As usual I have, when time allows (this is not every day) been making progress with my book on Extra-Contractual Recoveries.
In the last day or so, I have been particularly focused on the question of whether it is possible to contract out of the time at large principle by a generalised exclusion clause along the lines of, “Nothing we do will set time at large under this contract“. In Australia, at any rate, the usual answer is “yes”, and the brigade of solicitors who march up and down the relevant corridors in grey suits or black trouser suits now regularly insert a clause to that effect in pretty much every contract or subcontract over which they have control.
But is it true? The usual authority relied on is the judgment of Justice Brooking in SMK, but the more I look at it, the more I have come to the view that it does not bear the weight that is typically put upon it.
The current draft of Extra-Contractual Recoveries says this about the topic (obviously, the internal page references will not work for this extract). I am conscious that this is not merely an important point, but also somewhat contentious one. And so if readers of these pages have any observations, I would be interested to hear them, so that I may take account of them before the book is finalised.
Contracting out of the Principle?
- Is it possible to contract out of the prevention principle, and/or the time at large principle? The answer to this question is not obvious, and certainly a good deal less obvious than is sometimes assumed in Australia. It has become an important question, because many bespoke contracts and subcontracts now contain clauses purporting to exclude the principle. If the principle may be excluded by such a clause, the effect is not infrequently to render a contractor (or more typically a subcontractor) liable to pay significant liquidated damages for delays of the owner’s (or more typically head contractor’s) making.
- It seems that there is no reason why the parties cannot agree, if they so wish, that the contractor is bound to complete the works by a stipulated date, without any extension of time and regardless of the prospect that the owner might well order additional work which makes that obligation more onerous, or even impossible. It is an unusual arrangement, but not entirely unknown. It means that the contractor is accepting potential liability in circumstances that are not of his doing, but again, that is not entirely unknown. After all, insurers regularly compensate people who are careless enough to burn down their own homes or crash their own cars.
- But what of a provision, typically tucked away unnoticed in lengthy boilerplate conditions, that purports to disapply the principle as a matter of generality?
- In Australia, the answer is usually given that it is possible to disapply the principle by such provision. The authority typically relied on is an obiter remark in SMK Cabinets v Hili (1983). Justice Brooking declined to reach a conclusion as to whether the principle was one of implied term or of a rule of law, regarding that distinction as “largely of academic interest” and “simply a matter of terminology”. He said, however, that “of course” the principle yields to contractual intention, and that the parties can effectively manifest by their contract an intention that the contractor shall be liable for liquidated damages notwithstanding the prevention. It is not clear what Justice Brooking had in mind by manifest contractual intention. Did he have in mind an express agreement that the contractor should be liable for liquidated damages regardless of the ordering of additional work? Or was he contemplating some general words disapplying the principle without any express manifestation of what that would mean? In any event, he did not find any intention to exclude the principle, and found that time was at large.
- It may be that the obiter remark in SMK is even more restricted. In Probuild v DDI, McColl J said that the operation of the prevention principle can be modified or excluded by contract, citing SMK as authority. But she went on:
The manner in which this can be done, as relevant to the present case, is by extension of time provisions such as cll 41.5 – 41.6.
- That approach might explain why Brooking J dealt with the exclusion point in SMK: there was no extension of time provision in the contract in that case, and so nothing that would modify or exclude the application of the prevention principle. It also suggests that while the prevention principle can be modified or excluded by an extension of time clause (there is no controversy about that) it might not be capable of modification or exclusion by a generalised exclusion clause.
- Conversely, in Spiers Earthworks v Landtec [No 2] in the Court of Appeal in Western Australia McLure P thought that the matter was open. On the facts, she said that it was unnecessary to determine whether the contractual parties are free to exclude the implied duty to cooperate.
- If the time at large principle is treated as a rule of law, and not merely as an implied term, it is probably not excludable, at any rate by a generally worded clause. The point is put thus in Lewison:
By contrast, a rule of law operates irrespective of the intention of the parties, and may sometimes controvert it. Thus the grant of exclusive possession of residential accommodation for a term at a rent, where the landlord does not provide services or attendance, results in the creation of a tenancy, whatever the actual intention of the parties was. Whether a substantive legal rule applies is a question of classification of the contract, once the rights and obligations that it creates have been determined as a question of interpretation.
- That passage itself refers to paragraph 4.03. Because the relevant principles were not canvassed in SMK, it is worth setting out some of the content of that paragraph:
Many substantive legal rules apply only to contracts of a particular kind. In A1 Lofts Ltd v HMRC,32 Lewison J. said:
“The court is often called upon to decide whether a written contract falls within a particular legal description. In so doing the court will identify the rights and obligations of the parties as a matter of construction of the written agreement; but it will then go on to consider whether those obligations fall within the relevant legal description.”
The latter process is conveniently referred to as categorisation. During the 1970s and 1980s, for example, the courts were frequently required to determine whether a contract created a licence or a tenancy. Whether the occupier of residential property acquired security of tenure depended on the answer to that question. As Lord Templeman put it in Street v Mountford:
“Both parties enjoyed freedom to contract or not to contract and both parties exercised that freedom by contracting on the terms set forth in the written agreement and on no other terms. But the consequences in law of the agreement, once concluded, can only be determined by consideration of the effect of the agreement. If the agreement satisfied all the requirements of a tenancy, then the agreement produced a tenancy and the parties cannot alter the effect of the agreement by insisting that they only created a licence. The manufacture of a five-pronged implement for manual digging results in a fork even if the manufacturer, unfamiliar with the English language, insists that he intended to make and has made a spade.”
