Growthbuilt Pty Ltd v Modern Touch Marble & Granite [2021] NSWSC 290

Andrew Hales, Michelle Knight, Will Ryan

Key takeouts

Freedom of contract is alive and well.  If the provisions of a contract articulate a clear intention, the parties will be unable to rely on inconsistent implied terms or exceptions to the general rule.   This case upholds freedom of contract in the context of the implied terms of acting honestly, fairly and in good faith, as well as to the law on penalties.

Significance

Parties need to ensure that they understand the implications of their drafting of any ‘reserve’ or ‘unilateral’ extension of time clause in a construction contract. In the context of principal-caused delay, if the principal has a unilateral power to extend the date for completion, the court will consider the particular wording of the clause to determine whether there is room to imply any terms, such as to act reasonably or honestly, fairly and in good faith. 

Facts

Growthbuilt Pty Limited (contractor) entered into four subcontracts with subcontractor Modern Touch Marble & Granite Pty Limited (subcontractor) relating to four residential building projects. 

The extension of time (EOT) clauses in the subcontracts made the contractor’s compliance with the procedures for submitting an EOT claim a condition precedent to any entitlement. The EOT clause provided that:

‘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.’

Subsequently, the contractor terminated each of the subcontracts on the basis that the subcontractor had failed to complete the subcontracted works on time. 

The contractor then commenced proceedings in the Supreme Court of New South Wales seeking liquidated damages, post-termination completion costs and the costs of certain materials.  The subcontractor cross-claimed seeking to recover unpaid invoices.

At the hearing, the contractor submitted that as the subcontractor had not claimed an EOT or an EOT entitlement in the proceedings, and that any evidence contending that the contractor caused delay was of no legal consequence.  For this reason, the contractor argued that the subcontractor could not rely on the prevention principle.  The subcontractor contended that the contractor’s unilateral power to extend the dates for completion in the subcontracts meant that the prevention principle remained an issue.

Decision

The court rejected the subcontractor’s arguments and held that the contractor was entitled to the monies claimed (subject to the cross-claim).

Unilateral Power

The language of the EOT clause, which gave the contractor with an ‘absolute discretion’ but ‘no obligation’ to extend the date for completion, reflected a clear intention of the parties to give the contractor a discretionary power and that the contractor had no obligation to exercise (or consider exercising) that power to extend the date for completion. As the subcontractor had not complied with the contractual mechanism for claiming an EOT, it was not possible for the subcontractor to rely on the prevention principle. This meant that time was not ‘at large’ and liquidated damages applied.

The court also commented that a clause which conferred an ‘absolute discretion’ excluded an obligation to act reasonably, but those words alone may leave room to imply a good faith obligation in the exercise of a unilateral power.

Liquidated damages clause

Although the court considered that the sum for liquidated damages of $3,500 per day was on the ‘high side’ given the subcontract price was only $60,500, the subcontractor had not discharged its onus of proving that the sum was ‘extravagant, out of all proportion or unconscionable’ to the greatest loss which may be suffered by the contractor.  The court considered a number of factors, including that:

• the parties agreed that the rate was a genuine pre-estimate of the contractor’s damages – whilst this was not conclusive it was not irrelevant;
• it was not unreasonable to expect that the contractor would have incurred costs due to a delay in the project, such as holding costs, preliminaries, site establishment costs and costs associated with the loss of opportunity to undertake other work using the resources deployed on the project;
• as a commercial builder, the contractor had a commercial interest in the project being completed as soon as possible and on time; and
• there was no evidence that the subcontractor was not capable of protecting its own interests or that it was pressured into agreeing to the clause.