Need for Notice - Contractor's right for reimbursement of loss and expense

In FES Ltd v HFD Construction Group Ltd [2024], the Scottish Court of Session addressed a significant issue regarding whether the notification requirements in clauses 4.20 and 4.21 of the Standard Building Contract with Quantities for use in Scotland (SBC/Q/Scot) (2016 Edition) created a condition precedent for a contractor's right to reimbursement of loss and expense. This judgment provides essential guidance for users of SBCC contracts, emphasizing that adherence to notification clauses is crucial for maintaining entitlement to claims.

Contract Overview

FES Limited and HFD Construction Group Ltd entered into a contract for fit-out works on a Glasgow office building, which was based on the SBC/Q/Scot 2016 contract, amended to include certain bespoke clauses. During the works, FES experienced delays, particularly due to COVID-19, and sought additional time and compensation for loss and expense. The contract’s key clauses in dispute were:

• Clause 4.20.1: Allows contractors to recover loss and expense due to delays, provided there is compliance with clause 4.21.
• Clause 4.21.1: Requires contractors to notify the Contract Administrator as soon as any delay effect becomes reasonably apparent.

When FES submitted its claim, HFD contested it, arguing FES had failed to meet the notification requirements. The adjudicator sided with HFD, deeming the notice provisions a condition precedent. FES appealed, seeking a declaration that clause 4.21’s notice requirements were not a condition precedent for reimbursement under clause 4.20.1.

Court’s Analysis and Decision

The court undertook a detailed examination of the contract’s language and relevant legal principles, ultimately agreeing with the adjudicator’s initial decision.

1. Interpretation of Clause Language and Condition Precedent Lord Richardson applied a literal interpretation to clause 4.20.1, focusing on the phrase "subject to… compliance with clause 4.21." He noted that, without compliance, FES’s entitlement to reimbursement would not exist. The court found this phrasing clear and unequivocal, affirming that such compliance constitutes a condition precedent. Ignoring or reinterpreting this language, as FES argued, would require modifying the text of the contract itself.
2. Purpose and Practicality of Clause 4.21 Compliance The court held that clauses 4.21.1 to 4.21.4 set out a "practical and workable" procedure for notifying and documenting delays, thus benefiting both parties by ensuring timely information on potential issues. These procedural steps, qualified by phrases like “reasonably necessary” and “reasonably required,” were not seen as unduly burdensome. Lord Richardson rejected FES’s argument that requiring compliance with these steps could lead to disproportionate outcomes, as the procedural demands were considered reasonable and attainable.
3. Consideration of Business Common Sense FES argued that interpreting the notice requirement as a condition precedent would produce commercially unreasonable outcomes. Lord Richardson, however, found the contract language clear enough to preclude reliance on such arguments. Even if business common sense were relevant, he noted that strict adherence to notification processes serves a valuable purpose by creating predictable, efficient contract administration.
4. Consequences of Non-Compliance FES also argued that because clause 4.20.1 lacked explicit consequences for non-compliance, it should not be viewed as a condition precedent. The court disagreed, stating that the clause’s structure and language inherently made compliance mandatory. This aspect of the judgment underscores that in certain contracts, omission of specific consequences does not weaken procedural obligations if the contract’s structure clearly links compliance to entitlement.
5. Precedent and Industry Standards The judgment reinforces prior decisions that similar clauses in the JCT contracts create condition precedents. The court referred to Walter Lilly v Mackay and London Borough of Merton v Stanley Hugh Leach, which supported the view that notification provisions in similar standard contracts were conditions precedent. Additionally, industry commentary, like that in Hudson’s Building and Engineering Contracts, was cited to affirm the standard practice of requiring such notification as a precondition for claims.

Implications and Takeaways

The ruling provides critical clarity on the enforceability of notice requirements under the SBC/Q/Scot standard form, setting out clear implications for contractors and contract administrators:

• Mandatory Compliance for Claims: Parties using the SBCC suite must strictly comply with notification provisions to preserve reimbursement rights, as procedural requirements are upheld as conditions precedent.
• Drafting and Reviewing Clauses Carefully: This case highlights the need for both contractors and employers to ensure they understand procedural requirements fully. Where notification clauses are included, contractors should have processes in place to meet these obligations promptly.
• Strict Approach to Textual Interpretation: The court’s reliance on textual interpretation reflects a trend toward strict, plain-language construction in commercial contracts. This approach limits the impact of arguments based on fairness or business common sense if the language itself is clear.

Key Contractual Provisions and Case Background

The contract in question, based on the SBC/Q/Scot 2016 edition, contained clauses 4.20.1 and 4.21 that govern entitlement to claim losses due to delays, provided specific notice requirements are met. In this case, FES failed to provide the required notice under clause 4.21, and the adjudicator determined that this omission barred FES’s claim for loss and expense. FES sought a declarator in court to confirm that the notice requirement was not a condition precedent to their right to reimbursement. The court ultimately held that compliance with clause 4.21 is indeed a condition precedent, reinforcing the principle that procedural obligations must be strictly observed for claims to be maintained.

