Building Contract Claims

PART I

Chapter 1

Introduction

1.1 Structure of the Book

The book has been arranged in three parts:

Part 1 deals with general principles relating to time, liquidated damages and financial claims of various kinds.

Part 2 looks at the relevant clauses in JCT contracts.

Part 3 looks at the equivalent clauses in other standard contracts and in some standard sub-contracts.

1.2 Types of Claims

The dictionary defines ‘claim’ as ‘a demand for something as due’.1 Standard form contracts do not use the word ‘claim’. In this book the word is taken to mean the assertion of an alleged right, usually by the contractor, to an extension of the contract period and/or to payment arising under the express or implied terms of a building contract. In the construction industry a ‘claim’ is usually used to describe any application by the contractor for payment which is additional to the payment to which it would be entitled under the general interim payment provisions in the building contract. Although commonly associated with money (i.e. a claim for direct loss and/or expense) ‘claim’ is also used to describe a contractor’s application for extension of time. If it was not for ‘claims clauses’ in building contracts, the contractor would be obliged to fall back on a common law claim for damages (usually for breach of contract). In that sense, claims clauses may be considered, albeit not entirely correctly, as a contractual procedure for dealing with damages. More will be said about this later in the book.

It is useful to classify claims by contractors against employers into four categories. They are: contractual claims, common law claims, quantum meruit claims and ex gratia claims. It should not be forgotten that an employer may make claims against a contractor for liquidated damages or for payment of a balance owing on the final certificate or after termination of the contractor’s employment by the employer.

1.2.1 Contractual Claims

These are claims which are based on a clause or clauses in the contract which expressly provide for the contractor to make a claim in certain prescribed situations. A prime example is the direct loss and/or expense clause 4.23 in the Joint Contracts Tribunal Limited (JCT) Standard Building Contract 2005 (SBC). Such claims make use of the machinery in the contract to process the claim and produce a result. The principal reason for having such provisions in the contract is to avoid the necessity for the contractor to have to seek redress at common law and the inevitable expense involved for both parties in doing so. Most standard form contracts in any event preserve the contractor’s right to seek damages at common law if it is not satisfied with its reimbursement under the contract.

1.2.2 Common Law Claims

Common law claims are claims for damages, usually but not exclusively, for breach of contract under common law. They may also embrace claims for breach of some other aspect of the law such as tortious claims or claims for breach of statutory duty. Most standard forms expressly reserve the contractor’s right to make such claims, for example SBC clause 4.26. A common law claim may be made when it is impossible or difficult to make the claim under the contractual machinery, perhaps because the contractor has failed to comply with the criteria set out in the contract within the appropriate timescale. The making of an application within a reasonable time is an example of such a criterion. However, a common law claim may be more restricted in scope than the matters for which a contractual claim can be made, some of which (for example, architects’ instructions) are not breaches of contract. Common law claims are sometimes referred to as ‘ex-contractual’ or ‘extra-contractual’ claims. These terms are sometimes confused with the term ex contractu. That term is, rarely, found in certain legal textbooks when referring to claims which arise from the contract.

1.2.3 Quantum Meruit Claims

A quantum meruit claim (‘as much as he has earned’) provides a remedy where no price has been agreed. There are four relevant situations:

(1) Where work has been carried out under a contract, but no price has been agreed.

(2) Where work has been carried out under a contract believed to be valid, but actually void.

(3) Where there is an agreement to pay a reasonable sum.

(4) Where work is carried out in response to a request by a party, but without a contract. This is usually termed a claim in quasi-contract or restitution. Work done following a letter of intent is a good example.

The type of claim and the method of valuation are two different things. It is useful to consider the method of valuation under two heads:

(1) Where there is a contract

(2) Where there is no contract.

Where There Is a Contract

For example a contractor may be instructed to carry out certain work to a property, but neither party has thought to agree the price before the work is commenced. In practice, this scenario is remarkably common. If the parties cannot subsequently agree the amount to be paid, the law is that the contractor would be entitled to a reasonable sum. In Turriff Construction v Regalia Knitting Mills2 a contractor tendered for a design and build contract. The employer was anxious for completion by an early date and much preparatory work had to be completed. Although many things, including the price, remained to be agreed, a letter of intent was issued. It was held that in the circumstances an ancillary contract had been entered into which entitled the contractor to payment on a quantum meruit basis.

In Amantilla Ltd v Telefusion PLC,3 the court had to decide whether a cause of action was resuscitated under the Limitation Act (1980), but the cause of action centred on a quantum meruit claim. The contractor had carried out work for the employer for an agreed lump sum price. It was agreed that the contractor should carry out substantial additional work, but the price was not agreed. Various payments were made by the employer, but a final offer by the employer was turned down and matters proceeded to the court which held that the contractor was held entitled to recover, because:

‘A quantum meruit claim for a “reasonable sum” lies in debt because it is for money due under a contract. It is a liquidated pecuniary claim because “a reasonable sum” (or a “reasonable price” or “reasonable remuneration”) is a sufficiently certain contractual description for its amount to be ascertainable in the way I have mentioned.’4

A contractor will often argue that it is entitled to recover on the basis of a complete re-rating of the bills of quantities or on a quantum meruit basis, because the whole scope and character of the work has changed. Most such claims are doomed to failure, because the Works as defined in the contract rarely change and all standard form contracts provide for instructions to be issued to add to, omit from and to vary the Works. The extent to which the Works can be varied without changing their essential character is an interesting topic.

A successful case involved a contractor which contracted to construct an ordnance factory for the employer.5 The contract sum was £3.5 million and there was a subsequent agreement that the employer would pay the cost of the Works plus profit of between £150,000 and £300,000. The contractor thought that the work would cost about £5 million. The value of the contract was eventually increased to £6.83 million. This amount was paid together with a further £300,000 as profit. However, the contractor contended that it was entitled to further profit, while the employer’s position was that it was entitled to order unlimited extras provided that the total Works remained within the scope of the project. In holding that the contractor was due to further reasonable remuneration calculated on a quantum meruit basis, the Court of Appeal stated that the contractor had believed that the cost of the Works would not exceed £5 million and, therefore, a term would be implied into the contract that the employer was not entitled to receive work materially in excess of £5 million. The Court’s view was that neither party could have contemplated such a great increase in the value of the work when the agreement was made.

Where There Is No Contract

In British Steel Corporation v Cleveland Bridge & Engineering Co Ltd,6 the employer had invited tenders for the fabrication of steelwork. The contractor was asked for cast steel nodes. Following the tender, a letter of intent was sent and, expecting a formal order, the contractor began work. Negotiations continued until almost the whole of the nodes had been manufactured and delivered. The court held that no contract had come into existence, the work had been carried out on the basis of the letter of intent and the contractor was entitled to be paid on a quantum meruit basis.

In another case7 a contractor submitted a tender for the design and construction of a factory. The contractor was informed that if certain insurance monies became available, its tender would be accepted. Before any such monies were available, the contractor was requested to, and did, carry out some design work...