Introduction

It is a relatively quiet time for the construction industry. This goes some way to explaining the hype surrounding a decision involving a bank’s overdraft facility, which some commentators suggest casts doubt over the enforceability of time bars under construction contracts.

This article will briefly summarise the key aspects of the High Court decision in Andrews v Australian and New Zealand Banking Group [2012] HCA 30 (Andrews) and present an alternative approach that may be taken when considering whether Andrews will stymie the future use of time bars in construction contracts.

The Andrews Decision

Andrews related to a class action commenced by customers of ANZ Banking Corporation (ANZ) alleging that (among other things) a clause requiring customers to pay an “over limit” fee where an “instruction” by the customer to ANZ to withdraw an amount from the customer’s account, which would overdraw the account, was unenforceable as it constituted a penalty. 

The details of the decision of the High Court in Andrews are already well traversed. While this article does not seek to retrace the judgment of the High Court in any detail, here follows a brief summary of some of the salient observations of the High Court:

  • the penalty doctrine is not only activated upon a contractual breach but may also apply to the failure of a stipulation in a contract that is conditioned on the occurrence or non-occurrence of a particular event;
  • a penalty does not need to be a requirement to pay a sum of money (the High Court cited the decision in Jobson v Johnson [1989] 1 All ER 621); and
  • the NSW Court of Appeal’s view in Interstar Wholesale Finance Pty Ltd v Integral Home Loans Pty Ltd (2008) 257 ALR 292 that the modern rule of penalties “is a rule of law, not equity” is rejected but its view is likely retained that there is a difference between the extinguishment or deprivation of rights already accrued and the extinguishment or deprivation of those which had not already accrued.

While Andrews is a significant decision, and has extended the application of the penalty doctrine beyond circumstances involving a contractual breach, it keeps intact the remaining principles of the penalty doctrine. It is in this light that this article will explore whether Andrews is likely to give rise to questions on the enforceability of time bars under construction contracts.

The beginning of the end of time bars?

A time bar generally (and properly drafted) takes the shape of a provision which stipulates certain conditions precedent to an entitlement or a benefit and, if those conditions precedent have not been satisfied in time, that entitlement or benefit will not accrue.

Following Andrews, there are a number of preconditions which must all be satisfied before a stipulation (like a time bar) can be characterised as a penalty. Some of these are considered in the following example. (It should be noted that while this article uses an extension of time provision by way of example, the same principles are likely to apply in relation to claims generally under a contract.)

The example: an extension of time provision

1) Does the extension of time provision contain a primary stipulation in favour of the principal? 

The answer to this question will depend on the drafting. Time bars generally involve a primary stipulation (in favour of the contractor) which entitles the contractor to claim an extension of time, or otherwise claim relief under the contract, provided a claim is made within a certain period of time. In these circumstances, it is difficult to see how such a primary stipulation could benefit the principal. However, if the primary stipulation is so written as to oblige the contractor to make a claim within a certain period of time, you may contend that the primary stipulation is in favour of both the principal and the contractor.

2) Is there a stipulation that is collateral or accessory to that primary stipulation (“collateral stipulation”)? 

This will also depend on the drafting. A collateral stipulation, in the context of a time bar, may take the form of a statement that a failure by the contractor to claim an extension of time (or any other relevant form of relief under the contract) in accordance with the primary stipulation will bar the contractor from making any such claim in the future. 

3) Has the primary stipulation failed and, if so, does the collateral stipulation impose upon the contractor an additional detriment to the benefit of the principal (“penalty”)?

Again, the answer to this question will largely depend on the drafting of the primary stipulation. If the primary stipulation has “failed” (in other words, a claim has not been made within a certain period of time), a time bar may not (arguably) be a collateral stipulation which imposes an additional detriment on the contractor, as the contractor’s right or entitlement will be contingent on the relevant claim being made and, absent that claim, the contractor’s right or entitlement will not accrue. 

This view is consistent with previous judicial observations that notice requirements in certain extension of time clauses were mandatory “conditions precedent” to the making of a claim for an extension of time (Opat Decorating Service (Aust) Pty Ltd v Hansen Yuncken(SA) Pty Ltd (1994) 11 BCL 360) and, thus, the right to the extension of time would not accrue because it was contingent on timely notice.

In short, the alternative view is that the penalty doctrine ought not be engaged in these instances because no rights or entitlements are forfeited by the collateral stipulation because those rights and entitlements have not yet accrued.

