Contract administration and notice provisions: Mere procedure or condition precedent?

Recent decisions considering time bars and notification provisions have generated considerable commentary and discussion over the last few months. One of these is the English High Court decision in Boskalis Offshore Marine Contractive BV v Atlantic Marine and Aviation LLP (the “Atlantic Tonjer”) [2019] EWHC 1213 (Comm) which concerned notification provisions in a payment clause and the timely challenge of disputed invoices before they were due for payment.

A ‘time bar’ in appearance only

Although Boskalis concerned a charterparty, parallels can be drawn with the notification provisions in many construction contracts where payment is disputed. Atlantic Marine owned the Atlantic Tonjer and chartered it to Boskalis for a 21 day period. The charterparty contained various clauses detailing the terms of payment. The dispute centred on provisions which stated that firstly, Boskalis would pay all invoices within 21 days of receipt, and secondly, if Boskalis wished to dispute an invoice, it had to do so before the date it was due for payment:

“If the Charterers reasonably believe an incorrect invoice has been issued, they shall notify the Owners promptly, but in no event later than the due date [21 days from receipt of the invoice], specifying the reason for disputing the invoice. The Charterers shall pay the undisputed portion […] but shall be entitled to withhold payment of the disputed amount…”.

Boskalis attempted to dispute an invoice using an off-hire defence. However, it failed to do so before the date that it was due for payment. The court, confirming the decision reached by the arbitral tribunal, found that Boskalis was bound to pay the invoice in full. There was scope for this payment to be adjusted by a prescribed procedure, but the court was clear that Boskalis was to pay the invoice in the first instance.

The court was at pains to state that the clause did not amount to a time bar or an exclusion or limitation clause, even though it very much behaved like one. It was a clear and unambiguous clause, entered into by commercial parties of equal bargaining power in circumstances where, as is the case in the construction industry, cash flow is crucial. As the judge said: “To put it another way, the parties have bargained for how disputed payments are to be raised”. It was, in effect, a provision with which Boskalis must comply, failing which it was obliged to pay the full amount of the invoice.

There are clear similarities between the Boskalis provision and provisions commonly found in many construction contracts. But what does the approach taken in this case suggest for certain provisions of construction contracts that parties may typically view as merely procedural?

Clear language and conditions precedent

It has been said that drafting is not just about being understood, it’s about making it impossible to be misunderstood. Lawyers are generally told that if you want to draft an effective condition precedent, you should do so explicitly, using clear language. There have been a few cases that shed some light on this issue for the purpose of construction contracts.

Notification requirements in standard form construction contracts

In terms of the contractor’s entitlement to claim certain loss and expense, Clause 4.20 of the JCT SBC 2016 (commonly used in the UK) states:

“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…[deferment of possession or a 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.” (emphasis added)

Clause 4.21 sets out the notification requirements for such loss and expense claims, including the need to notify the employer of the claim as soon as the likely effect of the matter or nature and extent of the loss and expense becomes, or should have become, reasonably apparent.

Some contractors may be of the view that there is no condition precedent here. Case law on this clause is scant. However, various decisions on similar clauses may cast some doubt on this approach.

London Borough of Merton v Stanley Hugh Leach Ltd (1985) 32 BLR 51, concerned the 1963 version of the JCT Standard Form. The wording at that time (in Clause 24) was somewhat different, although the intention is much the same:

“If upon written application to him by the Contractor the Architect…is of the opinion that the Contractor has been involved in direct loss and/or expense…and if the written application is made within a reasonable time of it becoming apparent that the progress of the Works or any part thereof has been affected as aforesaid, then the Architect…[should ascertain] the amount of such loss and/or expense…”

Mr Justice Vinelott concluded that this clause was (in his words) an “if” provision – it is operative only if the preconditions prefaced by the word ‘if’ are satisfied. Among these is the precondition that a written application is made within a reasonable time.

A more recent decision, although not in respect of a construction standard form, was Steria Limited v Sigma Wireless Communications Limited [2007] EWHC 3454 (TCC). This concerned an extension of time provision in an IT services contract:

“If…[the Sub-contractor is delayed by a reason entitling it to an extension of time]… provided the Sub-Contractor shall have given within a reasonable period written notice to the Contractor of the circumstances giving rise to the delay, the time for completion hereunder shall be extended…”

The court considered whether the wording was sufficient to require the sub-contractor to give a written notice as a condition precedent to its entitlement to an extension of time. It concluded that it was. Stephen Davies J concluded that “[w]hat the sub-contractor is required to do is give written notice within a reasonable period from when he is delayed, and the fact that there may be scope for argument in an individual case as to whether or not a notice was given within a reasonable period is not in itself any reason for arguing that it is unclear in its meaning and intent”. He went on to say explicitly that a further statement that the provision was intended as a condition precedent was not necessary.

In the first instance decision in Obrascon Huarte Lain SA v Her Majesty’s AG for Gibraltar [2014] EWHC 1028 (TCC), Akenhead J considered the FIDIC Yellow Book’s provisions for claiming an extension of time which mirror those found elsewhere in the FIDIC suite. Clause 20.1 of the FIDIC Yellow Book 1999 was identified by the court as imposing a condition precedent:

“20.1 If the Contractor considers himself to be entitled to any extension of the Time for Completion…under any Clause of these Conditions or otherwise in connection with the Contract, the Contractor shall give notice to the Engineer, describing the event or circumstance giving rise to the claim. The notice shall be given as soon as practicable, and not later than 28 days after the Contractor became aware, or should have become aware, of the event or circumstance.”

Akenhead J noted that, in practice, the "event or circumstance giving rise to the claim" for an extension must first occur and the contractor must either be aware of or have the means of knowing about this event or circumstance “before the condition precedent bites”. Notice of the claim should also be given in writing to the employer as soon as practicable, and certainly before the 28 day longstop date. Under English law, failure to give the required notice will result in the contractor forfeiting its entitlement to an extension of time and/or additional payment in respect of what would otherwise be a valid claim.

More than merely procedural

There have been a range of cases where conditions precedent have been found to exist, as well as cases where the courts have considered that more specific drafting is required. Unfortunately, this makes it difficult to draw a firm conclusion on clauses in standard form construction contracts.

It goes without saying that contractors should, as a matter of course, make sure they comply in full with all of the notice requirements under their contracts. Whether drafting or administering construction contracts, one needs to be acutely aware of the possible import of obligations that may be considered, or appear to be, ‘merely procedural’. Clause 4.20 of the current JCT standard contract, for example, states that the contractor can have its loss and expense “subject to […] compliance with the provisions of clause 4.21”, the notification provision. No strict deadline is set, but this does not mean that the clause does not operate as a condition precedent and will not be construed as such.

All of this is compounded by the fact that many modern forms of construction contract are very good at stating what the parties should do, and rather less good at stating what happens if they do not. Parties may be left guessing as to what the consequences of their omissions and breaches might be, and, as Boskalis found out, they may well guess incorrectly.

A version of this article was published as a blog by Practical Law Construction on 27 November 2019.

This article was written by Christopher Hadnutt. For more information please get in touch via christopher.hadnutt@crsblaw.com or on +44 (0)20 7427 6571.