Member Article

In North Midland Building Ltd v Cyden Homes Ltd, the Court of Appeal held that an express contractual term allowing an employer to levy liquidated damages for periods of concurrent delay took precedence over a common law principle known as the prevention principle.

Background

Cyden Homes Limited (CH) employed a contractor, North Midland Building Limited (NMB), to design and build a large house in the Midlands, under a JCT Design and Build construction contract. The contract provided for a completion date of 18 June 2010, with liquidated damages of £5,000 per week being available thereafter for certain delays.

“Concurrent delay” arose in the works, in the sense of a delay which was the fault of CH arising concurrently with a delay which was the fault of NMB. The question for the court was whether this delay entitled NMB to an extension of the contractual completion date.

CH maintained that the contract provided a straightforward answer to this question. Amended clause 2.25.1.3(b) stated that in considering an extension of time, “any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account”. Accordingly, CH argued that concurrent delay would not entitle NMB to an extension of time to the completion date.

The prevention principleNMB conceded that the language of clause 2.25.1.3(b) was clear. However, NMB sought to strike down the clause by reference to a common law doctrine known as the “prevention principle”. This is a general contractual principle whereby a party cannot do something that prevents another party performing a contractual obligation and then found on that non-performance. In the context of construction contracts, one application of the prevention principle is that an employer cannot found on a contractor’s failure to perform an obligation by a particular date if the employer has prevented that performance.

NMB maintained that since clause 2.25.1.3(b) purported to allow CH to found upon a failure to perform which CH was itself preventing, the prevention principle was engaged and rendered clause 2.25.1.3(b) inoperable. This was not on the basis that the prevention principle was an implied term (since an implied term cannot take precedence over an unambiguous express term), but rather because it amounts to an overriding legal policy principle akin to the rule that the courts will strike down penalty clauses. The result, NMB argued, was that it was entitled to an extension of time for the concurrent delay and CH was not entitled to levy liquidated damages for the delay period.

The Court of Appeal rejected this argument. Clause 2.25.1.3(b) was unambiguous. The court rejected the proposition that the prevention principle is analogous to the rule against penalty clauses and concluded that the prevention principle cannot override an unambiguous clause agreed between the parties. In any case, the court took the view that the prevention principle “has no obvious connection with the separate issues that may arise from concurrent delay.” Therefore, even if the court had concluded that the prevention principle amounted to an overriding rule of legal policy, it would not have displaced clause 2.25.1.3(b).

Liquidated damages

NMB’s alternative argument was that even if clause 2.25.1.3(b) was valid, there was an implied contractual term which prevented CH from recovering liquidated damages in relation to any period of concurrent delay. NMB maintained that “it would be bizarre if [CH] could recover liquidated damages for a period of delay for which it was responsible.”

The court rejected this argument too, concluding that the extension of time provisions were “inextricably linked to the provisions relating to liquidated damages”. This was so because the “primary purpose of an extension of time provision is to give the contractor relief against the levying of liquidated damages for delays which were not his responsibility under the contract”. Given that the contract ruled out an extension of time where there was concurrent delay, it followed logically that liquidated damages could be levied in respect of such periods.

Conclusion

Finally, the court pointed out that in cases of concurrent delay, both the employer and contractor can equally argue that it would be unfair for the other to be able to benefit from delay which it is partly responsible for. The extension of time provisions found in the JCT suite of contracts have been held by the courts to benefit the contractor in cases of concurrent delay – in other words, the contractor is entitled to an extension of time notwithstanding that it was partly to blame for the delay. By contrast, clause 2.25.1.3(b) as agreed by the parties in this case benefited the employer by disallowing an extension of time to the contractor despite the fact the employer was partly at fault for preventing the contractor’s timely performance.

The court noted that “Either result may be regarded as harsh on the other party; neither could be said to be uncommercial or unworkable.” This case therefore demonstrates that while it may not be possible to reach an outcome in such cases which is wholly fair to both parties, it is at least possible to achieve commercial certainty by agreeing the position clearly in advance.