Are Notice Provisions Conditions Precedent To Loss And Expense Claims In Construction Disputes?

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In a recent Scottish decision, FES Ltd v HFD Construction Group Ltd [2024] CSOH 20, the Court of Session, Scotland's Supreme Civil Court, held that under the SBCC Standard Building Contract...
UK Real Estate and Construction
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In a recent Scottish decision, FES Ltd v HFD Construction Group Ltd [2024] CSOH 20, the Court of Session, Scotland's Supreme Civil Court, held that under the SBCC Standard Building Contract with Quantities for use in Scotland ("SBCC")recovery of loss and expense is conditional upon compliance with notification provisions.

This decision is important for those with contracts based on JCT Standard Building Contract, 2016 Edition ("JCT Standard Form"). It also appears to follow a line of reasoning that we have seen in other jurisdictions1, although it may be too early to go as far as to say that a stricter approach to notification provisions is a global judicial trend. Given its thorough consideration of this subject and reference to various leading English court decisions, in this Legal Update we take a closer look at this Scottish court decision and its wider significance for contractors, beginning with our key takeaways.

KEY TAKEAWAYS

  • The Court of Session's decision provides clarity that under the SBCC, a contractor must notify its counterparty that it has incurred, or is likely to incur, any direct loss or expense in order to be entitled to reimbursement. Notwithstanding their different wording, the court said that the contractor's compliance with the notification provisions is also required for earlier versions of the SBCC (before the 2016 Edition, which was in issue in this case). It held that this notification obligation is not "an unduly onerous one" and compliance produces benefits in the form of "timely and well administered contract administration".
  • The clauses of the SBCC examined by the court, namely clauses 4.20.1 and 4.21, are identical to the equivalent provisions of the JCT Standard Form. The decision is therefore likely to be of much importance for contractors entering into similar notice provisions under standard form contracts.
  • However, in instances where bespoke clauses are drafted, the courts will assess the notification wording by looking at the wider context in which the relevant language has been drafted, including the nature, formality, and quality of the drafting.

THE PARTIES AND THE DISPUTE

The parties entered into a contract whereby HFD Construction Group Ltd ("HFD") contracted with FES Ltd ("FES") to carry out certain fit out and related works in an office in Glasgow. The contract took the form of the SBCC with Quantities, 2016 Edition, with some bespoke amendments. During the course of carrying out the works, there were a number of delays, including the closure of the site due to the COVID-19 pandemic.

A dispute subsequently arose between the parties as to FES's entitlement to an extension of time and an associated claim for loss and expense under the parties' contract, which was referred to adjudication.

While the parties had not materially altered the standard terms at clauses 4.20 to 4.21.4 of the SBCC, they had made bespoke amendments. These included an increased period of time for a response by the architect/contract administrator/quantity surveyor under the notification provisions at clause 4.21, removal of the contractor's common law right to claim damages in respect of matters which fell within the scope of clause 4.20.1 and amendments to clause 4.21.5 to 4.21.7.

The adjudicator had to ascertain whether the giving of notice was a condition precedent for FES to recover loss and expense under the terms of clause 4.21.

According to Clause 4.20.1:

"If in the execution of this Contract the Contractor [the pursuer] incurs or is likely to incur any direct loss and/or expense as a result of any deferment of giving possession of the site or part of it under clause 2.5 or because regular progress of the Works or any part of them has been or is likely to be materially affected by any Relevant Matter, he shall, subject to clause 4.20.2 and compliance with the provisions of clause 4.21 be entitled to reimbursement of that loss and/or expense." [bold words for emphasis only].

Clause 4.21.1 stated that:

"The Contractor shall notify the Architect/Contract Administrator as soon as the likely effect of a Relevant Matter on regular progress or the likely nature and extent of any loss and/or expense arising from a deferment of possession becomes (or should have become) reasonably apparent to him."

Clause 4.21.2 to 4.21.7 provided further details about the notification procedure, the process of ascertainment of the contractor's entitlement to loss and expense and the possible abatement of that entitlement.

The adjudicator determined that notice was a condition precedent, concluding that FES had not given the notice required by clause 4.21 and so was not entitled to loss and expense under clause 4.20.1.

