The Prevention Principle – An irreproachable concept?

We recently spoke with Thomas Lazur of Keating Chambers on the "prevention principle." Our discussion can be listened to here, and this article supplements that discussion and considers further some of the key points raised during our conversation.

Introduction

This article assesses the extent to which the prevention principle remains a trite legal principle or whether, in reality, cracks have started to appear. In particular, the authors note the potential dichotomy of approach between traditional onshore construction contracts and offshore contracts and in the extent to which the principle is applied to the latter by the Commercial Court. We consider the development of the principle and its application to construction contracts and shipbuilding contracts further below.

Onshore Construction Contracts

a. Historical development of the prevention principle

In its most simplistic formulation, the prevention principle prevents a party, in the absence of clear terms to the contrary, from taking advantage of its own wrong.^[1]

Most construction and engineering contracts require the contractor to complete its works by a fixed, pre-agreed completion date, failing which the contractor will become liable to the employer for a period of time for liquidated damages. However, if the employer prevents the contractor from completing its works (either by the employer's legitimate conduct or by breaching the contract), most construction contracts provide a mechanism for extending the completion date to reflect the employer's act of prevention. The prevention principle is likely to apply where there is no extension of time mechanism in the contract, or the mechanism in the contract fails to clearly address what happens to the completion date in the event of employer caused delay.

The principle is long-established; in the context of construction law it dates back as far as Holme v Guppy^[2] in 1838, which first introduced the concept of "time at large" and which was later upheld in Dodd v Churton.^[3] In Dodd v Churton, Lord Esher held that:

"…if the building owner has ordered extra work beyond that specified by the original contract which has necessarily the time requisite for finishing the work, he is thereby disentitled to claim the penalties for non-completion provided by the contract. The reason for that rule is that otherwise a most unreasonable burden would be imposed upon the Contractor."^[4]

In effect, the early case law developed such that, if a building owner or employer acts in a manner which requires the contractor to do more and the contractor subsequently fails to meet the scheduled completion date, the employer will be precluded from relying on any liquidated damages provision.

b. Modern jurisprudence on "time at large"

The modern jurisprudence on "time at large" commenced with Lord Denning's judgment in Trollope & Colls Ltd v North West Metropolitan Regional Hospital Board, which was upheld in the House of Lords.^[5] In this case, it was held that:

“It is well settled that in building contracts - and in other contracts too - when there is a stipulation for work to be done in a limited time, if one party by his conduct - it may be quite legitimate conduct, such as ordering extra work - renders it impossible or impracticable for the other party to do his work within the stipulated time, then the one whose conduct caused the trouble can no longer insist upon strict adherence to the time stated. He cannot claim any penalties or liquidated damages for non-completion in that time.”^[6]

This reinforced the earlier decisions and confirmed that where there is an act of prevention, time is put at large and the employer's entitlement to liquidated damages is lost. Instead, the contractor will be entitled to a "reasonable time" for completion, but the contractual extension of time mechanism and completion dates are set aside. Effectively, these fall to be determined in a hypothetical common law microcosm and, as a consequence, what might constitute a reasonable time for completion in the circumstances remains inherently uncertain.

c. The orthodox view

The current orthodoxy was established in Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No 2).^[7] In this case, Jackson J held that:

"In the field of construction law, one consequence of the prevention principle is that the employer cannot hold the contractor to a specified completion date, if the employer has by act or omission prevented the contractor from completing by that date. Instead, time becomes at large and the obligation to complete by the specified date is replaced by an implied obligation to complete within a reasonable time. The same principle applies as between main contractor and sub-contractor.^"[8]

To avoid triggering the prevention principle, construction contracts typically include extension of time clauses, which entitle the contractor to claim an extension of time where the works are delayed as a result of an 'act of prevention' on the employer's part; and allow the completion date to be extended to a new date from which liquidated damages can be levied. The effect of such clauses is to preserve the contractual completion date and the employer's entitlement to claim liquidated damages for any delay beyond the extended completion date. In this regard, an extension of time clause is actually for the benefit of the employer, because it acts to preserve the liquidated damages mechanism whilst simultaneously providing the contractor with certainty as to its financial exposure in respect of such delays and maintaining a contractual deadline for completion.

