Taking Notice: Do you really need to follow the contract?

Most of us with experience of construction contracts of any description recognise that requests for more money or for longer to complete the job are commonplace.  A good construction contract will clearly establish the circumstances in which additional time or money can be allowed, and a basis for measuring any change.

But can a genuine claim for time or money be disallowed because the party claiming it has not followed the contractual process?  In the recent case of Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd & Others, it was confirmed that a failure to follow the agreed process could indeed lead to otherwise robust claims failing.

A condition precedent, or a time bar, is a clause in a contract that sets out a condition or an event that must be satisfied or occur before a right or obligation under a contract comes into existence.  In the case of time or money claims under a contract, that usually manifests as a requirement to provide a notice (or notices) within specified time periods.

A common example clause might state that it is a condition precedent to an award of additional money that a contractor or sub-contractor gives notice of the matter in question within a defined period of when it becomes reasonably apparent to the contractor or sub-contractor.  A failure to do so would allow the employer to disallow the claim, even if it was otherwise justifiable.

These clauses are useful for the employer because it gives them early warning of events that might impact their programme or budget and seek to mitigate the impact. However, they can have a draconian impact on the contractor or sub-contractor, who may lose substantial sums of money for getting its paperwork wrong.   Nevertheless, the courts accept that these clauses are, in principle at least, enforceable.

When is a Condition Precedent valid?

A condition precedent will not be construed simply because the words ‘condition precedent’ are used. It is well established in the watershed House of Lords case Bremer Handelsgesellschaft mbH v Vanden Avenne-Izegem nv that a valid condition precedent must:

1. State the precise time within which the notice is to be served; and
2. Make plain by express language that, unless the notice is served within that time, the party making the claim will lose its right under the clause.

In WW Gear Construction Ltd v McGee Group Ltd, the judge indicated that the wording ‘provided always that’ represents a strong indicator that the parties intend for there to be a binding condition precedent.  The clause relevant to this case had created a conditional link between the contractor’s timely application in writing and its right to loss and expense.  As the contractor failed to adhere to the condition precedent it had lost its right to claim loss and expense.

The importance of correctly drafting a condition precedent, or time bar, should not be overlooked. If the clause is drafted ambiguously or does not include all of the requisite elements, it may not be construed as a condition precedent.

What can we learn from recent developments in case law?

Historically, the courts have readily and strictly enforced condition precedents and time bars if the clause is sufficiently clear. Recent case law only serves to reinforce that position. Notwithstanding that these clauses may result in harsh consequences, the courts have been content to preserve the freedom to contract in this area and acknowledge that they can be a useful tool for employers to aid the smooth running of their projects and early awareness of potential problems.

It is essential for contractors and sub-contractors to have full awareness of their contractual obligations.  It is not enough to operate on the basis that a contract is only to be brought out of drawer to deal with problems.  Many contracts, including published standard forms, include various procedural and administrative requirements to meet when applying for time and money.  In some cases, these clauses amount to valid conditions precedent or time bars.

Contractors and sub-contractors should also consider the nature and extent of conditions precedent or time bars to their claims.   If they appear draconian or difficult to manage, then negotiation of the relevant provisions is needed.  The court cannot later be relied upon to provide relief from a bad bargain.

Are the time periods proposed manageable?

Can the information required in that time period be delivered?  For example, an initial notification within a few days may be straightforward, but the provision of full particulars within that same period impossible.

How is the notice served?  Is it clear that email can be used?

Are there provisions for the employer to respond in similarly clear timescales?

Having the necessary focus on these key questions both at the outset of a contract, and during construction, could be the difference between timely payment or expensive litigation.

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