+27 11 648 9500   +27 87 183 1933

Risks unaccounted for? The loss lies where it falls

10 January 2018

Construction is a risky business. Not all risks can be predicted prior to the commencement of a project. Not all risks can be prevented or curbed during the execution of a project. Millions of Rands could be lost should a risk materialize on a project. It is crucial for parties to construction contracts to be aware of which risks they are responsible for and for which they will ultimately bear the loss.

The CIDB endorsed standard forms of contract provide for who bears the risk in relation to specific events and thus who will be liable for the loss associated therewith. However, these contracts do not assign risk in respect of each and every possible event and a badly drafted bespoke contract might not assign risk at all, leaving the parties thereto in a very uncertain position.

While there are some risks that are clearly the risk of the contractor, such as substandard workmanship, or clearly the risk of the employer, such as a delay due to an instruction to carry out additional work, there are other events that are not obviously the fault of the contractor or the employer. Where it is not entirely apparent who should bear the risk, and in turn the loss, for an event, to whom should each party’s fingers be pointed?

Judge Edgar Fay QC in Henry Boot Construction Ltd v Central Lancashire New Town Development Corp[1] provided some clarity on this issue by stating as follows:

There are cases where the loss should be shared, and there are cases where it should be wholly borne by the employer. There are also cases which do not fall within either of these conditions and which are the fault of the contractor. But in cases where the fault is not that of the contractor the scheme clearly is that in certain cases the loss is to be shared: the loss lies where it falls. But in other cases the employer has to compensate the contractor in respect of the delay, and that category, where the employer has to compensate the contractor, should, one would think, clearly be composed of cases where there is fault upon the employer or fault for which the employer can be said to bear some responsibility.”[2]

The words of Judge Fay QC are not entirely clear in that he refers to the loss being shared in cases where the fault is not that of the contractor and then summarises that statement with a seemingly contradictory phrase – “the loss lies where it falls”.

Our understanding of Judge Fay QC’s words is that where an event is neither an employer’s risk event nor a contractor’s risk event, the loss must lie where it falls, unless the party at which the loss has fallen can establish a breach of contract or fault on the other party’s part.

To illustrate this dictum; where an event causes delay, it is the contractor’s risk as that is where the loss has fallen. This is provided, of course, that the event was not caused (in whole or part) by a breach of contract by the employer.

As mentioned above, the standard forms of contract provide for who bears the risk for specific events and provides mechanisms for dealing therewith. For example, in FIDIC:

in respect of the risk of delay – several clauses specify when the contractor will be entitled to an extension of time and additional payment (i.e. where the contractor is not at risk) such as clause 4.12 (unforeseeable physical conditions) and 4.24 (fossils);

in respect of damage to the works – clause 17.3 specifies the causes of damage which constitute risks of the employer (eg: war, riots and design by the employer)

Although the standard forms of contract assign many of the risks parties to construction contracts are faced with, there are still a few that have not been accounted for. Some of the examples we have come across include – flooding due to ground conditions (rather than due to weather), flooding due to municipal drains being blocked, civil unrest in the local community and shortages of materials.

If one puts the legal dictum “the loss lies where it falls” into practice, where events such as these (and importantly, events that have not been caused by either party) cause a delay to the works, the contractor is at risk as it is the contractor that will face a loss in such circumstances.

It is therefore important to review the assignment of risk within a construction contract and to keep in mind that not all risks can be predicted and where they haven’t, the loss may lie with the party at which it falls.

Author: Kelly Stannard, Associate