Notices: another year, yet more cautionary tales
Under most formal contracts it is necessary for the contractor (and, under FIDIC at least, the employer) to give notice of various matters as part of the process of seeking extensions of time and loss and expense. Generally, in the UK, the JCT form imposes a condition that such notices must be given within a reasonable time. However, increasingly, notice clauses are expressed as conditions precedent. In other words, a failure to comply with the requirements of the clause will result in a party being prevented from making what might otherwise be a perfectly valid claim. Sometimes, there may be time limits on when a party can refer a dispute to adjudication. However, it is not just standard forms which contain notice provisions; sometimes carefully negotiated agreements will contain provisions requiring specific notices to be served by a particular date.
Given the potential consequences, as Jeremy Glover highlights, care is needed to comply with any notice provision, as the following two examples from the courts in England and Hong Kong demonstrate:
Do your notices comply with the contract requirements?
In Stobart Group Ltd & Anor v Stobart & Anor1, Simon LJ had to consider whether a notice served was a compliant notice for the purpose of giving notice of claims under a Share Purchase Agreement dated 7 March 2008 (the “SPA”). Paragraph 6.3 of the SPA provided that:
“The Vendors shall not be liable in respect of a Tax Claim unless the Purchaser has given the Vendors written notice of such Tax Claim (stating in reasonable detail the nature of such Tax Claim and, if practicable, the amount claimed) on or before the seventh anniversary of Completion in respect of such Tax Claim unless a Tax Authority is [un]able to assess the Company in respect of the Liability to Taxation or other liability giving rise to the relevant Tax Claim because of fraudulent conduct.”
This meant that the vendors were discharged from liability unless a written notice of a Tax Claim was served before 4 April 2015, the seventh anniversary of completion. It was said that the claim before the court could not succeed because SGL had not given notice under paragraph 6.3 of schedule 4 by 4 April 2015. SGL said that their letter of 24 March 2015 did comply. At first instance the Judge decided that on its proper construction the 24 March letter was not an effective notice under paragraph 6.3. Instead it was a notice under paragraph 7.1 in respect of a potential claim by HMRC against SGL.
The letter of 24 March 2015 included:
“We refer to the agreement relating to the sale and purchase of the entire issued share capital of WA Developments Limited entered into on the 7 March 2008 (SPA) …
We hereby give you formal notice pursuant to the SPA of a potential Liability to Taxation under the Tax Covenant contained in Schedule 4 of the SPA …
We would be grateful if you would confirm pursuant to paragraph 7 of Part 4 of Schedule 4 as to whether you wish to have continued conduct of discussions with HMRC in relation to the Claim.
We have recently sought from BDO an update of the likely estimate of the quantum of the Claim and they presently believe it is circa £3,267,092 (as per the attached sheet) inclusive of interest but exclusive of penalties …”
Simon LJ referred to the words of Lord Steyn in Mannai Investment Co Ltd v Eagle Star Life Assurance Co Ltd2 (a case concerning a tenant’s notice exercising a break clause in a lease) where he said:
“The question is not how the landlord understood the notices. The construction of the notices must be approached objectively. The issue is how a reasonable recipient would have understood the notices. And in considering this question the notices must be construed taking into account the relevant objective contextual scene.”
Mannai was also referred to by the courts in the S & T (UK) Ltd v Grove Developments Ltd3 adjudication/litigation about the interrelationship between “smash and grab” adjudications, pay less notices and the entitlement of the employer to commence an adjudication to establish the true sum due in respect of interim applications. Here Jackson LJ had said that the construction of pay less notices must be approached objectively. The question was how a reasonable recipient would have understood the notice.
Simon LJ accepted that if it is clear that the parties have a common understanding as to the effect of a contractual term, the court should construe the contract in accordance with that understanding. He gave as an example a situation where a party has misnamed a property when giving a contractual notice in relation to it, or where a party has simply misstated the relevant contractual provision by one numeral (say paragraph 6.2 for 6.3) but where otherwise the intent is clear.
