UK: The Importance Of Good Contract Management In Successful Adjudication Time And Money Claims

Last Updated: 11 March 2011
Article by John Kittow

Good contract management practices are the essential foundation of successful adjudications. The adjudicator will decide the claim by applying the terms of the contract. It is very important to be able to demonstrate that the claim you are making fits the requirements of the contract, and that you have operated correctly the contractual machinery for bringing a claim.

This is brought to life by a comparison of how the Joint Contracts Tribunal (JCT) Standard Conditions and the New Engineering Contract (NEC) deal with contractors claims for time and money. Both contracts are addressing the same issue – when should a contractor be allowed an extension of time and be paid for loss and expense? But they approach this issue in very different ways.

NEC is generally much more proactive in requiring the parties to work together in managing the project, to keep it on budget and on programme. In contrast, the way the JCT is drafted, and particularly the mechanisms which have to be used to make claims, makes it far more likely that the parties will ignore what the contract says and store up problems on delays and loss and expense, so they are then not properly addressed until after completion as part of the final account process.

As lawyers we are unlikely to be consulted on practical problems and how to resolve them at minimum cost, and we are usually only brought in when things have gone wrong - to pick up the pieces, to see who is out of pocket and why, and who is liable under the contract. By the time these issues come to us the dispute is frequently contentious, the parties frustrated, and generally the situation is over heated and under illuminated.

The first thing we look at as lawyers is what the contract says, whether it has been put in place properly and signed by the parties, and the parties have served the right notices at the right time. So often, rather than looking at the merits of the claim, what has gone wrong, at whose risk, at whose cost, and what should be done to put it right, we address procedural issues on unsigned contracts and inadequate notices.

These are the legal points which cause so much difficulty and which are frequently the subject of reported cases. This again demonstrates the importance of good contract management. Where there are genuine problems and genuine issues on who is liable for what, the parties need to be in a position to take the real dispute to an adjudicator, rather than face procedural issues on unsigned contracts and inadequate notices. It is useful to compare how the JCT and the NEC should work if the contracts are operated correctly in dealing with contractors' claims for an extension of time and loss and expense.

I am going to assume that there is a design problem for which the employer is responsible, and the main contractor has a claim for time and money.

JCT 2005 Standard Conditions

The mechanics of the claim under the JCT 2005 conditions are as follows:-

2.26 deals with adjustment of the completion date (i.e. the extension of time); and

4.23 deals separately with loss and expense.

Under 2.27 the contractor is required 'forthwith' to give notice of delay caused by a Relevant Event. The contract defines a list of Relevant Events. It does not specifically deal with design issues, but the contractor would bring the claim under the catch all clause which covers 'any impediment prevention or default by the employer, architect, contract administer, quantity surveyor...except to the extent contributed to by any default of the contractor'. Once the contractor has given notice of the delay, the architect is required to make a decision as soon as reasonably practicable and in any event within 12 weeks.

Under clause 4.23 the contractor is entitled to loss and expense incurred because regular progress has been materially affected by a 'Relevant Matter'.

Again there is a list of Relevant Matters, which includes the same catch all term of any impediment prevention or default by the employer, architect etc.

The contractor must make his application for loss and expenses as soon as it was apparent or should have been apparent that regular progress had been affected. He must provide supporting information and respond to any requests for details made by the architect.

If and as soon as the architect is of the opinion that regular progress has been materially affected and direct loss and expense has been or is likely to be incurred then the architect shall from time to time thereafter ascertain the amount to be paid.

There are three obvious points to make about this as a contractual procedure. First, there are two clauses dealing with the different consequences of the same issue. Second, time limits are vague, or generous to the architect. Third, it is very difficult to enforce the mechanism as such, so the contractor can be confident that their claim is being addressed seriously and a decision will be made promptly.

So what happens in practice? Contractors will put the architect on notice of the applications for time and money, but without going into too much detail until they have the architect's initial response. But if the architect is not prepared to deal with the issue seriously there is no easy mechanism to take the claims further until after completion and as part of the final account process.

As architect there is no imperative to address the claim seriously, or refer back to the employer advising as to what is claimed by the contractor (and the merits of the claim, which the architect may well be reluctant to address if there really is a design problem which is their fault). In tricky situations, architects are often very reluctant to give either an extension of time or award money, at least at an interim stage, and will prefer to wait until after practical completion when there is a specific obligation to review whether the contractor is entitled to any further extension of time.

The principles of good contract management tell us to deal with issues as the job proceeds, but this requires both sides to co-operate, unless there are teeth in the contract. I believe it is a failing in the JCT that it is so difficult for a contractor to compel an architect to deal with issues in the course of the project, and too many are left until the end and dealt with as one of many items on the final account.

New Engineering Contract

In comparison, the NEC attempts to capture good project management and make it contractually binding.

Right up there as a core principle of the contract, found at page 3, is the obligation on both the contractor and the project manager to give 'Early Warning' of anything which may affect costs or the timing of completion or a key date.

If the contractor fails to do so he may not get all his costs back on a compensation claim.

The Early Warning may be given by either side to flag up issues which need to be addressed in order to mitigate the consequences of the overall cost and delay, whoever is at risk and whoever is picking up the bill.

The NEC uses the term 'Compensation Events' for events which, if not caused by the contractor, entitle the contractor to compensation for any impact on completion date and costs. Claims for both time and money are dealt with in section 6 under the heading 'Compensation events'.

I will go back to my example of the design problem, which is the employer's responsibility. What happens under the NEC?

First, under clause 16 the contractor should give Early Warning of the problem. This enables the project manager to address the problem, convene a meeting, come up with solutions, at the earliest possible opportunity so as to minimise the consequential loss in terms of time and money.

Where there is a claim, the contractor must give notice of the event and must do so within 2 weeks of being aware of it. The NEC notes make it clear that this is intended to bar any claim for compensation where the contractor does not give notice within that deadline. However, the deadline does not apply in respect of claims made for consequence on employer's variations and other matters for which the employer is required to give notice.

Under 61.4 the project manager must make a decision on the contractor's claim and notify this within just one week (or longer if the contractor agrees), and if the project manager accepts that the event is a 'Compensation Event' he will then require the contractor to submit a quotation for both time and money which must be submitted within just three weeks. The project manager responds to this quotation within two weeks.

When the contractor has submitted his quotation this is either accepted by the project manager or, alternatively, he makes his own assessment which must be notified within the same period that the contractor had been allowed for making the quotation, a minimum of three weeks. On this highly regulated time frame a decision will be made in 11 weeks. This is not very different from the 12 weeks allowed by the JCT for the architect to consider a claim for an extension of time, but the crucial difference is that each step of the way is a contractual requirement, and enforceable as such.

This is no more than a superficial run through of the way two standard contracts deal with contractors' claims. My general point is that any claim that is taken to adjudication must comply with the contract. All claims are defined by the contract and all claimants are asking an adjudicator to enforce their rights under the contract. Claimants can only do this successfully where they have taken care to comply with their own obligations under the contract, and that means knowing what those obligations are, diarising and serving notices as required.

Too often as lawyers we are advising clients that they would have had a good case but they did not serve a withholding notice in time or that they did not give notice of a delay event when they first knew about it.

When the new Construction Act comes into force the regime for payment notices under the main contract and all the sub-contracts remains as important as ever. Everyone with responsibility for contract management needs to know and understand what the contracts say, and maintain a good working relationship with the architect or contract administrator, or project manager. In these days of email it is easier than ever to get it right, but it is crucial to do so in order to provide a solid foundation for success in taking a claim or dispute through to adjudication.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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