People have been continuing to say kind things about my book Extra-Contractual Recoveries for Construction and Engineering Work, and it is gratifying to know that practitioners are finding it useful.
Somewhat belatedly, I have now sent to the UK Society of Construction Law the written version of the paper which I delivered for them in London in December. It is as follows:
CLAIMS OUTSIDE THE CONTRACT FROM A COMMON AND A CIVIL LAW PERSPECTIVE
PART ONE: THE COMMON LAW PERSPECTIVE
A Paper given to the Society of Construction Law
December 2023
Robert Fenwick Elliott
CLAIMS OUTSIDE THE CONTRACT FROM A COMMON AND A CIVIL LAW PERSPECTIVE
PART ONE: THE COMMON LAW PERSPECTIVE
Robert Fenwick Elliott
Introduction
Before turning to the subject matter of this topic, I would like to consider what we, as practising lawyers, are really doing, in the law? Let us leave front end lawyers aside for a moment, and focus on what is going on when clients come to us with a problem. It seems to me the skill is really twofold. On the one hand, it is all about prediction. Clients come to us and ask: what is my legal position? And that is really a prediction thing. What is a court, or other tribunal, likely to make of it all, if the case comes to trial? Being able to get that prediction right is of course a useful thing to offer to a client. It is rarely possible in construction cases for such predictions to be made with certainty. A key witness may be hopelessly unconvincing under cross-examination. There may be important facts that the client has not told us about. As the appeals process shows, different judges may reach different conclusions on any given case. A reasonable rule of thumb is that nothing is much better than an 80% prospect.
But the ability to make reasonably accurate predictions about legal outcomes is not what separates successful lawyers from less successful lawyers. The most useful thing is the other side of the skill: how to improve the client’s prospects. In other words, how to navigate within the probability cloud to get a better outcome.
Some will say that this is all to do with advocacy skills. A razor-sharp ability to expose lies in cross-examination. A clear and logical exposition of the relevant legal principles. A terrierlike tenacity to the rules of evidence so as to exclude as much as possible of one’s opponent’s case.
In my experience, this is not so much to do with advocacy. As lawyers, by far the most important thing we can do – to improve our client’s prospects – is to do with the formulation of the case. It is not so much to do with how we wield the sword; it is more to do with which weapons we choose to pick up and fight with. That is what makes the difference between lawyers who usually win cases, and lawyers who usually lose cases. And if you were to ask me the most significant difference between lawyers who usually win and lawyers who usually lose, I would say that the winners are those who more frequently pick up the weapons of extra-contractual recoveries. By which I mean legal causes of action that are not evident from the express words of the contract. As a rough shot, I would estimate that in about half the substantial construction cases I have been involved in over the years the result has been significantly determined by some extra-contractual entitlement.
The point may be illustrated in the following way. Suppose you are acting for a contractor who has a reasonable commercial expectation of being paid for his work, but who has not been reasonably paid. You can read the contract once, twice, or 20 times and find no contractual entitlement. What should you do? My suggestion is that you should run through a checklist of possible extra-contractual routes to recovery, and pursue one or more of those routes. Again as a broad rule of thumb, in most cases in which a contracting party has a reasonable commercial expectation of payment, at least one of these extra-contractual routes to recovery is likely to be available even if the express words of the contract offer no such route, or even look like a bar. All too often, however, such extra-contractual routes are neither properly explored nor pursued.
A Scenario
In order to illustrate the breadth of extra-contractual opportunities, this paper takes a simple hypothetical example. An owner is building a research facility. She asks a trade contractor to supply and install the windows. She tells the contractor that she wants him to start at the beginning of June and finish by the end of that month. They agree a price of £10,000, and liquidated damages of £1,000 a day. The contract contains a date for completion of 30th June and provides for extension of that time provided – as a condition precedent – that the contractor makes a written claim for extension of time containing a time impact analysis within 7 days of the commencement of any delay. There is a provision for loss and expense for the contractor in the event of owner delay, but only if the date for completion has been extended. There is no provision as to when the owner has to make the site available for the start of work. There is an entire agreement clause, and a clause that the owner is entitled to set-off any of her claims against her liability to pay the contract sum.
