Jacob Austin 00:00:00 Hi all. It's Jacob Austin here from QS.Zone. And welcome to episode 95 of The Subcontractors Blueprint, the show where subcontractors will learn how to ensure profitability, improve cash flow, and grow their business. In today's episode, we're going to tackle some legal fundamentals that can trip you up if you're not aware. In particular, we're diving deep into the prevention principle and a few other key common law principles that can intersect with construction contracts in UK law. Now, I know that might sound like boring legal stuff, but stick with me. These principles can have real pounds and pence impact on your projects and as ever, will be breaking them down into plain English with some real world examples so you can protect your business and avoid nasty surprises. And as ever, if you're new to the show, please do subscribe for more user friendly advice on all things subcontracting. So by the end of today's episode, you'll understand how common law doctrines like good faith, repudiation, breach, frustration, and especially the prevention principle play into your contracts.
Jacob Austin 00:01:28 We'll explore how the prevention principle can affect liquidated damages, and walk through a few case examples to give you a bit more understanding. We'll then discuss some contract drafting to give you some tips to keep out of trouble. And without further ado, let's dig in. First, let's set the stage with a quick overview of some common law principles that can often crop up in construction projects. These are legal doctrines developed by courts over several hundred years. They aren't specific to any one contract, but they do form the backdrop of all contracts. These are the basic rules of the game that will apply unless your contract clearly says otherwise. And each of them can significantly affect your rights and obligations in a contract, so it's worth understanding them. Good faith. In everyday terms, good faith means dealing honestly and fairly with your contracting partner. Many of us assume that, of course, each side should act in good faith and it's just common sense, right? But under English law, there's no general automatic duty for parties to act in good faith in contract performance, which is surprising.
Jacob Austin 00:02:38 But English courts have historically been hesitant to impose the broad duty of good faith, preferring to let each party look out for their own interests within the framework of the contract. That said, things are slowly evolving, and courts have hinted that in certain long term relationships, which could include some partnering style construction contracts. An implied duty of good faith might arise, and importantly, nothing stops parties from expressly including a good faith clause in their contract. In fact, if you're familiar with the NEC suite of contracts, you'll know that, in fact, this standard form does include a good faith clause, and it requires the parties to act in a spirit of mutual trust and cooperation, which is essentially a good faith obligation. So what does this mean for you as a subcontractor? Well, mainly don't assume that an unwritten fair play rule will save you if the other side behaves badly. If you want a duty of good faith, it should be written into the contract. But even when it's not mandated by law, treating others fairly and maintaining good relationships is just good business.
Jacob Austin 00:03:48 It can prevent disputes before they start. And whilst you might not be able to sue someone for being a complete bastard, a bit of good faith in practice can go a long way on site. Next we have repudiate breach. That's a bit of a mouthful, but it's an important term. A repudiate or breach is basically a serious breach of contract, so serious that it allows the innocent party to terminate the contract and claim damages. It indicates that one party no longer intends to honour its obligations under the contract. It can also be called fundamental breach. So let's put that into construction contract. Let's say a subcontractor suddenly abandons the site and refuses to carry out any more work. That is a repudiated breach by the subcontractor. The main contractor could accept that breach, terminate the subcontract, and potentially sue them for any extra cost to get the work finished by others. Flipping that round the other way, imagine a main contractor stops paying you altogether or wrongly kicks you off a project. That, again, could be a fundamental breach by the main contractor, allowing you, as a subcontractor, to walk away and claim damages for loss of income and loss of profit, etc..
Jacob Austin 00:05:03 The key element is that the breaching party is demonstrating that it doesn't plan to uphold its end of the deal. Most contracts will also list a specific set of criteria that count as default, or give grounds for termination that might be failing to proceed diligently or insolvency. But even if something isn't listed, the general law of repudiation can apply if the breach is serious enough. Be cautious though, if you wrongly call something a fundamental breach and walk off. You might yourself be in breach of your contract. It's quite a high stakes move. It's likely one where it's sensible to take some legal advice first. But no, you're right. You don't have to tolerate the other side's serious breaches. Recognising a repudiate or a breach can empower you to cut your losses and recover what you're owed. Frustration? No, not the feeling you get when the job drags on forever. This is the frustration of the contract. The doctrine of frustration comes into play when unforeseen events beyond the control of the parties occur, and it makes it impossible or even illegal to perform the contract.
