A number of times recently I have been asked to advise and prepare submissions on “I Delay, You Pay” arrangements, whereby head contractors have sought to levy liquidated damages on subcontractors for delays caused by the head contractors.

It works like this:

• the subcontract conditions, prepared by the head contractor, contain a Queen of Hearts clause[1], whereby the notice provisions are so onerous that it is vanishingly unlikely that the subcontractor will be able to give a valid notice;
• the extension of the date for completion of the subcontract is subject to the condition precedent of strict compliance with the Queen of Hearts clause;
• the head contract gets delayed, for reasons that have nothing to do with the subcontractor, such that the subcontractor is not given access to the whole of the workface until after the subcontract date for completion has come and gone;
• if there is a clause in the contract entitling the head contractor to extend time notwithstanding the giving of notices, the clause includes anti-Peninsular Balmain wording such that the head contractor is not obliged to so extend time;
• as expected, the subcontractor is unable strictly to comply with the Queen of Hearts clause;
• the head contractor does not extend the subcontract date for completion; the head contractor levies liquidated damages, and sets them off against the subcontract price and/or collects on an bank guarantee provided by the subcontractor;
• sometimes, perhaps, the head contractor collects liquidated damages from two or more subcontractors in respect of the same period of delay, that delay not being the fault of any of those subcontractors.

It hardly needs saying that these “I Delay, You Pay” arrangements are grossly unjust, and they are not implemented by head contractors who value their relationships with their subcontractors. But equally, there are head contractors who are perfectly prepared to adopt such tactics for the purpose of their short-term cash flow, and plenty of lawyers who are only too pleased to assist them to do so. There are even some judges who seem willing to do likewise (I come back to this in just a moment).

What is the legal answer for a subcontractor in the circumstances? In the UK, it might be quite simple. The relevant provisions might well be struck down under the Unfair Contract Terms Act 1977. In Australia, the answer, quite often, is for the subcontractor to make a claim under the security of payment legislation; many adjudicators will use the very extensive elbow room that they have to disallow the liquidated damages in the circumstances. But what is the position if the matter gets to court? Or for that matter arbitration?

The simplest (but by no means the only) route to justice for the subcontractor is likely to be by the doctrine of time at large. That is the route adopted by both the arbitrator and the court in Gaymark Investments v Walter Construction Group (1999) NTSC 143. It was a head contract case, but the principle is the same. Bailey J plainly has the merits in mind, saying:

69.          Acceptance of Gaymark’s submissions would result in an entirely unmeritorious award of liquidated damages for delays of its own making (and this in addition to the avoidance of Concrete Construction’s delay costs because of that company’s failure to comply with the notice provisions of SC 19).

The Gaymark decision has come in for some criticism, in particular from the late Ian Duncan Wallace in London. But it would be glib to dismiss the decision as a mere outlier. Bailey J carefully considered both of the Turner cases – Turner v Austotel [1994] 13 BCL 378 and Turner v Co-ordinated Industries (1995) 12 BCL 33. In both of those cases, it was found that time had not been set at large. But Bailey J extracted the ratio in terms of the focus in the second of these cases on the residual power: the reason the prevention principle did not operate was because of the clause – clause 35.4 – providing for extension of time notwithstanding the absence of strictly compliant notice clauses.[2] As we now know from Abigroup v Peninsular Balmain, the usual effect of such a clause is that the superintendent (or whoever else is responsible for administering the extension of time) is obliged to act honestly and impartially in deciding whether to use that reserve power[3]. Unless of course the draughtsman has tinkered with the clause to provide otherwise, in which case the clause is no longer one such as considered in the Turner decisions.

So what Bailey J was saying in Gaymark, paraphrasing and adding in the Peninsular Balmain point, was this (putting it for the moment in a subcontractual context):

If a head contractor actually prevents a subcontractor from achieving the subcontract date for completion, and the subcontractor has not given the required notices, then time is at large. Unless there is a reserve clause which empowers and requires the necessary extension of time notwithstanding the absence of notices.

The effect of time being at large, of course, is that the subcontract date for completion goes; instead, the subcontractor is merely required to complete within a reasonable time. And the liquidated damages go as well; the damages for which the subcontractor is liable are merely the head contractors actual losses (if any). In other words, the “unmeritorious”[4] is replaced by the reasonable.

But that is not the only basis on which Gaymark distinguished the Turner cases. Bailey J went on to say:

In neither case were acts for which the principal was responsible the cause of actual delay in preventing the contractor from achieving the date for practical completion. 

