The ‘prevention principle’ in contracts – schedule extensions and liquidated damages

The principle is important to watch when signing contracts or working to resolve a dispute. PHOTO: Getty Images

The owner of an infrastructure project agreed to provide engines for the contractor to install, and their installation was on the contractor’s critical path. Because of supplier problems, the engines failed to arrive on time. The owner knew this would probably impact the schedule, but had already extended it for unrelated reasons, and thought the contractor could accelerate to make do without a further extension. The contractor was late anyway, much later than could reasonably be blamed on the late delivery. The owner tried to recover contractual liquidated damages from the contractor. Can it?

This was the exact question before the B.C. Court of Appeal in the 1966 case Perini Pacific Ltd v Greater Vancouver Sewerage & Drainage District. Even though part of the delay was the contractor’s fault, the court decided the liquidated damages clause of the contract could not apply. By failing to ensure the engine delivery, the owner had interfered with the contractor’s ability to complete within the time required, so the owner ought to have extended the schedule to account for that. Because the owner had failed to do so, it could not hold the contractor to the original completion date. Instead, the contractor was required to complete within a “reasonable” time. For the liquidated damages clause to operate, however, there had to be a fixed completion date from which to calculate the number of days of delay. The owner’s interference made the liquidated damage clause inoperative, so the contractor was not required to pay them.

This is a specific example of the “prevention principle” in contracts. One party to a contract cannot properly complain if it causes the other party to fail to meet an obligation. The prevention principle operates even if one party does not completely prevent the other party’s contractual performance. It is enough to interfere with it seriously, as in the Perini case. An English court has described the principle in this way: “A building owner is not allowed to insist upon the penalty for delay if, by ordering extra, he has prevented the builder from completing the work by a specified time.”

Owners can avoid this problem with proper legal drafting and effective contract administration. If the consultant or owner provides a reasonable extension to the contract time, under the applicable contract mechanism, then a new fixed completion date for the contract is established. If the contractor is then late, without proper excuse, it is possible to calculate damages from the new date. Including schedule-extension clauses in construction contracts is thus as much for the benefit of the owner as it is for the contractor. Conversely, failing to grant appropriate schedule extensions is potentially harmful for everyone.

Problems can arise even with an appropriate extension clause. The consultant may be given authority under the contract to decide the amount (if any) of schedule extension to be granted for the owner’s interference and the contractor may disagree strongly with his or her decision. The contractor may be actually delayed, but it may fail to meet a short-fuse contractual time period for giving notice of delay. The owner may interfere with the decision of the consultant. The consultant may fail to decide on the schedule extension time until after the contract is completed – in such a case, the contractor could be in the difficult position of not knowing the supposed completion date until after the contract is complete. The contract may not apply clearly to the specific situation, or it may seem to override the prevention principle. Even if an owner clearly did interfere with the contractor’s work, the actual effect on the project schedule may be difficult to prove. Even where the interference was a provable cause of delay, schedule extensions can have multiple causes, arising from “concurrent delays.” Situations like these can quickly lead into deep legal waters. The thing to remember in such situations is that a party to a contract should not benefit from its own wrong.

All of this suggests that owners, contractors and consultants should bear the prevention principle in mind in contract drafting, contract administration and when seeking to resolve construction disputes. The principle tends to encourage fair dealing. On the other hand, it also adds considerations to the legal framework that can go beyond what is clearly set out in the contract language, which can lead to misunderstanding and dispute. Perhaps most importantly, it can be a touchstone for construction contractors in avoiding unfair treatment. Contractors should know their rights with respect to schedule extension, especially where the contractor’s ability to perform may be seriously impaired by the owner.

Dirk Laudan and Siobhan Small practice construction law at Borden Ladner Gervais LLP. This article is for information purposes only and may not be relied on for legal advice.

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This column first appeared in the October 2019 edition of On-Site. Click here to read through the entire issue.