Conditions Precedent to Recovery of Loss and Expense Claims

Dated – 07 January 2011 Author – Robert Dalton (Head of Construction and Dispute Resolution – NW for Blake Newport) Introduction There is a growing use of condition precedent clauses in contracts, which necessitate the

serving of notices to an identified recipient of matters which might delay the works and/or give

rise to additional cost. As set out below, where such provisions are properly drafted they are

likely to be enforceable.

A condition precedent clause requires an event or state of affairs before something else will

occur. In a construction context it is generally a provision of the contract which requires the

giving of a notice by the contractor, usually within a specified period of time, for any matter

that may give rise to a claim for additional time or money. The intention of such provisions is

that a failure to comply e.g. issue the required notice will have the effect that the contractor’s

rights in respect of that matter will be lost.

For instance, clause 61.3 of NEC3 relates to the contractor’s obligation to notify

compensation events and states;

“if the Contractor does not notify a Compensation Event within 8 weeks of becoming aware of the event he is not entitled to a change in the Price, the Completion Date or a Key Date unless the Project Manager should have notified the event to the contractor but did not”.

Likewise, clause 28.1 of the 1999 FIDIC form of contract requires the contractor to give notice

to the engineer of any event which may give rise to an extension of time or additional

payment and states

“if the Contractor fails to give notice of a claim within such period of 28 days, the Time for Completion shall not be extended, the Contractor shall not be entitled to additional payment and the Employer shall be discharged from all liability in connection with the claim”.

While condition precedent clauses have not generally been a feature of other standard form

of building contracts, it is increasingly common to amend these standard forms to introduce

such provisions.

Relevant Case Law In Bremer v Vanden1 the House of Lords stated that a notice provision was unlikely to be a

condition precedent unless it prescribed a specific time for delivery of the notice and clearly

stated that the rights would be lost in the event that notice was not given.

The NEC and FIDIC clauses quoted above clearly accord with this dictum. In City Inn v

Shepherd Construction12 the Inner House of the Court in Session confirmed that a properly

drafted condition precedent clause would be enforceable. Shepherd argued that the clause

imposed a penalty upon them, because an extension of time to which they were otherwise

entitled had not been granted, and delay damages deducted, merely because they had failed

to give a notice, rather than as a consequence of any failure on their part to progress the

works. The court rejected that argument commenting that the loss suffered by the employer

was not converted into a penalty by the fact that the contractor might have avoided the liability

by taking certain steps which the contract entitled it to take.

Where a contractor’s claim is rejected on the grounds that it has failed to serve appropriate

notices, the contractor will often argue that the employer’s position is contrary to the

‘prevention principle’. This principle is based upon the established common law rule that no

person can take advantage of the non-fulfilment of a condition, the performance of which he

has hindered.

In Multiplex Construction v Honeywell Control Systems3 the court noted that

“one consequence of the prevention principle is that the employer cannot hold the contractor to a specified completion date if the employer has by act or omission prevented the contractor from completing by that date. Instead time becomes at large and the obligation to complete by this specified date is replaced by an implied obligation to complete within a reasonable time”.

Whether the prevention principle will defeat a properly drafted condition precedent clause has

been examined in a number of cases. The Australian case of Gaymark Investments v

Walter Construction4 is often cited as an example where the court held that the prevention

principle presented a ‘formidable barrier’ to an employer’s claim for delay damages, where

events which might have given rise to an entitlement to an extension of time were ignored as

a consequence of the contractor’s failure to issue timely notices.

Such an approach has been questioned by the courts in the UK. For example, in the Multiplex

case the Judge stated

1 Bremer v Handelgelsellschaft mbH v Vanden Avenne Izegem P.V.B.A [1978] 2 LLR 109 2 City Inn v Shepherd Construction (2003) CILL 2009 3 Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd (No. 2) [2007] EWHC 447 (TCC) 4 Gaymark Investments Pty Ltd v Walter Construction Group [1999]

“I have considerable doubt that Gaymark represents the law of England. Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose. Such notice enables matters to be investigated while they are still current. Furthermore such notice sometimes gives the employer the opportunity to withdraw the instructions when the financial consequences become apparent”.