When the contractor gets there at the beginning of June, the superstructure has not even been started. The owner tells the contractor not to worry. It is not until the beginning of July – a whole month late – that the contractor can start, and he finishes the installation at the end of July. The building then stands idle and unused for many months because of the hold up in the procurement of suitable heat pumps now mandated by Net Zero regulations.
The contractor claims his £10,000 for the work, and a further £5,000 in respect of the delay. The owner pays nothing, but instead counterclaims for £31,000 for liquidated damages.
So how might the contractor go about framing his case? There is nothing useful to be found in the express words of the contract.
A checklist of extra-contractual routes might include the following:
- Misrepresentation
- Implied terms
- Damages for breach of contract
- Prevention/time at large
- Estoppel
- Impossibility
- Penalty
- Relief from forfeiture
Taking a brief look at these possibilities:
Misrepresentation
The owner might well be liable for damages under section 2 of the Misrepresentation Act 1967. She would have a defence if she can prove that she reasonably believed that the building would be ready to receive the windows by the beginning of June, but that would be unlikely if she knew that the project was already running a month behind, and had no reasonable grounds for thinking that that time could be made up.
It might be that the contract contains a term that the contractor has not relied on any representations, but that term is liable to fall foul of the anti-avoidance provision at section 3, particularly if she knew that her representation was false.
The owner might say that she never represented that the building would be ready by 1 June. But such a representation may well have been made if she gave the contractor a programme showing the window work starting on 1st June.
She might say that any such representation was not a representation of fact, but merely an expression of opinion. But if she gave the contractor a programme which was already out of date – showing perhaps that the foundation work had been completed when in fact it had not – then she may well have made misrepresentations of fact. And in any event, expressions of opinion frequently contain implied representations of fact.[1]
The contractor will have to show that he relied upon the representation in entering into the contract. It might be thought that reliance here is obvious: a contractor would have to be utterly foolish to enter into an arrangement like this, with substantial liquidated damages, if he knew that the project was already a month behind. But claimants in these circumstances do sometimes fail to prove reliance.[2]
If there is a case in misrepresentation, damages are assessed on the fraudulent measure, whether the case is brought under section 2 of the Act or in deceit.[3] In practice in a “no transaction” case[4], the contractor is likely to be able to recover by way of damages the actual cost of the work he has done (regardless of the contractual price) thereby putting him in the position that he would have been in had he not entered into the contract.
Implied terms and damages for breach of contract
There may be no express term as to timeous access, but there is likely to be an implied term to that effect[5], breach of such an implied term sounding in damages.
Damages for breach of such terms often represent a parallel remedy to an express loss and expense provision in the contract, and may have a particular advantage in that a notice provision designed to stifle contractual claims may well be ineffective against breach of contract claims. That was the position in the South Australian case of Decor v Cox (No 2)[6]. In that case the contract provided that the subcontractor had to give the head contractor a written claim for extension of time within 21 days in order to obtain an extension of time, and that the subcontractor was only entitled to extra costs caused by the delay if time had been extended. The subcontractor did not give that notice, but was nevertheless entitled to recover damages at common law caused by lack of access to the workface.
Prevention/time at large
The essential principles of prevention and time at large are well known: if an owner prevents the contractor from completing the work then, in the absence of an applicable extension of time clause, both the date for completion and liquidated damages go, being replaced by a reasonable time for completion and damages at large.
But there are at least a couple of uncertainties here:
- What is the position if the contract does contain an apposite extension of time clause, but the contractor has not given a notice which is a condition precedent to an extension of time? In Gaymark Investments v Walter Construction Group[7], both the arbitrator and then the court found that time was at large because there was no applicable extension of time provision where the principal had caused delay but the contractor had failed to give the requisite notice under the contract. That decision has been criticised in both England and Australia, but it probably remains binding authority, at least in Australia.[8]
- Are these principles of law – difficult if not impossible to displace[9] – or just matters of implied term, which can be disposed of by a mere entire agreement clause?[10]
In this hypothetical scenario, whether or not the contractor can successfully assert that time is at large might depend not only on the detailed facts, but also on what approach a court or arbitrator may take in these two areas of uncertainty. If the date for completion and liquidated damages are dispensed with, it is unlikely that the owner would be able to make out her cross claim, both because the contractor did complete the work within a reasonable time and because the owner did not in the event suffer any loss.