Here, SGL’s case relied on what was said to be the understanding of the recipients when they received the letter: namely, that it was a compliant notice under paragraph 6.3 regardless of its terms. However, there was no evidence of this. So far as subsequent conduct was concerned, it could not provide relevant contractual context for the interpretation of the notice nor assist in its construction. Simon LJ also noted the observation of Cooke J in Laminates Acquisition Co v BTR Australia Ltd4:
“Notice clauses of this kind are usually inserted for a purpose, to give some certainty to the party to be notified and a failure to observe their terms can rarely be dismissed as a technicality.”
Simon LJ noted that here:
(i) The letter of 24 March 2015 was “plainly” drafted by a lawyer and expressly adopted the definitions set out in the SPA.
(ii) The starting point was the consideration of the language of the notice: it made no reference to a Tax Claim, nor did it refer to a claim being made by SGL under paragraph 6.3.
(iii) The letter gave notice in terms of a contingency: “a potential Liability to Taxation”, and a “potential claim”. There is a difference between saying a claim is being pursued and indicating the possibility that a claim may yet be made.
The Judge considered that a person receiving the 24 March letter with knowledge of the terms of the SPA would have understood it to be a notice under paragraph 7. It was not a defective paragraph 6.3 notice; it was, as it said on its face, a compliant paragraph 7 notice.
If it looks like a claim….
In the case of Obrascon Huarte Lain SA v Her Majesty’s Attorney General for Gibraltar5, Mr Justice Akenhead noted that under the FIDIC Red and Yellow Books 1999, sub-clause 20.1 says that a claim should:
(i) be made by notice in writing to the Engineer;
(ii) describe the event or circumstance relied on; and
(iii) be recognisable as a claim for an extension of time or additional payment (or both) under the contract or in connection with it.
Notices in Hong Kong
In Maeda Corporation & Anr v Bauer Hong Kong Ltd6, the Hon. Mimmie Chan J had to consider whether Bauer had complied with the condition precedents to give notice under clauses 21.1 and 21.2 of the subcontract. Bauer had been employed as a subcontractor to carry out diaphragm wall works on the Guangzhou Express Rail Link tunnel works in Hong Kong.
Clause 21 of the subcontract included:
“21.1 If the Sub-Contractor intends to claim any additional payment or loss and expense pursuant due to:
21.1.1 any circumstances or occurrence as a consequence of which the Contractor is entitled to additional payment or loss and expense under the Main Contract;
21.1.6 any Variation of Sub-Contract Variation.”
Clause 21.2 of the subcontract continued:
“21.2 If the Sub-Contractor wishes to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Sub-Contractor shall as a condition precedent to any entitlement, within twenty eight (28) Days after giving of notice under Clause 21.1, submit in writing to the Contractor:
21.2.1 the contractual basis together with full and detailed particulars and the evaluation of the claim;
21.2.2 where an event, occurrence or matter has a continuing effect or where the Sub-Contractor is unable to determine whether the effect of an event, occurrence or matter will be continuing, such that it is not practicable for the Sub-Contractor to submit full and detailed particulars and the evaluation in accordance with Clause 21.2.1, a statement to that effect with reasons together with interim written particulars …
21.2.3 details of the documents and any contemporary records that will be maintained to support such claim; and
21.2.4 details of the measures which the Sub-Contractor has adopted and proposes to adopt to avoid or reduce the effects of such event, occurrence or matter which gives rise to the claim.”
Further, clause 21.3 continued by stating that the Defendant “shall have no right” to any additional or extra payment, loss and expense, under any clause of the subcontract or at common law unless clauses 21.1 and 21.2 have been strictly complied with.
Following the discovery of unforeseen ground conditions, Bauer sent the following letters to Maeda:
(i) 1 August 2011:
“We confirm the issuance of said design information/founding levels are causing a substantial increase in the quantity and quality of rock we are required to excavate compared to what was allowed for in our Sub-Contract. Please be advised that these additional quantities and change in quality represent variations to our Sub-Contract Works under Clause 17.1 of our Sub-Contract Agreement which shall be valued under Clause 19 and for which we are entitled to and will claim an extension of time in accordance with Clause 14.3.3 and additional costs as provided for under Clause 21.1.6.”
