20 October 2017

What is the prevention principle?

The 'prevention principle' is a legal doctrine that protects a contractor from liquidated damages for delays caused by the principal. The basic idea is that a party to a contract should not be permitted to profit from its own default.


How the prevention principle operates

A construction contract will normally require the contractor to achieve practical completion by the date for practical completion. Where the date of practical completion is after the date for practical completion, the contractor will usually be liable to pay liquidated damages to the principal.

The prevention principle exists to protect the contractor from exposure to liquidated damages for delays caused by the principal. 

When it applies, the prevention principle has the effect of setting time at large - meaning that the works must then be completed within a reasonable time, rather than a specific date - which effectively prevents the principal from enforcing liquidated damages.

The prevention principle and EOTs

The prevention principle was first acknowledged by the courts in the English case of Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd. (The principle is sometimes called the 'Peak Principle' for this reason.)

In the Peak case, the contractor was delayed by the principal's failure to give prompt instructions to proceed with certain works. The contract did not contain a mechanism for the contractor to claim an extension of time. As a result, the court found that it was 'beyond all reason' to find the contractor liable to pay damages for the delay to the works.

The Peak case (and the prevention principle) is one of the reasons why modern construction contracts contain extension of time clauses. 

It is also why many contracts allow the principal or superintendent to extend the date for practical completion, even where no EOT has been claimed.

A central purpose of an EOT clause is to allow the date for practical completion to be extended for acts and omissions of the principal, therefore avoiding the prevention principle and ensuring the liquidated damages regime can still operate.

This is also why the causes of delay entitling the contractor to claim an EOT will normally include words to the effect:

  • an act or omission of the principal;
  • a delay caused by the principal; or
  • an act of prevention by the principal.

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What happens if the Contractor could claim an EOT for an act of prevention, but does not?

This is a difficult question.

A key feature of the construction contract in the Peak case was that it did not contain a mechanism for the contractor to claim an extension of time. Consequently, any delay by the principal would have had the effect of immediately triggering the prevention principle and setting time at large.

Nowadays, virtually all construction contracts contain EOT clauses. And many of them also contain time bars, which render an EOT claim void if it is not made within the specified timeframe.

The question then arises - if the contractor has the ability to claim EOT because of a delay caused by the principal, but does not make a claim and subsequently becomes time barred, will the prevention principle apply?

This question has been considered by the courts on several occasions, and with mixed outcomes.

In Turner Corporation Pty Ltd v Austotel Pty Ltd, the Court decided the prevention principle should not apply because the contractor had the option of claiming an EOT for the principal's delay but failed to do so. The Court stated that the contractor:

could never say that it was prevented from completing the works on time...by the so called preventing act of the Proprietor because the preventing act of the Proprietor entitles the Builder to apply for an extension of time

In another case, the Court found that the contract had to be applied in accordance with its terms, acknowledging that the result was 'harsh' from the perspective of the contractor. The Court stated that the prevention principle had to be considered in the context of the contract. The contractor's failure to comply with the EOT requirements in the contract meant that it had:

no entitlement to an extension of time and any principle of law or equity which might render the Date for Practical Completion unenforceable shall not apply.

In a more recent decision, the Court side-stepped the issue by deciding that the superintendent should have granted an EOT under a separate clause giving it the power to do so.

Takeaways for Contractors

Understanding the prevention principle, and when it might apply, is an important piece of knowledge for you to have. However, it should really be considered a 'fallback' position, in that:

  • when entering a new contract, you should ensure the agreement will allow you to claim extensions of time and delay for relevant delay events, and that the claim procedures will allow you adequate time to make those claims; and
  • once the contract has started, you should ensure that you follow the process for making the claim so that the time bars (and prevention principle) never come into operation.

Takeaways for Principals (and Head Contractors)

Principals and head contractors need to be aware of the prevention principle for at least two reasons:

  • when preparing a new contract, you should ensure the drafting will allow the contractor to claim extensions of time for acts of prevention. Otherwise you may not be able to enforce liquidated damages. You should also pay close attention to a unilateral extension of time clause, to ensure the contractor may not become entitled to an extension of time even where none has been claimed; and
  • you may need to heed the prevention principle when assessing a contractor's EOT claims or when contemplating the application of liquidated damages. Although there will sometimes be exceptions (as illustrated above), the courts will typically work hard to prevent you from recovering liquidated damages for a delay you have caused.New call-to-action
About the Author

Andrew Hernandez | Lawyer

Andrew is a law graduate who, in his time with Turtons, has been involved in a range of contentious and non-contentious work (particularly in the construction space).


andrew.hernandez@turtons.com | (02) 9229 2918

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Andrew Hernandez | Lawyer

Author

Andrew Hernandez | Lawyer

andrew.hernandez@turtons.com

Andrew is a law graduate who, in his time with Turtons, has been involved in a range of contentious and non-contentious work (particularly in the construction space).


andrew.hernandez@turtons.com | (02) 9229 2918

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