Freedom of contract trumps the doctrine of prevention

Court of Appeal upholds decision at first instance

In July, the Court of Appeal upheld last year’s decision at first instance and confirmed that the parties to a construction or engineering contract may allocate the risk of concurrent delay contractually without being in contravention of the doctrine of prevention.

Aside from being a further endorsement of the freedom of the parties to allocate risk in the agreement concluded between them, the decision explores a number of items that will be of interest to those involved in construction and engineering projects, particularly those concerned with time and programming who will be considering the principles of concurrent delay.

Approach taken by the Court of Appeal

In our summary of the first instance decision we noted the formulation put forward by John Marrin QC. In the Court of Appeal, Lord Justice Coulson adopted this definition.

Of significance, the Court of Appeal referred to the Malmaison case (Henry Boot Construction (UK) Limited v Malmaison Hotel (Manchester) Limited (1999) - which, as we commented, the first instance decision did not explore) and concluded that the clause in question was designed to do no more than reverse the result in Malmaison and Walter Lilly and Co Limited v Giles Mackay and Another (2012). Malmaison and Walter Lilly are two important decisions that are often cited in support of the proposition that a contractor is entitled to an extension of time in situations of concurrent delay (interestingly, in Walter Lilly, the question of concurrent delay did not arise because the issues in relation to delay were found to be employer risks).

In this case, although the Court of Appeal did not decide whether there was concurrent delay, or provide any further clarification on the meaning of concurrent delay, the judgment can be regarded as judicial affirmation that the Malmaison approach may now be reversed by the parties in their contractual arrangements.

The court also noted that, under the unamended JCT standard forms, a contractor’s entitlement to an extension of time in circumstances of concurrent delay is not entirely free from doubt.

An issue which Lord Justice Coulson identified (but did not opine on) is whether, where there is concurrent delay, it can be said that the employer actually delayed the contractor at all. This particular point remains to be decided by the courts.

What about the prevention principle?

The judgment contains an interesting analysis of the doctrine of prevention. In Lord Justice Coulson’s view, this principle can only operate sensibly by incorporating implied terms. The principle is not based on an overriding rule of public or legal policy – and it is open to the parties to decide that the employer should benefit from an extension of time clause in relation to concurrent delay, despite one of the delay events being an act of prevention.

Employers and contractors alike will no doubt wish to consider the implications and how, in this context, the relevant clauses (under which the employer’s prevention is normally an event entitling the contractor to an extension of time) may need to be amended to reflect the intended risk allocation.

Could liquidated damages (LDs) be levied?

In addition, the court separately considered (under Ground 2 of the appeal) whether there was an implied term in the building contract that would prevent Cyden from levying LDs were the extension of time clause found to be enforceable (so that North Midland was not entitled to an extension of time for concurrent delay despite an act of prevention by Cyden).

The court rejected this ground for a number of different reasons

• There remained a proper causal link between the delay and the LDs.
• The extension of time provisions and the LDs provisions were inextricably linked, so that the express provisions conferring or denying a right to an extension of time are linked directly to the preservation of the employer’s right to LDs.
• Any implied term which sought to take away Cyden’s entitlement to levy LDs would be contrary to the express terms of the contract.
• It was not “in any way uncommercial or unreal”, notwithstanding that the result might be seen as harsh on the other party.

The importance of clear drafting

There is always a real life possibility that delays that occur concurrently may arise on major construction and engineering projects.

Contractors are now likely to be more vigilant and seek to negotiate out wording of the type that we have just seen approved by the Court of Appeal, where employers have sought to introduce it. However, it should be noted that, at first instance, the clause in question was stated to be “crystal clear” (a statement from which the Court of Appeal did not deviate, calling the clause unambiguous).

The warning is to those who draft and negotiate construction contracts (and, specifically, the allocation of risk in relation to extensions of time, concurrent delay and prevention) to remain mindful of the consequences and pitfalls that can arise if the parties’ intentions are not expressed clearly and unambiguously in their contractual arrangements.

The High Court decision: summary

Last autumn, the Technology and Construction Court (TCC) had to consider the enforceability of a provision in a building contract that expressly excluded the contractor’s entitlement to an extension of time in circumstances where there was concurrent delay.

The issue is one that frequently crops up in contract negotiations – not just in relation to building contracts in the built environment sector, but also in relation to major engineering and infrastructure contracts. Developers, and their lenders, will frequently have as a commercial aim the achievement of as much risk transfer to the building or engineering contractor as possible. Accordingly, they will often seek such exclusions. Yet all good construction lawyers know that care must be exercised when excluding entitlements to claim an extension of time. Without careful drafting, time can be rendered "at large" because of the operation of the prevention principle, unravelling the liquidated damages regime.

