What is the Prevention Principle
Where one party to a contract (the first party) is in breach of it and that breach in turn causes the other party (the second party) to also be in breach, the first party cannot usually complain about the second party’s breach or rely upon it to terminate the contract and sue for damages.[1]
In construction cases, this principle is commonly applied as an answer to a claim for liquidated damages, to say that the plaintiff’s own conduct prevented the defendant from completing the works within time and that the plaintiff, therefore, is disentitled from recovering liquidated damages. The principle in this context is called the prevention principle.
However, the right to rely upon the prevention principle is not absolute. The parties to a construction contract are free to contract out of the operation of the prevention principle altogether, or to modify it.[2] It should be noted, however, that the exclusion or modification of the prevention principle is rarely obvious.
Excluding or Modifying the Prevention Principle
The prevention principle can, for example, be entirely excluded by an appropriate extension of time regime under the relevant construction contract.[3]
All that is required in that respect is that the party potentially exposed to liquidated damages has some right to seek an extension of time for delays caused by the party to the contract with the right to claim liquidated damages. In those circumstances, there is no need (or room) for the prevention principle to apply because the party potentially exposed to liquidated damages has a means by which to avoid the exposure, by making a claim for an extension of time under the relevant extension of time regime.
However, even in these circumstances, the prevention principle can sometimes still survive, because of other terms of the contract. This is commonly the case where there is, independent of the extension of time regime, a discretion conferred on the party with the right to claim liquidated damages (or their superintendent) to nevertheless direct and allow an extension of time. In those circumstances, properly construed, the term can sometimes give rise to an obligation on the part of the party able to exercise the discretion to consider extending time for the benefit of the other party and specifically for principal caused delay.[4]
Whether a clause has that effect, however, is a matter for the proper construction of the contract and may not be readily ascertainable on the face of the document which is the contract and in particular the specific extension of time clauses. The contract must be considered as a whole and, moreover, if there is any ambiguity in the relevant clauses, the proper construction of them might require turning to and considering circumstances surrounding the transaction.[5] That in turn can make it very difficult for parties to properly appreciate the nature and effect of the extension of time regimes they are subject to, without legal advice.
Insights
The prevention principle provides important relief to parties on the receiving end of claims for liquidated damages, where the cause of the delay is the other party to the contract and where the contract provides no entitlement to an extension of time for those delays. However, the prevention principle can easily be excluded, and it can be so excluded by the affording of rights to claim an extension of time which are, despite existing, practically impossible to exercise strictly in accordance with the terms of the contract because strict time limits and other conditions are often imposed on the making of such a claim.
For subcontractors in particular, it is important not only to ensure appropriate entitlements to extensions of time are available in the contract, but also that these procedures and notice provisions, which apply to the extension of time regime, are practically exercisable and manageable having regard to their own sophistication and access to contracts administration resources. The effect otherwise can be the deceptive appearance of an entitlement, not practically exercisable, to extensions of time, which in turn displaces and excludes the operation of the prevention principle to their significant detriment.
Conversely, for principals and head contractors, the prevention principle is seriously undermining of the right to liquidated damages often included in commercial construction subcontracts. The prevention principle should be excluded, wherever possible, to avoid any impediment to the right to rely upon liquidated damages provisions. Those rights often provide an important remedy for avoiding costly and distracting disputes about damages where a subcontractor has not held up their end of the bargain and reached practical completion by the time agreed for doing so, and should be protected at all costs as being one of the most important rights available to principals and head contractors, in their contracts.
If you have any questions about the application of the prevention principle, or in respect of your construction contract generally, call Rose Litigation Lawyers to speak with an experienced building and construction lawyer today.
[1] Thallon Mole Group Pty Ltd v Morton [2022] QDC 224 at [495] citing Roadshow Entertainment v (ACN 053 006 269) Pty Ltd (1997) NSWLR 462 at 483 and Woo Nam Lee v Surfers Paradise Beach Resort Pty Ltd [2008] 2 Qd R 249 at [53].
[2] Probuild Constructions (Aus) Pty Ltd v DDI Group Pty Ltd (2017) 95 NSWLR 82 at [117].
[3] Growthbuild Pty Ltd v Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290 at [50].
[4] Midson Construction (Qld) Pty Ltd v The Haggarty Group Pty Ltd [2021] QC 280 at [148].
[5] See e.g. Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640 at [35] and Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 at [47].
The content of this publication is intended to provide a summary and commentary only. It is not intended to be comprehensive nor does it constitute legal advice, and has been prepared based on applicable legislation and case authority at the date of publication. You should seek legal advice on specific circumstances before taking any action.
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