However, if an extension of time clause is drafted too narrowly, or there is no clear or effective mechanism to extend the completion date on account of delays caused by the employer (whether permitted under the contract or otherwise), the prevention principle may still apply. In this regard, the operation of the prevention principle was summarised in Multiplex Constructions in the following terms:

1. Actions by the employer which are perfectly legitimate under a construction contract may still be characterised as prevention, if those actions cause delay beyond the contractual completion date.
2. Acts of prevention by an employer do not set time at large if the contract provides for extension of time in respect of those events.
3. In so far as the extension of time clause is ambiguous, it should be construed in favour of the contractor.

The first proposition is consistent with the traditional approach. However, the second proposition makes reference to time at large, without discussing what it means or considering its impact on the contract and how it should be dealt with. As to the third proposition, in effect, Jackson J said that where any ambiguity exists ultimately the contractor will be given the benefit of the doubt and the prevention principle applies.

This is indicative of a more general failure of the authorities to consider the practical implications of time being at large. For example, where there is concurrent delay, including an act of prevention, should it generally be accepted that the liquidated damages mechanism falls away entirely? This appears to be a rather extreme result – the alternative being to assess how much critical delay was caused by an event for which the contractor is responsible and grant an extension of time for that period, so the employer is still entitled to liquidated damages. There is thus a question as to whether the accepted wisdom of time being at large and the liquidated damages regime falling away is correct. This is a far cry from Trollope & Colls where Lord Denning said that an employer cannot claim any liquidated damages from non-completion within the specified time where the delay was caused by that relevant event, i.e. where the delay is caused by an act of prevention. The legal authorities have not considered the possibility that the employer should be able to claim liquidated damages for the period of delay for which the contractor is responsible (i.e. after the expiry of a reasonable time). Effectively, this results in the parties spending a significant length of time negotiating a liquidated damages mechanism prior to entering into the contract, only to find that this can be avoided entirely if it is not adequately drafted.

Coulson LJ's obiter comments in North Midland Building Ltd v Cyden Homes Ltd^[9] did very little to clarify the position – he stated that:

"If the parties do not stipulate that a particular act of prevention triggers an entitlement to an extension of time, then there will be no implied term to assist the employer and the application of the prevention principle would mean that, on the happening of that event, time was set at large."^[10]

Rather than provide clarity as to the meaning and effect of time at large, Coulson LJ evidently did not deem it necessary to start examining the rationale behind the orthodoxy.

d. Flashes of dissent

That is not to say that the principle has not been subject to criticism, in Bluewater Energy Services v Mercon,^[11] Ramsey J stated that "The principle is of some antiquity and has a surprising effect on the contractual obligations as to the time of completion."^[12]

In Balfour Beatty v Chestermount,^[13] Coleman J also highlighted the apparent pitfalls of this principle:

"The remarkable consequences of the application of this principle could therefore be as if … the contractor fell well behind the clock and overshot the completion date … if the architect then gave an instruction for the most trivial variation, representing perhaps only a day’s extra work, the employer would thereby lose all right to liquidated damages for the culpable delay … what might be a trivial variation instruction would destroy the whole liquidated damages regime…"^[14]

Given such criticisms, it can be inferred that there is genuine scope for considering the future application of this principle if a suitable case reaches the courts. For example, whether the principle permits the continued application of liquidated damages for the period beyond what is reasonable. However, for the time being the orthodox approach continues.

e. Risk allocation between the parties

Determining whether the prevention principle applies can create a conflict between freedom of contract on the one hand, whereby the parties are free to enter into the contract on whatever terms they like, and ensuring fairness on the other. The position taken in England and Wales has been to hold parties to their agreement where it was entered into at arm's length. In Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd^[15] and more recently in Stocznia Gdynia v Gearbulk^[16] the courts have held that parties should not be presumed to be abandoning rights under the general law without clear words to the contrary. Therefore, if the prevention principle is to be disapplied, there must be "clear contractual intention to be gathered from the express provisions of the contract."^[17]