Estoppel
It is not the purpose of this paper to explore the delicate and sometimes nebulous distinctions between estoppel by representation, estoppel by convention, estoppel by acquiescence, equitable estoppel and waiver. Suffice to say that there have been a number of cases in which owners have been estopped from relying on the absence of notice as a reason to deny an extension of time which would otherwise be due.[11]
In this hypothetical case, the indications by the owner that the contractor should not worry about the delay in the start date might well found an estoppel, preventing her from later relying upon lack of notice.
Impossibility
The maxim lex non cogit ad impossibilia (law does not compel the impossible) does not feature very often in construction cases. It is by no means unknown for contractors to contract to do what turns out to be impossible; the law of impossibility rarely if ever comes to a contractor’s aid in these circumstances.[12] But the doctrine does sometimes come into play when it comes to secondary obligations, and particularly machineries as to the giving of notice.
In recent times, bespoke construction contracts for substantial projects have got longer and longer, and sometimes it is downright impossible for a contractor to comply with the strict letter of notice provisions. In the example we have here, it is likely to have been impossible for the contractor to have produced a time impact analysis within the 7 days stipulated, because he had no information as to when the building was going to be ready for the windows to be installed, and in any event, a time impact analysis is not something that can be rustled up in just a few days. And so an impossibility to comply with the Queen of Hearts clause[13] may well be to create a breakdown in contractual machinery or to set time at large[14], or to dispense with the requirement to comply with the impossible provision[15], or to persuade the court to depart from a black letter reading of the clause as a matter of construction[16].
Penalty and Relief from forfeiture
For some reason which is not entirely obvious, the distinction between liquidated damages clauses (which are enforceable) and penalty clauses (which are not) is a topic beloved of students of construction law. The old test in Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd[17] has been displaced, or at least modified, by the new “true test” in Cavendish v El Makdessi[18]: is the provision “a secondary obligation which imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”. That is a test which is applied as at the time of the formation of the contract. The provision for £1,000 per day might or might not pass the test in this hypothetical example. But it may well be unenforceable if relief from forfeiture be granted, to which this paper turns below.
Taking Stock
So let us take stock. Our hypothetical case here is one in which it would be unjust for our contractor to be deprived of payment for his work, let alone to have to pay liquidated damages for delay which was in no way his fault. How is justice to be obtained? It will not be obtained by sticking myopically to the express words of the contract. It might very well be obtained by pursuing one of the extra-contractual routes just sketched out.
The extra-contractual recoveries discussed above in relation to the scenario chosen are by no means the only ones available in common law jurisdictions. There is much more to be said in relation to quantum meruit claims, pay when paid clauses, certification, breakdown of contractual machinery, negligence, and others. In Australia, the “security of payment” legislation provides for a statutory right to progress payments, which are parasitic upon but distinct from contractual rights to interim payment. And also in Australia, the Australian Consumer Law, to be found within the misleadingly-named Competition and Consumer Act 2010 (it is limited neither to competition issues, nor to consumers) provides a plethora of remedies including but not limited to damages where there has been misleading or unconscionable conduct.[19] Neither, in common law jurisdictions, is the availability of extra-contractual recoveries limited to claims “up the line”. Thus, even in contracts where there is a contractual regime setting out procedures and liabilities in respect of defects, there may well be an additional and parallel right to damages for defective work, at any rate in England.[20]
