PURPOSE OF TIME BAR CLAUSES
The purpose of a time bar clause was usefully summarised by Justice McDougall in the Supreme Court of New South Wales as (emphasis added): 1
- Firstly, it will enable the claim to be investigated promptly (and, perhaps, before any work comprised in it is rebuilt, or built over). Secondly, it will enable [the contractor] to monitor its overall exposure to the subcontractor. Thirdly, it will enable [the contractor] to assess its own position vis-Ã -vis its principal.
Enforcing time bars
Courts in Australia and the UK have made comments suggesting that time bars could potentially be void (and therefore unenforceable) where it is not possible (or reasonable) to comply with the requirement.2 However, as yet, there is no decided case law confirming this position.
Potential to be a penalty?
A recent decision of the High Court of Australia also has implications for the enforceability of time bars. In Andrews v ANZ3 the High Court confirmed that, in Australia, a clause can be characterised as ‘penal’ even where the application of the clause is not triggered by a breach of contract.
This being the case, a time bar (which may not necessarily be linked to a ‘breach’ of contract, and could be linked to a simple failure to do something within a prescribed period) could, in principle, be characterised as a penalty.
Whether the time bar clause in question operates as a penalty (and therefore unenforceable at law) is a separate issue. The test for whether a clause is penal is due to be considered by the High Court shortly in the appeal in the case of Paciocco v ANZ.4
In that case, the Full Federal Court held that certain over-limit fees could not be categorised as penalties as they were not, “extravagant, exorbitant or unconscionable”?. If an amount is not extravagant (i.e. out of all proportion to the possible loss), it is taken to be a “genuine pre-estimate of loss”? and is not a penalty.
A clause will be extravagant (and penal) if not “commensurate with the interest protected by the bargain”?.5
By way of commentary, until the High Court clarifies the position, the following points of guidance should be considered:
- A provision is not a penalty if it is not possible to make a fair assessment of monetary compensation for the failure to comply with a certain obligation.6 It is arguable that time bars protect against unanticipated losses to a principal arising from a claim being submitted belatedly, and that this is not something which is capable of being reduced to a dollar amount.
- A factor that may weigh against time bars in commercial contracts being considered penal is that generally parties to commercial contracts (unlike perhaps certain consumers) are free to negotiate the terms of their agreements. Inequality of bargaining power may be a relevant consideration in terms of assessing unconscionability.7
- The UK Supreme Court recently confirmed that the comparable bargaining power of the parties is relevant, but considered that the proper test as to whether a clause will be penal is whether the provision protects the ‘legitimate interests’ of a party.8
It remains to be seen whether the ‘legitimate interest’ test will be followed as the primary test in Australia.9
Practical Drafting Considerations
Parties to commercial contracts should consider the following when drafting or administering time bar provisions.
Practical Considerations for the Principal
A principal wishing to rely on the benefit of a time bar clause should, when drafting the provision, consider:
- Whether the timeframes it has stipulated are practical and reasonable in the circumstances, including what is being asked of the contractor or supplier
- The impact on the principal of the contractor not meeting the stated timeframe (what “˜legitimate interest’ is the principal seeking to protect)
- Whether the wording removes an entitlement to claim because of non-compliance with the timeframe (rather than being a condition precedent to an entitlement arising). If the former, there is potentially additional risk the clause could be found to be penal in nature.10
Practical Considerations for the Contractor
Contractors and suppliers should:
- Identify if their contracts contain any time bars
- Diarise the relevant dates (that will trigger the time bar)
- Understand what needs to be done to comply with the time bar and comply with the time bar as much as is possible in the circumstances – some degree of compliance is a better outcome for a contractor than zero compliance.
Suggested approach – a way to minimise risk
A time bar clause could be drafted to provide for a two-stage process with separate timeframes for submission of an initial (and simple) notice of claim with the provision of detailed particulars in a second (subsequent) notice.