As noted above, extension of time clauses tend to be strictly construed against the employer, such that ambiguity in an extension of time clause may be interpreted in favour of the contractor resulting in time being "at large" in the event of an employer act of prevention.^[18] The prevention principle is assumed to operate in circumstances where there is no extension of time mechanism. However, if the parties have clearly expressed an intention to deal with acts of prevention in a different way, then it is likely that those intentions would be respected by a court or tribunal in accordance with the normal rules of contractual interpretation.

Indeed, there have been efforts to reallocate such risks between the parties. For example, many extension of time clauses, including clause 20.1 of the FIDIC forms, make giving notice a condition precedent to any extension of time. This means that the contractor may not be entitled to an extension of time (even if the employer has delayed the project) unless it provides a notice compliant with the contract. It seems unlikely that a contractor will be able to ignore a notification clause in order to benefit from the application of the prevention principle and avoid paying liquidated damages.

In Multiplex Constructions,^[19] Jackson J considered notice requirements holding that:

"Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent."^[20]

Alternatively, some parties (presumably those with strong bargaining positions) have excluded the right to an extension of time where there is concurrent delay. The case of North Midland Building Ltd has clarified that the prevention principle can only operate as an implied term, and is not an overriding rule of public or legal policy. Accordingly, parties may essentially contract out of the prevention principle, for example, by agreeing that the contractor bears the risk of certain delays, notwithstanding that they are caused by the employer. In such cases, the application of the prevention principle may be excluded by the express terms of the contract.

In North Midland Building Ltd,^[21] Coulson LJ stated that:

"Clause 2.25.1.3(b) was an agreed term. There is no suggestion in the authorities noted above that the parties cannot contract out of some or all of the effects of the prevention principle: indeed, the contrary is plain. Salmon LJ’s judgment in Peak v McKinney … expressly envisaged that, although it had not happened in that case, the parties could have drafted an extension of time provision which would operate in the employer’s favour, notwithstanding that the employer was to blame for the delay."^[22]

However, it remains to be seen whether future parties to construction contracts may be more concerned with balancing risks produced by the current system and might start reallocating risk under the contract if they deem it to be fair, just and reasonable. If the law does take this line, we may be opening a Pandora's box as an element of uncertainty (which has thus far been contained through comprehensive extension of time clauses) will inevitably be reintroduced.

Offshore construction

a. General reluctance to apply the prevention principle

Historically, it has been questioned whether the prevention principle applies in the context of offshore construction contracts. Contrary to the position in the construction sector, there has been significant debate within the shipbuilding industry as to whether the prevention principle applies at all. As a consequence, the general consensus amongst lawyers has been that there may be a difference between the way offshore and onshore contracts address risk of delay, and therefore the applicability of the prevention principle. However, several recent cases call into question the extent to which this onshore-offshore dichotomy exists.

Traditionally, shipbuilding contracts have developed based on a sale-of-goods mentality, whereby if the purchaser orders a specific vessel for delivery by a particular date, the purchaser can cancel the order and obtain a refund if, subsequently, the vessel is not delivered on time. However, the shipbuilder cannot be prevented from delivering the vessel on time, because it has the power to refuse to make changes to the design and does not need to take into account any defects or punch list items provided that the Class is approved.

More recently, these types of contracts are being used in the oil and gas industry, for example in the context of constructing offshore oil rigs and platforms. However, traditional shipbuilding contracts have not been amended to take into account the shift towards this construction type of environment, where employers tend to take a more proactive approach to design and construction, for example, by reviewing and commenting upon designs and undertaking random inspections and testing. Such changes are not envisaged by the traditional shipbuilding contracts because, as noted above, they assume that the shipbuilder can ignore the employer's requests entirely. In some instances, shipbuilders eager to thrive in the international market have complied with the employer's requests without considering the allocation of risk under the contract. This has had the effect of contractors claiming that they were prevented from delivering the vessel on time, and employers arguing that the prevention principle is inapplicable in shipbuilding contracts and claiming liquidated damages.

b. Turning the tide

The tide turned, so to speak, when Hamblen J issued his judgment in Adyard Abu Dhabi v SD Marine Services,^[23] holding that:

"(1) In a basic shipbuilding contract, which simply provides for a Builder to complete the construction of a vessel and to reach certain milestones within specific periods of time, the Builder is entitled to the whole of that period of time to complete the contract work.

