The Expiry of a Contractual Claim
Takeaways From a Construction Adjudication
January 22, 2024
A subcontractor referred its six million pound claim to an adjudication against the main contractor, but it was determined to be time-barred. What can be learned from the adjudicator’s decision from a contract management perspective? FTI Consulting share five key components of effective dispute management that could be widely applicable to many construction projects from start to finish.
Background of the Adjudication
In early 2014, a subcontractor entered into an amended 2011 JCT Design and Build sub-contract with the main contractor for the building façade works for a multi-purpose commercial development project in England. Whilst the project was subject to delays and significant variations, the subcontractor eventually achieved practical completion in November 2015.
In 2017, the subcontractor issued its letter of claim for a dispute concerning the assessment of an interim payment notice dated October 2017 under the subcontract. The disputed payment notice stated that the final payment date in respect of the valued works was the end of October 2017. The main contractor claimed that the payment notice was not a formal payment notice under the subcontract; it was an administrative tool to pay a small amount of money (approximately £200,000) to the subcontractor. It also argued that the payment was not a revised assessment of the amount due in respect of the subcontract works.
Whilst the parties remained in dispute as to the value of the account, the subcontractor did not pursue its claim in any meaningful way after October 2017. In February 2022, the subcontractor referred the dispute to adjudication against the main contractor in conjunction with claims for prolongation, loss and expense, variations, contra charges and interest. The subcontractor’s claims totalled more than six million pounds.
The Adjudicator’s Decision
The adjudicator decided that the subcontractor’s cause of action for payment for the works accrued in November 2015 when practical completion was achieved. The subcontract was a simple contract, not a deed, so the limitation period was six years, commencing from November 2015. On this basis, the adjudicator determined that the limitation time expired in November 2021, and the subcontractor’s claim, dated February 2022, was time-barred.
The subcontractor lost the adjudication, as well as its entitlement to claims for prolongation, loss and expense, variations, contra charges and interest. Furthermore, the subcontractor was responsible for the adjudicator’s fees and expenses.
Takeaways From the Adjudication
Upon review of the subcontractor’s quantum submissions, although it appears that the subcontractor’s claim was exaggerated, from a quantum perceptive and putting aside the legal liability, it is possible that the subcontractor would have been able to recover some money from the main contractor had its claims not been time-barred. Furthermore, the legal and management costs that the subcontractor spent on the adjudication may not have been worthless.
Although, in this instance, the adjudicator determined that the subcontractor’s claim was time-barred, both the subcontractor and the main contractor could have proactively managed the disputes between them to avoid the failure of the subcontractor’s claim and minimise the consequences associated with such disputes.
What Are the Key Components of Effective Dispute Management?
The root cause of many claims and disputes on construction projects is the failure of risk allocation. The more complex the construction project, the greater the risks associated with it. Whilst risks should be allocated from the outset, any failure to clearly identify the party carrying a particular risk in the construction contract can result in disputed claims for additional payment should the risk occur. A good contract should clearly address how all risks are apportioned between the contracting parties.
There are standard forms of construction contract commonly used in the UK and other European regions, for example, NEC, FIDIC and JCT. Although this article does not seek to compare the allocation of risk amongst different forms of contract, some contracts aim for a fair and balanced allocation of risk.
From this, it is evident that selecting the right form of contract (either standard or bespoke) based on the specific construction project can significantly impact the likelihood of claims and disputes. For each project, legal advice should be sought to determine this.
Resolving a Claim in a Timely Manner
The simplest management strategy for a contractor and employer is to conduct a thorough, informed and realistic appraisal of claims, and to identify the cause and effect of the claims as early as possible to prevent the consequences of change from becoming distorted and a source of aggravation and cost at a later stage.
Whilst the timing for submissions of contractual claims under different forms of contract may vary, the general principle is to notify a claim as soon as the referring party becomes aware. Similarly, it is good practice for the responding party to act on the claim submission as soon as the claim is particularised and submitted. It is highly likely that the later the parties act on the claim, the greater the costs each party may bear, and the more difficult it may be to untangle the impact of the claimed event from other factors.
