Early warnings can stop later problems

It is a common feature in construction contracts that where a contractor intends to make a claim for additional time or money, the contractor must first notify the employer or its representatives of facts which may give rise to the claim as soon as they become apparent.

The underlying objective behind these provisions is to provide the employer with an early warning of likely problems so that steps may be taken to reduce or eliminate their impact upon the progress of the works.

Certain forms of contract, notably the New Engineering Contract, develop these provisions further such that the notice requirements are followed by steps which guide the manner in which the parties must manage the issues giving rise to the claim by, for example, convening meetings to develop solutions.

Deference

It is often questioned whether clauses which provide for the giving of a notice in this manner can form the basis of a defence to the claim in the event that the contractor has failed to give the required notice. This question is often put another way. Is the service of the notice a condition precedent to the remedy sought?

Alternatively, it is thought that the failure to give notice is itself a breach of contract which may give rise to a cross-claim for damages if a claim should be brought.

These matters were recently considered in the case of Alfred McAlpine -v- BAI (Run-Off) Ltd. McAlpine, as main contractor, had obtained judgment against a subcontractor in respect of an accident causing physical injury to a workman on site.

Before settlement the subcontractor became insolvent and accordingly McAlpine claimed against BAI, as statutory assignee under an insurance policy which had been held by the subcontractor.

The insurance policy contained a term as follows: "In the event of any occurrence which may give rise to a claim under this policy, the insured shall as soon as possible give notice thereof to the company in writing, with full details and as far as practicable there shall not be any alteration or repair until the company have had an opportunity of inspecting."

Such a requirement has much in common with the notice provisions of claims clauses in construction contracts.

Notification

The first notification of the accident was not given to the insurer until over a year after the accident had occurred. The court was required to determine whether compliance with the notification clause was a condition precedent to the liability of the insurer.

Mr Justice Coleman considered that it was unnecessary that express words should be used referring to the term as a condition precedent, since this might be inferred from the context and other provisions of the contract.

Firstly, he questioned whether the lack of notice would have a prejudicial effect on the ability of the underwriters to manage and defend the claim.

In addition, he noted that the insurer would have a remedy in damages for breach of the contract notice provisions, providing the insurer could establish that if it had been advised at the proper time, it could have taken steps which would have altogether avoided a judgment against the assured, or at least substantially reduced the assured's liability for damages.

Taking all these considerations into account, it was held that it was unlikely that the parties had intended that the notice provision should be condition precedent to the insurer's liability. This approach clearly reflected the decision in the case of Stanley Hugh Leach -v- London Borough of Merton in 1985 in the context of claims notices under JCT contracts.

Justice Coleman also considered that it was now generally the practice to insert a term in insurance policies to the effect that: "The due observance and fulfilment by the assured of all the terms, provisions, conditions and endorsements of the policy insofar as they relate to anything to be done or complied with by the assured is to be a condition precedent to any liability of the insurers to make payment under the policy."

Absence

In the view of Justice Coleman, the absence of such a term pointed to a conclusion that neither party had intended such a provision. It must be noted however that it cannot be said that such provisions are commonplace in construction contracts.

Another pointer to interpretation of the contract would be where compliance with the claims notification clause is not specifically stated to be a condition precedent to the insurer's liability, yet other particular policy terms are so expressed. Justice Coleman considered that the omission of such express provisions in the claim notification clause was a strong indication that it was not the mutual intention of the parties that it should be a condition precedent.

In conclusion, Justice Coleman was clear that in the event of non-notification, while the insurer may be able to establish a cross-claim for damages amounting to a complete set-off where it could prove quantifiable loss in an amount equal to the claim, he could not accept that proof of prejudice to the insurers could itself operate as a complete defence in the absence of express words to that effect.