The court rejected the contractor’s ‘prevention principle’ defence on the basis that it was

always open to the contractor to protect its interests by giving the relevant notices of delay.

Since the Multiplex case, the courts have shown increasing favour towards conditions

precedent as an instrument of practical contract administration, including the recent case of

WW Gear Construction v McGee Group5, which is considered in detail below.

WW Gear Construction v McGee Group The Facts The contract in this case incorporated the JCT Trade Contract (TC/C) 2002 terms with

Amendment No 1:2003, albeit as detailed below this was further amended by the parties.

WW Gear Construction ("the Employer") wished to develop a site on the south side of

Westminster Bridge, London. The development was to include the construction of the

Westminster Park Plaza Hotel. McGee Group ("the Contractor") is a groundworks contractor

which was retained by the Employer in August 2007 to carry out excavation and other

groundworks for this development. The agreed Contract Sum was £1,812,836.75. The

Construction Manager named in the Contract was GC Project Management.

The Contractor had completed its work in about May 2009. Disputes subsequently arose

between the parties in relation to payments including the Contractor's claims for loss and

expense related to delay and disruption.

The Contractor made applications for payment, broadly on a monthly basis. The applications

included requests or claims for payment for extended preliminary costs associated, with delay

either to individual elements of the works (for instance extended preliminaries for capping

beam works) and to the works as a whole from about June 2008. For Application 18 which

was said to summarise the position up to the end of March 2009, the Contractor referred in its

summary to a "Loss & Expense Claim" being "As Attached". That claim, in the sum of

£1,555,919.89, included for preliminaries which at least in part had previously formed the

subject matter of monthly applications for payment; it included various other delay and

disruption claims such as "Site Plant" as well as "Additional Head Office Direct Costs",

"Additional Site Management Costs" and "Head Office Overheads & Loss of Profit".

5 WW Gear Construction Ltd v McGee Group Ltd [2010] EWHC 1460

The Employer referred to adjudication issues arising between the parties, including issues

relating to the proper interpretation and application of extension of time and delay related loss

and expense clauses in the contract. The Adjudicator decided in broad terms against the

Employer on these issues. The Employer was not satisfied with this decision albeit it did not

seek to challenge the enforceability as such of the decision. Consequently, it sought final

declarations in court.

The Contract The Contract incorporated the standard Trade Contract (TC/C), albeit amended by the

various provisions set out at Part A20 of the Preliminaries and General Conditions. The

relevant clauses were as follows (those parts in the body of the clauses which were the

subject of the agreed amendments are underlined):

Clause 2.2.1

“If and whenever it becomes reasonably apparent that the commencement, progress or

completion of the Works or any part thereof is being or is likely to be delayed, the Trade

Contractor shall forthwith give written notice to the Construction Manager and to the Employer

of the material circumstances including, insofar as the Trade Contractor is able, the cause or

causes of the delay and identify in such notice any event which in his opinion is a Relevant

Event as described in clause 2.5. Any written notice given under this clause will be separate

from other correspondence and delivered by facsimile and post. It will be headed "this is

Delay Notice No…" and will be numbered sequentially."

It is unnecessary to set out verbatim the provisions of the other extension of time clauses,

namely Clauses 2.2, 2.3, 2.4 and 2.5. They make provision for the Contractor to give

particulars, if practicable, of the expected effects and extent of delay and for the Construction

Manager upon receipt of any notice particulars and estimate of the expected delay to grant

extension of time and revise the Completion Period in a fair and reasonable manner. In any

event the Construction Manager is required after the expiration of the Completion Period and

in any event not later than the expiry of 12 weeks after practical completion to grant fair and

reasonable extensions having regard to any of the Relevant Events, irrespective of any

notification.

