Construction: Allocation of risk – prevention principle not breached

Can the parties to a construction contract agree specific clauses as to the allocation of a risk when it comes to concurrent delay? An important ruling makes clear that the parties are free to do so as they see fit in such circumstances, so long as such clauses are clear and unambiguous.  

No construction contract is free of risk.  On the contrary, they are highly complex and full of risks.  So how should the parties approach the allocation of risk?

Concurrent delay and the prevention principle
In a notable case, the Court of Appeal set out important principles on these issues. A concurrent delay is a period of project overrun that is caused by at least two effective causes of delay which are of approximately equal causative potency – one being the responsibly of the employer, and the other being the contractor’s responsibility.

Here, the employer had engaged the contractor under a JCT Design and Build Contract with bespoke amendments for the build of a large residential property.  The contract included a clause requiring the Employer to give an extension of time “provided that (a) the Contractor has made reasonable and proper efforts to mitigate such delay; and (b) any delay caused by a Relevant Event which is concurrent with another delay for which the Contractor is responsible shall not be taken into account”.  

Effectively the clause sought to pass all risk associated with concurrent delays to the contractor. When the works were delayed, a dispute arose as to the proper extension of time due to the contractor. The employer only allowed a partial extension of time – relying on the clause to reject other parts of the contractor’s claim on the grounds those delays were concurrent with delays caused by the contractor.  The contractor claimed that the clause was ineffective as it offended the so-called prevention principle.

What was the outcome?
The Court of Appeal considered the validity of such a clause and concluded that all the clause does is to stipulate that where there is a concurrent delay, the contractor will not be entitled to an extension of time for a period of delay which was as much his responsibility as that of the employer. That was an allocation of risk which the parties were entitled to agree. As the Court noted, “a building contract is a detailed allocation of risk and reward” and the parties are free to negotiate and agree express provisions as to whom risk and responsibility rests.

The CA agreed with the HC judge that the meaning of the words were “crystal clear” – seeking to allocate the risk of concurrent delay to the appellant. So did the clause offend the prevention principle, i.e. in this instance that an employer cannot enforce the provision relating to timely competition if it has caused the delay? No, said the CA citing various reasons for its finding, including:

  • the prevention principle is not an overriding rule of public or legal policy. Eg. it is not analogous to the rule which strikes down liquidated damages as a penalty, a rule which has an entirely different legal provenance.
  • the prevention principle is not engaged here because there is no contravention of state principles (set out in Multiplex)
  • the prevention principle has no obvious connection with the separate issues that may arise from concurrent delay
  • on the existing legal authorities, the parties can contract out of some or all of the effects of the prevention principle, eg. the parties could have drafted an extension of time provision to operate in the employer’s favour, notwithstanding that the employer was to blame for the delay.

What does this mean?
The parties to construction contracts enjoy freedom of contract which means they can negotiate the allocation of risk in relation to concurrent delay, so long as the relevant clauses are clear and unambiguous. They need not be concerned that such a clause will offend the common law prevention principle.

However, contractors in particular may be more reticent to agree to clauses that effectively allocate the risk of concurrent risks back to them. This would include the many wider risks in construction projects that would affect the performance of a project.

Identifying the potential risks as early as possible in the negotiations will enable the parties to consider the allocation of risks in a way that is fair, depending on the particular circumstances of the project. Factors that may be important considerations for the parties include risks that are within who’s control, which party can insure the risk most economically, and who would benefit or lose out the most if a risk was to materialise.

How can we help?
We advise employers and contractors in the construction industry on their statutory and contractual rights and obligations.  For strategic advice on your legal obligations to other contractual parties, contact the expert commercial solicitors at Herrington Carmichael as early as possible. 

Please contact Mark Chapman on 01276 686222 and Cesare McArdle on 0118 977 4045.

This reflects the law at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought as appropriate in relation to a particular matter.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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