In what circumstances may a contractor claim for loss and/or expense in a construction contract?
Damages are the normal remedy for a breach of contract at common law. In order to obtain damages, however, it is necessary to have recourse to litigation or to arbitration proceedings. Only a judge in the course of litigation, or an arbitrator acting in the course of arbitration proceedings, can award damages.
However, building contracts, and other contracts, find a way around this. They provide for the certification by the contract administrator of payments for “loss and/or expense” as an alternative to the protracted process of seeking damages in litigation or arbitration.
One therefore never goes far in construction work without meeting the phrase “loss and/or expense”. The term is found in the express conditions of the building contract – most construction work of any consequence will use a set of express conditions and it is there that reference will be made to “loss and/or expense”.
Loss and/or expense, in the contractual conditions, is (mainly) concerned with situations where the building contractor is impeded by the employer in carrying out the construction work: if that happens, the contractor may be entitled to recover money from the employer as part of an ordinary payment under the contract for the loss and/or expense he suffers as a result. He will be able to do this to the extent provided for in the conditions, for which there are a number of causes; for example, where the contractor is impeded because of not receiving, in due time, instructions or drawings from the contract administrator: refer to clause 26.2 of the JCT Standard Form of Building Contract (JCT 80).
In such a case (and provided that required formalities have been carried out – see below) the contractor’s loss and/or expense shall be ascertained and paid. As clause 26.1 of JCT 80 puts it: “. . . if and as soon as the Architect [contract administrator] is of the opinion that the direct loss and/or expense has been incurred or is likely to be incurred then the Architect from time to time thereafter shall ascertain, or shall instruct the Quantity Surveyor to ascertain, the amount of such loss and/or expense which has been or is being incurred by the Contractor; . . .” and payment shall be made.
This is a very significant provision of great assistance to the contractor, avoiding all the disadvantages that attend an action in the courts or at arbitration.
Formalities
There are normally certain formalities imposed upon the contractor in the contractual conditions. These are pre-conditions which he must observe in order to enjoy the benefit of the provision. The formalities amount, in essence, to: good practice; keeping the employer informed (in good time); and co-operating in the necessary ascertainment of the amount of loss and expense.
Clause 26.1 of JCT 80 provides:
If the Contractor makes written application to the Architect stating that he has incurred or is likely to incur direct loss and/or expense in the execution of this Contract . . . because the regular progress of the Works or of any part thereof has been or is likely to be materially affected by one or more of the matters referred to in clause 26.2 (see above) . . . [then the contractor shall be entitled provided that] the Contractor’s application shall be made as soon as it has become, or should reasonably have become, apparent to him that the regular progress of the Works or of any part thereof has been or is likely to be affected as aforesaid; and the Contractor shall in support of his application submit to the Architect upon request such information as should reasonably enable the Architect to form an opinion as aforesaid; and
the Contractor shall submit to the Architect or to the Quantity Surveyor upon request such details of such loss and/or expense as are reasonably necessary for such ascertainment as aforesaid . . .
The contractor must work within these formalities in order for him to have the right to have his loss and expense ascertained and paid under certificate of the contract administrator. If he does not do so then his right to payment under the conditions in respect of the delay (though not his right to damages at common law) will be forfeited.
Quantum
What is the quantum (amount) of loss which the contractor is entitled to recoup under a “loss and/or expense” provision?
The amount that can be recouped will be the same as in general damages at common law: see Minter (FG) & Welsh Health Technical Services Organisation (1980) 13 Build LR 1.
The starting point for any discussion of general damages in the law of contract is the important case of Hadley v Baxendale (1854) 9 Exch 341. Here, a distinction was made between general damages and special damages. General damages would be those damages which arose naturally from the breach of contract, while special damages would be those which covered everything in the reasonable contemplation of the parties when they entered into the contract:
Where two parties have made a contract which one of them has broken the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either (1) arising naturally, ie according to the usual course of things from such breach of contract itself, or (2) such as may reasonably be supposed to have been in the contemplation of both parties at the time they made the contract, as the probable result of the breach of it.
The distinction between general and special damages was explained further in a later case, Victoria Laundry (Windsor) Ltd v Newman Industries [9] 1 AII ER 997. At pp1002-3 the judge said:
Everyone, as a reasonable person, is taken to know the “ordinary course of things” . . . This is the subject-matter of the “first rule” in Hadley v Baxendale, but to this knowledge, which a contract-breaker is assumed to possess whether he actually possesses it or not, there may have to be added in a particular case knowledge which he actually possesses of special circumstances outside the “ordinary course of things” of such a kind that a breach in those special circumstances would be liable to cause more loss. Such a case attracts the operation of the “second rule” so as to make additional loss also recoverable.
Since direct loss and expense under the contract conditions is as comprised in the “first rule” here, it would appear to be the case that knowledge of special circumstances cannot be considered in the contract administration’s ascertainment of loss and expense.
Keeping to the contract
The contract conditions provide, as we have seen, that the ascertainment of loss and expense is to be carried out by the contract administrator or quantity surveyor. It may be a matter of surprise, therefore, to find the contractor doing the ascertaining, submitting his figures to the contract administrator for the contract administrator to approve. Here one finds, even today (where clients are very watchful of their consultants), that a contract provision is not being observed in the manner agreed.
There are a number of reasons which can be put forward to justify why this should be so.
It is argued that the contractor has all the information and is better placed than the contract administrator or quantity surveyor to work up the information into a claim.
It is also argued that, for the contractor to provide his information, which must then be produced (by the quantity surveyor) as a claim, then in turn to be contested by the contractor, is counter-productive. There may also be a feeling in some quarters that the contractor should not be encouraged to make loss and expense claims.
Yet all this is by way of taking liberties with what the parties have agreed: a perilous course, surely.
Disruption
It is clearly the case that not every delay to the contractor will cause the completion of the building to be postponed. The delay may not lie on the critical path for the job in question. Even so, there will often be loss and expense suffered by the contractor which has resulted from reduced productivity.
In such a case, a payment for loss and expense will be due to the contractor in the same way as where the completion of the building is delayed.
Proven cost
For the ascertainment of loss and expense, proof of actual costs to the contractor will be needed. This can present problems: the contractor will have to prove what his loss and additional costs have been; while the employer now has to concern himself with the contractor’s costs. The contractor’s actual costs are not, in the normal way of any interest to the employer. The contractor will have tendered a price for his work. What lies behind that price is not of immediate concern to the employer.
Once, however, the contractor’s loss and expense has to be paid the contractor’s actual costs will now be important to the employer. It will be necessary for the employer to keep a check on the contractor’s costs now that he is having to pay them as they are incurred.
Two or more causes for delay
Contractual conditions stipulate for events as if they always happen tidily. But delays may arise in a less than tidy manner. There may be two or more causes of a delay running together. One may justify a loss and expense claim while the others may not. A question will arise as to whether the contractor is entitled to recoup his loss and expense.
The contractor’s position will be decided by reference to the dominant cause. In order to be entitled to reimbursement he must show that the cause which allegedly qualifies for loss and expense is, as a question of fact, the dominant cause. This must be decided by applying common-sense standards; and just because a cause comes first in time will not necessarily mean that it is the dominant cause.
Employer’s loss and expense
It may be a matter of surprise to readers that only the contractor’s loss and expense is considered in this article: the employer’s loss on account of delay is not addressed. The reason for this is that the contractor and the employer normally recoup their losses and expenses in entirely different ways under the contract.
A future article in this series will explain the employer’s position.
