A principal or contract administrator denying a contractor’s claim for an extension of time (‘EOT’) is (perhaps regrettably for contractors) very common.
Nonetheless, principals and contract administrators should always exercise their discretion on EOT claims with care. A principal must also ensure that they do not, and are seen not to, interfere with a superintendent's independence when assessing an EOT claim.
Wrongful refusal to grant an EOT
Contractors seek EOTs to reduce the risk of finishing late and, potentially, being obliged to pay ‘liquidated damages’ to their principal.
When a contractor is denied an EOT, the contractor may choose or need to incur additional costs to overcome or minimise the delay that was the basis of the EOT claim. The contractor may then seek to recover these additional costs from the principal on the basis that the EOT was wrongfully denied. This type of claim is sometimes referred to as a ‘constructive acceleration’ claim.
A contractor typically will not succeed in a claim of this nature where the principal or contract administrator has acted properly in making their decision to reject the EOT claim.
However, a recent judgment of the Supreme Court of Victoria is a reminder that a contractor may in some circumstances be entitled to recover acceleration costs incurred where an EOT claim was denied – in particular, where there has been improper rejection of an EOT due to a contract administrator’s bias or collusion with the principal.
The decision
In V601 Developments Pty Ltd v Probuild Constructions (Aust) Pty Ltd, V601 Developments (‘the Principal’) engaged Probuild Constructions (‘the Contractor’) under an amended AS4902-2000’ design and construct’ contract (‘the Contract’) for the construction of a large commercial and residential project.
After the project finished late, the Principal commenced proceedings suing the Contractor for liquidated damages under the Contract. In response, the Contractor filed a counterclaim. The counterclaim alleged that the Principal had breached the contract by wrongfully rejecting claims for EOTs, and also claimed the costs the Contractor incurred to accelerate work as a consequence of this wrongful rejection.
Justice Digby accepted the Contractor’s contention that the project manager had wrongfully denied its claims for EOTs under the Contract. The Judge held that this wrongful denial amounted to a breach of the Contract by the Principal, for which the Contractor was entitled to recover damages.
The Judge found that the Principal was liable to pay damages notwithstanding that a third-party project manager was engaged to administer the Contract (and in effect was the superintendent). Critical to this finding was the conclusion that the project manager’s wrongful denial of an EOT was attributable to the Principal, because the project manager was colluding with the Principal to manage the Contractor’s claims. This collusion extended to the Principal approving draft assessments and determinations prepared by the project manager of the Contractor’s claims for time extensions.
It is a requirement of AS4902-2000 contracts (and many others) that the Principal must ensure that the superintendent acts fairly.
In circumstances where the Principal and project manager were working in unison, the Contractor was entitled to recover damages from the Principal for the additional costs that the Contactor had expended trying to overcome and minimise the delay that was the subject of the wrongfully rejected EOT claims. If EOTs had been granted, the Principal would have been obliged to pay the Contractor the additional cost of accelerating, if the Principal wished to minimise the delay.
The Contractor’s entitlement to recover damages was predicated on the Court finding that:
The Contractor’s acceleration costs were caused by the Principal preventing the Contractor from making a valid claim under the contractual extension of time process.
The Contractor’s acceleration costs were necessary and reasonable costs for which, due to breach of the Contract by the Principal, the Contractor had not received compensation in time or cost (as provided for under clause 34 of the Contract).
The Contractor’s loss and damage was within the contemplation of both the Principal and the Contractor, and would have been within the contemplation of a reasonable person in the same position as either the Principal or Contractor.
Consequences of the decision
The decision offers some reassurance to contractors. Courts may assist them when their legitimate claims are thwarted by unreasonable behaviour of principals or contract administrators.
For principals, this case is a reminder that collusion with contract administrators appointed to make independent determinations may expose principals to claims. It is of course common for principals and superintendents to confer about claims by contractors. But care must be taken to ensure that dealings between principals and independent contract administrators preserve the independence of the contract administrator, and are seen to do so.
CCK Lawyers has extensive experience in drafting and negotiating construction contracts for complex projects (including contracts based on the Australian Standards such as AS4902), and in advising on project delivery issues and disputes arising from construction contracts.
To discuss your concerns about extensions of time claims under construction contracts, or other matters relating to construction and infrastructure projects, please contact Adam Rosser or John Vozzo.
This article provides general comments only and does not constitute legal advice. You should always seek specific advice on your particular circumstances.