Do principals need to act in good faith when exercising its “absolute direction” to extend the date for practical completion?

Summary

The decision in Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd [2021] NSWSC 290 is a timely reminder to contractors to comply with the time bars in their construction contracts when submitting their claims for extensions of time as the Principal does not have to act in good faith when exercising its “absolute direction” to extend the date for practical completion.

Background facts

Growthbuilt Pty Ltd (Growthbuilt) and Modern Touch Marble & Granite Pty Limited (Modern) entered into four subcontracts (the Subcontracts) whereby Modern would design, supply and install stone in four residential building Projects in Sydney (the Works).

Clause 11 of the Subcontracts provided, in effect, that Modern was to submit a claim for an extension of time within 5 days of the commencement of the Act of Prevention and failure to do so would preclude Modern from being entitled to make a claim:

“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, extend the date for completion, but Growthbuilt is under no obligation to extend, or to consider whether it should extend, the date for completion.”

Growthbuilt terminated the Subcontracts on the basis that Modern failed to complete the Works by the contracted date for completion and commenced proceedings against Modern to recover, amongst other things, Liquidated Damages (LD) in the sum of $1,300,000.

Modern disputed Growthbuilt’s claims on the basis that:

1. Growthbuilt prevented it from completing the Works;
2. Growthbuilt’s unilateral power to extend the Dates for Completion meant that the prevention principle remained in issue (despite Modern not having claimed any extensions of time under the Subcontracts); and
3. Growthbuilt was obliged, under an implied term, to act reasonably and in good faith in exercising its direction under the EOT clause.

Decision

The Court held that:

1. the operation of the prevention principle can be modified or excluded by contract¹;
2. the failure by the contractor to claim an extension of time in accordance with the contract “may negate” the effect of the Principal’s preventative conduct; and
3. despite the discretionary power, the express words in clause 11 of the Subcontract were inconsistent with the imposition on Growthbuilt of an obligation to grant an extension of time.

In determining these issues, the Court considered the Probuild and Peninsula Balmain² decisions in which the courts held that, where the contractor failed to make a valid claim for an extension of time, the independent certifier was obliged to exercise the unilateral extension of time power for the period of delay caused by the owner.

The Court distinguished those cases on the basis that clause 11 in the Subcontracts included the words “absolute direction” (cf unilateral power in the above mentioned cases). The words “absolute discretion” excluded the obligation to act reasonably. Justice Henry stated at [71]:

“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.”

As a result, Modern was precluded from arguing that the delays caused by Growthbuilt imposed an obligation on Growthbuilt to extend the dates for completion.

Implications

In summary, if the extension of time clause provides that the independent certifier has :

1. a unilateral right to grant an extension of time then it is arguable, subject to the terms of the contract, that there may be an implied right to act reasonably and in good faith; and
2. arguably, “absolute direction” , subject to the terms of the contract, and for that reason they do not have an obligation to act reasonably or in good faith.

This article was written by Paul Graham, Partner, Tara Nelson, Senior Associate, and Thomas Appleby, Solicitor.

¹Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151 (Probuild)
²Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211 (peninsula Balmain)