Earlier this year, a member of my audience at a RICS event asked how he should proceed to write a contract if he didn’t trust ‘them’ (also known as ‘the other side’). I was momentarily stunned into silence, which is unusual for a speaker. My answer was simple:
“If you don’t trust them, why are you entering into a contract with them? If you don’t trust them, don’t do business with them”
There are often signs that a company is not one you should do business with. Sometimes your instinct is a better judge of character and competence than your lawyer, your head or your wallet. In a series of blogs, I want to highlight clauses which indicate a lack of trust between the partners to the contract.
A condition precedent is a clause or term which one party MUST comply with before it is entitled to other rights or remedies. Think of it like a contract bouncer – if you don’t have the right code (dress or numeric) then you don’t get in. The UK standard forms contain a selection of conditions precedent:
- NEC3 clause 61.3 requires the contractor to notify each compensation event within 8 weeks of the event occurring. If it doesn’t then it cannot claim extra time or money
- FIDIC clause 20.1 (Silver/Yellow) requires the contractor to notify claims for extensions of time as soon as practicable and no later than 28 days of becoming aware. If it doesn’t then it cannot claim extra time.
- MF/1 clause 41.1 requires the contractor to notify all claims for additional payment within 30 days. If it doesn’t then it cannot claim extra money.
- IChemE clause 16.5 requires the contractor to notify the project manager within 14 days if a variation order would prevent/hinder it from complying with the contract (although the clause does not go on to state the consequences of failing to meet this time period – see next section)
- JCT requires the contractor to give notice of loss and expense (held by Walter Lilly v Mackay to be a condition precedent) and the employer to give notice of non-completion before deducting LADs
Most of these are requirements on the contractor not on the client.
What the Clause Requires
Under a case (1) the English courts held that a proper condition precedent needed:
- to state the precise time within which the act has to be carried out or notice to be served (so ‘as soon as reasonably practicable’ is not precise enough), and
- to expressly and plainly state that unless act is carried out or notice served within that time, then claimant loses specific rights or remedies and
- precisely what those rights/remedies are.
Conditions precedent have a valuable role to play in managing the project as it continues. In one of the Wembley Stadium cases (2), the courts said:
“Contractual terms requiring a contractor to give prompt notice of delay serve a valuable purpose; such notice enables matters to be investigated while they are still current. Furthermore, such notice sometimes gives the employer the opportunity to withdraw instructions when the financial consequences become apparent.”
Not all conditions precedent will cause imbalance and unfairness between the contract partners, which can be a factor in mistrust. The key is to use them wisely and sparingly. You will begin to stoke mistrust if your contract contains:
- numerous conditions precedent, which could potentially deny the contractor many of its usual rights and remedies
- any condition precedent which does not have a clear, practical purpose
- a condition precedent to rectify the client’s failures
- short or unrealistic specified time limits for complying or indeterminate time periods such as ‘as soon as it becomes aware’
- implied references or no reference to the rights or remedies that will be lost for failure to comply
- lingering discretion on the contract administrator to decide whether the condition was complied with
All conditions precedent are a form of exclusion clause. The courts will construe them against the partner seeking to rely on them and they may have to pass the fairness tests in UCTA 1977 and UTCCR 1999. Like all contract clauses, you should work out why you are using it before recklessly shoving it into a long-term relationship that requires mutual co-operation to be a success.
For example in a recent review of contracts which a subcontractor client was being asked to sign, there were conditions precedent relating to:
- issuing interim applications on specific dates – without stating what would happen if they were late or even if that date happened to be a public holiday
- paying if the contractor becomes insolvent – without an understanding of how insolvency rules could affect that condition
- agreeing the rate of interest on late payments – without reference to the statute which could override this provision
- providing notice of a claim for an extension ‘as soon as it becomes reasonably apparent’ and without reference to the rights/remedies that the subcontractor will lose if it doesn’t comply
- any payment becoming due under the contract without specific documents having been provided – again without a timescale and without reference to the subcontractor’s right to a reasonable sum under statute or equity
These clauses were drafted without reference to (a) what a proper condition precedent needs, (b) the valuable purpose for that condition precedent, or (c) how in practice those clauses will help the contract partners do business.
Contracts need to be workable and user-friendly, and then you will build trust and avoid disputes.
Contracts should build trust before they build terms.
Cases: (1) Bremer HandelsGesellschaft MBH V Vanden  2 Lloyds Rep 109; Multiplex Constructions (UK) Ltd v Honeywell Control Systems Ltd  EWHC 447 (TCC)