(ii) 2 August 2011:
“As notified in the above correspondence and meetings held with your goodselves the quantity and quality of rock excavation we have been instructed to excavate below rockhead level have increased substantially from those provided under the Sub-Contract and these amount to a variation of our Sub-Contract Works …
In accordance with the Sub-Contract Agreement we are entitled to claim additional costs under Clause 21.1.6 in respect of the instructed variations and resultant extension of time to our Sub-Contract Works which is a course we will follow …”
However, the Arbitrator did not consider that Bauer was entitled to a Variation simply because there was a change in the conditions which could have been foreseen and that this had an effect on the work. An essential part of the variation mechanism was that there had to be an instruction by the Engineer and/or by the Employer. Where in carrying out the diaphragm wall work, Bauer encountered unanticipated ground conditions, it was still obliged to carry out the same work in terms of the volume of material which had to be excavated and there was no change to the scope of the work. In the absence of an instruction, the changed ground conditions did not, in themselves, give rise to payment as a Variation or Sub-Contract Variation, in the absence of an instruction. However, the Arbitrator did consider that Bauer had established the right to claim for additional rock excavation caused by the inclination of the rock and by instructions to deepen founding levels.
Follow the contract requirements
The problem for Bauer was that the right to make such a claim arose under sub-clause 21.1.1 not 21.1.6. Having encountered difficulties with the ground conditions, Bauer did not obtain an instruction but proceeded with the extra work required. Strictly, no notice had been given. The Arbitrator said this:
“I consider that both as a matter of sympathy and as a matter of construction, the contractual basis of the claim stated in the Clause 21.2 notice does not have to be the contractual basis on which the party in the end succeeds in an arbitration. First, to expect a party to finalize its legal case within the relatively short period and be tied to that case through to the end of an arbitration is unrealistic. Secondly, what is important from the point of view of the Contractor is to know the factual basis for the claim so that it can assess it and decide what to do.”
The Hon. Mimmie Chan J disagreed. Clause 21.2 expressly provided that:
“as a condition precedent to any entitlement”, if the Defendant wanted to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Defendant “shall” within 28 days after giving notice under Clause 21.1 submit in writing (under clause 21.2.1) “the contractual basis together with full and detailed particulars and the evaluation of the claim ...
there can be no dispute, and no ambiguity, from the plain and clear language used in Clause 21, that the service of notices of claim in writing referred to in Clause 21.1 and 21.2 are conditions precedent, must be ‘strictly’ complied with, and failure to comply with these conditions will have the effect that the Defendant will have ‘no entitlement’ and ‘no right’ to any additional or extra payment, loss and expense [emphasis added by the Judge].”
In their August letters Bauer had simply given notice of the ground conditions encountered at the site, and the additional quantities and quality of the rock that needed to be excavated. At best these formed the factual basis for what may or may not give rise to a claim. However, those facts may result in different consequences and give rise to different rights and entitlements. Clause 21.1 envisaged a number of different bases for claims of additional payment or loss and expense. Clause 21.2 required Bauer, as a condition precedent, to submit “the contractual basis”, together with the detailed particulars and evaluation of the claim which Bauer wished to pursue after the service of the clause 21.1 notice. The sub-clause referred not only to the submission of the detailed factual particulars, but “the contractual basis” together with the full detailed particulars. What was required was the basis upon which Bauer claimed to be entitled under the subcontract to maintain and pursue its claim. There may be one or more contractual bases, which can be stated in the clause 21.2 notice, but the “contractual basis” under clause 21.1 was one or more of the different causes or events set out in clause 21.1.1 to clause 21.1.6 as giving rise to a claim. The Judge was clear that:
“however much sympathy the contractor may deserve, Clause 21 employs clear and mandatory language for the service and contents of the notices to be served, with no qualifying language such as ‘if practicable’, or ‘in so far as the sub-contractor is able’”.
The notices only referred to clause 21.1.6 and not 21.1.1 and so in the absence of a timely notice, given the wording of the subcontract, the claim had to fail.
The effect of Judge Chan’s decision certainly seems harsh, particularly as Bauer had continued to carry out the works when the unforeseen ground conditions were encountered. One might question whether Maeda would have acted any differently if the August letters had also made reference to sub-clause 21.1.6. However, the Judge noted that there was “commercial sense in allocating risks and attaining finality by designating strict time limits for claims to be made and for the contractual basis of claims to be specified”.
Both these decisions highlight the importance of understanding the language used in your contract when it comes to the service of notices. They also represent further examples of courts emphasising the importance of complying strictly with notice provisions.
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