01 Apr 2021

"Absolute discretion": express words negate the implied good faith obligation and operation of the prevention principle

By Stuart Cosgriff, Frank Bannon and Kathleen Hallpike

The NSW Courts have typically grounded the prevention principle in the implied duty to act reasonably and/or in good faith. A recent decision demonstrates the preparedness of NSW Courts to find that parties have contracted out of duties of this kind.

The NSW Supreme Court recently considered the relationship between extension of time provisions and the prevention principle and in particular, whether the principal's entitlement to unilaterally grant an extension of time is subject to an implied duty of good faith. The Court held that there was "no room" to impose an obligation of reasonableness and good faith on the principal's discretionary power to extend the Date for Practical Completion because the power was expressed to be exercisable in the principal's "absolute discretion".

In Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290, Growthbuilt terminated four subcontracts that it had entered into with Modern by reason that Modern had not completed the subcontracted works by the contracted dates for completion. Growthbuilt then commenced these proceedings to recover from Modern, among other things, liquidated damages.

Modern pursued two key alternative lines of defence, being that:

  • (notwithstanding Modern's failure to seek an extension of time), as a consequence of the application of the "prevention principle", Growthbuilt should have unilaterally granted an extension of time; or
  • the rate of liquidated damages in the subcontract rendered them unenforceable as a penalty.

The application of the prevention principle

Clause 11 of the subcontracts contained the extension of time regime, which was expressed in quite robust terms. It required the submission of a claim for a time extension resulting from an "Act of Prevention" within five days of the commencement of the Act of Prevention, and then included, relevantly, the following conditions:

"Failure by the Subcontractor to give notice to Growthbuilt strictly in accordance with the preceding paragraph within the stated period of 5 days for any delay to the Date for Completion caused by an Act of Prevention will disentitle the Subcontractor from making a claim (including for additional payment or time) against Growthbuilt and the Subcontractor will have no Claim arising out of or in any way connected with any delay to the Works caused by an Act of Prevention."

"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."

Justice Henry began by unreservedly endorsing the position stated in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151, that the "operation of the prevention principle can be modified or excluded by contract". She then noted that failure by a contractor to claim an extension of time in accordance with a contractual right "may negate" the effect of preventative conduct by a principal "such that the prevention principle does not operate to set time at large. Whether it does will depend on the proper construction of the contract."

In this case it was common ground that Modern had not claimed extensions of time in accordance with clause 11. However, Modern submitted that the prevention principle remained in issue on the basis of Growthbuilt’s unilateral power in clause 11. In that regard, Modern relied on numerous authorities in which obligations of reasonableness and good faith have been considered, in particular Probuild and Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211.

Importantly, the Court distinguished Probuild and Peninsula Balmain on the basis the reserve powers in those cases to unilaterally extend were not qualified by the words “absolute discretion”. The Court noted it has been accepted that the words “absolute discretion” exclude an obligation to act reasonably but "may leave room for the implication of a good faith obligation." To that latter point, it noted:

"the discretionary power to extend the Dates for Completion that is described as “absolute” is contained in a clause that also expressly excludes any obligation on Growthbuilt to exercise the power to extend or to consider whether to do so. In other words, the express terms of the subcontracts make clear that, despite having the discretionary power to do so, Growthbuilt has no obligation to extend or make any decision whether or not to extend time under the subcontracts at all."

Deferring to established principles of construction of commercial contracts, the Court determined that terms could not be implied if this would result in the imposition of obligations that were inconsistent with the terms of the relevant contract. In this instance, the Court was satisfied that despite the discretionary power, the express words of clause 11 were inconsistent with the imposition on Growthbuilt of an obligation to grant a time extension. 

The application of the rule against penalties

The Court otherwise considered an argument by Modern that the subcontracted liquidated damages rate was unenforceable as a penalty. The judgment contains analysis of various authorities germane to this point. In this instance, it concluded that Modern bore "the burden of establishing that the liquidated damages rate was “extravagant, out of all proportion or unconscionable” as compared to "the greatest loss which may be suffered by Growthbuilt." The Court was not persuaded that the liquidated damages provision constituted a penalty, despite the daily rate being on the "high side".

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.