“It’ll be alright on the night” – Disaster preparedness, contractual notifications and the case of Maeda v Bauer
“It’ll be alright on the night” – used to say that a performance or an event will be successful or adequate even if the preparations for it have not gone particularly well.
(This episode chosen as the opening clip is in Welsh)
“It’ll be alright on the night” was also a long running TV show in the UK featuring TV and film bloopers hosted for almost 30 years by the inimitable English comedy writer, Dennis Norden. The title of the show gave the impression (perhaps unfairly) that many of the unwitting participants were featured as a result of “winging it” and hoping for the best.
The Norden Syndrome
I was recently meeting a prospective client to discuss a potential assignment on a live project and the conversation turned to claim notifications. My advice to the prospective client was to strictly follow the contract requirements when submitting notices and particulars. His response was that up to that point no claim notifications had been issued as “We’re not a contractual organization”. Unfortunately, this is not the first time that I have come across an organisation that misguidedly considered that trying to keep the client happy by not submitting notifications and claims was preferable to ensuring that their contractual rights were maintained. In disaster preparedness, professors Robert Meyer and Howard Kunreuther sought to understand why humans are so poor at planning for foreseeable disasters. They identified that cognitive biases, such as optimism bias drove human behaviour in these situations coining the phrase the Ostrich Paradox to describe the behaviour. For the claims world, I have renamed this approach the Norden syndrome. The newly named Norden syndrome will be familiar to many in construction – let’s get the job done and (hope) the client will sort us out. “It’ll be alright on the night!” We have encountered countless projects adopting this approach to claims notifications and management.
On most large infrastructure and construction projects, contractors must usually issue notices within a set timeframe (typically 28 days, but sometimes within 5 or 7 days) giving various details of the event, its likely impact, and the contractual basis. This initial notice must then be followed, at regular intervals (again usually 28 days) with further interim particulars until the event is at an end. Failure to meet these requirements may completely invalidate the claim. The administration of the claims elements of modern construction contracts can therefore be onerous, time consuming and costly. However, failure to correctly and strictly administer the claims process can be catastrophic. Which brings us to the case of Maeda vs Bauer recently heard before the High Court in Hong Kong.
Maeda v Bauer: The Case
Maeda was engaged as the main contractor on a project for the Hong Kong Guangzhou Express Rail Link. The project involved the construction of cut and cover tunnels and Maeda engaged Bauer as the subcontractor for the diaphragm walls.
Maeda vs Bauer – the case arose out of changed ground conditions which Bauer argued were a variation ©Shutterstock
During the construction, Bauer encountered unforeseen ground conditions which meant that additional quantities of rock had to be excavated. Bauer gave notice for its loss and expense entitlement, but its initial notice of claim referred specifically to the event as a variation. A dispute arose regarding the claim and in the subsequent arbitration proceedings, notwithstanding that he rejected their case for a variation, the arbitrator found for Bauer. Maeda appealed the arbitrator’s award.
Key Issues of Appeal
One of the key issues that the High Court had to consider was this: if a notice was given on the basis of a variation under the contract, but the claimant’s claim ultimately succeeded on a different ground, was the original claim notice, and the corresponding claim, valid?
Under the subcontract, Bauer were required to give notice in accordance with the following clause:
“21.2. If the Sub-contractor wishes to maintain its right to pursue a claim for additional payment or loss and expense under Clause 21.1, the Sub-Contractor shall as a condition precedent to any entitlement within twenty eight (28) days after giving notice under Clause 21.1, submit in writing to the Contractor:
21.2.1. the contractual basis together with full and detailed particulars and the evaluation of the claim …”
Bauer issued a notice of claim referring to adverse physical conditions and stating that the conditions deviated from the Geotechnical Baseline Report and constituted a variation to the works. However, during the subsequent arbitration Bauer’s primary claim for a variation was rejected by the arbitrator as there was no change in scope and no variation order had been issued. However, the arbitrator permitted Bauer’s claims under a new legal basis of “like rights”; that is claims pursued under the main contract, notwithstanding that Bauer’s claim notice did not cover such a contractual basis.
