According to the tax and advisory organisation KPMG, the strain of the past few years has left the construction industry increasingly confrontational in a bid to counteract narrowing margins. Companies are pricing to break-even in order to survive as well as employing contractual defences to win back margins through ADR, including adjudication. Rob Dalton, Associate Director at commercial and contract management consultancy Blake Newport explains why condition precedent clauses are catching some contractors out and why they shouldn’t rely on common case law to save them…
Condition Precedent Clauses
There are a number of provisions within construction and engineering contracts that contractors should heed. One such provision that is threatening to impact on contractors across these sectors is the growing use of condition precedent clauses.
When applied to construction and engineering contracts, condition precedent clauses are usually provisions that require notification of a claim (delay of works or rise in cost) within a specified amount of time.
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”.
Accordingly, failure to issue the required notice is likely to result in contractors losing the right to both extension of time and additional money.
Although included in NEC3, and the FIDIC form of contract, condition precedent clauses have not generally been a feature of other standard form construction and engineering contracts. It is however becoming more common to amend these standard forms to introduce such provisions.
Enforceable or not enforceable?
In the Bremer v Vanden[1] case the House of Lords stated that for a notice issued by an employer to be considered a condition precedent, a specific time for delivery of the notice should be expressed. It should be accompanied by a clear indication of the impact of failing to issue the notice and clearly state that rights would be lost in the event that notice is not given.
In short, contractors must provide notices to their client as soon as any possible delays or additional costs become apparent; these notices must be accompanied with any relevant information that will help the employer to assess the contractor’s request.
But contractors beware!
Although they may be required to provide notice of delays or additional costs, they will not be entitled to direct loss and/or expense where their own negligence contributed or was directly responsible for it.
In another example, the case of City Inn v Shepherd Construction[2], Shepherd argued that the condition precedent clause imposed a penalty upon them, because an extension of time that they should have been entitled to had not been granted simply because they had failed to give notice and not because of any fault of the actual works. The court rejected Shepherd’s argument saying that it was always in the contractor’s power to avoid the liability, by taking the necessary steps as outlined in the contract.
So what can be done and can common law defeat a Condition Precedent?
When a contractor’s claim is rejected on the grounds that it has failed to serve notices, the contractor will often argue that the employer’s position is contrary to the ‘prevention principle’. Essentially, this means that if the client has prevented the contractor from delivering the project to the specified date, then the contractor cannot be blamed for not fulfilling their contract, as found in the case of Multiplex Construction v Honeywell Control Systems[3].
In Multiplex Construction v Honeywell Control Systems 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”.
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But whilst the ‘prevention principle’ may in some cases offer some defence to condition precedents it certainly cannot be relied on. In cases such as Gaymark Investments v Walter Construction[4] and WW Gear Construction v McGee Group[5], the court has rejected the contractor’s ‘prevention principle’ defence. This was on the basis that it was always in the power of the contractor to notify the employer and protect its interests by giving the relevant notices of delay.
It is clear then that contractors must take notice of properly drafted condition precedent clauses and undertake careful commercial and contract management in order to ensure they do not fall foul of these provisions. In times like these, careful contract management will help you to not only claim for money or time owed to you but also ensure client-contractor relationships are maintained, better margins achieved and hopefully the opportunity of future projects secured.
For the full technical document and explanation of the court cases mentioned in the above summary please go to wwww.blakenewport.co.uk/downloads
[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]
[5] WW Gear Construction Ltd v McGee Group Ltd [2010] EWHC 1460
