CIArb March 2017 Conference Civil-Common Law Divergence and Convergence: The Construction Industry Case Study

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1 CIArb March 2017 Conference Civil-Common Law Divergence and Convergence: The Construction Industry Case Study Note Good Faith, Estoppel and Abuse of Rights: The Prevention Principle Contents I. GOOD FAITH IN COMMON LAW JURISDICTIONS... 1 II. ESTOPPEL IN COMMON LAW JURISDICTIONS... 2 III. ABUSE OF RIGHTS IN COMMON LAW JURISDICTIONS... 3 IV. THE PREVENTION PRINCIPLE... 3 A. WHAT IS THE PREVENTION PRINCIPLE?... 3 B. ASSORTED EXAMPLES: WHAT SORT OF ACTS/OMISSIONS ENGAGE THE PREVENTION PRINCIPLE?... 5 C. EFFECT OF THE APPLICATION OF THE PREVENTION PRINCIPLE... 6 D. IS A CONTRACTUAL BREACH REQUIRED FOR THE PREVENTION PRINCIPLE TO OPERATE?... 7 E. CAUSATION ISSUES... 7 F. DEBATE... 9 G. EXCEPTIONS I. GOOD FAITH IN COMMON LAW JURISDICTIONS 1. Generally, a duty of good faith must be imposed by express term. In Mid Essex Hospital Services NHS Trust v Compass Group UK & Ireland Ltd (t/a Medirest) [2013] EWCA Civ 200, Jackson LJ held (at [105]): In addressing this question, I start by reminding myself that there is no general doctrine of good faith in English contract law, although a duty of good faith is implied by law as an incident of certain categories of contract If the parties wish to impose such a duty they must do so expressly. 2. In Chelsfield Advisers LLP v Qatari Diar Real Estate Investment Co [2015] EWHC 1322 (Ch), Richard Spearman QC (sitting as a Deputy High Court Judge) held (at [80]), having endorsed the statement of Jackson LJ above in Medirest [2013] EWCA Civ 200, that: 1

2 I consider that the case is stronger still for saying that if the parties wish to produce the result that each of them has the right to terminate the contract in the event that it loses trust and confidence in the other, even when the other party is not in breach of contract and if that may be unreasonable, then they should do expressly. 3. However, an implied term of good faith (or at least a requirement that the parties exercise a certain degree of communication and co-operation which is equivalent to an obligation of good faith) may operate in so-called relational contracts. The class of relational contracts is not firmly established. However, long-term contracts involving a high degree of interaction between parties are the most likely to be included in that description (e.g. joint venture agreements, franchise agreements and long-term distributorship agreements (see Yam Seng Pte Ltd v International Trade Corporation Ltd [2013] EWHC 111 (QB) at [142]-[143] per Leggatt J)). 4. If an obligation of good faith does exist, then its scope and effect will be a matter of contractual interpretation. In CPC Group Ltd v Qatari Diar Real Estate Investment Co [2010] EWHC 1535 (Ch), Vos J held (at [246]) that an agreement to act in utmost good faith in a sale and purchase transaction forming part of a joint venture agreement for a property development was held to give rise to obligations: to adhere to the spirit of the contract, which was to seek to obtain planning consent for the maximum Developable Area in the shortest possible time, and to observe reasonable commercial standards of fair dealing, and to be faithful to the agreed common purpose, and to act consistently with the justified expectations of the parties. 5. In Medirest [2013] EWCA Civ 200, Jackson LJ held (at [112]), in the context of a longterm agreement for the supply of hospital services, that an agreement to co-operate with each other in good faith gave rise to an obligation to work together honestly endeavouring to achieve the stated purposes. II. ESTOPPEL IN COMMON LAW JURISDICTIONS 6. Estoppel is a doctrine which may prevent a party from denying facts that it has previously asserted, or even from denying the effect of promises previously made by it (which will not be enforced as contracts at common law). There are various different types of estoppel: 6.1. issue estoppel prevents a defendant who is adjudged liable by a competent tribunal from subsequently disputing that it was liable in later proceedings with the same parties; 6.2. estoppel by deed is an evidentiary rule that recitals in a deed may not be denied by the party that made them; 6.3. estoppel by representation prevents a claimant from alleging a fact necessary to its claim if it has previously, by word or conduct, represented the contrary to the 2

