Contracts

Conditions precedent and construction contracts

James Sargeant LLB(Hons) PGDip(LP) LLM MCIOB CMreg, Associate Director, and Harry King BA, PGDL, Junior Associate, Quigg Golden

What are conditions precedent and what is required for them to be binding?

CONDITIONS Precedents are a common point of contention in construction contracts, and in disputes theirub interpretation is often a pivotal point in deciding the outcome, as a binding condition. Precedent can effectively guillotine claims for payment, loss and expense, or extensions of time. A construction professional can mitigate this risk by gaining a sound understanding of how conditions precedent operate. This article explains what conditions precedents are, what is required for them to be binding, and some of their common applications in construction contracts.

What is a condition precedent?

A condition precedent is a provision in a contract that must be fulfilled before a right or obligation will arise.

For example, a clause may make the notification within a certain timeframe a condition precedent to a contractor’s right to claim loss and expense. In bespoke contracts, conditions precedent will generally be woven in throughout the relevant clauses, but with standard form contract they will typically be inserted via a schedule of amendments (albeit some standard forms already contain certain condition precedents). The impact of condition precedents is notable, as their validity can either enable or completely undermine claims for additional time and money. Often, their validity tends to be a harsh binary judgement – either they apply, or they do not.

What is required for a binding condition precedent?

Construction and clarity

The construction of each clause must be examined to assess its validity as a condition precedent. The approach to conditions precedents that may exclude the right to payment was summarised by Lord Diplock in Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd (1974) A.C. 689 (25 July 1973):

“Parties may exclude or vary the application of the principle to a particular contract by its express terms if they are couched in language that is sufficiently clear”.

A clause that is not sufficiently clear cannot usually operate as a condition precedent, particularly if it seeks to exclude what would otherwise be a valid claims or entitlement, such as payment.

The impact of condition precedents is notable, as their validity can either enable or completely undermine claims for additional time and money. Often, their validity tends to be a harsh binary judgement – either they apply, or they do notThis approach was outlined by Lord Wilberforce, in Bremer Handels GmbH v Vanden-Avenne Izegem PVBA (1978) 2 Lloyd’s Rep 109 (06 March 1978):

“Whether this clause is a condition precedent or a contractual term of some other character must depend on (i) the form of the clause itself, (ii) the relation of the clause to the contract as a whole, (iii) general considerations of law.”

Accordingly, the most immediate indicator of a binding condition precedent would be a clause that clearly purports to create a condition precedent. In WW Gear Construction Ltd v McGee Group Ltd (2010) EWHC 1460 (TCC), Akenhead J gave “provided always that” as an example of the type of wording that is often the strongest sign that the parties intend for there to be a condition precedent.

While the inclusion of the words ‘condition precedent’ do not necessarily mean a court will find the clause to function as such, it will play into their consideration of the effect of the clause’s. That said, a sufficiently clear clause that does not use the term condition precedent can still be binding.

Conditional links

The operation of a condition precedent is dependent on the completion of specific requirements, establishing a conditional link between the requirements and the condition precedent¹.

The requirement to make a timely application in writing was a condition precedent to the right to claim loss and expense, because of the conditional link the clause created. In WW Gear, the contract between the parties contained a provision that sought to make the contractor providing notice within a certain timeframe a condition precedent to the right of the contractor to claim loss and expense. Because the provision was specifically identified as a condition precedent, the court did not wish to interfere with the clearly intended meaning of the contract and upheld the provision.

As a result, the contractor, who had not submitted a notice within the specified time, had no right to claim loss and expense. The requirement to make a timely application in writing was a condition precedent to the right to claim loss and expense, because of the conditional link the clause created.

Time periods

A condition precedent need not necessarily refer to a fixed time period for compliance. The relevant clause in MamidoilJetoil Greek Petroleum Company SA v Okta Crude Oil Refinery (2002) EWHC 2210 (Comm) required notice to be given so that the counterparty could investigate the existence of force majeure and issue a challenge if necessary. The inclusion of an express time limit was therefore unnecessary and somewhat unworkable in this context.

