The Effect of Absolute Discretion on the Application of the Prevention Principle

The recent New South Wales Supreme Court decision of Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290 considered the effect of an extension of time clause that granted absolute discretion as to its exercise, on the application of the prevention principle.

The builder (Growthbuilt) and the subcontractor (Modern Touch) entered into multiple agreements to design, supply and install stone in multiple residential developments in Sydney (the Subcontracts). Relevantly, each of the Subcontracts included an extension of time (EOT) clause that:

•    allowed Modern Touch to claim a reasonable EOT in respect of delay caused by an ‘Act of Prevention’ (as defined in the Subcontracts);
•    expressly stated that failure to submit a notice of delay within the time prescribed by the Subcontracts would disentitle Modern Touch from making such an EOT claim; and
•    granted Growthbuilt the power to unilaterally extend, at its absolute discretion, the Date for Completion.

Modern Touch did not complete the works by the Date for Completion under the Subcontracts and did not claim an EOT during the project. Growthbuilt terminated each of the Subcontracts. Subsequently, Growthbuilt commenced proceedings to recover liquidated damages for the period between the Date for Completion and termination of the Subcontracts, as well as post termination completion costs.

At issue in the proceedings, amongst other things, was whether Modern Touch had been prevented from completing works by acts or omissions on the part of Growthbuilt. If so, whether the EOT clause in the Subcontracts limited the application of the prevention principle.

In its cross claim, Modern Touch argued:

•    Growthbuilt prevented it from completing the works;
•    Growthbuilt’s unilateral power to extend the Dates for Completion meant the prevention principle remained an issue, even though it had not sought an EOT under the contract; and
•    Growthbuilt was obliged, under implied terms, to act reasonably and in good faith in exercising its discretion under the EOT clause.

In response, Growthbuilt argued that Modern Touch could not rely on preventing conduct in defence as it had failed to exercise the contractual right to claim EOTs that would have negated the effect of any preventing conduct.

Justice Henry held that the EOT clause in the Subcontracts had in fact modified the application of the prevention principle and made the following observations:

•    A party cannot require the other party to perform a contractual obligation if it itself has caused the other party’s non-performance. However, the prevention principle can be excluded by contract, commonly by way of a contractual EOT regime.
•    The express terms in the Subcontracts made clear that despite having discretionary power to do so, Growthbuilt had no obligation to extend or make any decisions whether or not to extend time under the Subcontracts.
•    Justice Henry relied on Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151 (Probuild) in finding that the prevention principle may be modified or excluded by way of contract. However, her Honour held the express terms of the Subcontracts were distinguished from those in Probuild, on the basis that the EOT regime here granted an absolute discretion when exercising the power to grant an EOT.
•    An obligation of reasonableness and good faith may be implied as a matter of law in particular commercial contracts however that implication does not extend to impose obligations that are inconsistent with the express terms of the agreement.
•    It would be circular to contend for an implied term that obliged Growthbuilt not to rely on an express exclusion.

In conclusion, Justice Henry held the Subcontracts modified the application of the prevention principle and Modern Touch was precluded from arguing delays caused by Growthbuilt obliged it to extend the Dates for Completion.

The full decision can be found here.