Clause 4.21

“If the Trade Contractor makes written application to the Construction Manager stating that he

has incurred or is likely to incur direct loss and/or expense (of which the Trade Contractor

may give his quantification) in the execution of this Trade Contract…because the regular

progress of the Works or any part thereof has been or is likely to be materially affected by any

one or more of the matters referred to in clause 4.22; and if as soon as the Construction

Manager is of the opinion…that the regular progress of the Works or of any part thereof has

been or is likely to be so materially affected as set out in the application of the Trade

Contractor then the Construction Manager from time to time thereafter shall ascertain the

amount of such loss and/or expense which has been or is being incurred by the Trade

Contractor; provided always that:

.1 the Trade Contractor's application shall be made as soon as and in any event not later than

two months after it has become, or should reasonably have become, apparent to him that the

regular progress of the Works or any part thereof has been or was likely to be affected as

aforesaid, and such application shall be formally made in writing and fully documented and

costed in detail, and it shall be a condition precedent to the Trade Contractor's entitlement

under this clause 4.21.1 or clause 4.25 that the Trade Contractor has complied fully with all

the requirements of this clauses [sic] including, for the accordance [sic] of doubt, the said time

period of two months.

.2 the Trade Contractor shall in support of his application submit to the Construction Manager

upon request such information as should reasonably enable the Construction Manager to

form an opinion as aforesaid;

.3 the Trade Contractor shall submit to the Construction Manager upon request such details

of such loss and/or expense as are reasonably necessary for such ascertainment.

.4 The Trade Contractor shall not be entitled to direct loss and/or expense to the extent that

the loss or expense or…other matters have been caused or contributed to by their Trade

Contractor's negligence or the default."

Clause 4.22 listed the matters which could give rise to a loss and expense claim under

Clause 4.21; these included the late release of information, failure to give in due time ingress

to or egress from the site, Variation instructions and "any impediment, prevention or default,

whether by act or omission, by the Client or any person for whom the Client is responsible".

Clause 4.25

“Save as otherwise provide [sic] in this Clause 4 the provisions of clauses 4.21 and 4.23 are

without prejudice to any other remedies or rights of the Trade Contractor under this Trade

Contract”.

The Parties’ Submissions The Employer sought a final determination from the court as to the true meaning and effect of

clause 4.21. The Employer took issue with the Adjudicator’s decision that the condition

precedent was “devoid of meaning”, and argued that clause 4.21 required the Contractor to

make a timely and detailed application for loss and expense as a condition precedent to

entitlement to such a claim.

The Contractor argued that conditions precedents were to be construed strictly and that the

words in clause 4.21 should not be construed as barring the Contractor from a legitimate

claim for loss and expense if its application were not made within the stipulated two month

period.

Much of the remaining argument, between the parties, centred on whether the words “Trade

Contractor’s entitlement under this clause 4.21.1” were meaningless because there was no

entitlement under that sub-sub-clause.

The Relevant Principles The court noted the following principles as set out in Chartbrook v Persimmon Homes6:

a contract should be interpreted by reference to what a reasonable person having all the

relevant background knowledge would have understood the words to mean;

the court did not readily accept that contractual parties have made a mistake in their

written contracts;

if something had gone wrong with the language, the court would not attribute to the

parties an intention which a reasonable person would not have understood the words to

mean;

a strong case was needed to persuade a court that something had gone wrong with the

language.

Once it was clear that something had gone wrong with the language, the court would seek as

a matter of construction and interpretation to determine what the parties really meant. In so

doing, the court would have regard to the background and context of the contract to see what

was intended from the wording of the contract. If it was not possible to determine what was

mutually intended from the wording, the background and the context then the court might

have to conclude that the parties had produced a meaningless term or contract.

6 Chartbrook Ltd -v- Persimmon Homes Ltd and Another ChD [2007] EWHC 409

There was no direct authority on this particular JCT form of contract, but the form of wording

was similar and comparable to that used in the earlier editions of the JCT contracts. The court

noted the dictum in Merton v Stanley Hugh Leach7 where clause 24 (1) of the 1963 edition

of the JCT contract (the pre-curser to clause 4.21) was held to be an “if" clause. By this the

judge meant that the provisions of the clause only operated “if” the contractor invoked them

first by making a written application. “If” the application was made, the architect then had to

form an opinion whether loss and/or expense was suffered, “if” the written application was

made within a reasonable time.