Jacob Austin 00:06:16 Or perhaps it fundamentally changes the nature of what was agreed. In these cases, the contract can be automatically discharged. Essentially, it can end then and there, with neither party at fault in construction. A good example, if a little extreme, would be if the project suddenly gets destroyed, let's say by an accidental fire or some other natural disaster partway through the job. Or imagine if a new Covid strain was discovered and suddenly construction was illegal for a period of time. Or perhaps the government bans a particular kind of material that's involved, which makes the designed project impossible to complete. That could frustrate the contract. The bar for frustration is really high. The event must be truly unexpected. Not the fault of either party and not something you could simply plan for. But you haven't. It won't be enough if the job just gets harder, or a bit more expensive, or that some foreseeable risks materialize like it rained a lot. It might be cause for an extension of time, but it's not frustration. It's a normal construction risk.
Jacob Austin 00:07:24 If frustration does occur, the events are significant and the effects are significant too. The contract ends, future obligations are excused, and neither party can claim breach against the other. Since it wasn't really anyone's fault. There's even a law, the Law Reform frustrated Contracts Act of 1943, and that deals with the aftermath. For example, if there's been money paid in advance, then that is likely to be recovered and work done might be compensated to avoid unjust enrichment. In practice, though, frustration is rare in construction contracts. And that's because our contracts usually have a force majeure clause or a detailed extension of time provision that cover some catastrophic events. These contract clauses basically fill in the gap and handle the situation and take the Covid 19 pandemic. Many contractors during that time looked to a force majeure or to specific government actions to get time relief, rather than arguing that the contract was frustrated altogether. The outcome of that might have been different if the government had said construction work must stop alongside the mass shutdowns of many other industries, but keep frustration at the back of your mind.
Jacob Austin 00:08:39 It's always there as a last resort concept, and it's good to know that it exists for truly unforeseen project ending events. Now, prevention In principle, I saved this one for last because it's the star of today's show and deserves some deeper discussion. The prevention principle is a longstanding common law doctrine, and it's highly relevant to construction contracts. In a nutshell, it says that a party can't take advantage of its own wrongdoing. And more specifically, in construction, the prevention principle holds that if the employer or the main contractor does something that prevents the main contractor or subcontractor from completing on time, then the employer or main contractor can't enforce contractual penalties for late completion. They can't have their cake and eat it, so to speak. This principle is all about fundamental fairness. You shouldn't be allowed to profit from the delay that you've caused. If you think that sounds like a big deal, then you're absolutely right. It's the reason we have extension of time clauses in contracts, and we'll mention that again later. So next I will talk more about prevention principle, because it's a critical piece of law that impacts liquidated damages and time being set at large.
Jacob Austin 00:09:56 So more on that next. But that covers our quick rundown of some key legal principles that can affect your subcontract. But now let's dig into the prevention principle in a bit more detail. At its core, the idea is really simple the person benefiting from the contract. So that might be the client or main contractor can't insist on a contractual obligation being satisfied if they have caused some kind of impediment that stops that performance. So if your client is the reason you can't finish by a particular deadline, then you can't be held to that deadline. They've prevented you from finishing on time. So the law prevents them from enforcing the contract date or charging delay damages for that situation. Instead, the completion time frame can get blown wide open, which is where we have time at large, and that means there is no longer a set contractual completion date. The contractor is simply obliged to finish within a reasonable period of time. Another way to put it would be that the prevention principle stops an employer from penalizing a contractor for a delay that they've caused themselves.
Jacob Austin 00:11:05 This comes from a really old concept that states no one should benefit from their own wrongdoing, and it's not even necessary that the preventative action is a breach of contract, even if it's completely lawful and completely allowed under your contract, like adding some additional variation work that can trigger the prevention principle if it causes delay and the contract doesn't address the consequences. So let's bring that down to site level. Imagine you're a subcontractor responsible for installing a building's facade. The contract says you must complete by the 31st of December. And there's a liquidated damages clause that if you're late, you owe, let's say, five grand a week. Straight forward. Now imagine the contractor keeps changing the design and issues. Multiple revisions, provides you access months late, and then maybe shuts you down and stops you working for a period of time. These are all events caused by the main contractor. In other words, acts of prevention. If your contract doesn't have a mechanism to extend the time for those events, then what would happen? Under the prevention principle, the employer loses the right to hold you to that original 31st of December date.
