Blake Newport

Analysis on Retrospective Claims and Compensation

SMEWeb - 25/03/2011

With the number of claims being pursued reaching a high, what does this present for SME's?

With the current economic climate squeezing margins and a scarcity of future projects, SME’s in the construction industry need to ensure that they are paid their full entitlement under the Contract.
Simon McGrail, Associate Director of commercial and contract management consultancy, Blake Newport, explains why retrospective claims and compensation are becoming more common.

As with so many of the problems that SMEs are facing, the main reason behind the presentation of claims late in the programme is the age old problem of tight margins, cash flow issues and an often erroneous desire to maintain relationships.

Once margins are eroded, cash flow problems arise or relationships break down subcontractors often increase their scrutiny of concluding works and old accounts to see if there are claims that they can pursue.

SME contractors may recognise that clients have previously tried to get around this by introducing contractual time limits prohibiting late submissions.

But often these time limits have been set so short they are rendered inoperable or worded in such a way that the period for presentation is an aspiration rather than a stipulation.

In these cases the courts have tended to be unsympathetic towards any attempt to entirely prevent legitimate claims due to late notification.

An example of a clearly intended condition precedent clause is contained in the Engineering and Construction Contract known as the NEC3 suite of contracts.

Clause 61.3 of the contract generally, limits claims only to events that have been notified by the contractor within eight weeks of becoming aware of the event - seven weeks in the case of subcontractors.

This means that a party has to comply strictly with the provision in that clause in order for them to be able to claim compensation

What does this mean for SMEs?
Whilst the best advice is for a SME contractor to follow the conditions of the contract precisely in terms of the issuance of notices and so on, failure to do so may not be entirely terminal.

Opportunities for SME contractors to make claims ’after the event’ may still be possible and a clients assumption that a contract containing claims clauses with condition precedent means they are protected may not be entirely correct.

The ability for the client to rely on a condition precedent clause to avoid liability is subject to particular facts.

This could include poor contract administration, inadequate knowledge of the conditions of contract, inexperienced staff and inaccurate programming and cost reporting.

Any of these things could mean that the client may not be able to rely on a time limit as a defence to payment of a late claim.

So what can be done?
Within reason, the courts will allow claims presented ‘after the event’ provided the contract does not contain a condition precedent that has not been met.

More importantly the notification of a claim is not necessarily a complex procedure, although it is sensible to investigate whether the contract includes a method of notification, which may also be a pre-condition of payment.

Our advice is simple take preventative measures to maintain relationships.

The best way is to ensure that effective contract management is undertaken at all times and if at all possible set up administrative procedures that encourage a free flow of information between you and your client and allow proper administration of the contract.

While to some users of traditional contracts it may appear distasteful to constantly remind the other party of changes in information, price and programme, contracts such as NEC3 rely on the constant exchange of information.

Only by taking these steps can you hope to make sure that no money is owed to you at the end of the project and hopefully then possibility for future work and profit.

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