Entitlement to loss and expense under the JCT and SBCC standard forms – notify or else!
November 2024Lord Carloway, the Lord President of the Court of Session, has handed down his Opinion in the reclaiming motion (appeal) issued by FES Limited against HFD Construction Group Limited. The case dealt with the contractual interpretation of the notice provisions in clauses related to entitlement to loss and/or expense. The underlying contract was the Standard Building Contract with Quantities for use in Scotland 2016 Edition (SBC/Q/Scot).
Following judicial precedents from the courts of Scotland and England & Wales, combined with an analysis of the relevant clauses, Lord Carloway has confirmed that the notice provisions for loss and expense in the SBC/Q/Scot are a condition precedent to recovery. Given the wording of the relevant clauses, it is expected that this decision will be followed in England & Wales.
The Contract
FES Limited (“FES”) and HFD Construction Group Limited (“HFD”) entered into a contract in February 2020 under which FES was to carry out fit-out and related works on an office building. The parties used the Standard Building Contract with Quantities for use in Scotland 2016 Edition (SBC/Q/Scot).
Of relevance to this claim are clauses 4.20 and 4.21 of the SBC/Q/Scot which set out the basis for the contractor’s entitlement to loss and expense.
The SBC/Q/Scot has been adapted by the Scottish Building Contract Committee from the JCT version in an effort for commonality between the jurisdictions. Adaptations have also been made to the Design & Build standard forms. As such, it is important to understand the wording of the clause in question and the mirror clauses in the JCT contracts used in England and Wales.
SBC/Q/Scot and JCT SBC/Q 2016
As above, clauses 4.20 and 4.21 in both forms of SBC deal with loss and expense. They state:
“4.20.1 If in the execution of this Contract the Contractor 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.
…
4.21.1 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.
4.21.2 That notification shall be accompanied by or, as soon as reasonably practicable, followed by the Contractor’s initial assessment of the loss and/or expense incurred and any further amounts likely to be incurred, together with such information as is reasonably necessary to enable the Architect/Contract Administrator or Quantity Surveyor to ascertain the loss and/or expense incurred.
4.21.3 The Contractor shall thereafter, in such form and manner as the Architect/Contract Administrator may reasonably require, update that assessment and information at monthly intervals until all information reasonably necessary to allow ascertainment of the total amount of such loss and expense has been supplied.
4.21.4 Within 42 days of receipt of the initial assessment and information and 28 days of each subsequent update of them the Architect/Contract Administrator or Quantity Surveyor shall notify the Contractor of the ascertained amount of the loss and/or expense incurred, each ascertainment being made by reference to the information supplied by the Contractor and in sufficient detail to enable the Contractor to identify differences between it and the Contractor’s assessment” [emphasis added].
These clauses are also similar to that used in the Design and Build standard form (clauses 4.19 and 4.20):
“4.19.1 If in the execution of this Contract the Contractor 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 2.4 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 4.19.2 and compliance with the provisions of clause 4.20 be entitled to reimbursement of that loss and/or expense…”
“4.20.1 The Contractor shall notify the Employer 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.
4.20.2 That notification shall be accompanied by or, as soon as reasonably practicable, followed by the Contractor’s initial assessment of the loss and/or expense incurred and any further amounts likely to be incurred, together with such information as is reasonably necessary to enable the Employer to ascertain the loss and/or expense incurred”.
For JCT sub-contracts, the SBCSub/C 2016 and the DB/Sub/C have almost the same wording as above at clauses 4.14 and 4.15. It does not include deferment of possession as an event that causes loss and expense in clause 4.14, in turn there is no requirement to include in the notice the likely nature and extent of loss and expense caused by a deferment, and is amended to reflect the different roles.
However, the material wording that establishes an entitlement to loss and expense remains, meaning any entitlement is subject to compliance with a notice being given as soon as the likely effect of a Relevant Matter is or should have become known. A condition precedent is a contractual clause stipulating that specific obligations or entitlements will only become effective when certain predetermined conditions are met.
Background to the dispute
There were numerous delays on the project which led to a dispute in relation to FES’s claim for an extension of time and loss and expense. That dispute was referred to adjudication.
The Adjudicator found that clauses 4.20 and 4.21 contained a condition precedent to entitlement to loss and expense, and without the required notice there would be no entitlement. As such FES’s claim for financial recovery failed.
FES subsequently sought a declaration from the Outer House, Court of Session that the relevant clauses did not contain a condition precedent and, if the Court so found, that the Adjudicator’s decision was not binding on the parties.
