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Why being upront with partners could save you from expense

What are the legal consequences of failing to inform the other party of a possible hazards in a tender? By Guy Cottam

I am always amazed at how unwilling people are to raise difficulties which could increase the tender price when negotiating contracts.

Consultants seem to think that raising issues will increase the price for their client. Contractors fear that preparing for potential problems will render their offer uncompetitive.

Similarly, if the client knows of a poten-tial difficulty then there is no cheaper way of minimising its effect than to inform the contractor of it at the time of tender. The odds are that the contractor will either include a small percentage of the cost or ignore it altogether.

There is also a parallel reluct-ance to draw attention to onerous clauses in the prop-osed conditions, whether they be from the client to the tenderer or the other way around.

The point of onerous clauses is to protect the party including those clauses from liability, should their actions cause loss to the other party - by breach of contract or negligence.

However, such reluctance to highlight these onerous clauses could nullify the effect of them and remove the protection they were intended to provide.

English law generally only all-ows for the recovery of losses caused by the wrongful action of one of the parties, such losses being referred to as damages.

The starting point for the assess-ment of such damages is one of the most famous of cases in English contract law - Hadley v Baxendale. That case separates losses for breach of contract into two categories:

a) Those which arise naturally from the breach, that is accord-ing to the usual course of things and;

b) Such losses as may reasonably be supposed to have been within the contemplation of both parties as the time they made the contract, as the probable result of a breach of it.

The first are always claimable but for the latter knowledge of purpose is necessary.

To tell or not to tell

Consider a site which has a water-main supplying a local factory crossing it. The contractor knows it is there, but because it is below the level of expected excavation does not tell his excavation subcontractor about it.

The subcontractor damages the pipe, bringing the factory to a standstill. The factory owner sues the contractor for his losses. The contractor - because he is responsible for the work - could be held liable for the losses incurred by the factory, but would not be able to reclaim them from his subcontractor unless the subcontractor was aware, or ought to have been aware, of the presence of the pipe.

It will always be a commercial decision as to what information should be supplied to the other party to a contract at the time of tender. It is a balancing act of possible cost against the risk involved.

When making that decision it is important to understand the downside of getting the decision wrong against the possible benefits. Failing to inform the other party of a potential hazard could be a very expensive mistake.

Guy Cottam is a conciliator, arbitrator and former chairman of the arbitration advisory panel of the Institution of Civil Engineers