Compared with the civil law approach, these extra-contractual remedies at common law do not get the attention that they deserve. I would like to illustrate this by looking at the availability of relief from forfeiture. For this we need to look at the other case decided with Cavendish in 2008: ParkingEye v Beavis. Mr Beavis parked his car in a car park to a retail park where there were notices that the maximum free stay was two hours, and that there was a charge of £85 payable for overstaying. Mr Beavis left his car there for nearly 3 hours. Mr Beavis refused to pay the £85 demanded of him. ParkingEye sued. Mr Beavis accepted that the arrangement was contractual, but said that the £85 charge was a penalty. For present purposes, the interest in the judgment is not on that issue (the £85 charge was found to be not penal), but what the court said about relief from forfeiture as a second stage in the relevant test.[21] This second stage in the proper legal analysis is to look, not merely at the circumstances prevailing at the time the contract was made, but at the consequences of the breach: did the innocent party suffer any and if so what loss? If the consequence of allowing enforcement of the liquidated damages provision would be out of all proportion to any legitimate interest of the innocent party, then principles of contractual autonomy should not prevent the court from denying enforcement. Whilst obiter, this was no casual throwaway suggestion: it is worth setting out the relevant extracts in what each of the judges had to say:
Lord Mance
…
The relationship between the penalty doctrine and relief against forfeiture
160 Jobson v Johnson proceeds on the basis that a case may raise for consideration both the penalty doctrine and the power of the court to relieve against forfeiture. In my opinion, that is both logical and correct in principle under the current law. A penalty clause imposes a sanction for breach which is extravagant to the point where the court will in no circumstances enforce it according to its terms. The power to relieve against forfeiture relates to clauses which do not have that character, but which nonetheless operate on breach to deprive a party of an interest in a manner which would not be penal… The two doctrines, both originating in equity, therefore operate at different points and with different effects. Consideration whether a clause is penal occurs necessarily as a preliminary to considering whether it should be enforced, or whether relief should be granted against forfeiture.
- This same inter-relationship between the penalty doctrine and relief against forfeiture was also assumed in BICC plc v Burndy Corpn [1985] Ch 232, where Dillon LJ, with whom Ackner LJ agreed, considered first whether the clause was a penalty, before moving to the issue of relief against forfeiture. …
Lord Hodge
…
227 There is no reason in principle why a contractual provision, which involves forfeiture of sums otherwise due, should not be subjected to the rule against penalties, if the forfeiture is wholly disproportionate either to the loss suffered by the innocent party or to another justifiable commercial interest which that party has sought to protect by the clause. If the forfeiture is not so exorbitant and therefore is enforceable under the rule against penalties, the court can then consider whether under English law it should grant equitable relief from forfeiture, looking at the position of the parties after the breach and the circumstances in which the contract was broken.
…
Lord Clarke
…
291…As to the relationship between penalties and forfeiture, my present inclination is to agree with Lord Hodge (in para 227) and with Lord Mance (in paras 160 and 161) that in an appropriate case the court should ask first whether, as a matter of construction, the clause is a penalty and, if it answers that question in the negative, it should ask (where relevant) whether relief against forfeiture should be granted in equity having regard to the position of each of the parties after the breach.
Lord Toulson
…
- On the inter-relationship between the law relating to penalties and forfeiture clauses, I agree specifically with paras 160-161 of Lord Mance’s judgment and paras 227-230 of Lord Mance’s judgment… I agree with them that the proper approach is to consider first whether the clause was an exorbitant provision to have included in the contract at the time when it was made; and, if not, to consider next whether any relief should properly be granted under the equitable doctrine of relief against forfeiture in the circumstances at and after the time of the breach. As Lord Mance and Lord Hodge have noted, this approach was followed by the Court of Appeal (Ackner, Kerr and Dillon LJJ) in BICC plc v Bundy Corpn [1985] Ch 232. It is logical and just.
Lords Neuberger and Sumption (Lord Carnwath agreeing)
- What is less clear is whether a provision is capable of being both a penalty clause and a forfeiture clause. It is inappropriate to consider that issue in any detail in this judgment, as we have heard very little argument on forfeitures – unsurprisingly because in neither appeal has it been alleged that any provision in issue is a forfeiture from which relief could be granted. But it is right to mention the possibility that, in some circumstances, a provision could, at least potentially, be a penalty clause as well as a forfeiture clause. We see the force of the arguments to that effect advanced by Lord Mance and Lord Hodge in their judgments.
