EXTRA-CONTRACTUAL RECOVERIES: 12 HIDDEN OPPORTUNITIES AND RISKS – The Paper

Here is my paper delivered at the Society Of Construction Law Conference a couple of weeks ago:

 

SoCLA National Conference 2022

“Getting Risk Right”

 

Hobart

5 – 7 May 2022

 

EXTRA-CONTRACTUAL RECOVERIES:

12 HIDDEN OPPORTUNITIES AND RISKS

 

Robert Fenwick Elliott[1]

 

Introduction

  1. As bespoke contracts have become lengthier, and more heavily laden with Queen of Hearts clauses[2] and “I Delay, You Pay”[3] arrangements, it has increasingly been the case that the contractual entitlement of contractors and subcontractors to commercially reasonable payment for their work is shut out by express contractual provision. They may read the contract once, twice, or 20 times, and find no express contractual route to payment. In those circumstances, it is necessary to turn to extra-contractual routes to recovery; that is to say routes to recovery that are not to be found in the express words of the contract.
  2. These routes have become all the more important. They are not much taught in law schools, and are frequently overlooked by claimants to whom they may be available.  As such, they can represent hidden opportunities for claimants.  They can also constitute hidden risks for employing parties – both owners and contractors who engage subcontractors –  that may not become apparent until a legal case against them has been advanced in legal proceedings.
  3. Understandably, a good deal of what is said and written about construction law centres on construction contracts. This paper focuses on one aspect of construction law: what rights are available to a party which executes construction or engineering work to get paid? And understandably, people typically start looking at the express wording of the contract. And those who are to pay for the work typically assume that their liability to pay is limited to what the contract says.
  4. There are two particular problems with this approach. Firstly, there are numerous alternative routes to payment for work other than the express wording of the contract.  This paper is intended to illuminate the overall landscape of extra-contractual recovery by looking at a dozen particular paths.[4] Some of them are very well established. Others are more speculative.
  5. The author has not made a precise count, but guesses that in about half of the recoveries in which he has been involved as a lawyer have involved[5] some element of extra-contractual recovery, often pleaded in the alternative to the contractual right.
  6. As one looks at these alternative routes, one sees a second problem. Very often, parties do not do what they have contracted to do. Conceptually, this is easily understood where the contractor does not build what he has contracted to build, and thus becomes liable for the cost of rectification, either under the contract or by way of damages. More complex is what happens when the owner, and/or the owner’ s agents, do not do what they are required to do by the contract. A number of the alternative routes to payment are concerned with the legal consequences of such failures.
  7. Clearly, these alternative routes to payment represent opportunities for contractors and risks for owners. They are not as well recognised as they might be, and it is in that sense that they might be characterised as hidden. For the parties who have undertaken work for which they have not been paid, notwithstanding their legitimate commercial expectation, the takeaway from this paper will be that it is worthwhile going through these alternative routes in order to see whether any of them are available. If you are advising an owner, the takeaway is not to be too myopic about the contract: the risks might well lie elsewhere.

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Preorder Details for Extra-Contractual Recoveries for Construction & Engineering Work

I am delighted to be able to say that my book Extra-Contractual Recoveries for Construction & Engineering Work – published by London Publishing Partnership next month – is now available for preorder.

Preorders are already coming in, obtaining the discounts applying for the next 3 weeks.  The publisher’s book page is at https://londonpublishingpartnership.co.uk/extra-contractual-recoveries/.

Happily, the reaction so far has been good:

“This text, the magnum opus of an already impressive oeuvre, will make a formidable contribution to the domain of construction law and provide great value to counsel, arbitrators, judges and construction industry participants at all levels of the industry.”

— From the book’s foreword by Professor Douglas Jones, international commercial and investor/state arbitrator, and an International Judge of the Singapore International Commercial Court

“The merit of the book lies in the author’s encyclopaedic knowledge, but also in its engagement with the real-life business of setting up and running projects. It will delight all those (lawyers and construction professionals) in the business of claims and defending against them. To have such experience distilled in such a rigorous and systematic way is a gift to the reader.”

Philip Britton, co-author of Residential Construction Law (Hart, 2021) and Visiting Professor (Law), King’s College London

“To the unwary, a construction contract may give the impression of creating a complete universe of rights and obligations.  Yet any contract is merely foreground, against a wider landscape of common law, statute and sometimes even customary laws.  Contracting parties need to know where they stand from an overall legal perspective.  In Extra-Contractual Recoveries, Robert Fenwick Elliott shows us with great clarity the ‘Yang’ of construction law that nestles against the ‘Yin’ of the contract’s written letter”.

Julian Bailey, author of Construction Law (3rd edition, LPP, 2020) and partner at White & Case LLP, London

“Construction law is traditionally understood to be primarily a subset of contract law, as applied in detail via the common law and via standard and bespoke forms of contract. This understanding can obscure the growing importance of remedies which lie outside (or, adjacent to) this contractual realm. This book is valuable not only for bringing these extra-contractual matters out of obscurity but in its sheer generosity of insight, drawn from the author’s deep and thoughtful engagement at the forefront of international construction law discourse and practice over many years. The international construction law community, and the broader community it serves, will be all the richer for this book’s contribution.”