Likewise, in McEntire v Crossley, Lord Herschell L.C. said:
“Coming then to the examination of the agreement, I quite concede that the agreement must be regarded as a whole—its substance must be looked at. The parties cannot, by the insertion of any mere words, defeat the effect of the transaction as appearing from the whole of the agreement into which they have entered. If the words in one part of it point in one direction and the words in another part in another direction, you must look at the agreement as a whole and see what its substantial effect is. But there is no such thing, as seems to have been argued here, as looking at the substance, apart from looking at the language which the parties have used. It is only by a study of the whole of the language that the substance can be ascertained.”
In Agnew v Commissioner of Inland Revenue, the Privy Council considered whether an agreement created a fixed charge or a floating charge. Lord Millett explained:
“In deciding whether a charge is a fixed charge or a floating charge, the court is engaged in a two-stage process. At the first stage it must construe the instrument of charge and seek to gather the intentions of the parties from the language they have used. But the object at this stage of the process is not to discover whether the parties intended to create a fixed or a floating charge. It is to ascertain the nature of the rights and obligations which the parties intended to grant each other in respect of the charged assets. Once these have been ascertained, the court can then embark on the second stage of the process, which is one of categorisation. This is a matter of law. It does not depend on the intention of the parties. If their intention, properly gathered from the language of the instrument, is to grant the company rights in respect of the charged assets which are inconsistent with the nature of a fixed charge, then the charge cannot be a fixed charge however they may have chosen to describe it. A similar process is involved in construing a document to see whether it creates a licence or tenancy.”
Equally the classification of a contract may bring with it particular non-statutory legal rights and obligations. In Socimer International Bank Ltd v Standard Bank London Ltd , Lloyd L.J. said:
“If parties enter into a transaction which is a mortgage, then the law imposes certain obligations on the mortgagee, and confers certain rights on the mortgagor, which go back to the intervention of equity in the early development of mortgages. Although a mortgage is a contractual transaction, the imposition of such duties has nothing to do with the implication of terms in a contract under the general law of contracts … Whether these duties are imposed on a given party depends only on whether, on the true analysis of the transaction, it is or is not a mortgage.”
Similarly, because of the different legal consequences that may attach to a guarantee on the one hand and an indemnity on the other, it may be important to classify the document as one or the other.
In each case there is a public interest which overrides unrestrained freedom of contract, namely to ensure that the substantive law is properly applied. Lord Walker explained this in Re Spectrum Plus Ltd:
“it is the court’s duty to characterise the document according to the true legal effect of its terms … In each case there is a public interest which overrides unrestrained freedom of contract. On the lease/licence issue, the public interest is the protection of vulnerable people seeking living accommodation. On the fixed/floating issue, it is ensuring that preferential creditors obtain the measure of protection which Parliament intended them to have.”
In considering how to classify a contract, “the task is to decide the nature of the instrument by looking at it as a whole without any preconceptions as to what it is”.
In the case of a composite transaction, the court will assess the substance of the transaction taken as a whole.
- On this analysis (and, if has been repeatedly established in the reports, the time at large principle is a rule of law) it seems that the time at large principle may not be displaced by a general exclusion clause. That is not to say that the parties may not, by clear express terms, agree that the completion date is binding on the contractor without extension of any time for additional work or other obstruction by the owner, but that may depend upon the Progress Property classification process referred to above: is the contract – like a contract of insurance – one by which the contractor has undertaken to compensate the owner for the consequences of the owner’s own actions? Or is it a more conventional construction contract, such that it would be “most unreasonable” for the contractor to pay the owner for the consequence of the owner’s own delay.
- In the UK, the Unfair Contract Terms Act might intervene so as to prevent reliance on a generalised exclusion of time at large. It seems the point has not yet been tested.
- It is thus suggested that the question of whether the time at large principle may be excluded by general words is unsettled.
 See page ~below for both the more detailed commentary on the decision, and extracts from it.
 Although he did note that there are “many passages to be found in the reports which suggest it is a positive rule of law, not an implied term”. As noted below, it was odd to treat rules of law and implied terms as equivalent.
  NSWCA 151. See page 1074 below for extracts.
  WASCA 53
 She does not appear to have considered the point that, whereas the duty to cooperate may be implied, the time at large principle may be a rule of law.
 The Interpretation of Contracts
 Street v Mountford  A.C. 809.
 Progress Property Co Ltd v Moorgarth Group Ltd  2 All E.R. 432.
  A.C. 809. See also Progress Property Co Ltd v Moorgarth Group Ltd  2 All E.R. 432.
  A.C. 457. See also Welsh Development Agency v Export Finance Co Ltd  B.C.L.C. 148.
  1 Lloyd’s Rep. 558.
 Associated British Ports v Ferryways NV  1 Lloyd’s Rep. 595.
 Gold Coast Ltd v Caja de Ahorros del Mediterraneo  1 Lloyd’s Rep. 617.
 Brighton & Hove City Council v Audus  EWHC 340 (Ch).
 As characterised in Dodd v Churton; see page 791 below.
 See page 574 below.