Returning to our hypothetical example, the owner suffered no loss from the window delay, because it was overreached by the heat pump delay, and in any event, it would hardly be equitable to allow the liquidated damages to be enforced given that the delay was not the contractor’s fault. Such a state of affairs is by no means unusual in real life. And yet, as far as I am aware there has in the 8 years which have passed since the Cavendish decision been no reported construction case in which relief has been claimed from the forfeiture of liquidated damages.
Why not? One answer to that question might be that too much attention is paid to the black letter of construction contracts, and not enough attention is paid to extra-contractual opportunities. We have long been steered in that direction by the very titles of the traditional authorities: Hudson’s Building and Engineering Contracts and Keating on Construction Contracts.[22] But the lack of attention that has been paid to extra-contractual recoveries is more likely to be due to the wide diversity of the sources of the relevant law, scattered as it is across a very broad range of topics, including a number of equitable principles, statute, tort, the implication of terms, and some general principles of law.[23]
Indeed, it might be thought that construction lawyers have become unduly fixated on the express words of the contract, in a way which is not seen in other areas of the law. Of course we can find contracts in pretty much everything we do. When we get married. When we go into a shop to buy something. The way we interact with our employers and the way they interact with us. We have legitimate expectations about how these things will work out, but not much of those expectations are to be found in the terms of the contracts which we make. In these areas, the legal position is by no means dominated by what has been spelled out in the form of agreement.
Construction law is of course unusual in that it was not codified by statute in the 19th century. There was nothing equivalent to the Sale of Goods Act, the Partnership Act, the Factors Acts, or the Bills of Exchange Act. Instead, the practice emerged of drawing up long construction contracts. Sir John Egan remarked in his report Rethinking Construction in 1998[24]
Contracts can add significantly to the cost of a project and often add no value for the client… formal contract documents should gradually become obsolete. The construction industry may find this revolutionary. So did the motor industry, but we have seen non-contractually based relationships between Nissan and its 130 principal suppliers and we know they work;
The courts often talk about “party autonomy” as a justification for applying the black letter of a lengthy contract over a commercially reasonable expectation of what the legal position should be. That whole concept is based on a fiction: that the true nature of their bargain is to be found in the written words of the contract they have signed. It is a convenient fiction of course. You may say indeed that it is a necessary fiction, at least to some degree. But of this you may be sure: if you were to test the decision-makers who had just signed a 500 page contract, you would find that most of them have a very imperfect understanding of what they have just signed up to.
The sensible way for the commercial law to operate is, it seems to me, clear. The law should, as far as possible, align itself with the reasonable commercial expectations of people who do business. Traditionally, that is what the law has done, and the common law still has powerful weapons to achieve that objective. And hence my rule of thumb: that if the black letter of the contract leads to a commercially absurd result, there is likely to be an extra-contractual route somewhere capable of fixing that absurdity.
If we fail to look beyond the black letter of a construction contract, we are not only getting the law wrong, we are doing a bad job for our clients. And for the industry. And for society at large.
Robert Fenwick Elliott is a Barrister of the Supreme Court of South Australia, Lawyer of the Supreme Court of New South Wales, Solicitor and Barrister of the Federal Court of Australia and formerly a Solicitor of the Supreme Court of Judicature of England & Wales. He is the author of, inter alia, Extra-Contractual Recoveries for Construction and Engineering Work, London Publishing Partnership, 2022.
(c) Robert Fenwick Elliott 2023 and 2024
The views expressed by the author in this paper are his alone, and do not necessarily represent the views of the Society of Construction Law or the editor, neither of whom can accept any liability in respect of any use to which this paper or any information in it may be put, whether arising through negligence or otherwise.
[1] Spice Girls v Aprilia World Service [2002] EWCA save 15 at [51]. See also Esso v Mardon [1976] EWCA Civ 4, [1976] QB 801, [1976] 2 All ER 5.
[2] See for example Brighton Australia v Multiplex Constructions [2018] VSC 246, in which a plasterwork subcontractor fails to prove reliance on the contract programme provided by the head contractor. That case was bought pursuant to section 18 of the Australian Consumer Law, which replaces section 52 of the Trade Practices Act 1974 as the principal vehicle by which misrepresentation cases are considered in Australia.