Cases

1. Lagan Construction v Scot Roads Partnership and Wood v Capita: Textual Interpretation in Professional Contracts

In Lagan Construction v Scot Roads Partnership and Wood v Capita, the courts emphasized a textual approach to contractual interpretation, especially when the contract is professionally drafted. Wood v Capita established that a contract should be interpreted to ascertain the objective meaning of the words chosen, with a focus on both textual and contextual readings. The court in Lagan Construction extended this approach, applying it to construction contracts by noting that professionally drafted contracts warrant close adherence to the language itself, without significant deviation based on subjective interpretations or external concepts like business common sense unless absolutely necessary.

In FES v HFD, Lord Richardson followed this textualist approach, observing that the contract was drafted with clarity by professionals. He noted that interpreting clause 4.20.1 required adherence to its explicit language, which tied the contractor’s right to reimbursement directly to compliance with clause 4.21. He found that the phrase “subject to… compliance with clause 4.21” left little room for an alternative interpretation and concluded that the language clearly created a condition precedent. This aligns with the rulings in Wood v Capita and Lagan Construction, where the courts prioritized precise contract language over inferred intentions or notions of fairness. This approach limits the impact of arguments around business common sense, which were raised by FES but deemed unnecessary by Lord Richardson given the clear language of the contract.        

2. Walter Lilly v Mackay and London Borough of Merton v Stanley Hugh Leach: Notification Clauses as Conditions Precedent

Both Walter Lilly v Mackay and London Borough of Merton v Stanley Hugh Leach involved notification clauses similar to those in FES v HFD, where timely notification was required as a condition for claiming loss and expense. In Walter Lilly, the court accepted the notice requirements as a condition precedent, ruling that compliance was mandatory for entitlement. London Borough of Merton similarly found that notification was essential for invoking certain contractual rights, stressing that failure to provide notice effectively precluded claims for loss and expense.

In FES v HFD, Lord Richardson drew from the logic in these cases, particularly in relation to the language used in clause 4.20.1. He noted that interpreting the clause as FES suggested would involve ignoring or altering critical wording, contrary to the approach in Walter Lilly and London Borough of Merton, where the courts accepted that the inclusion of a notification clause established a condition precedent. By affirming that compliance with clause 4.21 was mandatory, Lord Richardson effectively reinforced the view that notice provisions serve a key function in construction contracts, facilitating clear communication of project delays and allowing both parties to address issues in a timely, manageable way.        

Critique of the Decision and Implications

1. Strict Textual Approach and Potential Rigidity The strict textual approach in FES v HFD reflects a judicial trend towards enforcing clear, direct language in commercial contracts. This approach provides certainty in contract enforcement, benefiting the party reliant on procedural compliance, such as HFD. However, this rigidity may create challenges in situations where external factors, like a pandemic, impact the ability to comply fully with notification requirements. Courts that emphasize the plain meaning of contract terms without consideration of unforeseen circumstances or context risk creating disproportionate outcomes, as noted by FES’s argument about disproportionate burdens.
2. Role of Business Common Sense While Wood v Capita and Lagan Construction acknowledge that business common sense may play a role in interpretation, Lord Richardson chose not to apply it here, citing the clarity of the contract language. This narrow focus has benefits, as it avoids subjective interpretations of commercial fairness, but it could potentially ignore practical realities faced by contractors, such as delayed recognition of Relevant Matters. The court’s unwillingness to consider commercial fairness highlights the possible downsides of prioritizing strict textualism over a holistic understanding of the contract in its operational context.
3. Consistency with Precedents in Construction Contracts The decision in FES v HFD is consistent with Walter Lilly and London Borough of Merton, reinforcing the position that notification clauses in construction contracts serve as conditions precedent. This consistency emphasizes the importance of procedural compliance in construction projects, where timely notification allows parties to evaluate and mitigate the impacts of delays. However, the decision also places a considerable burden on contractors to maintain strict adherence to procedural requirements, which can be challenging in complex projects. Such stringent requirements may lead to disputes over minor procedural lapses, as contractors face the risk of losing significant claims if any aspect of the notification process is incomplete or delayed.
4. Impact on Future Contract Drafting and Administration The ruling underlines the importance of precision in contract drafting, particularly around notification requirements. It suggests that parties should include explicit language regarding procedural obligations and their consequences. For contractors, this means adopting rigorous internal processes to ensure compliance with all notice provisions. For employers, the decision provides a clear basis to enforce procedural requirements, potentially reducing the frequency of contested claims by reinforcing the necessity of timely notification.

Conclusion

The judgment in FES v HFD affirms that compliance with notice provisions in clauses 4.20 and 4.21 is a strict condition precedent to reimbursement for delay-related expenses. By emphasizing the clarity and simplicity of the contract language, the Court of Session reinforces the importance of strictly adhering to notification procedures in construction contracts. This case serves as a reminder for all SBCC contract users to carefully review and meet all procedural requirements for claiming loss and expense.

The Court of Session’s decision in FES v HFD highlights a commitment to strict textual interpretation of contracts in line with Lagan Construction and Wood v Capita, particularly in the construction context where procedural compliance is crucial. By affirming that the notice requirements in clauses 4.20.1 and 4.21 were conditions precedent, the judgment reinforces a clear, standardized approach to construction contract disputes involving notification. It aligns with the outcomes in Walter Lilly and London Borough of Merton, emphasizing the importance of procedural adherence in claiming losses. While this decision promotes contract certainty, it may also prompt contractors to advocate for more balanced terms that consider unforeseen project complexities and avoid disproportionate penalties for procedural lapses.