The Court’s decision
Analysing the rules of contractual interpretation and specific cases related to condition precedents, and relying on Scottish and English & Welsh judgments, the Court rejected FES’s claim for a declaration.
The cases cited in the judgment related to two fundamental issues: how the clauses (including in the context of the contract overall) should be interpreted, and whether the specific clauses amounted to a condition precedent based on the interpretation applied.
The Court held that clauses 4.20.1 and 4.21 were “negotiated and drafted by skilled professionals” (paragraph 53) and were “clear and straight-forward” (paragraph 54). It was clear that giving notices in accordance with the clauses was a condition precedent to recovery of loss and expense.
As stated at paragraph 56 of the judgment, “as a result of the way in which clause is structured, the contractor’s entitlement is dependent on compliance. Accordingly, far from not spelling out the consequences of non-compliance, the wording of the clause makes it clear that without such compliance, the contractor is not entitled to reimbursement”.
In particular, the wording of clause 4.20.1 was similar to the wording in Walter Lilly v Mackay [2012] BLR 503 and London Borough of Merton v Stanley Hugh Leach Ltd 32 BLR 51, and was recognised by the wider industry to be a condition precedent, including in the commentary at paragraph 5-040 of Hudson’s Building and Engineering Contracts (14th Edition).
The Court also found that compliance with the notice provisions was not unduly onerous and capable of being complied with.
Appeal
FES appealed to the Inner House of the Court of Session. In a detailed Opinion, Lord Carloway examined the wording of the clauses, and the relevant case law related to contractual interpretation and condition precedents. He determined that:
- Clause 4.20.1 had been prepared by skilled professionals and so it was appropriate to interpret by textual analysis, citing Wood v Capita Insurance Services as referenced in Lagan Construction Group v Scot Roads Partnership Project.
- Clause 4.20.1 (with similar wording in the JCT form) includes wording that entitlement to loss and expense is subject to compliance with clause 4.21 i.e. notify “as soon as” becoming aware of the (potential) entitlement to loss and expense. To avoid the impact of the clause being a condition precedent, and for FES’s position to be correct, clear wording would need to be ignored. The Court determined that this was incorrect and since the wording was clear using their ordinary or plain meaning, the consequences of not complying with the provisions of clause 4.21 meant that entitlement to loss and expense under clause 4.20.1 was lost.
- As there is no ambiguity in the wording used in these clauses, the Court determined that commercial common sense was not a contractual interpretation principle that required consideration.
As a result, the appeal was rejected, and the first instance (and the earlier decision of the Adjudicator) stands. Clauses 4.20.1 and 4.21 are conditions precedent, and non-compliance with the requirements in these clauses ends any entitlement to loss and expense.
Comment
The decision by an appellate court emphasises that where parties have used an unamended JCT or SBCC, the clauses related to loss and expense contain a condition precedent related to the timing of the notice provisions. If no notice or a late notice is given the entitlement to loss and expense is lost.
Using the same analysis, it is also expected to be found that compliance with the content requirements of an initial assessment as set down in clause 4.21.2 is also a condition precedent.
The content and timing of any notices given under these clauses will remain an issue, as there may be disputes as to whether a particular notice was given as soon as a Relevant Matter was or should have been reasonably apparent.
The decision clarifies that where no notice is given, or notice is obviously given some time after the contractual trigger for it (for example notifying at the end of the project an event that occurred at the start), the unamended condition precedent bites, and the contractor’s entitlement to loss and expense under such provisions is lost. Notably, the releases of the JCT DB 2024 and JCT SBC/Q 2024 contain the same wording (save for modifications to make the language gender neutral).
Parties operating under contracts with similar wording (including unamended JCT or SBCC contracts) must ensure that notices are given in accordance with conditions within loss and expense clauses, to protect and avoid losing their entitlement. Contractual notices should be issued timely and follow the agreed requirements for their form, content, and delivery.
In making such notices, the contractor (or sub-contractor as applicable) should mark these clearly and appropriately. The party giving the notice should also consider keeping an internal note of the factors considered when determining whether a Relevant Matter had become reasonably apparent. This could be important in the event there is a future dispute as to whether the condition precedent has been complied with as to the timing of a particular notice.
Finally, this decision was reached on the unamended wording and with no reported argument that during the commission of the works the obligation to comply with these notice provisions had been waived by agreement or conduct. That may be a further consideration that will factor into similar disputes in the future, but will be case-specific.
Should you require support in reviewing the terms or notice requirements in your construction contracts, or advice concerning the specific circumstances of a potential challenge or dispute, please contact James Vernon or your Beale & Co contact.
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