Attempts to dislodge the Gaymark decision as binding Australian law have so far been unsuccessful. In Spiers Earthworks Pty Ltd v Landtec Projects Corp Pty Ltd (No 2)^[5] McLure P  found that she did not  need to determine  any conflict between the Turner cases and  Gaymark .  Similarly  in Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151 the New South Wales Court of Appeal noted that neither party had asked it to resolve the “conflict” between the Turner decisions and Gaymark (if any[6]) and it did not seek to do so.

I have sought in this post  to put the point as shortly as possible.  Lawyers drafting subcontracts for head contractors might want to have another think about whether it is really so clever to emasculate the reserve power of extension of time. But there are always complications. A point that is made in all of these cases is that they turn on the precise contractual wording in question. Advice on real cases tends to run to dozens of pages.  And many subcontractors, of course, do not have access to legal advice which is fully on top of the point.

It should not be so. There are at least a couple of solutions.

One solution is for the federal government to pass legislation controlling the abuse of Queen of Hearts clauses. That was the recommendation of the Murray report.[7] Governments all around the world have banned pay when paid clauses – rightly so – and Queen of hearts clauses represent a yet more oppressive abuse of power.

Another solution is for “black letter” judges – those who are reluctant to apply common law and equitable principles requiring fairness – to drop their absurd fiction concerning contractual allocation of risk. Of course, it is the case that parties should be held to their bargains. But the bargains which are binding should be the bargains which were apparent to the commercial men striking those bargains. I do not have any grandmothers left, that if I had, I would willingly bet their lives that in the cases that I have been looking at, the subcontractors signing their subcontracts would have no notion that the weasel words in front of them would render them liable for liquidated damages for delays caused by the head contractor. And if the subcontractors, having picked up their pens but before signing, had asked the head contractor’s commercial people, “Does this mean that I’m going to have to pay liquidated damages for your delay?” the head contractor’s commercial people would have said “No, of course not”. The head contractor’s lawyers might perhaps at this point be putting their heads under the desk and smirking, but the law, properly administered, should be punishing them – not rewarding them – for their slipperiness. It is not all judges, of course, who are so careless of their duty to administer justice. The better judges are those whose conclusions sound in fairness. And who realise, when trying to achieve certainty, the certainty that matters is to be measured according to what commercial men reasonably expect, not what emerges from a detailed examination of dozens or even hundreds of pages of contractual conditions.

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[1] See previous posts at https://feconslaw.com/2017/02/28/a-suggested-ban-on-queens-of-hearts-clauses/,  https://feconslaw.com/2017/06/06/queens-of-hearts-in-the-dock/,  and https://feconslaw.com/2018/05/22/queen-of-hearts-a-good-idea-endorsed/.

[2] He said:

[65]         Clause 9.05 of the JCCA contract was in this regard substantially similar to the NPWC contract between Gaymark and Concrete Constructions in standard form – but the relevant provision, GC 35.4 had been deleted in favour of SC 19 (which permitted no discretion to the Superintendent to grant or allow any extensions of time where Concrete Constructions had failed to meet the notice requirements of SC 19).

[66]         In Mr Cochrane’s submission, the presence of a clause equivalent to GC 35.4 in the JCCA contract was vital to the reasoning of Cole J in Turner Corporation Ltd v Austotel Pty Ltd, supra and similarly determinative of the outcome in the later case of Turner Corporation Ltd v Co-ordinated Industries Pty Ltd (1995) 11 BCL 202.  In that case, Rolfe J considered a NPWC Edit 3 (1981) contract in which GC 35.4 was still operative.  At p.217, Rolfe J observed:

“Mr Gyles (for the principal) submitted that where one finds in a building contract a clause in terms of cl.35 and, in particular, one containing a clause such as cl. 35.4, there is no room for the prevention principle to operate because it is, in effect, excluded by the express provision.  The authorities to which I have referred support, in my opinion, this submission.”

[67]         The New South Wales Court of Appeal upheld Rolfe J’s decision: Turner Corporation Ltd v Co-ordinated Industries Pty Ltd (1995) 12 BCL 33.

[68]         I consider that the arbitrator was correct to distinguish both the Co-ordinated Industries Case, supra and the Austotel Case, supra. 

[3] Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211; (2002) 18 BCL 322 at [79]

[4] Per Bailey J.

[5] [2012] WASCA 53; (2012) 287 ALR 360; (2012) 28 BCL 282; [2012] WASCA 53 at [57].

[6] It is to be noted that Gaymark did not challenge the correctness of the Turner cases, but rather applied them, and distinguished itself accordingly

[7] https://feconslaw.com/2018/05/22/queen-of-hearts-a-good-idea-endorsed/.