Prevention Principle won’t override parties’ agreement

A recent decision from the UK Court of Appeal stands as a firm reminder that what the parties agree and record in contract is the starting point when a dispute arises.

In North Midland Building Limited v Cyden Homes Limited [2018] EWCA Civ 1744, the contractor North Midland Building (North Midland) had contracted out of the Prevention Principle and was therefore liable to the principal, Cyden Homes (Cyden) for not completing the works on time.

Unless a construction contract says otherwise, generally a principal will be unable to rely on delay provisions in its favour and recover from a contractor if the delay was in some way caused by the principal itself as well as the contractor.

In this scenario, when there are two causes of the delay acting together (known as “Concurrent Delay”) the Prevention Principle prevents a principal from claiming against the contractor for delay.

The net effect of the Prevention Principle being upheld can be twofold:

  • the completion date for the contractor is no longer strict and instead the contractor can complete the project within “a reasonable time”; and
  • the principal may no longer be able to rely on a liquidated damages clause for delay, instead having to set about establishing its entitlement to common law damages which are more difficult to calculate and involve proving that the contractor did not complete within a reasonable time (which can be an onerous undertaking in and of itself)

A case of a clause

The contract between North Midland and Cyden was a standard form design and build contract. The standard terms may have allowed for the Prevention Principle to have effect in favour of North Midland, but the amendments to the standard terms squarely placed the cost arising out of any Concurrent Delay on North Midland.

North Midland argued that because the clause was contrary to the Prevention Principle, it must have no effect. The Court’s reasons for rejecting North Midland’s arguments included:

  • No case law indicates that the Prevention Principle has any overriding force;
  • Case law, in fact, indicates that the Prevention Principle can be contracted out of; and
  • The contract provided for extensions of time in the event of any acts of prevention by the principal and the case law indicates that when such provisions exist, the Prevention Principle does not take effect (See for example the New Zealand case of Fernbrook Trading Co Ltd v Taggart [1979] 1 NZLR 556 where the court held that the Prevention Principle applied due to there being no such provision in the contract).

Contract first; principles later

Common law principles (such as the Prevention Principle) often promote construction of contractual terms in favour of the contractor. In the UK, these common law principles have been organised into a scheme for dealing with delay and disruption events in the Society of Construction Law Delay and Disruption Protocol. However such principles will succumb in the face of contractual provisions contrary to them. These principles cannot be resorted to in an attempt to read down – or strike down – a contractual provision agreed between the parties.

This case is a reminder of the need for parties to be aware of what they are contracting into (and out of) in light of clear indications from courts such as this that contracts will be honoured – even if the net result of doing so may not seem ‘fair’. We think this is particularly evident in light of recent New Zealand decisions in the context of assessing liquidated damages clauses (See our article on Honey Bees and Torchlight) which display a judicial hesitancy in New Zealand toward interfering in contractual arrangements made between commercial parties.

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