The addition of absolute discretion in EOT clauses – No notices – no extensions of time

The New South Wales Supreme Court’s decision in Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290 (Growthbuilt) has extremely significant implications regarding extension of time (EOT) clauses. Contractors and legal practitioners must take note of this momentous decision.

Implications for contractors

The key takeaway from Growthbuilt is that a contractor’s failure to comply with a properly drafted EOT clause will almost always bar the contractor’s entitlement to an EOT. This means that even in an adjudication application under the Building and Construction Industry Security of Payment Act 1999 (NSW) (SOPA), non-compliance with the contract should properly prevent a contractor/subcontractor from obtaining an EOT (and any consequent delay damages).

Given the serious consequences of the Growthbuilt decision, contractors must tread carefully in negotiating and administering EOT clauses, including:

  1. thoroughly negotiating EOT clauses to ensure that the contractor can reasonably comply with the necessary conditions to establish its entitlement to an EOT; and
  2. ensuring its contract administrators strictly and consistently comply with EOT clauses.

If contractors fail to administer their contracts properly, they risk losing any entitlement to an EOT, even in situations where the principal has clearly delayed the contractor.

Impacts for legal professionals

The decision in Growthbuilt represents a significant shift regarding the administration of EOT clauses from the previous decision in Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211, which was more recently affirmed in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151 (Probuild).

The relevant EOT clause in Probuild stated:

Notwithstanding that the Subcontractor is not entitled to or has not claimed an extension of time, the Head Contractor may at any time and from time to time before the issue of the Final Certificate under this Subcontract by notice in writing to the Subcontractor extend the time for Practical Completion for any reason.

The New South Wales Court of Appeal found in Probuild that the specific formulation of the EOT clause in that case did not stop the operation of the prevention principle or an implied duty of good faith in exercising the discretion. That is to say, that the prevention principal could operate if it were applicable.

In contrast to the Probuild decision, the relevant EOT clause in Growthbuilt stated (emphasis added):

“Growthbuilt may in its absolute discretion at any time and for any reason, without prejudice to its rights or the Subcontractor’s obligations under this Subcontract, extend the Date for Completion, but Growthbuilt is under no obligation to extend, or to consider whether it should extend, the Date for Completion”.

In Her Honour’s decision in Growthbuilt, Henry J outlined that the inclusion of the element of “absolute discretion” was the critical distinguishing factor from Probuild. That is, in contracts where the principal or superintendent is given an absolute unilateral discretion to grant extensions of time, then the contractor/subcontractor will not be able to rely on the prevention principle or an implied duty of good faith to obtain an EOT, even where the principal has unilaterally delayed the contractor. This is a very important point for lawyers drafting construction contracts.

Therefore, where an EOT clause has “covered the field” and there is no fetter on the principal’s or superintendent’s discretion, the contractual mechanism for granting and assessing EOTs will continue to operate even in the face of undeniable delay created by the principal. The only options to dispute the exercise of that discretion will arise outside of the Contract (such as a claim for misleading and deceptive conduct under the Australian Consumer Law).

As stated above, the effect of the Growthbuilt decision will be felt throughout the industry and we expect in SOPA decisions if this law is properly applied by the adjudicator. Previously, in SOPA claims contractors would often rely on the prevention principle to obtain a determination of their entitlement to EOTs where the principal had caused the delay, even without strict contractual compliance. Now, where an EOT clause provides the principal or Superintendent with an absolute discretion in relation to unilateral extensions of time, that loophole appears to be now well and truly closed.

Case Summary

Facts

Growthbuilt Pty Ltd (Contractor) entered into subcontracts for four respective residential building projects with Modern Touch Marble & Granite Pty Ltd (Subcontractor) to design, supply and install stone for the building projects (Subcontracts).

The Subcontractor claimed that its works were delayed by the Contractor. Subsequently, the Contractor terminated each of the respective Subcontracts, alleging the Subcontractor failed to complete its works on time.

The Contractor commenced the proceedings claiming liquidated damages, costs to complete the projects after termination of the Subcontractor, and the cost of materials used to complete the work. The Subcontractor cross-claimed against the Contractor for unpaid monies due under the Subcontracts.

In relation to the Contractor’s liquidated damages claim, the Contractor submitted that the Subcontractor had not claimed an EOT, any delays had no legal bearing, and the prevention principle did not apply. The Subcontractor argued that the Contractor’s unilateral power to grant an extension of time in each Subcontract meant that the prevention principle was a live issue, and that the liquidated damages rate in each Subcontract was a penalty and not enforceable.

Decision

The Court awarded the Contractor the net amount of $1,126,119.79 (after setting off any outstanding amounts due to the Subcontractor).

EOT clause

The Court held that the drafting of the EOT clause in the Subcontracts meant that the Contractor had an ‘absolute discretion’ to grant an EOT and was under no obligation to do so for the benefit of the Subcontractor or at all. Additionally, the Court decided that the Subcontractor had not complied with the mechanisms of the EOT clauses in the Subcontracts and as such could not rely on the prevention principle.

Liquidated damages rate

Whilst the liquidated damages rate of $3,500 per calendar day was ‘high’ for relative to the value of the Subcontracts, the Court determined that the Subcontractor had not proved that the sum was ‘extravagant, out of proportion or unconscionable’ in relation to the potential loss of the builder and awarded the claimed liquidated damages to the Contractor.

Article by Brett Vincent, Partner and Joel Dueck, Graduate Lawyer