The Court’s Analysis and Decision Applying those principles, the court analysed clause 4.21 to show that it was an “if” clause

similar to that referred by in the Merton case. As a result the court held that:

the requirement to make a timely application in writing was a precondition to the recovery

of loss and/or expense under clause 4.21;

the Contractor had no entitlement to recover such loss and/or expense unless and until it

had made such an application because it was the application which activated the

assessment process;

the parties had agreed through the stipulation in clause 4.21.1, as amended, that the

application must be made in a timely manner and in any event no more than two months

after it has become or should reasonably have become apparent that the regular

progress of the works had been or was likely to be affected;

the proper construction of clause 4.21 was that it was a condition precedent to the

Contractor's entitlement to recover loss and/or expense.

In scrutinising clause 4.21, the court separated the essential elements of the clause as

follows:

(a) “If the Trade Contractor makes written application to the Construction Manager stating

that he has incurred or is likely to incur direct loss and/or expense”

The operation of clause 4.21 was brought about by the Contractor’s written application.

There was nothing in clause 4.21 which suggested that the Construction Manager or the

Employer had any obligation to ascertain loss and expense if there was no application.

(b) “because the regular progress of the Works…has been or is likely to be materially

affected …”

7 London Borough of Merton v Stanley Hugh Leach (1985) 32 BLR 51

This made it clear that the application should state in effect that the regular progress was

or was likely to be affected by the various matters listed as entitling additional loss and

expense.

(c) “provided always that”

Use of this wording was often the most obvious indication that the parties intended there

to be a condition precedent which was followed by a qualification and explanation of what

was required to enable the preceding entitlement to materialise.

(d) “.1 the Trade Contractor's application shall be made as soon as and in any event not later

than two months after it has become, or should reasonably have become, apparent to

him that the regular progress of the Works … has been or was likely to be affected”

There was nothing particularly onerous on the Contractor to make its application within

either the general or specific timetables. The application had to be made within the long

stop period of two months after it had become or should reasonably have become

apparent that the regular progress of the works was or was likely to be affected.

(e) “and it shall be a condition precedent to the Trade Contractor's entitlement under this

clause 4.21.1… that the Trade Contractor has complied fully with all the requirements of

this clauses [sic] 4.21.1 including, for the accordance [sic] of doubt, the said time period

of two months”

The erroneous references to “clause 4.21.1” in this part of the sub-clause suggested a lack of

attention in the drafting because there was no specific entitlement under clause 4.21.1.

Essentially, the words in this sub-clause were superfluous because the drafting of the earlier

parts of clause 4.21 and 4.21.1 was sufficient to establish that the submission of a timely

application was a condition precedent to entitlement.

Following the dictum in the Chartbrook case, what the parties clearly intended was to refer to

that part of the overall clause which actually gave rise to an entitlement which was clause

4.21. The whole context of clause 4.21.1 itself is clause 4.21 and it was obvious that the

parties were intending to refer to clause 4.21.

The court was clear in this case how the relevant clauses were intended to operate and was

prepared to correct the mistake made in the cross-referencing of clause 4.21 and 4.21.1.

The judge decided that it was the Contractor’s application which triggered the ascertainment

process and the fact that there was an obvious mistake in the drafting of one of the sub-

clauses to clause 4.21 did not undermine the clear intent of the clause.

It followed that upon a proper construction of clause 4.21, and its sub-clauses, there is a

condition precedent to the Contractor’s entitlement to recover loss and/or expense. The court

did not consider that the requirement for the Contractor to submit a timely application in this

regard, no more than two months after either it became or should reasonably have become

apparent to him, was unduly onerous in any event.

Implications It is even clearer from the Gear case that when contractors are faced with properly drafted

clauses of this type, they must be prudent and put in place sufficient commercial and contract

management resources to ensure they do not fall foul of these provisions, irrespective of the

merits of their case, for want of following the procedure.

It is also worthy of note that the parties in this case had through amended clause 4.25

preserved the contractor’s right to claim at common law for breach of contract,

notwithstanding the validity of the condition precedent provision. The drafters of contracts

shall therefore be aware that the right to recover at common law may still be available in the

absence of any clear words to the contrary.

As a concluding point, it is also worth noting that a failure to follow a condition precedent

clause in a contract is not always fatal to the claim. There may be an equitable remedy in

estoppel, waiver or variation.