Dr Matthew Bell, Associate Professor and Co-Director of Studies for Construction Law, Melbourne Law School, The University of Melbourne

The book took me really Continue reading

Brooking of Argument on Time at Large

As usual I have, when time allows (this is not every day) been making progress with my book on Extra-Contractual Recoveries.

In the last day or so, I have been particularly focused on the question of whether it is possible to contract out of the time at large principle by a generalised exclusion clause along the lines of, “Nothing we do will set time at large under this contract“. In Australia, at any rate, the usual answer is “yes”, and the brigade of solicitors who march up and down the relevant corridors in grey suits or black trouser suits now regularly insert a clause to that effect in pretty much every contract or subcontract over which they have control.

But is it true? The usual authority relied on is the judgment of Justice Brooking in SMK, but the more I look at it, the more I have come to the view that it does not bear the weight that is typically put upon it.

The current draft of Extra-Contractual Recoveries says this about the topic (obviously, the internal page references will not work for this extract).  I am conscious that this is not merely an important point, but also somewhat contentious one. And so if readers of these pages have any observations, I would be interested to hear them, so that I may take account of them before the book is finalised.

Contracting out of the Principle?

  • Is it possible to contract out of the prevention principle, and/or the time at large principle? The answer to this question is not obvious, and certainly a good deal less obvious than is sometimes assumed in Australia. It has become an important question, because many bespoke contracts and subcontracts now contain clauses purporting to exclude the principle. If the principle may be excluded by such a clause, the effect is not infrequently to render a contractor (or more typically a subcontractor) liable to pay significant liquidated damages for delays of the owner’s (or more typically head contractor’s) making.
  • It seems that there is no reason why the parties cannot agree, if they so wish, that the contractor is bound to complete the works by a stipulated date, without any extension of time and regardless of the prospect that the owner might well order additional work which makes that obligation more onerous, or even impossible. It is an unusual arrangement, but not entirely unknown. It means that the contractor is accepting potential liability in circumstances that are not of his doing, but again, that is not entirely unknown. After all, insurers regularly compensate people who are careless enough to burn down their own homes or crash their own cars.
  • But what of a provision, typically tucked away unnoticed in lengthy boilerplate conditions, that purports to disapply the principle as a matter of generality?
  • In Australia, the answer is usually given that it is possible to disapply the principle by such provision. The authority typically relied on is an obiter remark in SMK Cabinets v Hili (1983).[1] Justice Brooking declined to reach a conclusion as to whether the principle was one of implied term or of a rule of law, regarding that distinction as “largely of academic interest” and “simply a matter of terminology”.[2] He said, however, that “of course” the principle yields to contractual intention, and that the parties can effectively manifest by their contract an intention that the contractor shall be liable for liquidated damages notwithstanding the prevention. It is not clear what Justice Brooking had in mind by manifest contractual intention. Did he have in mind an express agreement that the contractor should be liable for liquidated damages regardless of the ordering of additional work? Or was he contemplating some general words disapplying the principle without any express manifestation of what that would mean? In any event, he did not find any intention to exclude the principle, and found that time was at large.
  • It may be that the obiter remark in SMK is even more restricted. In Probuild v DDI[3], McColl J said that the operation of the prevention principle can be modified or excluded by contract, citing SMK as authority. But she went on:

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Mann down

langtree courtThe decision of the High Court in Mann v Paterson [2019] HCA 32 came out today. It makes depressing reading for anybody interested in fair play in the construction industry in Australia.

The basic point can be explained fairly simply. If, during the course of a building contract, an owner is in severe breach of the terms of the contract, then the builder is entitled to terminate the contract at common law. The builder does not have to terminate, of course, but has an election; he can either leave the contract in place, or he can accept the owner’s conduct as repudiatory such that the contract is then at an end.

Then, according to the law as it has existed in common law jurisdictions for well over a hundred years, the builder has another choice. He can either elect to recover the amount of the contract price that he has earned up to the time of the termination, and also recover damages for breach of contract. Or, if he wants, he can instead take the much simpler course of claiming a quantum meruit for the whole of the work that he has done on the contract which has been repudiated.

The effect of this latest decision is to remove this second election, at any rate in large measure. The builder cannot now recover a quantum meruit for the whole of the work that he has done. In large measure (I get back to this in a moment) he has to be satisfied with whatever the contract permitted by way of recovery for the work done prior to the determination.

The effect of the decision is that the courts have shown common cause with owners who are in serious breach of their contracts, and the decision will cause further pain for innocent builders.

