Kevin Reeves reviews the provisions of construction contracts requiring contractors to give written notice for extension of time [EOT] and, more crucially, provisions to make these written notices a condition precedent to a contractor’s entitlement.
The international FIDIC Conditions of Contract for Plant and Design-Build, 1999 provide that:
“20.1 If the Contractor considers himself to be entitled to any extension of the Time for Completion ... the Contactor shall give notice to the Engineer ... The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.
If the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended ...”
The Malaysian PAM 2006 Conditions provide that:
“23.1(a) the Contractor shall give written notice to the Architect of his intention to claim for such extension of time... Such notice must be given within twenty eight (28) Days from the date of the AI [Architect’s
Instruction], CAI [Confirmation of Architect’s Instruction] or the commencement of the Relevant Event, whichever is earlier. The giving of such written notice shall be a condition precedent to an entitlement of extension of time...”
The granting of any EOT invariably provides the contractor with relief from liquidated damages for late completion. There has therefore been much debate as to whether failure to comply with such notice provisions, resulting in no EOT being awarded to the contractor, would entitle the employer to still charge liquidated damages. This is especially where the employer has clearly delayed the contractor in completing the works by the contractual date for completion. This has been considered in a number of cases with conflicting outcomes. The arguments usually revolve around the prevention principle.
THE PREVENTION PRINCIPLE
The prevention principle is based on the assumption that a party to a contract (e.g. employer) must not do anything to prevent the other party (e.g. the contractor) from performing its obligations under the contract. In the English case of Peak v McKinney (1970) the Court of Appeal held that, where the employer delayed the contractor and there was no extension of time provision covering the employer’s delay, the employer could no longer require completion by the original contract completion date. In such a situation, the contractor is only obliged to complete within a reasonable period, often referred to as time being ‘at large’, and the employer loses its right to liquidated damages.
But how does the prevention principle apply in circumstances where there is a provision in the contract allowing an EOT for the employer’s delay but it cannot be operated due to an absence of the required notice from the contractor?
One view is that the employer still cannot charge liquidated damages because it is the employer’s act of prevention that is delaying completion of the works. Quite simply, the contractor’s lack of notice would, on this basis, not affect that principle.
The other view is that the prevention principle would not apply because the contractor’s entitlement to an EOT has been lost due to its own failure to give notice.
GAYMARK
In 1999, the Australian case of Gaymark Investments Pty v Walter Construction Group Ltd gave support to the view that, in such circumstances, liquidated damages could not be charged. In Gaymark, the employer was responsible for 77 days delay but no EOT had been granted because the contractor had not given the required notice. Not surprisingly, the employer wanted to deduct liquidated damages. The arbitrator had considered that no liquidated damages could be charged by the employer, as a point of law and based on the prevention principle. The employer took this point of law to the Australian courts. The judge agreed with the arbitrator, stating that acceptance of the employer’s position would result in an entirely unmeritorious award of liquidated damages for delays of its own making. The Gaymark decision sparked much debate, especially as it distinguished two earlier Australian judgments that expressed the opposite view. In one of these earlier cases, Turner Corporation v. Austotel Pty Limited (1994), the judge had conversely stated:
“If the Builder having a right to claim an extension of time fails to do so, it cannot claim that the act of prevention which would have entitled it to an extension of the time for Practical Completion resulted in its inability to complete by that time. A party to a contract cannot rely upon preventing conduct of the other party where it failed to exercise a contractual right which would have negated the effect of that preventing conduct.”
OTHER CASES
Gaymark was followed by another Australian case, Peninsula Balmain
Pty Ltd v Abigroup (2002), then the Scottish case of City Inn Limited v Shepherd Construction Limited (2003), and in March 2007, the English case
of Multiplex Constructions (UK) Limited v Honeywell Control Systems
Limited (No. 2).
In Peninsula Balmain, the New South Wales Court of Appeal did not follow Gaymark. The contractor was required by the contract to give a written claim for an EOT. Its failure to do so was considered by the court to preclude the contractor from the benefit of an EOT and to make it liable for liquidated damages. This was considered to be the case even if the delay had been caused by variations required by the employer and thus within the prevention principle. However, in this case, the contractor was found to be entitled to an EOT under a separate provision of the contract, explained below.
