Is notification of loss and expense under the JCT a condition precedent?

A recent decision of the Scottish Court of Session has considered whether the notification of a claim for loss and expense is a condition precedent under the 2016 edition of the JCT form. The wording of the loss and expense clause in the 2016 edition had changed from the 2011 edition and the Court’s upholding of a condition precedent provides important guidance on the new wording. A failure to adhere to the notification requirements can, as in this case, result in a contractor losing valuable rights to recover loss and expense, particularly where common law rights have been excluded.

FES Ltd v HFD Construction Group Ltd

FES and HFD entered into a contract for fit out and related works for an office building in Glasgow. The contract was an amended form of the 2016 JCT Standard Building Contract for use in Scotland. The contract was entered into in February 2020, just before the Covid-19 lockdown.

A dispute arose between the parties as to claims by FES for an extension of time and an associated claim for loss and expense. FES ultimately referred the dispute to adjudication. One of the issues the adjudicator needed to decide was whether the notification requirements for loss and expense claims in clause 4.21 of the contract was a condition precedent to recovery of loss and expense under clause 4.20. Clause 4.20 (in unamended form) read as follows

“If in the execution of this Contract the Contractor incurs or is likely to incur any direct loss and/or expense … because regular progress of the Works … has been or is likely to be materially affected by any Relevant Matter, he shall, subject to … compliance with the provisions of clause 4.21 be entitled to reimbursement of that loss and/or expense.”

A very similar version of this clause is found in the 2011 edition of the JCT/SBCC contracts, but with the phrase “provided always that” used where the words “subject to” now appear. This earlier clause was agreed to be a condition precedent in the English case of Walter Lilly v Mackay. 

In the present case, the adjudicator decided that the 2016 wording remained a condition precedent despite the change in wording. As FES had not notified its claims in time, its right to claim loss and expense was barred under clause 4.20. As the parties had also excluded common law rights to claim for loss and expense (for example, due to breaches of contract by way of hindrance or prevention), FES was left without any recourse.

FES sought to challenge the adjudicator’s decision in the Scottish Court of Session.

New wording remains a condition precedent

FES made a number of arguments for why the “subject to” language of the 2016 contract should not amount to a condition precedent:

• Clear wording was required to establish a condition precedent, whereas the JCT drafting did not spell out the consequences of non-compliance with the notification requirements.
• Absent clear words, the clause was simply contractual machinery with a breach of the notification requirements allowing a claim for damages to be made by the Employer which could be deducted from any entitlement to loss and expense otherwise arising.
• The “subject to” language did not necessarily require a condition precedent interpretation and could properly be read as referring to the Employer’s ability to deduct damages for breach of the notification requirements (i.e. that the Contractor’s entitlement to loss and expense was “subject to” any claims made by the Employer for breach of the notification requirements).
• Depriving the Contractor of the entirety of its entitlement to loss and expense due to a failure to comply with any of the notification requirements was “illogical, disproportionate and unreasonable.”
• By way of contrast, the NEC form of contract clearly states that if the notification requirements for Compensation Events are not complied with, the Prices, the Completion Date and the Key Dates are not to be changed.
• An article on the JCT website, drafted by a member of the JCT drafting committee, suggested that the JCT had intentionally not taken the approach of the NEC form in making the notification requirements a condition precedent to entitlement.

The Court of Session rejected these arguments, finding that no entitlement to loss and expense could arise under clause 4.20 without compliance with the notification requirements. Lord Richardson noted that clause 4.20 had been drafted by skilled professionals. The language was clear and straightforward and, in his view, it was difficult to interpret the phrase “subject to compliance with” in any way other than as a condition precedent. Compliance with the clause was not unduly onerous and both parties stood to benefit from the timely notification of loss and expense claims.

Conclusions and implications

This is the first case to consider the notification requirements for loss and expense claims under the 2016 edition of the JCT/SBCC form. The upholding of a condition precedent is of crucial importance to contractors operating under the form, as a failure to comply will deprive a contractor of its right to recover loss and expense.

The impact of the condition precedent is softened by the standard wording which states expressly that the right to claim loss and expense under the contract does not limit or affect any other rights and remedies. This means that in many cases a contractor who has failed to comply with the notification requirements and has lost its rights to claim loss and expense could nonetheless bring claims at common law for breach of contract, often by alleging that the employer had breached implied terms as to co-operation and non-hindrance. Contractors should therefore think carefully about excluding such common law rights, as occurred in the present case, as a failure to adhere to the notification requirements may then leave them without any claim at all.

It remains to be seen whether the same approach to the 2016 edition will be adopted in England and Wales.

References:

FES Ltd v HFD Construction Group Ltd [2024] CSOH 20

Walter Lilly & Company Ltd v Mackay [2012] EWHC 1773 (TCC)