How claims under contract differ from those for breach

The distinction between claims made under a construction contract and claims made for a breach of that contract's terms is often misunderstood.

Although these sound as though they could be the same, the differences have important practical consequences.

Examples include the extension of time provisions to claim time, loss or expense, or other provisions allowing the contractor to claim more money, such as for variations.

Contracts almost always give rights to employers to make claims as well. These could for example, enable them to claim for liquidated damages for delayed completion, or to have defects rectified after practical completion.

In this way, rather than relying on the general legal position the parties are clear about what their rights, remedies and obligations are if one of these circumstances arises.

So for example, if a claim is made under the contract for liquidated damages – as opposed to a claim for general damages for breach – the parties will have predetermined the sum payable for specific periods of delay, and for specific sections of the works.

Similarly, claims for termination under the contract are often designed to apply in expressly defined situations, with greater clarity than termination at common law for an alleged repudiatory breach.

However, while such claims under express contract terms offer greater certainty, these provisions often require that procedural obligations are also met for those contractual remedies to apply.

This is because the rights of the parties for claims under the contract will be subject to the terms of that contract. In practice, this frequently includes the need to comply with notice or application requirements to make such claims.

These requirements can often be onerous, involving notice or application to be made speedily and in a prescribed format.

If these are not fulfilled then the rights to the remedy under the contract will sometimes be lost altogether, a situation referred to as a 'condition precedent'.

The justification for such onerous terms is to give certainty and advanced warning of outcome. The practical effect, however, is to create considerable legal and practical risk of upsetting the original commercial balance of the bargain when unplanned events, or extraneous events as the JCT describes them, occur.

Although such events are not the contractor's risk, if it does not follow terms relating to notification it can be left without any remedy or recourse – thus in effect reversing that original risk allocation.

Practically, it is more common for claims under the contract to be made during the course of the works themselves or immediately after completion, in relation to events such as delays.

An example would be the loss and expense provisions in clauses 4.19 to 4.22 of the JCT 2016 Design & Build Contract. These entitle the contractor to additional payment for issues that could otherwise amount to a breach of contract by the employer.

These additional, express contractual remedies to claim under the contract are particularly used in relation to claims for additional time.

Breaches of contract by the employer that cause delay are in practice almost always identified expressly under the extension of time provisions, so that such an extension can be claimed under the contract as well for breach.

This is because of the common law prevention principle. In short, it means that if a breach of contract by the employer that amounts to an 'act of prevention' – such as lack of site access or a requirement for additional work – causes a delay and the contract does not provide a right to an extension of time, then 'time is at large' and the contractual date for completion no longer applies.

Instead, the contractor has a reasonable period to complete, taking into account that act of prevention. As a result, well-drafted construction contracts always give the contractor the right to extensions of time for such acts of prevention.

For example, clause 60.1(19) of the NEC4 Engineering and Construction Contract is drafted as a catch-all provision for any 'event [that] stops the contractor completing the whole of the works or … completing the whole of the works by the date for planned completion'.

This applies where such events could not be avoided, and it was so unlikely that the contractor could not have allowed for them.

An important exception to the application of both contract and common law is where contractual rights are made the exclusive or exhaustive remedy.

While for the sake of certainty the courts have consistently held that contracts require clear wording to exclude remedies for breach, they have often upheld such exclusive remedy provisions.

This takes the form of damages from the defaulting party, rather than for sums or another remedy for which the contract expressly provides.

Usually, the measure for that remedy is to put the innocent party in the financial position it would have been if the breach had not occurred.

To make a claim for damages for breach, the innocent party must prove that:

• there was an obligation on the defaulting party
• that the defaulting party breached that obligation and
• this caused loss to the innocent party.

If all of these are proved, the level of damages is assessed on the basis of putting the innocent party in the same position as it would have been in if it had not sustained the wrong for which it is now getting compensation or reparation – a precedent that has stood since 1880.

Another feature of damages claims is that such losses must be foreseeable and not too remote.

So for example, if a party anticipated a significant profit but this could not be realised because the loss of an opportunity that could not have been reasonably foreseen by the breaching party at the time the contract was entered into, this will not usually be recoverable as damages.

Similarly, in common law there will usually be a duty on the innocent party to mitigate its losses, which will not generally be the case when there is a prescribed measure for a claim under the contract.

Practically, it is more common for breach of contract claims to be made after the works have been completed; for example, the employer claiming for defective works.

While the general law of limitation will apply when such a claim is made, this will not usually be subject to the express notice or application requirements for claims under the contract.

The key differences between claims for breach and those under the contract are detailed in Table 1.

A typical issue that could be claimed either under the contract – where the terms allow – or as a breach is when an employer is responsible for a delay in the contractor's access to the site. This can happen, for example, when a previous contractor carrying out demolition or enabling works is late.