For the benefit of readers of this Continue reading

Misrepresentation by Programme – A Second String To The Paradigm Case Bow

Misrepresentation has always been one of the more important ways in which contractors and subcontractors have been able to obtain extra-contractual recoveries in the construction industry. Whether the misrepresentation is relied upon pursuant to one of the statutory bases based on the UK legislation[1], or by way of negligent misstatement, or by way of misleading conduct pursuant to the Australian Consumer Law, the paradigm case has typically been to do with latent ground conditions. The owner induces the contractor to enter into a construction contract by misrepresenting the state of her[2] knowledge about what is underground.

Typically, she will require the contractor to sign a contract acknowledging that he is entering into the contract without reliance upon anything that she has said, but instead upon reliance on his own inspection. Equally typically, those contractual provisions are ineffective to avoid liability.

In Australia, perhaps the most notable of these cases is Abigroup v Sydney Catchment Authority[3], where it was held that the employer was liable for her statement that she had no plans showing underground conditions. In fact, and entirely innocently, there was an old plan undiscovered in her archive.

But this is not the only type of case in which an owner who contracts with the head contractor, or head contractor who contracts with the subcontractor, might be liable for misrepresentation. There is another category of case, which sees the light of day less often, which also potentially sees a representor liable for misrepresentation. It is a case particularly common in the context of subcontracting, and so will be described in those terms. The head contractor knows that the project is already in trouble; it is already the subject of delay and disruption with dark clouds already overhead. That delay and disruption is going to affect most, if not all, of the subcontractors yet to start work. Anxious not to inflate subcontract tender prices, the head contractor conceals what it knows about that delay and disruption. Instead, it puts forward to the subcontractor a programme which represents that the subcontractor will get prompt and uninterrupted access to the work. Sometimes, that programme may well have been achievable at the time it was originally put forward, but by the time the subcontract is entered into, the head contractor knows, or ought to have know, that the programme is no longer achievable.

The scenario gives rise to some questions Continue reading

Queen of Hearts – A Good Idea Endorsed

The Australian Government has at last released the Report of John Murray Review of Security of Payment Laws – Building Trust and Confidence.

It will take a while to digest this Report – at 407 pages there are inevitably recommendations which are welcome and others which will be less welcome.

QueenAn aspect of the Report that might come as a surprise to some is its treatment of Queen of Hearts clauses.  I posted about this issue last year in a post called Queen of Hearts in the Dock, and discussed it with John Murray. In short, I suggested that it would be a good idea to introduce a statutory benchmark, to more reliably separate reasonable time-barring notice clauses which should be allowed from unreasonable clauses which should not.

John Murray has agreed with me. His commentary in the Report is thus:

Unreasonably onerous time-barring provisions

When conducting a detailed interview with one of the leading lawyers specialising in this field, Mr Fenwick-Elliott, the issue of unreasonably onerous time-barring provision was discussed. Mr Fenwick-Elliott referred me to his website where, under the article Queen of Hearts in the Dock, he sets out the following synopsis of the range of ‘arsenals’ or principles that the courts have developed to relieve a contractor from the harsh consequences of failing to give a required notice: Continue reading

Queens of Hearts in the Dock

QueenOn 15th June, SoCLA is holding a nationwide event to consider the proposal of a new statutory benchmark for unreasonably onerous time-barring provisions in construction contracts.  Discussion in each mainland State in Australia will be followed by a national video hook-up. I will be the convenor for the Adelaide session.

The intention is not so much to move the goalposts here, but to seek to fix the goalposts at a sensible place, since the current reality is that courts, adjudicators and arbitrators use a wide variety of techniques to avoid the inequitable application of Queen of Hearts clauses if they possibly can.

In my book Extra-Contractual Recoveries (still not finished!) I attempt to list the many weapons available in the arsenal of circumvention: Continue reading

Understanding Construction Law

RJFE coggins evans

With Jeremy Coggins (centre) and Phil Evans (right)

I was pleased the other day to be at the book launch of Understanding Construction Law, by inter alia Dr Jeremy Coggins and Professor Phil Evans.

With the benefit of only a brief look, it looks very good; I will look forward to spending some more time with it in due course.

My own progress with Extra-Contractual Recoveries has been Continue reading

Talking, Talking

I have a couple of talks this coming week, in Adelaide on Wednesday and then in Brisbane on Thursday.

The Wednesday talk is on indemnities, with the snappy title of Drafting Indemnities: Getting the Details Right. The session is part of a day run by Legalwise seminars – I suspect most people will be there because of the need to earn CPD points.

More fun will be the session in Keating 2015Brisbane on Thurday, where I will be joining my colleagues from my London chambers – Keating Chambers – Marcus Taverner, Adam Constable and Jennie Wild at a SoCLA event, debating the impact of Cavendish v Makdessi and other recent cases. It will take the form of a sort of debate, Jennie setting the scene, then Adam suggesting that not much has changed, and then me suggesting that the revival and expansion of the doctrine of relief from forfeiture might well be really quite a big change. I have Continue reading