3 defendant. It is a defence to a claim (or counterclaim), and is not itself a cause of action; 6.4. estoppel by convention (a variant of estoppel by representation, where two parties to a transaction act upon a basis assumed by both of them, rather than represented by one to the other). III. ABUSE OF RIGHTS IN COMMON LAW JURISDICTIONS 7. In common law jurisdictions, abuse of contractual powers is generally dealt with by implying a duty of reasonableness into many contractual obligations. 8. English law implies terms at common law and under statute in certain situations, for example, as to a price (absent agreement), or as to time (absent agreement). Many of these implied terms, rely on the concept of reasonableness in order to fill gaps in the contract that have been left by the parties. Where the English courts imply a term ad hoc into a particular contract, the courts must have regard to the intention of the parties (i.e. an implied term of reasonableness cannot be implied unless it reflects the parties intentions). 9. In Mona Oil Equipment & Supply Co Ltd v Rhodesia Railways Ltd [1949] 2 All ER 1014, Devlin J held that a term of co-operation (which is very often implied) may only reflect the degree of co-operation necessary to make the contract workable. Thus the implied term may fall far short of a requirement for reasonable co-operation. IV. THE PREVENTION PRINCIPLE A. WHAT IS THE PREVENTION PRINCIPLE? 10. The prevention principle is predicated on the idea that a promisee may not insist upon the performance of a contractual obligation which the promisee has itself by its conduct prevented the promisor from performing. 11. In the Edwardian English case of Wells v Army & Navy Co-operative Society, it was held by Vaughan Williams LJ that: In the contract one finds the time limited within which [a party] is to do his work. This means, not only that he is to do it within that time but it means also that he is to have that time within which to do it. 12. Thus, if the work is expanded so as to require more time, the obligor must be given that time, otherwise the obligee may not be permitted to rely upon its contractual rights against non-compliance because at least one of the causes of delay to the completion date will have arisen as a result of an event for which the obligor takes the risk and the prevention principle then arises. 3

4 13. In Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] EWHC 447 (TCC) (a claim by a main contractor against a sub-contractor blaming them for delays in the design, supply and installation of various electronic communication systems at Wembley Stadium), Jackson J (as he then was) (at [47]-[49]) held as follows: 47 The construction point turns upon the operation of the prevention principle in the context of the present sub-contract. The essence of the prevention principle is that the promisee cannot insist upon the performance of an obligation which he has prevented the promisor from performing. 48 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. 49 It is order to avoid the operation of the prevention principle that many construction contracts and sub-contracts include provisions for extension of time. Thus, it can be seen that extension of time clauses exist for the protection of both parties to a construction contract or sub-contract. 14. In Bluewater Energy Services BV v Mercon Steel Structures BV [2014] EWHC 2132 (TCC) (another main contractor vs sub-contractor claim), Ramsey J (at [518]) held as follows: The principle is of some antiquity and has a surprising effect on the contractual obligations as to the time for completion. 15. Perhaps the most significant effect of the prevention principle in terms of its practical application is that, as a general rule, the promisee loses its right to claim liquidated damages in respect of a failure by the other party to complete work to time. In McAlpine Humberoak v McDermott International (1992) 8 Const LJ 383, Lloyd LJ noted that Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd 1 BLR 111, The Cape Hatteras [1982] 1 Lloyd s Rep 518 and SMK Cabinets v Hill Modern Electrics Pty Ltd [1984] VR 391 were all cases where an employer was claiming liquidated damages and in all of them it was held that the claim for liquidated damages must fail since the employer could not rely on the original date of completion, nor on a power to extend the date of completion. In the absence of such a power, there could be no fixed date from which the liquidated damages could run. 16. In summary, therefore, where there is a contractually binding date for completion but, for reasons within the obligee s control, the obligor is prevented from completing by the stipulated date, then: the obligee can no longer insist upon completion by the due date; 4