Under the standard form JCT 2016 Design & Build Contract, for example, a claim for additional payment due to lack of access is often framed as both a change, as a result of clauses 4.21.1 and 5.1.2.1, and also as an impediment by the employer, under clause 4.21.5.

If the contractor can show that the relevant conditions are met it will be entitled to an extension of time, and thus relief from having to pay liquidated damages to the employer.

It will also be able to claim for loss and expense incurred as a result of the delays. However, these conditions require the contractor to apply in writing for that loss or expense and extension of time.

Alternatively, financial compensation could also be sought as a breach of contract claim for damages, provided this is not excluded by an exclusive or exhaustive remedies clause.

The employer usually has an express obligation in the contract, as well as an implied obligation under common law, to provide access to the site. Generally, such claims for breach do not require prescribed notice or application.

In this JCT example, the application for an extension of time for lack of access could also be made under the contract. Generally, a claim that time was at large for such a breach would not succeed, because the contract already provides a remedy.

This prevention principle – and the desire to avoid the uncertainty of time at large compared to a defined date for completion and a prescribed mechanism to adjust it – is why JCT expressly provide that, after practical completion, all relevant events have to be taken into account, whether notified or not.

If that were not the case, then any relevant event that was an act of prevention delaying completion, and which could not be taken into account because the JCT requires that such events are only taken into account before practical completion where notified, would render time at large.

Under the standard form JCT 2016 Design & Build Contract, there is a rectification period in which the employer is obliged to inform the contractor of any defects.

During this time, the contractor is reciprocally obliged to return and remedy the defects at no cost to the employer.

The employer may instruct otherwise, though, if it prefers to live with those defects and instead make deductions from the sums payable.

If this is the case, or the contractor refuses, then the employer may deduct an appropriate amount from the contract sum to reflect those defects that have not been made good.

Once the rectification period comes to an end, any claim for defects after practical completion would need to be for breach of contract. Specifically, this would be a breach of the contractor's obligation to carry out the works.

In these circumstances, the employer would be claiming the costs of rectifying the defects – which could also include losses such as loss of rental income – if they can show that defects were due to the contractor's default.

For such claims, there is a general common law rule that parties also have to mitigate their losses.

This is also reflected in the express terms of JCT, whereby the employer is obliged during the rectification period as well as by that common law rule to request that the contractor returns to site to remedy the defects.

However, these claims for breach would be subject to, for example, any exhaustive remedies clauses, any express terms such as those mentioned above that relate to a defects rectification period, and the duty to mitigate.

This might, in practice, entail giving the contractor an opportunity to put the defects right at its own cost.

The case related to a power station being constructed in Cambridgeshire. Stein Industrie and GEC Alsthom were the subcontractor and Strachan & Henshaw was their sub-subcontractor. The latter's work was to construct, commission and support heat recovery system generators (HRSGs).

Strachan & Henshaw employed around 150 workers on site and provided them with accommodation cabins there. These were initially installed near the part of the site where the HRSGs would be constructed.

After the works began, Stein and GEC instructed that the cabins were moved around half a mile away. This meant a round trip of a mile's walk for all the sub-subcontractor's staff each time they went to the toilet or their tea breaks. Strachan & Henshaw wanted to recover the costs associated with this lost time, which it claimed to be around £1.6m.

It made this claim on a number of alternative bases, of which two are relevant here.

The first was that the instruction to move the cabins was a variation for the purposes of the contract; the second was that it constituted a breach of contract for which damages could be claimed.

The court found that the instruction was not a variation, because it did not change the permanent works or otherwise satisfy the contract's test for a variation. It therefore had to consider the alternative claim of breach.

Stein and GEC contended that there was an exhaustive remedies clause that meant the only claims available were those under the contract, so claims for breach were not available.

The clause was clear in stating that there should be no liability for breach of contract except as under the contract. The courts agreed and enforced this provision, such that Strachan & Henshaw's claim for breach of contract failed.

Therefore, it is vital that parties are aware of the impact of any exhaustive remedies clauses in contracts when considering how claims should be made.

These requirements can be onerous – in terms of the detail needed or the time in which they must be completed – and there can be draconian consequences for failing to fulfil them.

It is thus vital that parties are aware of notification requirements, and other potential conditions precedent. This will ensure they are not barred from making any claims under the contract, or do not have to pay sums that are not contractually due.

Parties that have not complied with those notice requirements should consider whether a claim can still be made for damages for breach of contract – or because time is at large.

Breach claims avoid these sometimes strict processes, but do generally mean the parties have to incur higher costs and spend more time establishing breach, causation and loss.

Such claims are also subject to proving that losses are foreseeable, not too remote, and have been mitigated so far as is possible.

There may also be exhaustive or exclusive remedies provisions in the contract, designed to prevent claiming for breach.

Whether it is more advisable to claim under a contract or for breach will ultimately depend on the type of claim and the relevant wording in the contract.

As a general rule, if a party has complied with the notice requirements, a claim under the contract will usually bring a quicker and more certain outcome for most claimants.