Direct Loss and/or Additional Expense Claims

Definition of Claim
A claim is an assertion of a right to something, and in contractual terms it means an assertion of right to payment. Payment may arise out of an express term, like month progress payments, and direct loss and/or expense claim etc. These are known as contractual claims. Payments may also arise out of provisions of common law, like negligence and torts. These are common law claims.

The third category of claims is quantum meruit claims, or as much as he has earned claim; a remedy for a person who has carried out work where no price has been agreed, or where the original contract has been replaced with a new one and payment is claimed under the substituted contract.

The fourth category is ex-gratia claims or claims out of kindness, where the employer is under no contractual obligation to pay. These are seldom met, unless the employer has obtain some benefits from the performance. Examples are ex-gratia payment to help a contractor from insolvency and where the cost of employing someone else than the contractor would involve costs higher than the ex-gratia payments.

In a claim situation, the Architect or SO can only certify for payments only sums which the express terms of the contract authorise him to so certify. He has no power to certify amounts in respect of common law, quantum meruit or exgratia claims. Too often Architects and Sos assume incorrectly that they have inherent powers to as the employers agent in all respect. And contractors too make the mistaken assumption, and are consequently disappointed when architects correctly refuse to certify payments for such claims.

Origin and Basis of Claims

Contractual claims must originate from a particular clause in the contract. Such clauses concern: Variations Pc and provisional sums Matters that affect the regular progress of the works antiquities

An extension of time does not, of itself , give right

JKR Form 203A (Rev 2007) Clause 44 PAM 2006 Clause 24

General
Delays are very common in construction contracts, and these could be attributed to a number of causes, from neutral events, or some act or prevention of the Employer or the contractor himself. Usually, if the events are not attributed to the contractors failure, the remedy is extension of time, i.e. a revised date is fixed for completion.

The main purpose of this extension is to preserve the rights of both parties, i.e the contractors and the employers right vis-vis liquidated damages; meaning the contractor need not pay LD and the employers right to deduct it is kept alive as the contract is not at large.

When extension of time is granted, most contractors usually make a claim for prolongation of costs arising out of the extension. It is commonly believed by most contractors that any extension entitles them to direct loss and additional expenses claims. This is not true, and many contractors have lost out when they pursue them in the courts or in other forms of dispute resolution.

Misconception
There is a common misconception in the construction industry that once an extension of time is granted, there is an automatic entitlement for direct loss and or expense. EOT does not automatically lead to an entitlement to compensation. Only in cases where the client and/or his agents causes the delay will claims for direct loss and/or additional expense be entertained.

Main Reasons for Claims

Projects being implemented in unduly short periods with inadequate site investigations, design work, tender and contract documentation Inadequate definition and/or specification of the precise scope of contract works Incomplete and/or uncoordinated design Lack of clarity in employers requirement and/or inadequacy in design brief

Acceptance of unclear/imprecise tender offers without proper clarification, recording of change etc Changes in user requirement at post tender stage Changes arising out of local authoritys requirements Employers contract administrator failing to meet relevant contract obligations in time like granting approvals, responding to drawings request etc

Sudden swing in market or economic conditions Deterioration in standards of professionals Parties generally more aware of their rights and litigious/claim conscious Shift in philosophy of project implementation towards adversarial/confrontational approach

More use of claims consultants Negative effect of political factors Contracting environment relatively more competitive with larger number of players and narrower profit margins Usually it is not just one reason but a combination of the above

Meaning of Direct Loss and/or Additional Expense

The JCT invented the use of this term. Simply it means the additional payment to which the contractor may be entitled outside the contractual machinery for valuing the work itself. The phrase is first used in the JCT 63 (clause 24), and later in clause 26 of JCT 80. Broadly, this is equated to common law damages for breach of contract

The claims must be considered separately as direct loss and direct expense; direct meaning as a direct consequence of the event , and this covers those heads of claim which would be recoverable as damages at common law according to the principles of remoteness of damage as established in the classic case of Hadley v Baxendale (1854). Damages are recoverable at common law as compensation as parties may reasonably foresee as a natural consequence of the breach of contract.

Minter v WHTSO (1980) 13BLR

The decision by the Court of Appeal in the case above established the principle that the costs of financing the contract to a contractor is part of the direct loss and/or expense that is reimbursable under this clause. In other words direct loss and/or expense is wide enough to include interest which a contractor has paid on capital borrowed as a result of event as specified in the clause, or interest which he had been prevented from earning on capital sums which he has been obliged to expend on the contract as a result of the specified events.

however, as direct loss is equated to damages in common law, the contractor is under a duty to mitigate his loss, and is only entitled to recover such part of the loss actually resulting as was reasonably foreseeable as liable to result from the breach orother specified event. This is judged at the time the contract was made.