[3] Royscot v Rogerson [1991] 3 WLR 57.
[4] I.e. a case in which, but for the misrepresentation, the contractor would not have entered into the contract at all.
[5] Roberts v Bury Commissioners (1890) LR 5 CP 310
[6] [2005] SASC 483.
[7] (1999) NTSC 143
[8] For a lengthy and persuasive argument that Gaymark was correctly decided, see The Prevention Principle and Making the Contractor pay for Employer Delay: is English Law departing from its Roots? Tony Marshall [2020] ICLR 325 and [2021] ICLR 88. That pair of articles is also to be found at feconslaw.com/2021/10/04/prevention-and-all-that.
[9] See eg Peak v McKinney [1970] 1 BLR 111 per Lord Salmon:
“I cannot see how, in the ordinary course, the employer can insist on compliance with a condition if it is partly his own fault that it cannot be fulfilled: Wells v Army & Navy Co-operative Society Limited; Amalgamated Building Contractors v Waltham Urban District Council; and Holme v Guppy… if the extension of time clause provided for a postponement of the completion date on account of delay caused by some breach or fault on the part of the employer, the position would be different”
[10] The implied term approach was adopted Coulson LJ in North Midland Building Ltd v Cyden Homes Ltd [2018] EWCA Civ 1744, and by the Supreme Court of Victoria Hera Project Pty Ltd v Bisognin (No3) [2017] VSC 268 and then again in Bensons Pty Ltd v Key Infrastructure Australia Pty Ltd [2021] VSCA 69. But again there is a powerful note by Tony Marshall to the effect that that approach was not open to those courts, it being firmly established by high authority that the principle is indeed one of law. That further note can be found at feconslaw.com/2021/10/11/more-on-prevention-as-a-a-rule-of-law.
[11] See for example Rees & Kirby v Swansea City Council (1985) 30 BLR 1 and BMD v Victorian Urban Development Authority [2009] VSCA 221 for appeal court authorities.
[12] A vanishingly rare exception might be a supervening external event, such as the total destruction of the site.
[13] A Queen of Hearts clause is a notice provision or time bar designed, not for any legitimate commercial purpose, but to be difficult or impossible to comply with.
[14] As was the case in Alstom v Yokogawa (No 7) [2012] SASC 49 at [1530].
[15] As was suggested but not firmly concluded in the South African case in Barkhuizen v Napier [2007] ZACC 5; 2007 (5) SA 323 (CC); 2007 (7) BCLR 691 (CC) at [83].
[16] As was the case BMD v Victorian UDA (ibid).
[17] [1915] AC 79.
[18] Cavendish v El Makdessi, ParkingEye Ltd v Beavis [2015] UKSC 67 at [32].
[19] I have endeavoured to pull these threads together for the purpose of common law jurisdictions in my book Extra-Contractual Recoveries for Construction and Engineering Work.
[20] H.W. Nevill (Sunblest) Limited v. William Press and Son Limited (1981) 20 BLR 78; William Tomkinson and Sons Ltd v The Parochial Church Council of St Michael 1990 C.L.J. 319, Pearce & High v Baxter [1999] BLR 101. In Australia, a different position usually taken: that the contractual provisions represent a complete code excluding the opportunity for damages for breach of contract at common law; Turner Corporation Ltd v Austotel Pty Ltd (1994) 13 BCL 378.
[21] There are a number of cases in which both liquidated damages provisions and notice provisions have been described in terms of forfeiture; see Extra-Contractual Recoveries for Construction and Engineering Work (supra) Volume I at paragraphs 4.307 to 4.310. See also Cavendish v El Makdessi per Lord Hodge:
“There is no reason in principle why a contractual provision, which involves forfeiture of sums otherwise due…[court can] consider whether under English law it should grant equitable relief from forfeiture” (emphasis added).
[22] In fairness, it should be noted that the third and most recent magnus opus is different; Julian Bailey’s very thorough book is simply called Construction Law.
[23] I have attempted to bring them together in my book Extra-Contractual Recoveries for Construction and Engineering Work.
[24] Available at https://constructingexcellence.org.uk/rethinking-construction-the-egan-report/