Construction and engineering contracts sometimes give the employer or the engineer a power to grant an extension of time as a matter of discretion. A recent case from Australia considers the nature of this discretion, and when and how it is to be exercised.
In Growthbuilt Pty Ltd v Modern Touch Marble & Granite Pty Ltd  NSWSC 290, the New South Wales Supreme Court held that a main contractor was not required to exercise its discretion to grant an extension of time to a subcontractor, even though the main contractor had prevented the subcontractor from completing its works on time. This was because the discretion of the main contractor was expressed to be an "absolute discretion".
Extension of time ("EOT") clauses are an invariable feature of construction contracts, giving the contractor the ability to claim an extension to the date for completion, thereby avoiding the application of liquidated damages where certain delays occur. A discretionary EOT power (also referred to as a "reserve power") gives the employer or the engineer the ability, but not necessarily the obligation, to grant an EOT where one has not been validly claimed or is otherwise not due under the contract. How these clauses operate will depend on their terms, and whether (if at all) the discretion is limited.
Where a contract includes a discretionary EOT clause, the Australian courts in previous cases have required the employer to exercise that discretion "honestly and fairly having regard to the underlying rationale of the prevention principle" and in accordance with an implied duty of good faith, in order to grant an EOT for a delay which it has caused. The subcontract under consideration in Growthbuilt was different, however, because it provided for an "absolute discretion" as to whether an EOT should be granted.
Growthbuilt involved four subcontracts relating to residential building projects in Sydney. The EOT clause in the subcontracts stipulated for the subcontractor claiming an EOT if it was delayed by an act of prevention by the main contractor. Additionally, it provided that:
"[The main contractor] 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 [the main contractor] is under no obligation to extend, or to consider when it should extend, the Date for Completion".
There was no dispute that the main contractor had caused delay to the subcontractor's works. However, the subcontractor had not claimed any EOTs under the relevant subcontracts.
The main contractor sought to recover liquidated damages from the subcontractor, arguing that because the subcontractor had failed to claim any EOTs, it could no longer claim that the main contractor's acts of prevention resulted in its inability to complete the works on time.
For its part the subcontractor, relying on Australian case law on implied terms of good faith and reasonableness, replied by contending that even though it had failed to claim EOTs under the subcontracts, the main contractor was obliged to act reasonably and in good faith in exercising its discretion under the EOT clause, and in the circumstances it ought to have granted discretionary EOTs to the subcontractor.
The main contractor resisted this argument on the basis that it had an "absolute discretion" to decide whether to grant an EOT, and its failure or refusal to grant a discretionary EOT could not be challenged.
The NSW Supreme Court found in favour of the main contractor, and took the following approach in its judgment:
- The implication of terms of good faith and reasonableness could not extend to imposing obligations on parties that were inconsistent with the contract itself. Therefore, there was no room to impose an obligation on the main contractor to exercise the power to extend the completion date, whether reasonably or fairly in the interests of the contractor, where the express terms provided for no such obligation.
- This case was distinct from cases in which the employer has a discretion, but not an "absolute discretion", to extend time. Here, the unilateral EOT clause described the main contractor's power to extend time as an "absolute discretion", which indicates that the decision to grant an EOT (or not) is unimpeachable.
Growthbuilt highlights critical distinctions that come into play when construction and engineering contracts confer discretions on a party.
- If the employer or the engineer has a "discretion" to grant an EOT, even if the contractor has not validly claimed one, issues of good faith and reasonableness in the exercise of that discretion come into play. This issue is acute in those jurisdictions which codify parties' obligations to act in good faith in the performance of a contract.
- On the other hand, if a contract is clear that the decision of a party to grant an EOT, or even whether to consider granting an EOT, is unfettered and in its "absolute discretion", the basis for impugning a decision not to award an EOT may be thin or non-existent, as in Growthbuilt.
Although discretionary EOT clauses are commonly found in Australian forms of contract, they are to some extent "hidden in plain sight" in the English JCT form, and have received little attention. Under clause 2.28.5 of the JCT Standard Building Contract (2016), the Architect / Contract Administrator has a discretion to award a further EOT to the Contractor following completion of the works if in his or her opinion it is "fair and reasonable" to do so, and irrespective of whether the Contractor even claimed an EOT. This discretionary power of the Architect / Contract Administrator is not expressed as an "absolute discretion", and may in some cases open the door to an argument that the discretion ought in good faith to have been exercised.
Martha Glaser (White & Case, Associate, London) contributed to the development of this publication.
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