5 16.2. the obligor is then left without a firm date by which to complete; and the obligor must then complete within a reasonable period. 17. According to Pickavance K, Delay and Disruption in Construction Contracts (4th ed) (2010), citing Bramble B and Callahan M, Construction Delay Claims (2009), there does not appear to be any or any significant US case law on the prevention principle. However, the prevention principle is an equitable remedy that is familiar to most common law countries. 18. Furthermore, the prevention principle is encapsulated in Article of the Unidroit Principles of International Commercial Contracts (2010) (interference by the other party) (a party may not rely on the non-performance of the other party to the extent that such non-performance was caused by the first party s act or omission or by another event for which the first party bears the risk). 19. Concepts similar to the common law prevention principle arise in some civil law codes. One example is Article 1147 of the French Civil Code: A debtor shall be ordered to pay damages, if there is occasion, either by reason of the non-performance of the obligation, or by reason of delay in performing, whenever he does not prove that the nonperformance comes from an external cause which may not be ascribed to him, although there is no bad faith on his part. B. ASSORTED EXAMPLES: WHAT SORT OF ACTS/OMISSIONS ENGAGE THE PREVENTION PRINCIPLE? 20. The following examples emerge from the case law where an employer has prevented the completion of the works in some way and has thus been denied relief by virtue of the prevention principle. 21. Failure to give possession of/access to the work site: in Holme v Guppy (1838) 15 ER 1195, the plaintiffs were supposed to complete carpentry work within 4.5 months from the date of the contract, but the defendant failed to give them possession until 4 weeks after the contract entered into force, which in turn caused further delays); in Rapid Building v Ealing Family Housing (1984) 29 BLR 5, the defendant was unable to give possession to the plaintiffs because of squatters which caused 19 days of delay whilst eviction proceedings were prosecuted through the county courts and subsequent eviction measures were taken. 22. Failure to provide plans at the proper time: in Roberts v Bury Commissioners (1870) LR 5 CP 310, failure by the defendants (and third party architects) to supply plans and drawings and failure to set out the land and define roads and failure to give particulars necessary to enable the commencement of the works caused delay. 5

6 23. Improper interference in the carrying out of the works: in Russell v Sa da Bandeira (1862) 13 CB (NS) 149, the plaintiffs had contracted with the defendant to build a warship for the Government of Portugal. A large number of disputes and objections arose during the course of the build as a result of demands made by the defendant (which, in turn, were as a result of demands made (orally) by Portuguese government agents). An arbitrator found that a considerable portion of the delay in completing the vessel was attributable to these disputes and objections. 24. Ordering extras which necessarily delay the works: in Dodd v Churton [1897] 1 QB 562, the additional extras ordered necessitated a delay. The defendant allowed a fortnight s delay but the work took 6 months extra. Even so, liquidated damages were still disallowed on the basis of the prevention principle; in The Cape Hatteras [1982] 1 Lloyd s Rep 518, the plaintiffs provided goods and services to a ship including drydocking, cleaning, painting, modifications and ancillary services for repairs carried out by the ship s crew. The defendant owners and managers attempted to avoid liability for anything more than the agreed price of engine repair and counterclaimed for a 92 day delay. Staughton J rejected the counterclaim on the basis of the defendants delays caused by the additional works requested over and above the agreed engine repair. 25. Failure to deliver components agreed in the contract: in Perini Pacific v Greater Vancouver Sewerage & Drainage District (1966) 57 DLR (2d) 307, the Court of Appeal of British Columbia held that an owner s failure to deliver engines that were agreed to be incorporated into a building (which resulted in the builder failing to complete the work on time) prevented him from relying on a liquidated damages clause. 26. Delay in providing essential instructions: in Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 69 LGR 1, an independent engineer nominated by a local authority to do a report on defective foundation piles took 6 months to enter his report and then the local authority took a further 2 months to accept the report. Total delay was 58 weeks. The Court of Appeal held that this prevented reliance on a liquidated damages clause. C. EFFECT OF THE APPLICATION OF THE PREVENTION PRINCIPLE 27. In such circumstances time is at large (i.e. absent an effective extension of time clause and unless the contract clearly provides otherwise, an act of prevention by a party releases the counterparty from its obligation to complete the works within or by any fixed period or date and that original obligation is replaced by an implied obligation to complete within a reasonable time). 6

