Time bar clauses – might they be void?

Introduction

In this Update we look at a recent High Court case that appears to cast doubt on the validity of onerous time bar clauses in construction contracts, particularly where they relate to notification about delays to the works.¹

Most commercial construction contracts require the works to be brought to practical completion by an agreed date.  If the contractor encounters delay, it must notify the principal and ask for an extension of time (EOT) to complete the works.  Late completion of the works will usually result in the principal withholding liquidated damages from the amount of the progress payment due at practical completion.

Many contracts include a “time bar” clause which might read something like:

If the Contractor becomes aware of any Event likely to cause delay to the works program it must within [7] days notify the Superintendent:

• of the delaying event;
• of the steps it has taken to avoid the delay;
• of the likely extent of the delay.

A failure by the Contractor to strictly comply with this clause will preclude the Contractor from obtaining an extension of time arising from the Event.

The 7 day period is sometimes reduced to as little as 2 days.  This time bar clause could be described a “condition precedent”; that is, a condition that must be fulfilled by the contractor in order to entitle it to an EOT.  However, many of the standard form construction contracts contain a clause giving discretion to a Superintendent to award an EOT even where the contractor has not asked for it.

In Update 804 (‘Does the Superintendent have to be fair?’) we looked at cases where Courts or Arbitrators have relied on the discretionary powers given to a Superintendent to award an EOT to a contractor who had failed to comply with a time bar clause.

In 2002, the NSW Court of Appeal found that under the unamended AS2124 contract the Superintendent had power to extend time for the completion of a building contract and the power was able to be exercised in the interests both of the owner and the builder.²  In that case, Abigroup had not complied with the time bar clause.  The Court ultimately granted the extension of time and added that a Superintendent ‘is obliged to act honestly and impartially in deciding whether to exercise this power.’

Subsequently, in the Hervey Bay case³ (also covered in Update 804) the Court discussed a contract where the Superintendent’s powers to award an EOT not properly requested within the time bar clause period to a contractor were “in the Superintendent’s absolute discretion and without being under any obligation to do so.”  The Court found that this clause in the contract allowed the Superintendent to reject a claim for an EOT on the basis that the contractor had failed to comply with the time bar clause.  It was within the Superintendent’s power to reject any application for EOT made outside of that clause.

Many construction contracts now contain wording similar to the Hervey Bay contract.

The High Court’s recent decision

The recent case in the High Court was not concerning construction, but rather the validity of clauses in a contract between ANZ Bank and its customers.  The customers said ANZ had applied excessive fees to their accounts for honour, dishonour, non-payment and over-limit events.  The customers said that the fees were out of all proportion to any consequent loss actually suffered by ANZ and as such were “penalties”.

Courts have repeatedly found “penalty” clauses in contracts to be void.  In the past, a “penalty” clause has been described as a clause that offers a windfall to one party at the expense of another who breaches the contract.  By way of example, building contracts often include a liquidated damages clause.  If the amount for the late completion of a small office building was specified as $1 million per day, we could confidently expect that a Court would say the clause was a penalty and void, thereby removing the liquidated damages provision from the contract.  We previously discussed liquidated damages clauses in Update 607 (‘When is a liquidated damages clause a penalty?’).

In the ANZ case, the customers had not actually breached their contracts so as to entitle ANZ to charge the excess fees.  Hence, ANZ said that the imposition of the fees complained of could not be a penalty and therefore could not be found void.  The High Court disagreed.  The Court surveyed the origins of the law relating to penalties and concluded that when a Court is determining whether a clause is penal in nature, it should be guided by principles of fairness and equity as well as an application of the letter of the law.  The Court said that a clause can still be a penalty notwithstanding there has been no actual breach to bring it into effect.

Applicability of the ANZ case to construction disputes

At the time of writing this Update we are not aware of any construction dispute that has tested the applicability of the ANZ case to time bar clauses in construction contracts.  However, modern construction contracts often include provisions in the time bar clause such as:

• A 7 day time period (sometimes as little as 2 days).
• A requirement to provide an up to date construction program to obtain an EOT.
• A requirement to outline steps proposed to be taken to avoid the delay.

Before any entitlement to an EOT arises, the contractor is invariably required to demonstrate that the delaying event is on the critical path for the works.

In most commercial construction projects, it would take significant resources to put together this extent of information within a 7 day period.  To completely deny any right to compensation for a delay caused by the principal or Superintendent in these circumstances seems likely to give rise to issues of fairness and equity.  Further, if the actual loss to the principal caused by the late notification is minimal, it is difficult to see why the clause would not be subject to challenge as a penal clause.

Consider the following hypothetical scenario:

1. The Principal delays the Contractor for 10 days, all of which are on the critical path.
2. The Contractor fails to request an EOT within the time bar period but does so later.
3. The Superintendent refuses an EOT due to non-compliance with the time bar clause.
4. The project reaches practical completion 10 days late.
5. The Principal imposes liquidated damages on the Contractor for 10 days late completion.

The contentions for the contractor in asking a Court or Arbitrator to find the time bar clause void would be as follows:

1. The ANZ case makes it clear that a clause can be considered a penalty even if it has effect without a breach of contract.  Here the failure by the Contractor to ask for an EOT within the time bar period is not a breach of contract.  It is simply a failure to exercise a right.
2. The ANZ case makes it clear that principles of equity and fairness are relevant in considering whether a clause is a penalty.
3. It is likely that the Principal already knew (or should have known) that the works were being delayed as the principal caused the delay.
4. The loss to the principal from the failure by the contractor to notify within the Time Bar clause limit is arguably nil – as the principal had delayed the works anyway.
5. Even if the Principal suffered some small loss due to the failure by the contractor to notify of the delay within the Time Bar period, it is likely that the loss to the Contractor by reason of the imposition of liquidated damages bears no proportion to the real loss suffered by the Principal as a result of the late notification.

Conclusion

Many commercial construction contracts have been substantially expanded over recent years to attempt to pass through to contractors a disproportionate degree of risk.   One of the particular areas of risk that has been addressed is the risk of late completion and exposure of the parties to liquidated damages.

The recent High Court decision in ANZ leaves the door open for a party who is subject to a disproportionate loss as a result of a failure to act within a time period imposed in the contract to contend that the relevant clause in the contract is void.

Contributor:  Tom Grace

[1] Andrews v Australia and New Zealand Banking Group Ltd (2012) 247 CLR 205.

[2] Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211.

[3] Hervey Bay (JV) Pty Ltd v Civil Mining and Constructions Pty Ltd [2008] QSC 58.