Consequences of non-compliance

Whilst including the consequences of noncompliance in the wording of a condition precedent is advisable, the judgement in Steria v Sigma Wireless Communications (2007) EWHC 3454 (TCC); [2008] BLR 79 stated that it is not a prerequisite for a binding condition precedent.

In this case a failure to give notice regarding an extension of time was judged to exclude the subcontractor’s right to such an extension, despite the relevant condition precedent only requiring them to have ‘given within a reasonable period written notice to the contractor of the circumstances giving rise to the delay’.

No such notice was given, and despite the clause not outright stating it was a condition precedent, and not clearly setting out the consequences of noncompliance, the condition precedent was still held to be unambiguous and binding.

What can prevent a condition precedent from being binding?

Unfair terms

If a clause is rendered void due to it being an unreasonable exclusion clause, then the clause may not function as a condition precedent.

A clause may be deemed an exclusion clause under the Unfair Contract Terms Act 1977, and if considered unreasonable may be rendered void. The act will apply to contracts that are commercial in nature, excluding contracts between individuals, contracts of employment, contracts concerning interests in land and real property, and contracts relating to intellectual property.

Under section 13(1) of the act, an exclusion clause is one which:

Makes the liability or its enforcement subject to restrictive or onerous conditions.
Excludes or restricts a person from pursuing a right or remedy.
Excludes or restricts the rules of evidence or procedure.

As to whether or not such a clause is unreasonable, the court would likely assess the following factors:

If the parties to the contract had equal bargaining power when the contract was signed.
The clarity and precision of the clause’s wording.
How onerous or difficult it is to complete the task required by the clause.

If a clause is rendered void due to it being an unreasonable exclusion clause, such as one making payment conditional on notices being raised in an unreasonably short period of time, then the clause may not function as a condition precedent.

Ambiguity

Ambiguity within a clause may create sufficient doubt as to the intention of the clause so as to undermine its effect as a condition precedent. If a party is to give up a common law right such as the right to payment, it must be unambiguous in order for the courts to find it to be binding.

For example, if a clause requires notice to be issued ‘promptly’ as opposed to ‘within 7 days’, then the court may find it impossible for the clause to operate as a condition precedent as the condition itself is not clearly defined. An example of potential ambiguity is contained in NEC clause 61.3:

“The contractor notifies the project manager of an event which has happened, or which is expected to happen as a compensation event if:

The contractor believes that an event is a compensation event.
The project manager has not notified the event to the contractor.

If the contractor does not notify a compensation event within eight weeks of becoming aware that the event has happened, the prices, the completion date or a key date are not changed unless the event arises from the project manager or the supervisor giving an instruction or notification, issuing a certificate or changing an earlier decision”.

The possible ambiguity in this clause comes from the wording ‘believes’ and ‘becoming aware’, which are unfixed and subjective when trying to pin down a timeframe for a condition precedent to be met.

A contractor claiming that it is due an extension of time despite not meeting a condition precedent may argue, for example, that the employer has waived its right to rely on the condition precedent.Typically, when faced with ambiguity the courts will take the narrower interpretation, which in this case would require the contractor to demonstrate that the eight weeks did not commence from when they became aware of an event, due to them not also believing it to be a compensation event. This is potentially a difficult argument to demonstrate.

Waiver by estoppel

Estoppel is a legal principle that prevents a party from going against something they previously said or agreed to by law. Waiver is an aspect of estoppel by which a party can give up a right they would otherwise hold. A contractor claiming that it is due an extension of time despite not meeting a condition precedent may argue, for example, that the employer has waived its right to rely on the condition precedent.