7 28. Therefore there is no contractual date from which liability to pay liquidated damages may run (Peak Construction (Liverpool) Ltd v McKinney Foundations Ltd (1970) 69 LGR 1). D. IS A CONTRACTUAL BREACH REQUIRED FOR THE PREVENTION PRINCIPLE TO OPERATE? 29. The operation of the prevention principle does not require a breach of contract. It also applies to actions that are lawful and are permissible under the contract terms but which nevertheless have the effect of impeding the progress of the building works. This was established in Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] EWHC 447 (TCC) at [56] where Jackson J, having reviewed the authorities, derived three propositions, the first of which was: (i) 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. E. CAUSATION ISSUES 30. A key aspect of the operation of the prevention principle is that the acts of prevention must have been the cause of the delay. Therefore issues of causation regularly feature in judicial considerations of the prevention principle. 31. According to Keating on Contracts (10th ed) at 8-014, if the prevention occurs after the contractual completion date when the contractor is already in delay, it seems that the employer is able to recover liquidated damages up to the date of prevention and may be able to do so beyond. The cases of McAlpine Humberoak v McDermott International (1992) 58 BLR 1 and SMK Cabinets v Hill Modern Electrics [1984] VR 391 are cited in this respect however the point does not seem to have been decided conclusively yet. 32. The same passage from Keating on Contracts also notes that there may be complications arising if there is a condition precedent to the right to recover liquidated damages in the contract: in Balfour Beatty v Chestermount Properties (1993) 62 BLR 1, where an architect s certificate was such a condition precedent, Colman J concluded that, on a true construction of the contract in that case, the architect was entitled to grant extensions of time as a consequence of relevant events whether such events occurred before or after the completion date as then extended; in Al-Waddan Hotel Ltd v MAN Enterprise SAL (Offshore) [2014] EWHC 4796 (TCC), HHJ Raeside QC held (at [53]) that: It is and must be conceded that if a party desires to rely on the non-performance of a condition precedent he must do nothing to prevent the condition from being performed, and if there is anything that must be done by him to render possible the performance of the condition, a failure by him to do what is required disentitles him from insisting on performance of the condition. 7

8 33. Importantly, in cases where there are concurrent causes of delay (and where each party bears responsibility for one of the causes) the prevention principle will not operate. This is because the delay would have occurred anyway; it cannot be said that the delay would not have occurred but for the delay for which the obligee is responsible. 34. In Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm), the defendant engaged the claimant to build ships for the UK Government under contracts that required the vessels to satisfy the requirements of the UK Maritime Coastguard Agency ( UKMCA ). When the ships were not ready on time, and the issue arose as to whether the defendant was entitled to rescind the contracts, the claimant contended that the delays were caused by the imposition of various new design items imposed by the UKMCA. The defendant, in addition to arguing that the new design items did not constitute contractual variations, countered that the claimant had already fallen behind schedule over a year earlier (and had failed to comply with notice provisions for seeking extensions). In finding that the claimant was not entitled to rely on the prevention principle, Hamblen J held (at [282]): The conduct therefore has to render it impossible or impracticable for the other party to do the work within the stipulated time. The act relied on must actually prevent the contract from carrying out the works within the contract period or, in other words, must cause some actual delay. 35. In Jerram Falkus Construction Ltd v Fenice Investments Ltd [2011] EWHC 1935 (TCC), (a challenge to an adjudication decision where the claimant argued that deletions from the extension of time provisions meant that no extension of time could be granted in relation to acts of prevention and therefore time must be at large), Coulson J held (at [50]) as follows regarding Hamblen J s judgment in Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm): Hamblen J s analysis indicated that, if there were two concurrent causes of delay, one which was the contractor s responsibility, and one which was said to trigger the prevention principle, the principle would not in fact be triggered because the contractor could not show that the employer s conduct made it impossible for him to complete within the stipulated time. The existence of a delay for which the contractor is responsible, covering the same period of delay which was caused by an act of prevention, would mean that the employer had not prevented actual completion. Throughout his analysis, Hamblen J stressed the importance of the contractor proving delay to the actual progress of the work as a result of the alleged act of prevention. 36. In Saga Cruises BDF Ltd v Fincantieri SPA [2016] EWHC 1875 (Comm), Sara Cockerill QC (sitting as a Deputy High Court Judge) held (at [251]), having reviewed the authorities, that: These extracts, in my judgment, point the way clearly. A careful consideration of the authorities indicates that unless there is a concurrency actually affecting the completion date as then scheduled the contractor cannot claim the benefit of it. Causation in fact must be proved based on the situation at the time as regards delay. 8