In City Inn, the contract contained a provision that where an Architect’s instruction would delay completion of the works, the contractor was not to execute the instruction until an estimate of the additional time (amongst other things) had been submitted to the Architect. The estimate was to be submitted within 10 working days. The contract provided that if the contractor failed to provide this estimate, it would lose its entitlement to an EOT. It was held by the court that where the contractor chose not to give this estimate of additional time, it was not entitled to an EOT and so would be liable for delay damages. However, City Inn was not argued on the basis of the prevention principle, nor were the previous Australian cases cited.
The Multiplex case involved a dispute between a contractor and subcontractor regarding an EOT. The subcontractor argued, by reference to Gaymark, that its own failure to comply with the notice procedures under the subcontract had put time at large. The contractor disagreed. In finding for the contractor, the judge expressed serious reservations about the Gaymark decision and felt that there was considerable force in the reasoning of the alternative views expressed in the Turner, Peninsular Balmain and City Inn cases. He doubted that Gaymark represented the law of England, stating that if Gaymark was good law, then a contractor could disregard with impunity any provision making proper notice a condition precedent. At his option, the contractor could thereby set time at large. However, in the end the judge considered that this was not a question he was required finally to decide. Instead, he went on to distinguish Gaymark based on the particular wording of the subcontract.
Other than Gaymark, the judgments in Australia, Scotland and England suggest that a contractor will lose its right to an EOT and so be liable for liquidated damages if it does not comply with a strict notice requirement in the contract. However, it must be noted that all the cases turned on the particular contract provisions in question and it was the other contract provisions that in most cases ultimately decided whether the contactor was liable for damages or not.
OTHER CONTRACT PROVISIONS
As with any contract issue, all the relevant clauses need to be taken into account when considering the parties’ positions. For example, in the Peninsular Balmain case, the court considered that failure to provide a written notice of a delay and an EOT would, by itself, have denied the contractor a right to EOT and made it liable for liquidated damages. However, another contract provision left it open to the contract administrator to grant an EOT even if the contractor had not provided the written claim. As a result of this other provision, the contractor was saved from liquidated damages.
Clause 23.1(a) quoted from above PAM 2006 clearly requires notice to be given as a condition precedent to an EOT. However, Clause 23.10 provides that the architect may (but is not obliged to) receive an EOT after practical completion, whether notice has been given or not. While the contractor would have to wait until after completion, it may ultimately be able to get an EOT, even where notice =has not been given.
However, contractors would be wise to comply strictly with the notice provisions rather than rely on Clause 23.10 (or such similar terms in the contract) to save them. By relying on Clause 23.10, contractors will have to continue with the works up to practical completion uncertain if they will get any EOT. If the liquidated damages are substantial, that will make the decision as to whether acceleration measures should be
taken much more difficult to assess. In addition, it is not clear how architects or the courts will interpret Clause 23.10, especially as the consideration of an EOT by the architect after practical completion is not expressed in mandatory terms. In particular, the contractor may find itself with a lesser EOT due to its failure to give notice. In the Peninsular Balmain case, for example, the judge suggested that if there is a late notice of EOT which is difficult to decide because of the lapse of time, this may be a ground on which the EOT may be refused.
CONCLUSION
Strict notice provisions for delays and EOTs are common in bespoke forms of contract and appear in many standard forms as well. While Gaymark may give some comfort to contractors who fail to give the required EOT notices, the body of other case law from Australia, Scotland and England suggest that it may not be good law. Contractors who fail to give the required EOT notice may be liable for liquidated damages for late completion even though the employer has caused the delay. Contractors would be wise to follow the notice provisions to avoid losing their right to EOT and risk exposure to liquidated damages.
While there may be other provisions in the contract that allow for EOT or relief from liquidated damages later, these should be avoided if at all possible.
Good contract administration is, therefore, essential to identify potential delays promptly so that contractual notice periods are met.
Kevin Reeves is based at Trett Consulting’s Kuala Lumpur office