Jacob Austin 00:12:19 They've made it impossible. So in legal terms, the agreed completion date is no longer binding and you are only obligated to finish within a reasonable period considering the delays that have occurred. Added to that, the liquidated damages clause can't be enforced. They can't now fine you for finishing late when they're the ones who've thrown obstacles in the way. The classic case that illustrates this condition is peak construction. Liverpool Limited versus McKinney Foundations Limited. It dates back to 1970, but the lessons are still relevant today. In this case, the contractor was delayed by the employer's actions and importantly, the contract didn't have an extension of time clause, so there was no more time afforded to the contractor. For that delay, the court decided that it would be beyond all reason for the contractor to be held to the original completion date, or to make them pay liquidated damages under those conditions. Instead, the employer would have to establish an entitlement and then would only be able to claim actual proven damages instead of the liquidated damages clause. So in short, because the employer prevented completion, time was set at large and the liquidated damages clause was nullified.
Jacob Austin 00:13:37 This principle isn't just ancient history, it's very much alive and relevant today, and judges continue to echo that same sentiment. A famous quote by Lord Denning from the case between Trollop and Coles versus Northwest Metropolitan Hospital ward sums it up. If one party to a construction contract by their conduct, even legitimate conduct like ordering extra work makes it impossible for the other party to complete on time, then the party who caused the delay can no longer insist upon strict adherence to the time stated. He cannot claim any liquidated damages for non completion in that time. That nicely captures the prevention principle. Cause a delay. Lose the right to penalize for that delay. Now hearing this, you might be thinking wow, if the client messes up, I'm automatically off the hook for liquidated damages. In principle, yes, but there's always a but. In modern contracts, we usually have ways to avoid the whole situation of time becoming at large. And that's what extension of time clauses are for. Which we'll cover in a moment. But before that, let's complete the picture on prevention principle by discussing how it ties into liquidated damages in practice, and looking at a couple more cases that tested the boundaries.
Jacob Austin 00:14:58 One of the biggest practical impacts of the prevention principle is upon liquidated damages for delay. LDS are those pre-agreed damages, often a weak or part thereof, charge that the contractor or subcontractor must pay if they finish late. They're a common feature in construction contracts, giving the client a straightforward remedy for delay without having to actually prove their loss. But the prevention principle is basically a Kryptonite to an LD clause. If the delay in question was caused by the person enforcing it. And why is that? Well, because if time is at large, then there is no active completion date from which you can start to calculate liquidated damages. The contract's date has effectively been replaced by a reasonable time. No date, no leads. It's as simple as that. Now, the employer could still try to claim liquidated damages or general damages for late completion, but they'd have to prove actual losses. And they'd also have to overcome the fact that they caused the delay in the first place. That's a tall order, and courts often won't allow any recovery for a period of delay that the employer or client has been responsible for.
Jacob Austin 00:16:13 And many contracts state that liquidated damages are the exclusive remedy for delay. So if the LED clause is voided by prevention, the employer might end up with no remedy at all for that delay. So from the client's perspective, avoiding preventing you is critical to preserve their rights. Now, to really cement that, let's discuss a few key cases that illustrate the prevention principle and show how it intersects with contract terms. We already mentioned Peake versus McKinney from 1970, but let's fast forward to the 21st century and we'll discuss multiplex construction. UK limited versus Honeywell Control Systems Limited. This was a High Court case and it's often cited for modern prevention. Principal basis. Multiplex was the main contractor building Wembley Stadium and Honeywell was a subcontractor for the fire detection system. The project suffered many delays and Honeywell missed some key interim milestones. Honeywell argued that multiplexes own delays had set time at large, and that Honeywell shouldn't be liable for liquidated damages for the missed milestones. Now, the contract did have an EOT mechanism and it also had notice requirements for claiming extensions.
