and joinery work forming part of a new brewery in Liverpool for £1,700. The contract specified a completion date of 31st August 1836 and provided for liquidated damages at the rate of £40 per week. The Employer had failed to give possession of the site for four weeks following execution of the contract. Other causes of delay established were certain defaults on the part the Contractor and also certain defaults on the part of other contractors engaged by the Employer. In the Court of Exchequer Parke B held that if a party is prevented by the refusal of the other contracting party from completing the contract within the time limit he is not liable in law for the default. This proposition of law is often referred to as the “prevention principle”.
In Peak Construction Ltd v McKinney Foundations (Ltd) [1970] 1BLR114 CA Salmon LJ said that the liquidated damages clause did not bite if the failure to complete on time is due to the fault of both the Employer and the Contractor. Relying on Holme v Guppy he considered that in the ordinary course, the Employer cannot insist on compliance with a condition if it is partly his own fault that it cannot be fulfilled.
Importantly, Salmon J observed that if the extension of time clause provided for postponement of the completion date on account of delay caused by some breach or fault on the part of the Employer, the position would be different. He considered that this would mean that the parties had intended that the Employer could recover liquidated damages notwithstanding that he was partly to blame for the failure to achieve the completion date. In such a case the architect would extend the date for completion, and the Contractor would then be liable to pay liquidated damages for delay as from the extended completion date.
In Bilton v Greater Council [1982]20BLR1 HL it was recognised that the general rule in Holme v Guppy may be amended by the express terms of the contract.
In Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC) Jackson J reviewed the authorities and re-stated the prevention principle that the Employer cannot hold the Contractor to a specified completion date, if the Employer has by act or omission prevented the Contractor from completing by that date. He observed that acts of prevention by an Employer do not set time at large, if the contract provides for extension of time in respect of those events.
It follows that the application of the prevention principle is a matter of construction of the contract to determine the intention of the parties. In that respect it can be regarded as a particular application of the proposition of law in Alghussein. If the contract makes provision for changing the Contractor’s obligation to complete in the event of delays caused by the Employer then the prevention principle does not apply.
The NEC3 contractual machinery allows the Completion Date to be changed for delays caused by the Employer’s breach of contract. The operation of the contractual machinery requires the express cooperation of the Contractor. He must provide and regularly revise an Accepted Programme (NEC3 Clause 31.1 and 32.2), give early warnings of events (NEC3 Clause 16.1), give notice of compensation events(NEC3 Clause 61.3) and submit quotations for compensation events (NEC3 Clause 62.3).
NEC3 prescribes default provisions for the Contractor’s failures in any of these requirements so that the contractual machinery continues to operate (for failure to give early warning the compensation may be adjusted by NEC3 Clauses 61.5 and 63.5. For failures in relation to the Accepted Programme NEC3 Clause 64.2 provides a default procedure. For failures in relation to quotations NEC3 Clause 64.1 provides a default procedure) except for notice under NEC3 Clause 61.3. The failure to give notice under Clause 61.3 does not prevent the operation of the contractual machinery if the events are instructions or changes in decision by the Project Manager or Supervisor. That does not apply to breaches of contract by the Employer.
The Contractor’s failure to give the notice required under Clause 61.3 may be considered a breach of an obligation of cooperation in the operation of the contractual machinery on the basis of Mackay v Dick. However the fact that the parties have agreed default provisions for other failures but none for failure to give notice for the event of an Employer’s breach suggests that the intention is that notice under Clause 61.3 is an option and not an obligation. The Contractor’s decision not to give the required notice is an election as described above in which he does not take the opportunity to avoid liability applying the reasoning of Mackay v Dick (In the Outer House in the Scots case of City Inn Ltd v Shepherd Construction Ltd [2001] Lord Macfadyen considered the Contractor’s failure to give notice condition precedent to entitlement was a breach of contract and that there was a causal connection between that failure and his liability. In the Inner House in City Inn Ltd v Shepherd Construction Ltd [2003]BLR468 it was held that the failure to give notice was not a breach of contract by the Contractor. Instead it was held that the Contractor would be in breach of the obligation to complete, of which the ultimate cause may be the contractor's failure to take advantage of the condition precedent which would provide him with protection at his option.).
Since the parties have chosen to limit their rights, remedies and liabilities in this way, there is no reason why the law should stand in their way and prevent them from doing so as stated in Strachan v Stein in relation to Clause 44 MF/1.
There is indication in the recent decision in Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2) [2007] EWHC 447 (TCC) that an important aspect of the analysis is whether the condition precedent has some practical commercial purpose so that the effect of failure to give notice cannot be considered to be a penalty.
Jackson J observed that if the prevention principle operated in the situation of a Contractor’s failure to give notice condition precedent then the effect would be that a Contractor could at his option set time at large. He doubted whether this represented English Law but in doing so observed that contractual terms requiring a Contractor to give prompt notice of delay served a valuable purpose. He observed that the notice enabled matters to be investigated while they were still current. Sometimes the notice gave the Employer the opportunity to withdraw instructions when the financial consequences became apparent.
Jackson J did not decide the point in the case before him and distinguished the entitlement to extension of time and the entitlement to liquidated damages. He held that even if Honeywell had forfeited an extension of time that did not automatically make Honeywell liable to pay damages for delay. Under clause 12 of the Sub-Contract Conditions, Multiplex could only recover in respect of loss or damage caused by the failure of the Sub-Contractor. If in reality the relevant delay was caused by Multiplex, not Honeywell, then Multiplex could not recover against Honeywell. He therefore decided the case on the basis of causation.
The contractual machinery under NEC3 Section 6 serves an important purpose in the administration of the contract and does not present the Contractor with an onerous task. It is an important part of that machinery that the Contractor notifies events within the prescribed timescales.
First, the analysis of delay is intended to be based on the updated time impact analysis based on an Accepted Programme regularly revised. It is important therefore that the Accepted Programme takes into account all events including compensation events within the timescales prescribed in the contract.
Second, the timescales in the NEC3 requires matters to be investigated while they were still current.
In conclusion under NEC3 the prevention principle does not operate to prevent the Employer’s right to have the Contractor pay delay damages under NEC3 Clause X7.1 simply because the Contractor has not exercised his right to give notice in accordance with Clause 63.1 for the Employer’s breach of contract.