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Claim preperation costs: are these claimable?

18 March 2019

A question which is often asked, is whether a contractor can claim back the cost of preparing its contractual claims under the terms of a construction contract.  Unless there is an express term permitting this, the answer is generally no.  In certain very limited circumstances, however, it may be possible.

The SCL Delay and Disruption protocol (second edition) 2017, Guidance Part C, Article 3, addresses this as follows:

“Most construction contracts provide that the Contractor may only recover the cost, loss and/or expense it has actually incurred and that this be demonstrated or proved by documentary evidence. The Contractor should not be entitled to additional costs for the preparation of that information, unless it can show that it has been put to additional cost as a result of unreasonable actions or inactions of the CA [contract administrator] in dealing with the Contractor’s claim.[Emphasis added]

A number of the employer risk events, which entitle a contractor to make a claim in terms of a construction contract (such as late delivery of drawings and information) could also constitute a breach of contract [Hudson’s Building and Engineering Contracts (eleventh edition) states at paragraph 4.180].  Under the common law, damages for breach of contract are not intended to compensate the innocent party for loss, but to put that party in the position it would have been in if the contract had been properly performed [Victoria Falls and Transvaal Power Co Ltd v Consolidated Langlaagte Mines Ltd 1915 AD 1 22].  Such damages must flow naturally and generally from the kind of breach that has been committed [Holmdene Brickworks (Pty) Ltd v Roberts Construction Co Ltd 1977 (3) SA 670 (A)].

As stated in the SCL Delay and Disruption Protocol, claim preparation costs are generally considered to be nothing more than the cost of complying with the provisions of the contract.  If, however, it could be shown that an employer or its agent (such as the engineer or project manager) acted unreasonably, or were in breach of contract, from which unreasonable action or breach, claim preparation costs can be said to flow, naturally and generally, it may be possible to claim back these costs.

Although this issue does not appear to have been considered in the South African courts, it has been addressed in the Technology and Construction Court in the matter of Walter Lilly & Company Limited v Giles Patrick Cyril Mackay and DMW Developments Limited [2012] EWHC 1773 (TCC).  Mr Justice Akenhead found that the costs of preparing a claim were claimable, either in terms of the relevant contract provisions or by way of a damages claim for breach of contract.

It is, however, important to note that, in this matter, Mr. Mackay (the owner or employer) had been particularly obstructive during the course of the project, which may well have swayed the court in favour of Walter Lilly (the contractor).  It will be necessary to demonstrate that the actions of the employer/engineer in a particular instance were so unreasonable, and far removed from the normal manner in which their projects are managed, as to result in a cost far beyond what could have been envisaged at tender stage. This is a factual enquiry.

It would, further, be important to keep the appropriate records, demonstrating which time of the contractor’s own staff and/or resources were dedicated or incurred as a result of the breach.

Author: Michelle Kerr, Senior Associate