Jacob Austin 00:17:30 Mr. Justice Jackson, as he was at the time, made a few influential points here. First, he reaffirmed that the prevention principle does not apply if the contract provides for an extension of time in respect of the relevant delay event. In other words, if your contract has a workable EOT clause that covers the delay, then there's no prevention issue. You just have to follow the contract, giving the extension of time rather than time becoming at large. Secondly, he addressed the lack of timely notices because Honeywell had failed to give a notice of certain delays. And he famously said that requiring prompt notice of delay serves a valuable purpose. It allows issues to be addressed whilst they're fresh, and maybe even less the delaying party to mitigate that delay or reduce its effects. Because Honeywell hadn't followed the notice rules, some delays that might have been employer caused didn't result in iots since the process wasn't followed. So the court was basically saying here, if you know you've got a way to get an extension of time and you don't use it.
Jacob Austin 00:18:39 You don't stick to the contract claim procedures. Then you can't turn around later and use the prevention principle as an escape hatch after the event. Failing to give notice is a failure by the subcontractor in this instance. So multiplex versus Honeywell clarified that the prevention principle is a shield for the contractor only when the contract doesn't have a valid mechanism to grant relief. If there's a certain event, or when the employer refuses to grant rightful extensions of time. It's not a rescue mechanism for a contractor that's slapped on their rights under the contract. The takeaway from that is that modern contracts are drafted to include extension of time provisions and notice requirements precisely to manage delays without time going at large. So as a subcontractor, you've got to follow those procedures to get the benefit of them. And so I think it's really important for you to understand that if you don't submit notices, you can likely lose the production of both the contract and the prevention principle. Next, we have North Midland Building Limited versus Caden Homes Limited. This is a case from 2018, and it's a biggie because it addressed where the parties can contract out of the prevention principle in certain scenarios, specifically concurrent delays.
Jacob Austin 00:20:00 In this case, a clause was inserted in the contract to say that if delay to completion was caused by concurrent delays, i.e. two causes at the same time, and one of those causes was the contractor's fault, then no extension of time would be given for the period of concurrent delay. In simple terms, if the employer causes a delay and the contractor was independently causing their own delay at the same time, then the contractor would get no time extension. So the delay is effectively all on the contractor. Now, on the face of it, that sounds like it could allow the employer to benefit from a delay that they've caused, as long as there was a concurrent delay that the contract had caused. North Midland argued that this clause should be invalidated by the prevention principle, essentially saying you can't agree a clause that lets the employer off the hook for delays that they cause, and that the prevention principle is an overriding rule that would make time at large in that situation. However, the Court of Appeal disagreed. Lord Justice Colson held that the clause was clear and unambiguous.
Jacob Austin 00:21:07 The parties had therefore agreed how to allocate the risk of concurrent delay, and that agreement should be upheld, and he noted that nothing in the law prevents parties from contracting out some or all of the effects of the prevention principle. In fact, he pointed out that even in the Old Peak case, Lord salmon had debated whether the parties could have included a clause to avoid time at large. But they hadn't. So the North Midland case essentially confirms that freedom of contract wins. You can't invoke the prevention principle to strike out a contract clause that explicitly puts certain delays on the contractor. In this instance, because North Midland had agreed to bear concurrent delay risk, they could be held to the original completion date and be liable for lease, even though the employer was partly causing delay. So time was not at large because the contract told you how to deal with that situation by not giving an EOT. This decision is a wake up call. Be very mindful of bespoke amendments like concurrency clauses. If you agree to them, you might be surrendering what would otherwise be an EOT right under the prevention principle.
Jacob Austin 00:22:24 So these cases teaches a few things. The prevention principle is alive and well, but it's often tamed by well drafted contracts, and those contracts follow the logic of prevention and share out the risk in a fair fashion. They teach us that courts will enforce clear contract terms about delays, even if they favor one side, as long as it's clear what the parties were agreeing to. You can't rely on common law to swoop in like a shining knight if the contract explicitly covers the scenario. But if a contract is silent or poorly drafted on delay events, then the prevention principle is there to fill in the gap to provide fairness to the contractor. So what are some key takeaways from today's digest? Firstly, know the legal basics. A little knowledge of common law principles can go a long way. Remember that the English law won't automatically imply a duty of good faith, so you can't rely on unwritten fair play expectations. If you want the other party to be obliged to act reasonably or cooperatively, then get it in writing.
