Many contractors believe they are entitled to certain compensation if unanticipated circumstances occur, but usually that eventuality needs to be covered in the contractual agreement.And even then, they may not get the bridging amount they are looking for, writes Guy Cottam
MANY contractors and subcontractors seem to think that because events occur that they could not foresee at the time of tender they have a right to additional payment.
Some even appear to believe that because the works cost more than they anticipated they should be paid additional money.
Often they may get away with it, either because the client's representative knows no better, or it will be too costly or troublesome to argue.
There are, in general, two legitimate routes for obtaining additional payment under a contract.
The first is where the contract provides for the eventuality - for instance, unforeseen ground conditions under Clause 12 of the ICE conditions.
The second is damages for breach of contract. In both cases there has to be a term in the contract, express or implied, which covers the event giving rise to the extra expense.
Additionally, of course, if you are claiming this extra payment you have to prove that you have suffered a loss as a result of this unforeseen event. If there is no relevant contract term, or you cannot prove any loss, you will have no entitlement.
Our standard contracts cope with unforeseen matters in different ways.Whereas the ICE conditions have a clause covering unforeseen ground conditions, the JCT conditions do not.
So, under JCT, if you suddenly find unexpected rock or running sand, this will be dealt with under the Standard Method of Measurement (SMM6) and paid for according to the appropriate bill items.
However, since the conditions would be unforeseen, it is unlikely that you would find the relevant items in the bill as priced;
new rates would therefore need to be negotiated.
The way reimbursement is assessed under a contract will depend upon the wording of the particular contract.The ICE conditions base assessment on 'additional costs incurred'whereas the JCT wording is 'direct loss and/or expense'Other contracts have different principles again.
However, the meaning of both the ICE and JCT wording has been held by the courts to be akin to a claim for damages.
Damages were summarised by Judge Thornton in the case of Earls Terrace Properties v Nilsson Design (discussed at length by Jeremy Winter in Construction News, September 16).
Thornton stated: 'In a case involving loss arising from damage to or defects in building work caused by negligent contractual breach by a contractor or construction professional, there is a linkage between the scope of the duty, the breach, remoteness and foreseeability of damage, nature of damage and recoverable damage.
'Subject to any limitation imposed by these tests, a claimant is entitled to recover a sum of money that will put it in the same position as it would have been in if it had not sustained the wrong in question and if the contract had been performed properly.'
The most important limitation on recovery is the concept of 'remoteness'.Some losses are said to be too remote to be recovered. For a claim for damages to succeed, the cause of the damage has to have been within the reasonable contemplation of the parties at the time the contract was drawn up.This is an extension of the principle that where a loss is unforeseen it is the person incurring it that has to bear it.
It should also be borne in mind that the conditions of contract set the circumstances under which a contractor may be entitled to an extension of time, and these are generally distinct from the clauses giving rise to financial entitlement.
For instance, under the ICE conditions, if a supplier supplies goods to a contractor late because his workers went on strike and this results in delay to the contractor's contract, the contractor may be entitled to an extension of time under Clause 44's provision covering 'any special circumstance whatsoever'But he will not be entitled to any payment.
The reason for this is that there is no condition in the contract that provides for payment for that eventuality.
The straightforward extra costs incurred on site are simple in principle.They may be difficult to assess accurately but that will depend on the quality of the records kept.
Greater difficulty arises when the costs are knock-on effects of a breach of contract.
For instance, contractors may claim loss of opportunity because their plant has been tied up for a longer period than expected due to changes made to a design for which they were not responsible. Or, a developer may claim for loss of opportunity because his working capital has been tied up for longer than had been planned due to deficiencies of the contractor.
The main question in each of these examples is whether it was reasonably foreseeable, at the time the contract was put together, that the particular conduct of one party would result in a loss of opportunity for the other.And if so, what is the basis for calculating the loss?
In the Earls Terrace case, Judge Thornton went on to say that the rules or principles 'must be imposed. . . in a way that allows recovery for loss actually incurred and does not allow recovery where there has been no, or no discernable, loss.
'This creates further difficulties in some cases since it is sometimes unclear whether the claim relates to a loss which is sufficiently discernable or quantifiable in monetary terms to allow recovery.'
It is therefore important that contractors or subcontractors, when claiming for damages, can show that the extra costs being claimed were caused by an event for which the client is responsible, and their amount [? ].This means accurate records.
It is also important for contractors to remember that if they breach the contract, they may be liable to the employer for costs which the employer incurs as a result of any default of theirs, such as defects in the works which they [the contractors] may not have considered but which, on reflection, are obvious, such as damages to would-be tenants, and loss of opportunity on any capital locked up.