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International Quarterly — Issue 17

Are notice clauses always fair and reasonable?

By Jeremy Glover, Partner, Fenwick Elliott

As we have discussed in previous issues of IQ and our Annual Review, under the FIDIC form there is a requirement on both the Contractor1 and Employer2 to submit notices about claims and that if they do not do so within the timescales set out in the contract there is a real chance that they will lose the right to make such a claim.

This issue came up in the recent English case of Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd & Anr.3  In April 2002 Regorco had entered into a subcontract with Mitchell to carry out certain ground treatment (or vibro-compaction) works at a site on which a warehouse was to be built. By a separate subcontract Regorco also agreed to carry out the piling at the site.  The vibro-compaction works were carried out at the end of March 2002, and the piling was installed a month or two later. Practical completion of the building was achieved on 19 December 2002. However, some nine years later, in November 2011, the sub-tenant in occupation of the warehouse complained of settlement of the slab beneath the production area.

Regorco's standard terms and conditions had provided at clause 12(d) that:

"all claims under … this Contract must, in order to be considered valid, be notified to us in writing within 28 days of the appearance of any alleged defect … and shall in any event be deemed to be waived and absolutely barred unless so notified within one calendar year of the date of completion of the works".

Regorco said that the limitation of liability clause, clause 12(d), meant that the claim could not be brought. The claim had not been notified within 28 days of the appearance of the defect or within a year of the completion of the works. The first question that the Judge, Mr Justice Edwards-Stuart, had to consider was whether and to what extent Regorco’s standard terms applied. He held that they did not. However, the Judge went on to comment on whether or not clause 12(d) would have prevented the claim from being brought, had he decided otherwise.4

The Unfair Contract Terms Act

The Judge did this by reference to the English Unfair Contract Terms Act 1977 (“UCTA”), which applies where one or other party puts forward its standard conditions. Section 1 of UCTA provides that, apart from cases of personal injury or death, a person cannot restrict his liability for negligence:

"except in so far as the term or notice satisfies the requirement of reasonableness".

Section 11 of UCTA further provides:

"(1) In relation to a contract term, the requirement of reasonableness … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."

Reference should also be made to the UCTA guidelines which say that the following should also be taken into account:  

"(a) The strength of the bargaining positions of the parties relative to each other, taking account (among other things) alternative means by which the customer's requirements could have been met;

(b) Whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;

(c) Whether the customer knew or ought reasonably have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any course of dealing between the parties);

(d) Where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; and

(e) Whether the goods were manufactured, processed or adapted to the special order of the customer."

The nature of the groundworks

The burden of showing that clause 12(d) was reasonable rested with Regorco, as the clause was part of their standard terms. The Judge concluded that the only operative trigger that would start the running of the 28-day period was the appearance of a defect. The event complained of could only be negligent design or construction in relation to that work. The Judge then went on to consider the nature of the groundwork in question and said that:

“In practical terms, any defect in the ground compaction work would never be visible because it would be concealed by the structure above it. Accordingly, any defect in that work would manifest itself in the form of some distress to the structure of the building, probably cracking of the floor slab or a wall.

It is in the nature of ground compaction work and piling that in general defects do not appear until sometime after the work has been carried out, although … occasionally piles or ground improvement columns can fail whilst the contractor is still on site … In general, failure is unlikely to occur until substantial loading is applied to the ground or piles …”

As the Judge noted, this was what you would expect the designer of the ground treatment work to anticipate.  There would not only be the loads imposed by the building itself, but also the loads imposed by the use of the building. The Judge gave the example of forklift trucks moving goods around if the building was being used as a warehouse.  

This was of some importance as the Judge stressed that this meant that there would often be a substantial lapse of time between the carrying out of the work and the occurrence of any visible cracking to the fabric of the building, and an even longer lapse of time until the likely cause of the cracking is established. Even the building of a simple warehouse would take a few months. Therefore it would not be for a few months that it became loaded by the user. Although ground treatment works might fail whilst the subcontractor is still on site, here the potential for a claim is reduced because the subcontractor would have the chance to put the work right straightaway. The key to the reasonableness of the condition precedent in question was the nature of the work being undertaken. In this case what had to be taken into consideration was the fact that where the failure of ground or piles occurs under load, that failure is usually a gradual process.

Was the limitation clause reasonable?

This case was heard in the Technology and Construction Courts, where the judges have specialist experience of construction disputes. Here Mr Justice Edwards-Stuart said that:

“It is, in my experience at least, rare for a failure of ground or piles to manifest itself in a period measured in months, rather than in years. Of course, there may be exceptional cases when the design or construction is so poor that failure occurs almost immediately upon loading, but I cannot recall such a case. In this case, the lapse of time was in excess of 10 years: whilst I would not suggest that such a long period is normal, it is more of the order that one would expect.

Another feature of this type of failure is that it is almost invariably progressive, starting with small cracks which then grow larger. Such cracking, when it begins, may not be readily visible … in these circumstances it is not unlikely that the first ‘appearance’ of cracking may go unnoticed by anyone for days if not weeks.”

By this time, the contractor who was subject to the notice clause would not be the user of the building and would be in no position to observe any cracking when it appears. The Judge noted that the UCTA Guidelines are concerned with “what it is reasonable to expect, not what actually happens”. Looking at those Guidelines, the Judge commented that whilst Mitchell could have sought to engage a subcontractor other than Regorco whose terms and conditions did not contain clause 12(d), he did not consider that it was reasonable to expect, at the time when the subcontract was made, that compliance by Mitchell with the 28-day time limit imposed by clause 12(d) would, in most cases at least, be practicable.

In other words the Judge thought that item item (d) of the UCTA Guidelines was the most important factor and concluded that the clause 12(d) failed the reasonableness test:

“the parties would not reasonably have expected - if they had thought about it - that compliance with both the 28 day time limit and the requirement to make a claim within a year would be achievable, let alone practicable, save in rare cases”.

The FIDIC form

As one might expect, there was discussion in the judgment about the FIDIC time bar. The Judge thought that the circumstances of most projects where the FIDIC form is used were different to the project here. In particular:

  1. Contractors on building projects generally know when a contract is in delay or whether the work has been disrupted and so giving notice of the relevant event within 28 days should not, in the words of the Judge, “be unduly onerous”.
  2. Under the FIDIC form, time runs from the date on which the contractor is aware, or should have been aware, of the event in question. Here, under clause 12(d) time ran from when the defect was capable of being seen, rather than from when the contractor knew or ought to have known about it, which made clause 12(d) more onerous than sub-clause 20.1 of the FIDIC contract.

Conclusion

This is undoubtedly correct, although many will disagree with the Judge’s comment that the provisions of sub-clause 20.1 are not “unduly onerous”.  However, there are likely to be instances on many construction projects where works are covered up with the result that defects can be difficult or impossible to identify.  Under the FIDIC form, as the Judge noted, where this happens, it will be difficult to suggest that the contractor was aware of the event, but equally, if that suggestion is made, this case provides support for the argument that attempting to rely on such a clause in those circumstances was unreasonable.

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