A reminder from the NSW Supreme Court of how to draw a valid time bar clause that will preserve your right to apply liquidated damages

In the recent decision of Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd, the New South Wales Supreme Court ordered liquidated damages (LDs) to be paid by a subcontractor (Modern) to a builder (Growthbuilt) due to delays in the completion of the works. In short, Growthbuilt was successful because:

1.   Modern failed to submit a claim for an EOT in accordance with the subcontract;

2.   Growthbuilt could levy liquidated damages against Modern because the subcontract contained a valid time bar that was not subject to implied terms that Growthbuilt would act reasonably or in good faith in assessing EOTs.

Background Facts

Growthbuilt terminated four subcontracts that it had entered into with Modern for Modern’s failure to complete the subcontract works by the contract dates for completion. Growthbuilt sued Modern to recover liquidated damages and post-termination costs.

Modern’s defence was that:

1.   The delay in completing the works resulted from Growthbuilt’s acts or defaults (which Growthbuilt denied).

2.   Even though Modern had failed to claim an extension of time (EOT), by reason of the “prevention principle”, Growthbuilt was obliged to exercise its discretionary power under the contract to unilaterally extend time.

Subcontract provisions

The parties agreed that a factual contest about causes of delay had no legal consequence on the ruling by the Court. Therefore, the decision came down to the proper construction of clause 11 of the subcontracts. The Court found that clause 11 of the subcontracts contained a valid time bar because the clause provided that:

1.   Modern must submit a claim for an EOT resulting from an “Act of Prevention” within five days of the commencement of the Act of Prevention including details on the nature, cause, effect and duration of the delay;

2.   Failure by Modern to strictly comply with the above notice requirement will disentitle it from making a claim against Growthbuilt.

Crucially, clause 11 contained the followed provision which is commonly known as the discretionary power to unilaterally extend time:

“Growthbuilt may in its absolute discretion at an any time and for any reason, without prejudice to its rights or the Subcontractor’s obligations, extend the date for completion, but Growthbuilt is under no obligation to extend, or to consider whether it should extend, the date for completion.”

What is the prevention principle?

The essence of the prevention principle is that a party in default under a contract will not be allowed to take advantage of its own wrong. An act of prevention (i.e. directing a variation) that delays the works will, in the absence of a contractual mechanism to grant an EOT, have the effect of setting the time for completion “at large”. This means completion within a reasonable time and therefore no liquidated damages. This principle can be excluded by contract (and that is usually done by having a properly drafted EOT clause).

The competing arguments in this case

In this case, it was common ground that Modern had not claimed any EOTs under the subcontracts in accordance with clause 11. Growthbuilt argued that Modern could not now rely on any preventing conduct (delays caused by Growthbuilt) because Modern failed to exercise the contractual right to claim EOTs that would have negated the effect of that conduct.

Modern sought to rely on the case of Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd (2017) NSWLR 82, arguing that even though Modern failed to claim EOTs under the subcontracts, Growthbuilt was obliged to act reasonably and in good faith in exercising its discretionary power under clause 11 having regard to the prevention principle if delays were solely due to Growthbuilt.

The decision

The Court distinguished the decision in Probuild from this case because the discretionary power to extend time in the Probuild contract did not contain the words “absolute discretion”.

The Court said that “the discretionary power to unilaterally extend that is described as an “absolute” is contained in a clause that also expressly excludes any obligations on Growthbuilt to exercise the power to extend or consider whether to do so. In other words, the express terms of the subcontracts make clear that, despite having the discretionary power to do so, Growthbuilt has no obligation to extend or make any decision whether or not to extend time under the subcontracts at all.”

The Court also made the following key points  

1.   The objectively determined purpose of the EOT clause was to:

a)    provide contractual machinery to enable new Dates for Completion to be arrived at in the event of an “Act of Prevention” by Growthbuilt; and

b)   place on Modern the risk of delay caused by an “Act of Prevention” if Modern failed to claim EOTs under the contractual regime.

 2.   The implied terms of reasonableness and good faith could not be implied into the subcontracts because it would be inconsistent with the express terms of the subcontracts which provided that Growthbuilt had no obligation to exercise or to consider exercising its contractual discretion.

Key Takeaway

This decision is a timely reminder to principals and head contractors that a failure to amend the discretionary EOT clause in your contracts could risk your entitlement to enforce liquidated damages and render any time bar ineffective.

For head contractors and subcontractors, this decision emphasises the importance of reviewing the notice requirements in your head contract/subcontracts and ensuring that:

1.   you are in a position to reasonably comply with those notice provisions;

2.   if the notice provisions are unreasonably onerous – you should push back and request more reasonable timeframes;

3.   you have procedures in place during construction to ensure that you comply with all notice requirements.