Rees & Kirkby Ltd v Swansea City Corp (1985)5 Con LR 39

The Court held that, inter alia: The meaning of the word direct in the expression direct loss and/or expense should permit recovery of damages flowing naturally in the course of things within the meaning of those words as used in the rule in Hadley v Baxendale (1854) The distinction between direct loss and/or expense and indirect and consequential loss is the same distinction as that which has to be made whenever common law damages are assessed.

Potential Heads of Claim

Where a contractor is subjected to disruption or delay, there are several potential heads of claim 1.Labour on site may be affected, either because extra labour is required, or because on-site labour is underutilised.

Plant may be similarly affected. Those brought to site may be under-utilised and idle, causing downtime claims. See B.

Sunley & Co Ltd v Cunard White Star Ltd

(1940) 1 KB 740

On site Overheads may be increased where a delay to a contract results. Exact details of time and costs broken down into the relevant category are required

Head Office overheads: those expenses the head office of the contractor that was incurred as a consequence of the delay may be increased.

Loss of Profit: while this can be claimed on paper, it is much more difficult to prove profit was loss during the extension period. Showing proof that one can achieve certain level of profitability is not and easy task as records has to be shown.

Extra Financing Cost: as shown in Minter above, this is an allowable claim, subject to records

The Use and Abuse of Formula

Formula methods are used to calculate head-office or off-site overheads and loss of profit claims. Hudson Formula Eichleay Formula Emden Formula Other formula are available, and used locally.

a. Head Office Overheads

Other things being equal, the contractors loss from an extended contract must be a proportionate extension of this percentage of the contract sum, and the real loss calculated this way is deemed real loss. These percentage should reflect a return on capital employed

What the contract requires

Loss and/or expense recoverable under contract must be subject to proof, and that the amount claimed must be a direct loss, or money expended, and not recoverable elsewhere under the contract. It means money must have really flowed out of the contractors pocket and not mere academic loss.

The provisions for payment of direct loss and/or expense claims are regulated provisions for payment, and certain conditions must be met. The contractor can recover these if he must observe these conditions which are standard in most forms of contract: The Architect is required to ascertain (or instruct the quantity surveyor to ascertain) the amount of direct loss and/or expense only if:

The contractor makes written application stating that he has incurred or likely to incur direct loss and/or additional expense not reimbursable under any other contractual provisions; and Application is made as soon as it has become, or should reasonably have become apparent that the regular progress of the works has been or likely to be materially affected by one or more of the specified matters, and The SO or Architect is of the opinion that regular progress is so affected as set out in the contractors application.

In fact the JKR form makes it mandatory to give a notice of his intention to claim within 1 month of the occurrence of such event, together with an estimate of the loss, failing which his right to claim is lost (see clause 44 which states that the contractor shall).

The new 2007 JKR form is more stringent in giving the contractor only 30 days after the occurrence of the cause of delay to give notice (see Clause 44.1). Clause 44.2 provides the time frame for the contractor to submit his claim, that is 90 days after the CPC. Clause 44.3 deals with the consequence of not complying with 44.1 or 44.2: losing the entitlement.

The contractor must, at the request of the SO/Architect: supply necessary information to enable him to form an opinion. Provide details of loss and/or additional expense allegedly incurred are as reasonably necessary to enable the loss etc to be ascertained. This provision is conditioned on a request by the Architect or QS

Claims for Extra Money

Other than prolongation of contract time, other avenues for claims for extra money lies in the implied terms as follows: i. the employer would not hinder or prevent the contractor from carrying out his obligations in accordance with the terms of the contract and from executing the works in an orderly manner

ii. The employer would take all steps reasonably necessary to enable the contractor to discharge his obligations and execute the works in a regular and orderly manner. Both these implied terms were decided in the case of London Borough of Merton v Stanley Hugh Leach Ltd

In summary, for a claim to be successful it must: Be made in time, if not the SO/Architect may reject it. Show that the regular progress of the work or part thereof has been or likely to be materially affected by one or more matters as stated in the contract Supported by relevant information and details of loss and/or expense Be of such nature that reimbursement is not recoverable under any other clause of the contract