The intricacies of notice provisions

Chris Binnington revisits the thorny issue of notice provision as a prerequisite to a contractor’s claim.

In a previous article, I suggested that contractors fail to give notice because of one of the following reasons:

  • Ignorance: Despite having a general knowledge of contractual requirements, the contractor’s decision maker, be he contracts manager or site agent, has not bothered to read the specific clauses and acquainted himself with the express requirements.
  • Conflict avoidance: The submission of a claim, or even a notice to claim, is viewed by some people as being confrontational and likely to lead to a breakdown of relationships.
  • Intimidation: Frequently the supervising officer (project manager, architect or engineer) puts out strong vibes that the contractor will lose his cooperation if a climate of claims is created by the early submission of a notice for extension of time or cost.
  • ‘Do not worry, we’ll sort it out later’; Under this regime the contractor is aware of his obligation to claim but is persuaded against claiming on the basis that, if he gets on with the job and if there is a problem at the end of the contract, it will be sorted out amicably.

With the increased use of the New Engineering Contract (NEC) suite of contracts, the introduction of the third edition NEC in June 2005 and the debate that has raged internationally with regard to whether or not these documents contain a time bar, it seems appropriate to revisit this thorny issue. In addition, the decision by Transnet to abandon its old E5 Conditions of Contract, which is not Construction Industry Development Board (CIDB)-approved, as well as the Gauteng Department of Public Works decision to move to NEC3 and abandon what is arguably the worst draft of the CIDB-approved contract documents, Joint Building Contracts Committee (JBCC) 2000 series, it is perhaps appropriate to revisit the issue of time barring. I think it can be safely said that, insofar as NEC2 is concerned, this was never intended to contain a time barring provision in the Compensation Event notice clause, 61.3, and that the wording of this clause does not create a time bar.

“The Contractor notifies an event which has happened or which he expects to happen to the Project Manager as a Compensation Event if it is less than two weeks since he became aware of the event.” While the intention and indeed the words clearly create a condition in which the contractor is advised to give notice within two weeks, the absence of wording to the effect that failure to give such notice will result in the contractor losing its rights, must preclude an interpretation in terms of which this clause acts as a time bar. Equally, the argument that, in the event of notice being given outside the two-week period would result in a situation where the project manager has lost his authority to deal with the compensation event, is also incorrect. A loss of rights arising out of a breach of contract can only occur where the remedy for breach is widened beyond that available in common law to provide a sanction in respect of the loss of rights. Equally, if one wishes to deprive the agent of the authority to deal with a claim or compensation event after a certain period has lapsed, it would be necessary to create a term of the contract expressly stating such a result. Patently NEC2 does not do this and the project manager Is perfectly entitled to give his ruling when both the compensation event notice Is later than two weeks and the project manager’s period for reply has also expired. NEC3, however, has followed the procedure, which is now the rule rather than the exception in most standard-form contracts, insofar as an absolute time bar has been introduced in Clause 61 .3. This clause now has the requirement included as part of the express terms that:

“If the Contractor does not notify a Compensation Event within eight weeks of becoming aware of the event, he is not entitled to a change in the Prices, the Completion Date or a Key Date unless the Project Manager should have notified the event to the Contractor but did not.”

The qualification with regard to the project manager’s notification id unfortunate since this may well lead to dispute. It would have been preferable to have left the onus for notifying a compensation event with the contract. In addition, it is clear that NEC did not want to take a more robust approach to time barring as is evident from the unnecessarily lengthy period provided — eight weeks. We suggest that this clause needs to be amended to reduce the period to a more reasonable four weeks and to delete the qualification in respect of project manager’s notification. This can be achieved quite simply by a suitable Z Clause, the mechanism by which the NEC suite introduces special conditions of contract.

Another problem for the users of NEC, whether Edition 2 or Edition 3, seems to be in the understanding of the purpose of the notice regarding early warning in Clause 16. The notice specified to be given places an onus on both the contractor and the project manager to give an early warning by notifying the other as soon as they become aware of a potential situation, which will impact on price, completion, key date or performance of the works. No time period is specified for this notice bùt the sanction, if the project manager decides that a compensation event has arisen without prior early warning notice having been given in circumstances where an early warning notice should have been given, is draconian. Under Clause 63.5, ii the project manager notifies the contractor that an experienced contractor should have given an early warning notice but the contractor did not, then the event is assessed as if the contractor had given early warning. The effect of this may be an assessment in terms of which the project manager sets out the steps he would have taken had early warning been given, which could result in zero compensation to the contractor for time or cost. However we are increasingly encountering contractors who appear to think that a notice given under Clause 16, Early Warning, opens the door to a compensation event. Clearly it does not. If a contractor, having given an early warning notice, now wishes to escalate this warning to an actual notification of a compensation event, it must do so through the mechanism of Clause 61.3. It cannot simply rely upon the early warning notice.

We have encountered this misconception on so many occasions during the past 12 months as to indicate a general misconception within the industry insofar as users of NEC are concerned. We have even seen contractors attempt to escalate an early warning notice into a dispute through the adjudication clause in the absence of a compensation event notice. This is completely incorrect and an adjudicator would have no jurisdiction to decide a compensation event where the contractor is simply reliant upon an early warning notice and has failed to give any subsequent compensation event notice. The employer could simply refuse to participate in the adjudication procedure and, to the extent that a favourable decision was given by the adjudicator towards the contractor, simply raise the issue of jurisdiction with the High Court when the contractor attempted to enforce the decision.

This situation would be similar to that described in the Appellate Division decision of Withinshaw Properties (Pty) Ltd v Dura Construction Co (SA) (Pty) Ltd 1989 (4) SA 1 073 (A). In this appeal arising out of a building contract, it was a prerequisite that any dispute between the parties should first be resolved by written decision of the architect given to the contractor and binding on the parties unless objection thereto was raised within a specified period by the contractor. No evidence was placed before the court that the architects had given or had been called upon to give any such decision in terms of the relevant clause and, therefore, the court found that the factual basis for the contractor’s contention was absent. This would be the position where the project manager had not been called upon to consider whether or not a compensation event had arisen due to lack of notice of such compensation event where the contractor simply relied upon the early warning notice.

Our advice to contractors is always to treat notices as if they are time barring whether or not they are stated to be so, Any other approach places the contractor at risk to the extent that the agent or employer wishes to treat the absence of notice or late notice as if it were a time bar thus creating a dispute between the parties.