(2) In the event that the Buyer interferes with the work so as to delay its completion in accordance with the agreed timetable, this amounts to an act of prevention and the Builder is no longer bound by the strict requirements of the contract as to time.

            (3) The instruction of variations to the work can amount to an act of prevention."^[24]

In effect, Hamblen J concluded that the prevention principle applies to shipbuilding contracts generally, although he construed the specific clause in question to mean that it did not apply in that case.

In the case of Zhoushan Jinhaiwan Shipyard Co Ltd v Golden Exquisite Inc,^[25]  Leggatt J considered an amended Shipbuilders' Association of Japan contract and held that there was a tripartite categorisation of delay:

1. "permissible delay" being delays for which the builder could obtain an extension of time;
2. “non-permissible delays” being delays for which the builder could not obtain an extension to time; and
3. Various other types of delay spread throughout the contract which the judge called “excluded” delays as they were, under a separate term of the contract, effectively permissible delays.

Despite outlining the three potential categories of delay, Leggatt J concluded that the parties had considered all the risks and had allocated these appropriately, so there was no need to consider this further and, in those circumstances, the prevention principle would not apply.

The recent case of Jiangsu Guoxin Corporation Ltd (formerly known as Sainty Marine Corporation Ltd) v Precious Shipping Public Co. Ltd,^[26] also considered the application of the prevention principle in an amended Shipbuilders' Association of Japan contract. However, here, Butcher J held that as the relevant article in question applied to delay attributable to "other causes beyond the control of the seller or its subcontractors",^[27] this could be construed widely to include acts within the control of the buyer, i.e. preventive acts by the employer. In this instance, Butcher J found that the narrow interpretation in Zhoushan had been formed in a different context and, therefore, construing the article on its natural and ordinary meaning the contract was deemed to include an extension of time provision and, thus, once again, the prevention principle did not apply. In any event, the relevant notices had not been given so there was no entitlement to an extension of time. At the time of writing, this case is subject to an appeal. It would be interesting to consider whether such a term in an onshore construction contract would have been interpreted in the same way.

Based on the shipbuilding cases to date, perhaps the only thing that is clear is that there is a lot of uncertainty (and also some fear) surrounding the application of the prevention principle to shipbuilding contracts. Arguably, the judiciary appears unwilling to engage directly with this issue and would rather sidestep any meaningful debate on the topic. The prevention principle has been tentatively applied to shipbuilding disputes, but with no significant development of case law precedent. Therefore, it remains to be seen whether the industry itself grapples directly with these issues. For example, whether standard form shipbuilding contracts in future will be drafted in a manner which is more closely aligned to construction contracts and sets out a comprehensive extension of time mechanism.

Conclusion

The future trajectory of the prevention principle is uncertain. This uncertainty is compounded by the recent jurisprudence, particularly in the context of offshore construction contracts. Given that most construction contracts contain comprehensive extension of time provisions, in practice, the prevention principle is rarely invoked in construction disputes. As a result, any development of the principle is likely to arise from the shipbuilding industry. For example, a potential development would be to continue to apply the prevention principle as an implied term but not to construe it so strictly such that it entirely obfuscates the extension of time mechanism and liquidated damages provisions agreed between the parties. Rather, in the alternative, the prevention principle might only be deemed to apply in circumstances where the delay event was caused by an act of prevention not explicitly covered in the terms of the contract. This would effectively promote a middle ground and potentially encourage a universal approach to the prevention principle between onshore and offshore construction contracts. However, whether or not this amounts to any significant changes in the coming years remains to be seen.