Contract advice: clauses that risk unravelling your claim

Onerous contract clauses are common features of the construction industry.

However, certain combinations of clauses may have profound consequences for the unsuspecting contractor or subcontractor if the contract terms are not strictly complied with, or the implications are not fully considered when drafting the contract.

Ostensibly condition precedent, or “time bar”, clauses are included in contracts to alert the employer or the contract administrator to the contractor’s claim at an early stage.  The employer may then take preventative measures to either avoid any delay or additional costs being incurred, or ensure that the effects are mitigated as far as possible. In theory, early notification or warning also facilitates swift evaluation of a claim and prevents stockpiling of claims by contractors.

Inevitably, however, condition precedent clauses are often included within contracts as a means of denying what otherwise would be a perfectly valid claim from a contractor or subcontractor, due to a failure to observe the strict obligations regarding notification contained within the contract.

Condition precedent clauses can take many different guises, but generally will consist of a requirement for a party to do something (usually to provide notification within a certain time), failing which the right to make a claim is lost. But their most common application by far is for the notification of claims and delays by a contractor and/or subcontractor.  Although they tend to be found in the reams of amendments to the contract, they are also used in some standard forms of contract.  For example NEC 3, clause 61.3 requires a contractor to notify a compensation event within eight weeks of becoming aware of the event.  If he fails to do so (and the event is not a matter which the project manager is required to notify to the contractor) then the contractor is not entitled to a change in the prices, the completion date, or a key date.

The courts will require clear wording to enforce a condition precedent clause, namely the clause must state a clear timescale for notice to be provided, and that rights would be lost if no such notice was provided. But when these requirements are met, the courts will rigorously enforce such terms as demonstrated in recent case law:

In the Scottish case of Education 4 Ayrshire Ltd v South Ayrshire Council [2009], the dispute centred around the notification of delays and loss and expense, following the discovery of type 3 asbestos during the construction works. The contractor, Education 4 Ayrshire Ltd, duly submitted a claim for £815,792 and an extension of time request for 16 weeks.

The contract conditions under clause 17.6.1 required the contractor to notify of a delay and compensation within 20 business days.  Further, under clause 72.1, notice to the authority had to be specifically issued to the chief executive of Ayrshire council.  Although Education 4 Ayrshire did send a letter to the chief executive within 20 business days, regarding the discovery of asbestos, the letter referred to an anticipated delay only, and did not comply with the notification requirements contained within clause 17.6.1; namely specifically advising of a delay to the target service availability date (or completion date) and requesting a compensation payment.

Despite the employer’s representatives attending meetings with the contractor to discuss the asbestos, and the impact on the programme during this period, Education 4 Ayrshire was not deemed to have issued a valid notice in accordance with clause 17.6.1 and therefore the claim failed.

The case is a stark reminder of the robust approach that can be taken by the courts and the potential unfairness of condition precedent clauses.  It would seem that in this instance the court made no allowance for the notice being drafted by businessmen, rather than a professional adviser.

Where the contractor has failed to comply strictly with a condition precedent clause, depending upon the nature of the claim, all is not lost, as it may be possible for him to frame his claim as a breach of contract by the employer and successfully claim damages under common law. However, the potential unfairness of a condition precedent clause to a contractor may be further compounded if the contract also contains an “entire agreement” clause.

Entire agreement clauses

Entire agreement clauses have grown in usage in construction contracts due to the willingness of the courts to look at the surrounding circumstances and factual background of the written contract to ascertain the contract terms.   The purpose of these clauses is generally to limit the terms of the contract to the written contract, by excluding extrinsic information, and thereby provide certainty as to the contract terms.

While this clearly has benefits, it should be borne in mind that entire agreement clauses can act as a double edged sword, in that if the contract agreement fails to reflect all matters agreed between the parties, then a party may subsequently be unable to rely on a term or representation which formed the basis of the contract.  Great care should therefore be exercised when using such a clause, to ensure that all representations which a party has placed reliance on when entering the contract, and all obligations of the parties, are clearly stated within the contract. 

Entire agreement clauses will typically exclude a party making a claim at common law for breach of contract or under tort.  Perhaps the best known example is clause 44.4 within MF/1 which was confirmed by the courts as excluding a party’s common law rights for breach of contract in the case of Strachan & Henshaw Ltd v Stein Industries [1997].  Strachan, as the contractor, claimed that the relocation of the workers’ tea rooms and clocking-in point some half a mile from the workface was a variation, or in the alternative a breach of contract, following representations made to them pre-contract.  

Thus a condition precedent clause combined with an entire agreement clause in a contract agreement may have fatal consequences for a contractor’s claim under the contract, and/or at common law, irrespective of how genuine and justified that claim may be.  Ultimately, if a contractor fails to comply strictly with a condition precedent clause, and the contract also contains an entire agreement clause, not only will he be barred from recovery under the contract, but he will also be prevented in advancing a claim for damages by virtue of breach of contract.       

To avoid such pitfalls, contractors would therefore be well advised to seek professional contractual advice when submitting notifications of a claim and/or finalising the terms of a contract.