The project in question was the construction of a house in Lincolnshire which was (as noted by the judge) “exceptionally large” and “exceptionally expensive”. It was to be occupied by the Dyson family once completed. The building contractor, North Midland Building Limited, brought a Part 8 claim against its employer on a point of contractual interpretation. Cyden Homes, a company set up by a number of members of the Dyson family, was the defendant employer.

The building contract was based on the form of the JCT Design and Build Contract 2005 edition, to which the parties agreed bespoke amendments. One of the bespoke amendments clearly concerned the way in which extensions of time were to be dealt with.

The clause in question: bespoke amendment to the JCT standard form

The clause in question provided that the contractor could claim an extension of time if delay was caused by a “Relevant Event”, but also included an amendment that “any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account".

The Part 8 claim brought by the contractor was to obtain two declarations, from the court, as to the meaning and effect of the amended provision – namely that

• Where the contractor had a claim to an extension of time for a delay caused by a Relevant Event where that delay was concurrent with another delay for which the contractor was responsible, time would be made "at large"
• In such circumstances, the contractor would be required to complete the works within a reasonable time, and the liquidated damages for delay would be void.

Meaning of “concurrent” delay

The formulation of concurrent delay that is commonly referred to is the one put forward by John Marrin QC and most recently re-iterated in his presentation to the Society of Construction Law in London in December 2012 (and appearing in his subsequent paper Concurrent Delay Revisited): “ … a period of project overrun which is caused by two or more effective causes of delay which are of approximately equal causative potency” and the phrase ‘of equal causative potency’ was cited by Mr Justice Fraser in the judgment handed down by the court.

The reality is that true "concurrency" (as defined by John Marrin QC) is rare – yet how to deal with it in construction and engineering contracts seems to crop up time and time again in transactional negotiations.

The court held that the amended JCT clause was valid and enforceable and it now seems clear that, under English law, the issue of concurrency may be dealt with expressly by the parties in their contractual arrangements.

The claimant placed reliance on Multiplex Construction v Honeywell Control Systems (2007) and argued that the ‘doctrine of prevention’ meant that time was at large and that they simply had to complete the works within a reasonable time.

In coming to his conclusion, the judge paid particular attention to the drafting of the clause in question. He said (para 16) that “…the prevention principle simply does not arise” and the case “...is purely concerned with the correct construction of the clause agreed by the parties, in this case specifically agreed by the incorporation into it of a bespoke amendment.”

“The starting point is the language itself; the words the parties have themselves chosen…”

The judge cited the Supreme Court’s decision earlier this year in Wood v Capita Insurance Services Ltd (2017) that followed Arnold v Britton (2015) and he stated that (para 17) “The starting point is the language itself; the words the parties have themselves chosen. In the case of this term of the contract in these Part 8 proceedings, the objective meaning of this provision is barely in issue between the parties at all.”

The parties had quite clearly agreed that, if the contractor were responsible for a delaying event which caused delay at the same time as, or during, the delay caused by a Relevant Event, then the delay caused by the Relevant Event would not be taken into account when assessing the extension of time. In reaching its decision, the court noted (“the final nail in the coffin”) that the definition of "Relevant Event" included any act of prevention and that acts of prevention were accordingly to be taken into account expressly in the way identified in the extension of time clause.

Interestingly, the court did not refer to what is known as ‘the Malmaison approach’ (after the decision in Henry Boot Construction (UK) Ltd v Malmaison Hotel (Manchester) Ltd (1999)), which is often thought by commentators to be the favoured approach to resolving issues of concurrency of delay events of equal causative potency in extension of time claims. Under this approach, where there are two concurrent causes of delay, one of which is a relevant event, and the other is not, the contractor is entitled to an extension of time for the period of delay caused by the relevant event notwithstanding the concurrent effect of the other event.

The TCC decision is another in a line of cases in which the courts have held up the principle of freedom of contract and given emphasis to the words used by parties in their agreements. The doctrine of prevention is not superior to an express term to the contrary, especially where there was no ambiguity in the term. It is a decision (which has now been upheld by the Court of Appeal, as noted above) that will very much be welcomed by employers and their lenders. Contractors will no doubt take notice and seek to negotiate out such wording, given the potential for concurrent delays to occur on construction and engineering projects.