This can be done if the condition precedent was not strictly enforced in the past, such as if the employer had previously awarded an extension of time even though the contractor had not complied with the contractual notification requirements i.e. to notify delay within a specific timeframe. In order for the waiver to apply, the following must be met:

There must be a clear or unequivocal promise or representation²
Which is intended to affect the legal relationship between the parties³
Which indicates that strict legal rights will not be insisted upon.
The party affected acted in reliance of the representation⁴
It would be inequitable for the promisor to go back on the promise⁵

Common applications of conditions precedent in construction contracts

JCT

There is some debate over whether conditions precedent apply within the JCT 2016. Loss and expense claims, for example, require notice to be given within a reasonable time or as soon as possible after the event. However, Suzanne Reeves, who is a member of the JCT drafting subcommittee and sits on the JCT Council has stated:

“JCT has not adopted the approach of some bespoke amendments whereby notification by the contractor in accordance with a time limit is a condition precedent to entitlement to loss and expense, which means that in principle noncompliance avoids the claim⁶.”

It, therefore, appears that the notification requirements for loss and expense under the JCT 2016 are not a condition precedent to loss and expense claims, or at least were not intended as such by the drafting committee.

NEC

As mentioned above, clause 61.3 of the NEC, requires notice of compensation events within eight weeks. This is generally strictly enforced as binding, but this time bar will not apply if it arises out of an instruction, from a certificate, from changing an earlier decision or from correcting an instruction.

Common arguments around this time bar include:

Who must become aware of the event? Is it any employee of the contractor, or must it be someone of the requisite seniority? The latter may push the start date of the eight-week countdown back if a manager, for example, is not immediately made aware of the event.
Waiver of the condition precedent, often through informal agreements.
That the effect of the event wasn’t obvious at the time it occurred, thus delaying notification.

FIDIC

FIDIC subclauses 20.1 and 20.2 require parties to give notice of any claims within 28 days of the party becoming aware of the relevant event. Notably, this includes when the party ought to have become aware, and as a result many arguments involving claims under FIDIC concern exactly how and when a party ought to be aware of an event.

Many assume that certain fundamentals of the construction industry, such as the right to loss and expense or extensions of time, will be assured, and don’t realise that they can agree to exclude these rights under a legally binding and enforceable condition precedent clause.

What is almost certain, is that if notice is not given within this time limit, the party attempting to bring a claim may lose any entitlement. Arguing ambiguity is not possible, but some may attempt to argue waiver by estoppel depending on the circumstances. As with NEC, such circumstances will often involve an informal gentleman’s agreement that the condition precedent would not be upheld.

In Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar (2014]) EWHC 1028 (TCC), Akenhead J. did put forward a less harsh approach to clause 20.1:

“I see no reason why this clause should be construed strictly against the contractor and can see reason why it should be construed reasonably broadly, given its serious effect on what could otherwise be good claims.”

This may imply that some leeway is possible for a contractor who has not strictly complied with the requirements of the clause.

Regardless, one of Obrascon’s two extension of time claims was rejected due to the wording failing to identify a delay, instead referring to the works being affected.

Contractors should therefore take note that any notice they intend to rely on for a claim should clearly identify the issue(s) and impact using the wording of the contract.

Conclusion

It is not uncommon for a party to a contract to be caught out by a condition precedent that bars their right to payment or relief.

It is crucial to have contracts reviewed if you wish to include condition precedents, or if you want to avoid being caught out. It is recommended that contractors and subcontractors should always ensure their teams are aware of the requirements of any relevant condition precedents and notify accordingly. Understanding the terms of your contract and implementing their operation into your own training and procedures is the best way to avoid missing out on entitlement.

James Sargeant LLB(Hons) PGDip(LP) LLM MCIOB CMreg, Associate Director, and

Harry King BA PGDL, Junior Associate, Quigg Golden

James.Sargeant@QuiggGolden.com

Harry.King@QuiggGolden.com

www.QuiggGolden.com

@QuiggGolden

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1 Aspen Insurance UK Ltd v Pectel Ltd [2009] 2 All ER (Comm) 873

2 Collin v Duke of Westminster (1985) QB581

3 Spence v Shell (1980) 256EG819

4 WJ Alan v El Nasar Export and Import Co (1972) 2 QB189

5 D&C Builders v Rees (1965) 2 QB 617