Jacob Austin 00:23:32 If you always strive to act professionally and fairly yourself, even if it's not mandated, it will build your reputation and reduce conflict. Recognize repudiation breaches. If the other party's behavior shows they're effectively disowning the contract, you might be dealing with one of those breaches. Examples might be a main contractor refusing to pay you at all, wrongly terminating your contract, or preventing you from working on site. All of these breaches may enable you to terminate the contract and seek damages. Likewise, if a subcontractor abandons work, the main contractor can terminate and this is where you need to follow things like the non-payment procedure of giving notice before you walk off site. These are very drastic situations so legal advice is recommended. But know that you don't have to suffer a contract that's been fundamentally breached by the other side. Frustration is very rare. Don't assume that a tough break on a project will legally frustrate your contract, unless it's a truly unforeseen and uncontrollable event. There will likely be a contract delay that you can notify and obtain an extension of time for.
Jacob Austin 00:24:47 So look at the mechanisms in your subcontract when something goes awry. Frustration is a last resort, and claiming it when it's not clearly applicable can actually be a fundamental breach. Understand the prevention principle, whereby you can't be held responsible for a delay that the client or the contractor has caused to you. This principle only usually comes into play outside of your subcontract, and in reality, most contracts provide a mechanism for you to get an extension of time without needing to rely on prevention, but it is there as a safety net. What you can't do, though, is fail to notify an extension of time. Now, I've thought and spoken about notices many times, and it's vital for you to protect yourself to follow those procedures. Missing a notice deadline can be fatal to your claims for more money or for more time. If something big happens that can delay you, even if you think I'll be fine. Protect yourself by sending in the notice. It can be polite and factual and even helpful. It's not a declaration of war, it's just you preserving your subcontract, right? You can always decide not to pursue an extension later if things get resolved, but you can't start claiming an extension if you haven't notified.
Jacob Austin 00:26:06 Watch out for risky clauses when you're reviewing your contract. Keep an eye out for clauses that heavily tilt the delay risk. For example, a concurrent delay clause like in the North Midland case, which means you could be liable for delays that aren't even your fault. Alternatively, things such as a time bar clause with stringent requirements like 48 hours to notify or lose all your rights to a delay event. These could mean big trouble because they're difficult to administer. If you spot them, then try and negotiate them out. You might not always succeed, and if you don't, then you can price the risk accordingly. Liquidated damages. Check the LD rate and the cap if there is one in your contract, and understand how it ties in to the EOT clause. If the contract leaves a scenario where you could be paying loads for something beyond your control, that's a problem. Communicate and document. Legal principles aside, a lot of disputes can be avoided by early communication if delays or issues crop up. Have a conversation.
Jacob Austin 00:27:14 Often there's a workaround if that means a bit of acceleration or a bit of work in a different sequence, especially if they know that there's some delay on them. Document those discussions with confirmation emails and keep records as we know. This is your evidence if things get contentious. So keep those daily logs. Photos. Correspondence. It also helps keep everyone honest and on track. In a sense, this is acting in good faith proactively, and it can pay dividends in preserving your relationships to get the project done. So give these principles and contract clauses some thought before you commit to your next project, or the next time something goes wrong on a big job. A bit of foresight can save a ton of pain and money later, and I hope you've enjoyed today's episode of The Subcontractors Blueprint. This was a bit of a deep dive into legal territory, but I try to keep it practical because understanding your entitlements and obligations is key to running a profitable subcontract business. My mission with the show is to help the million SME contractors working out there in our industry.
Jacob Austin 00:28:23 If you've taken some value away from today's episode, I'd love it if you'd share the show with someone else who could benefit. Be it a colleague, a fellow subcontractor, or even that main contractor who keeps sending you 500 page contracts. Let's pass the knowledge along so everyone can build better contracts and better projects. And of course, subscribe to the podcast if you haven't already. Thanks for tuning in. If you like what you've heard, then please do check us out at QS.zone for more information. You can also shout at me on all your favorite socials. I'm at @QS.Zone, on LinkedIn, Instagram, you name it. And I always love hearing feedback or questions from listeners. Thanks again. I've been Jacob Austin and you've been awesome.