FES sought a declaration from the court that the notice provisions in clause 4.21 were not conditions precedent to any entitlement of FES for reimbursement of the direct loss and expense and that, consequently, the adjudicator's decision on this issue was no longer binding on the parties.

SCOTTISH COURT'S DECISION

On 27 February 2024, Lord Richardson held that when determining the meaning of clause 4.20.1, the (English and Scottish) authorities were well-established and one has to consider what a reasonable person, who had all the background knowledge reasonable available to the parties, would have understood the parties to have meant by the language used. This involves "considering the language in the whole context in which it is used and, depending the nature, formality, and quality of the drafting of the contract, giving more or less weight to the elements of that wider context". Accordingly, the "poorer the quality of the drafting, the less willing the court should be driven by semantic niceties to attribute to parties an improbable and unbusinesslike intention" (Mitsui Construction Co Ltd v AG of Hong Kong [1986] 33 BLR 14, per Lord Bridge).

Lord Richardson highlighted that clause 4.20.1 in question came directly and unaltered from the SBCC, which was negotiated and drafted by skilled professionals. He held that the language of clause 4.20.1 is "clear and straightforward" and sufficiently clear to indicate that a contractor's entitlement to reimbursement was subject to clause 4.21. He said that "it is difficult to construe this language other than that it creates a condition precedent" and construing clause 4.20.1 as a condition precedent served an "intelligible purpose".

The court then said that the provisions of clause 4.21 did not compel an alternative reading of clause 4.20.1. Clauses 4.21.1 to 4.21.3 were procedural provisions which he said "set out a practical and workable set of steps for notification and provision of information by the contractor". As to FES's argument that clause 4.21.4 imposed an obligation on a third party (architect/contract administrator/quantity surveyor) to consider and reply to the contractor's submissions meaning that compliance with clause 4.21.4 could not be a condition precedent to the contractor's entitlement under clause 4.20.1, he provided useful clarity about clause 4.20.1. He said a natural reading of that clause is that it requires compliance by the contractor and hence it is the contractor's compliance with the provisions of clause 4.21 which constitutes the condition precedent to entitlement.

Lord Richardson highlighted that there were patent infelicities in the drafting of the bespoke amendments in clause 4.21.5-4.21.7, but the key point was that the wording of clause 4.20.1 was taken from the SBCC standard form and not altered by the parties. Consequently, the poorly drafted bespoke clauses did not alter the court's view of the wording of clause 4.20.1.

Accordingly, FES's action was dismissed.

WIDER SIGNIFICANCE

Arguments as to the applicability of notice provisions have for many years featured commonly in construction disputes. Initially, it appeared that the courts would take a more lenient approach to notification provisions given the seemingly draconian consequences of preventing a claim entirely for failure to comply with a particular time period. That approach has gradually changed, and there is now a distinct shift towards finding that contractual notification requirements are conditions precedent to claims. In the interests of certainty, and efficient contract administration, this is probably to be welcomed. However, it does mean that contractors will now have to be extra vigilant and organised in the notification of claims, and should have someone specifically assigned to the task of notifying claims to make sure nothing falls through the cracks.

Footnote

1. For example, see Panther Real Estate Development LLC v Modern Executive Systems Contracting LLC [2022] DIFC CA 016

Originally Published by 2 April 2024

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This Mayer Brown article provides information and comments on legal issues and developments of interest. The foregoing is not a comprehensive treatment of the subject matter covered and is not intended to provide legal advice. Readers should seek specific legal advice before taking any action with respect to the matters discussed herein.

Are Notice Provisions Conditions Precedent To Loss And Expense Claims In Construction Disputes?

UK Real Estate and Construction

Contributor

Mayer Brown is a distinctively global law firm, uniquely positioned to advise the world’s leading companies and financial institutions on their most complex deals and disputes. With extensive reach across four continents, we are the only integrated law firm in the world with approximately 200 lawyers in each of the world’s three largest financial centers—New York, London and Hong Kong—the backbone of the global economy. We have deep experience in high-stakes litigation and complex transactions across industry sectors, including our signature strength, the global financial services industry.
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