9 F. DEBATE 37. There has been some judicial criticism of taking a strict approach to the application of the prevention principle to invalidate contractual liquidated damages clauses. 38. In Rapid Building Group Ltd v Ealing Family Housing Association Ltd (1984) 29 BLR 5, Lloyd LJ stated: Like Lord Justice Phillimore in Peak Construction (Liverpool v. McKinney Foundations Ltd, at p.127 of the report, I was somewhat startled to be told in the course of the argument that if any part of the delay was caused by the employer, no matter how slight, then the liquidated damages clause in the contract, clause 22, becomes inoperative. I can well understand how that must necessarily be so in a case in which the delay is indivisible and there is a dispute as to the extent of the employer s responsibility for that delay. But where there are, as it were, two separate and distinct periods of delay with two separate causes, and where the dispute relates only to one of those two causes, then it would seem to me just and convenient that the employer should be able to claim liquidated damages in relation to the other period. 39. The operation of the prevention principle has been limited in situations where an extension of time is not available as regards an employer s default caused by a contractor s failure to comply with contractual notice provisions. In Steria Ltd v Sigma Wireless Communications Ltd [2008] BLR 79, HHJ Davies held (at [95]-[96]) that: It is difficult to see why [the prevention principle should apply to the aforementioned situations], since these circumstances cannot readily be characterised as acts of prevention by the employer. 40. A spanner was thrown in the works by Gaymark Investments Pty Ltd v Walter Construction Group Ltd (formerly Concrete Constructions Group Ltd) 21 Con LJ 71 an Australian case which decided that non-compliance with a notice provision was sufficient to put time at large. However, in Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd [2007] EWHC 447 (TCC), Jackson J held (at [103]), having reviewed academic authority, that: I am bound to say that I see considerable force in Professor Wallace s criticisms of Gaymark. I also see considerable force in the reasoning of the Australian courts in the Turner and Peninsula cases and in the reasoning of the Inner House in City Inn. Whatever may be the law of the Northern Territory in Australia, I have considerable doubt that Gaymark represents the law of England. 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. If Gaymark is good law, then a 9

10 contractor could disregard with impunity any provision making proper notice a condition precedent. At his option the contractor could set time at large. G. EXCEPTIONS 41. There are two exceptions to the general rule that the obligee will lose (as a result of the application of the prevention principle) the right to rely on a liquidated damages clause: where a contractor agrees to complete works by the due date even though additional work is instructed; and where the contract provides a mechanism for the extension of time for a delay event which otherwise would amount to an act of prevention by the employer. 42. In Adyard Abu Dhabi v SD Marine Services [2011] EWHC 848 (Comm), Hamblen J held (at [243]), following Multiplex v Honeywell, that: the prevention principle does not apply if the contract provides for an extension of time in respect of relevant events. Where such a mechanism exists, if the relevant act of prevention falls within the scope of the extension of time clause, the contract completion dates are extended as appropriate and the Builder must complete the work by the new date, or pay liquidated damages (or accept any other contractual consequence of late completion). 43. In Walter Lilly & Co Ltd v Mackay [2012] EWHC 1773 (TCC), Akenhead J held (at [370]) that: In any event, I am clearly of the view that, where there is an extension of time clause such as that agreed upon in this case and where delay is caused by two or more effective causes, one of which entitles the contractor to an extension of time as being a relevant event, the contractor is entitled to a full extension of time. Part of the logic of this is that many of the relevant events would otherwise amount to acts of prevention and that it would be wrong in principle to construe Clause 25 on the basis that the contractor should be denied a full extension of time in those circumstances. More importantly however, there is a straight contractual interpretation of Clause 25 which points very strongly in favour of the view that, provided that the relevant events can be shown to have delayed the Works, the contractor is entitled to an extension of time for the whole period of delay caused by the relevant events in question. There is nothing in the wording of Clause 25 which expressly suggests that there is any sort of proviso to the effect that an extension should be reduced if the causation criterion is established. The fact that the architect has to award a fair and reasonable extension does not imply that there should be some apportionment in the case of concurrent delays. The test is primarily a causation one. 44. In Carillion Construction Ltd v Woods Bagot Europe Ltd [2017] EWCA Civ 65, Jackson LJ held (at [55]) that: 10

11 In the present case the sub-contract contains a perfectly workable extension of time clause. If event B causes, say, two months delay, then the sub-contractor obtains a two month extension of time. The fact that the extension commences on date A, not date C, does not bring the prevention principle into operation. The sub-contractor is not prevented from carrying out the sub-contract works within the extended period which the sub-contract allows. If the sub-contractor fails to complete within that period (either through its own fault or because of the fault of others for whom the subcontractor is responsible, or because of events for which the sub-contractor bears the risk) then the sub-contractor is liable to the main contractor under clause 12 of the conditions. The question whether the extension of time is contiguous or noncontiguous may affect the quantification of that liability. But it does not bring into play the prevention principle. 23 February 2017 Nothing in this text is intended to constitute or should be read as constituting legal advice. Should you require advice on any of the issues discussed in this text, please contact us directly. 11