The arbitrator stated, “I consider that both as a matter of sympathy and as a matter of construction, the contractual basis of the claim stated in the Clause 21.2 notice does not have to be the contractual basis on which the party in the end succeeds in an arbitration”.
The High Court Findings
The court overruled the arbitrator’s decision and rejected Bauer’s claim. The court considered that Bauer had only provided the facts for its claim, and failed to rely on the relevant contractual basis required in Clause 21.
The court’s ruling required Bauer to state the contractual basis on which it believed it was entitled to a claim and to support it with factual circumstances. However, since the contractual basis requirement was not satisfied, Bauer had no right to the payment claimed.
The Court noted that the contract entered into by both parties provided clear and mandatory language for the execution of the contract. Further, under clause 21 there was no qualifying language such as ‘within reasonable time’ or ‘subject to’. Therefore, it would seem reasonable to presume that both parties were aware of the risks and commercial certainty by designating strict time limits for the submission of the factual and contractual basis of the entitlement claims.
Bauer have been given leave to appeal the High Court judgement. In the meantime, however, the outcome of the case appears on its face to be disproportionate to Bauer and potentially severely problematic to contractors. Claims issues often develop on projects over many months and the root cause of such issues (and the corresponding contractual basis to seek recovery) can often evolve as further facts arise. The High Court judgement quite rightly places a high bar on strict compliance with the wording of the contract. However, in this case, it has arguably led to a harsh outcome for Bauer and a salutary lesson for contractors when it comes to issuing contractual notices.
The Way Forward
Contractors need to think of claims management as a type of insurance policy. Good claims management doesn’t guarantee that you will be fully covered (as evidenced by the Bauer case) but without it your chances of recovery could be fatally impacted. In a Financial Times article in April this year entitled “Why we fail to prepare for disasters” (sorry, paywall), economist Tim Harford explored preparedness for recent natural disasters including Hurricane Katrina and of course the current COVID-19 pandemic.
The wreckage of Hurricane Katrina – A near miss in 2004 should have provided the impetus for disaster preparedness for New Orleans © Shutterstock
These natural disasters were foreseen and could have been planned for. However, ultimately preparedness and planning were reduced due to cost cutting and efficiency considerations. This is the same dilemma facing contractors – what effort should be expended in managing contractual claims. With many projects on tight margins, costs need to be carefully controlled.
Drawing on the experience of Bauer, all parties to the contract should make sure they fully comply with the notice requirements of their contract. In particular, parties involved should pay heed to the allocation of risks and whether claim the notification clause is merely procedural or operates as a condition precedent, where strict time limits and compliance are required in order for the contractor to be entitled to a claim.
Most importantly, contractors should now carefully consider whether they need to notify their claims under several contractual heads of claim to ensure that all potential contractual bases are covered. Notifying alternative heads of claim would appear to be a prudent safeguard to avoid the same problems faced by Bauer. CDC have also developed numerous strategies to help contractors protect themselves on projects where there is significant change.
Claims management on complex projects presents unique challenges © David Feehan
It is true that claims management on major, complex projects can be costly, time consuming and staff intensive. However, this should be measured against the very real possibility of completely losing your entitlements. Clause 64.5 of the Hong Kong Government General Conditions of Contract is clear, “If the contractor fails to comply with the notice provisions …of this Clause in respect of any claim, such claim shall not be considered.” Many other contracts are much less forgiving.
Will it be alright on the night for your project? Perhaps. But any viewing of the TV show will demonstrate that things regularly go wrong. So, contractors be warned! Don’t let your project claims become a victim of the Norden syndrome.
Contract Dispute Consultant has significant experience on change and claims management on large complex construction projects including rail, bridge and airport projects. For assistance, get in touch.
