The prevention principle
Few principles of law are a greater source of confusion for civil and construction contractors than the prevention principle. The prevention principle basically prevents principals and employers from recovering liquidated damages for delay in some circumstances. That many find the prevention principle confusing is unsurprising, given the Courts themselves seem to be unable to agree on its precise legal basis or the extent of its application. For example, in recent cases, courts in Victoria, have given the prevention principle a narrower application than in NSW.
Technical differences aside, what really matters at a practical level is:
- to the contractor – avoiding liability for liquidated damages; and
- to the employer – recovering liquidated damages.
To their credit, contract terms designed to help principals/employers bypass the prevention principle as potentially obstructing their liquidated damages claims are generally quite effective. The key is to provide for:
- the ability of the principal/employer to extend the time for completion of civil or construction works unilaterally, without the need for a valid extension of time claim by the contractor; and
- the principal/employer to have sole and absolute power to decide whether or not to grant an extension of time unilaterally, serving only its own interests.
Recourse to contractors’ security
Most civil and construction contracts will allow the employer to access retention monies or make a call on a bank guarantee or performance bond based on nothing more than a genuine (i.e. not made-up) belief that the amount being taken is owed to them under the contract.
Of course, the employer’s belief that the money is owed does not make it so. But the employer’s ability to take and use the money while the parties fight about the validity of the claims the employer believes it has gives the employer an obvious commercial advantage, particularly where the underlying dispute drags on for years
Some security clauses tip the balance even further in the employer’s favour, by making it a breach of the contract to attempt to restrain – or in some cases, even to threaten to attempt to restrain – any recourse by an employer who believes, rightly or wrongly, that it has a claim to money held as security.
We will be sharing parts two and three of the Principals and Contractors: Make Civil and Construction Contracts Work For You series soon.
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