For the referenced case, the dispute on the interim payment valuations between the main contractor and the subcontractor had materialised much earlier than the letter of claim submitted by the subcontractor in 2017. The main contractor only certified an approximate sum of £200,000 in the disputed payment notice, whereas the total value of the claims referred by the subcontractor in the adjudication was a much greater sum equating to more than six million pounds. The subcontractor submitted its claim in 2017 but practical completion was awarded in 2015. From this, the subcontractor did not notify the main contractor of the interim payment valuation issue in a timely manner. If the subcontractor had notified the main contractor at the time when the dispute on the interim payment valuation arose, the disputed items could have potentially been assessed in good time, and the associated snowball effect on the disputed interim payment valuation could have been minimised.
Good Record Keeping
Many disputes arise in the evaluation of claims for additional payment because of inadequate or poor records. It is essential to keep proper records to avoid the obvious risk that the claim is reduced or even negated due to a lack of evidential information. Keeping accurate records is also vital to protect against potential claims. The importance of maintaining good records is reinforced in the decision of a TCC case, Freeborn v De Almeida Marcal (2019).
Upon a review of the subcontractor’s submissions, it was considered that the subcontractor did not keep sufficient records. If it had, the dispute on the interim payment valuations between the parties could have been resolved or, at least, limited to those matters truly in dispute.
But what constitutes good records? In normal circumstances, contemporaneous records that are kept progressively during the works are considered better than records provided retrospectively. Many standard forms have express provisions for record keeping in the event of claim situations. For instance, FIDIC Red Book Sub-Cause 20.1 requires the contractor to keep contemporaneous records to substantiate any claim. A good record should at least cover the following:
- The scope and progress of the works with reference to physical milestones and significant events.
- The quantification of all deployed resources associated with specific activity undertaken in the recorded period.
- Deliveries of materials and items for incorporation in the works with supporting procurement documentation.
Closing Out the Contract Upon Completion
There might be a few reasons why the main contractor did not settle the final account with the subcontractor and did not subsequently issue the final payment notice. One reason could be that the main contractor could still pay the subcontractor a sum of money via an interim payment which was regarded as an administrative tool, but this was not fully set out in the adjudication. However, the main contractor could have avoided the adjudication had it issued the final payment notice and closed out the subcontract as soon as all the subcontract works had completed.
Sub-Clause 1.8 of the subcontract states that the final payment notice is a tool for the main contractor to conclude the final subcontract sum, inclusive of the value of the subcontract works, extension of time and direct loss or expense (if any). The final payment notice may also prevent the subcontractor from advancing any adjudication, arbitration, or other proceedings later than 10 days after the receipt of the final payment notice.
The Use of a Supplementary Agreement in Resolving Disputes
In many circumstances, contracting parties may not have accurately measured and estimated the volume or value of construction works at the time of forming an agreement due to its inherent complexity and uncertainty. When a project is subject to delays and significant variations, the original contract may not provide a sufficient mechanism (and particularly contract rates) to assess the additional works, delays or disruptions that the parties encounter in the project. Many employers and contractors tend to leave disputes to the end of the works, using this as a bargaining chip in the negotiation of final account. However, good practice (as well as a good contract) dictates that instead of leaving disputes to the end, the contracting parties should seek to agree variations and payment valuations progressively throughout the project. In certain instances, the parties could produce supplementary agreement(s) to assist in resolving disputes. This can help the parties to add, omit or modify the terms and conditions, including (but not limited to) the quantities and rates of the works agreed in the original contract documents to resolve commercial issues.
The main contractor and the subcontractor may have been able to avoid the adjudication had a supplementary agreement been reached during the project, aiding the parties in assessing the additional works, prolongation and disruptions.
Taking a Proactive Approach to Minimising Disputes
Many construction disputes can be mitigated or avoided if an effective dispute management approach is adopted. Even when disputes become unavoidable, unnecessary costs or consequences can be minimised through pragmatic management.
From a contract management perspective, five good practices have been outlined in this article to minimise the likelihood of disputes. They are not a blanket formula but the key principle behind them is to act promptly and proactively rather than passively. Being proactive helps the contracting parties to minimise the consequences associated with a dispute, even if the dispute cannot be avoided in the first place.
January 22, 2024
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