4) Is the prejudice or damage suffered by the principal, due to the failure of the primary stipulation, susceptible of evaluation and assessment in monetary terms (as at the time of the formation of the contract) so that the principal may be compensated? 

Generally speaking, it would be difficult to see how any time bar can satisfy this precondition. 

One of the fundamental principles of the penalty doctrine is Lord Dunedin’s statement in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 that whether a particular stipulation is a penalty is a question judged “as at the time of making the contract, not as at the time of the breach”. In this way, it could be argued that the prejudice or damage suffered by the principal due to a failure to comply with a time bar cannot be quantified at the time of entering into the contract. That is, it would not be possible to quantify, in money terms, the loss attributable to a failure to comply with notice provisions of this type until the actual delay event has occurred and a claim is made (out of time).

In the context of time bars, the difficulty in quantifying the damage incurred by a principal if there is failure to serve notice on time has been considered in Australian Development Corporation Pty Ltd v White Constructions (ACT) Pty Ltd and Ors (1996) 12 BCL 317, where the NSW Supreme Court observed that the notification requirement was a “deliberate and important part of the mechanism for determining the [extension of time]” and the absence of such provision would leave the principal with only an action for damages if timely notification was not given and would “leave difficulties of proving what [the principal] would or might have done had timely notification been received and quantifying the damage suffered, which the parties are unlikely to have intended”. Also, in Wormald Engineering Pty Ltd v Resources Conservations Co. International (1992) 8 BCL 158, the NSW Supreme Court considered the application of a time bar to various claims for variations under the relevant contract and observed that "[q]uantifying the damage suffered would be a matter of no little difficulty". While these cases held that there would be great difficulty in quantifying loss at the time of an action for damages (and after the late notice is served), it may be argued that it would therefore be equally difficult, if not impossible, to engage in the same enquiry at the time of entering into the contract.   

5) Is the additional detriment to the contractor out of all proportion to the loss or damage sustained by the principal so that it is not a “genuine pre-estimate of the loss” incurred by the principal due to failure of the primary stipulation? 

If a stipulation (involving a time bar) satisfies all of the above preconditions, it must still be found that the difference between the benefit of the penalty conferred on the principal, to the detriment of the contractor, is “out of all proportion” to the loss or damage sustained due to the failure of the particular contractual stipulation. In other words, “a mere difference is not enough, let alone suspicion of a difference. The comparison calls for something more “extravagant and unconscionable” in the value of what is transferred compared to the price to be received…[i]t calls for a “degree of disproportion” sufficient to point to oppressiveness”(Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71). This will obviously turn on the drafting of the particular stipulation and the corresponding detriment suffered by the contractor.

Business as usual?

Andrews involved contracts which were not commercially negotiated in the same way that construction contracts generally are. Under construction contracts, parties allocate risk deliberately. Clauses limiting or excluding rights and liabilities are generally the subject of negotiation. For this reason, the High Court has observed that caution is required in finding that a provision is a penalty (and is therefore unenforceable) and, that:

[e]xceptions… require good reason to attract judicial intervention to set aside the bargains upon which parties of full capacity have agreed. That is why the law on penalties is, and is expressed to be, an exception from the general rule. It is why it is expressed in exceptional language” (Ringrow Pty Ltd v BP Australia Pty Ltd [2005] HCA 71).

In the context of construction contracts, the Courts have recognised the legitimate purpose for incorporating time bars:

[w]here [the subcontractor]… wishes to claim an amount over and above the Contract Amount (for example, for a variation, or for delay or disruption costs), it is required, as a precondition of such a claim, to give notice under, and complying with the terms of [the time bar clause]. It is obvious why a head contractor … might stipulate for such notice. Firstly it will enable the claim to be investigated promptly (and, perhaps, before any work compromised in it is rebuilt, or built over). Secondly, it will enable [the head contractor]… to monitor its overall exposure to the subcontractor. Thirdly, it will enable [the head contractor]…to assess its own position vis a vis its principal. No doubt, there are other good reasons for stipulations of the kind found in [the time bar clause]" (John Goss Projects v Leighton Contractors & Anor [2006] NSWSC 798).

In short, any discussion regarding the implications of Andrews on the enforceability of time bars ought to: 

  • consider each of the preconditions discussed in this article and assess whether they have all been satisfied; and
  • give appropriate weight to the Courts’ observations in relation to the exceptional nature of the penalty doctrine and the legitimate purpose of time bars.