Out-Law / Your Daily Need-To-Know

Construction law terms: claims under contract vs breach of contract claims

11 Jul 2023, 1:44 pm

The distinction between claims made under a construction contract and claims made for a breach of that contract’s terms is often misunderstood.

Although these terms sound like they perhaps ought to be the same, the differences have important consequences in practice. This guide examines the meaning of both terms, explains important differences, looks at how these differences have been illustrated in recent case law and offers some practical takeaways.

Claims under the contract

Construction contracts almost always contain express terms which give the parties contractual rights to make claims for time and money. Examples include the extension of time provisions to claim time and ‘loss and/or expense’ or other provisions allowing the contractor to claim more money. They also almost always give rights to employing parties to make claims – for example for liquidated damages for delayed completion or to have defects rectified in the period after completion of the works.

In this way, rather than relying on the general legal position, the parties are clear on what their rights, remedies and obligations are if one of those circumstances arises. So, for example, if the claim is made under the contract for liquidated damages, as opposed to for general damages for breach, the parties will know the sum payable. Similarly, claims for termination under the contract are often for expressly defined situations, with greater clarity than termination at common law for an alleged repudiatory breach.

Breach of contract claims

A breach of contract claim arises when the other party does not comply with their obligations to the other under that contract. In those circumstances, the innocent party can claim a remedy for breach. This remedy is for damages from the defaulting party, rather than for sums or another remedy expressly provided by the contract. Usually the measure for that remedy is to put the innocent party in the financial position it would have been if the breach had not occurred.

To make the damages for breach claim, the innocent party must prove that:

there was an obligation on the defaulting party;
that the obligation was breached by the defaulting party; and
such breach caused loss to the innocent party.

If all of these are proved, the level of damages is assessed on the basis of putting the innocent party “in the same position as he would have been in if he had not sustained the wrong for which he is now getting compensation or reparation” – a precedent which has stood since 1880.

Another feature of damages claims is that such losses are foreseeable and not too remote. Similarly, there will usually be a duty on the innocent party to mitigate its losses, which will not generally exist when there is a prescribed measure for a claim under the contract. Practically, it is more common for breach of contract claims to be made after the works have been completed, for example the employer making claims for defective works.

On the other hand, while the general law of limitation will apply, a claim for damages for breach will not usually be subject to the express notice or application requirements for claims under the contract.

Key differences between breach of contract and claims under the contract

Claims under the contract	Breach of contract claims
Claims are more commonly made during the course of the works or immediately thereafter, such as delay-related claims.	Claims are more commonly made after completion of the works, such as defects claims.
Requirement to comply with certain notification requirements and/or other conditions/conditions precedent to making claims.	No notification requirements or conditions precedent – usually only general law of limitation for damages claims.
Certainty of recovery upon establishing breach, such as extension of time mechanisms are clearly set out, what is payable as loss and/or expense.	The claimant has to prove the breach, then that such breach caused the claimed loss.
No requirement to show foreseeability or remoteness, or duty to mitigate.	Need to prove loss was foreseeable, not too remote and was mitigated.
Rights and remedies clearly set out under the express terms	Can be excluded by well-drafted exclusive and exhaustive remedies provisions.
Allows the parties to agree how the contract will be managed. Extensions of time will be granted for acts of prevention or impediment by the employer.	The common law or implied terms can interfere with the parties’ original intentions, such as setting “time at large” due to acts of prevention or impediment by the employer.
Often alternative remedies are available, such as requiring the contractor to remedy defects.	Usually the only remedy available would be damages. This is because specific performance for construction contracts is a rare remedy.

Legal examples of breach of contract and claims under the contract

Delays in granting access to site

If a contractor’s access to site is delayed by the employer, this is a typical claim which could fall either under the contract, provided the terms allow, or as a breach of contract claim. Under the standard form JCT 2016 Design & Build Contract, for example, a claim for additional payment due to lack of access is often framed as both a change as a result of clauses 4.21.1 and 5.1.2.1 and also as an impediment by the employer as a result of clause 4.21.5.

If the contractor can show that the relevant conditions are met, the contractor will be entitled to an extension of time, and thus relief from liquidated damages, as well as to claim for loss and expense incurred as a result of the delays. These conditions will require providing written application for that loss and/or expense and extension of time.

Alternatively, the claim for financial compensation for delayed access could also be made as a breach of contract claim for damages, provided it is not excluded by an exclusive or exhaustive remedies clause. This is because the employer usually has an express obligation to provide access to the site or because it will be found to be an implied term. Generally, such claims for breach do not require prescribed notice or application.

In this JCT example, the application for an extension of time would have to be made under the contract. Generally, a claim that ‘time was at large’ for such breach would not succeed, because the contract provides such a remedy. This ‘prevention principle’, and the desire to avoid the uncertainty of ‘time at large’, is why the JCT contract expressly provides that post-practical completion, all relevant events have to be taken into account, whether notified or not.

Defects in the works post-practical completion

A common claim by the employer which could fall under either scenario is for defects which appear in the works post-practical completion. Under the standard form JCT 2016 Design & Build Contract, there is a ‘rectification period’ in which the employer is obliged to inform the contractor of any defects. In such period, the contractor is obliged to return and remedy the defects at no cost to the employer, unless the employer instructs otherwise. If the contractor refuses to do so – or the employer instructs the contractor not to remedy the defects – then the employer may make an appropriate deduction from the contract sum to reflect those defects that have not been made good.

Once the rectification period comes to an end, any claim for defects in the works post-practical completion would be a breach of contract claim. In these circumstances, the employer would be claiming the costs of rectifying the defects, which could include losses such as loss of rental income, from the contractor if they could show that the defect was due to the contractor’s default.

For such claims, there is a general rule that parties have to mitigate their losses. This is reflected in the express terms here – whereby the employer is obliged in this period, as well as by that common law rule, to request that the contractor returns to site to remedy the defects during the rectification period.

It would also be possible in this example scenario for the employer to make a claim against the contractor for damages for breach of contract. This would be for breach of the contractor’s obligation to carry out the works in accordance with their contractual obligations. However, such a claim for breach would be subject to, for example, any exhaustive remedies clause, any express terms such as above in relation to a defects rectification period and the duty to mitigate. This might, in practice, entail giving the contractor an opportunity to put the defects right at their own cost, such as with their own supply chain.

Effect of an exhaustive remedies clause

One example of a case in which an exhaustive remedies clause was enforced, and in turn limiting claims to those under the contract only, not for breach of contract, was the 1997 dispute between Strachan & Henshaw Limited, Stein Industrie (UK) Limited and GEC Alsthom Limited. The facts of this case may seem unusual and it may appear to be an extreme case, but it demonstrates the importance attached to these clauses by the courts.

The case related to a power station which was being constructed in Cambridgeshire. Stein Industrie and GEC Alsthom were subcontractors and Strachan & Henshaw were their sub-subcontractors whose work related to “erection services and commissioning and support work in respect of Heat Recovery System Generators” (HRSGs). Strachan & Henshaw employed around 150 workers at the site and provided its own site accommodation cabins for its staff. The cabins were initially installed near the part of the site where the HRSGs would be constructed.

After the works began, Stein and GEC instructed that the cabins were moved to a different location on the site around half a mile away. This meant a round trip of a mile walk for all staff each time they went to the toilet or for their tea breaks. Strachan & Henshaw wanted to recover the costs associated with the existing walking time, which it claimed to be around £1.6 million.

Strachan & Henshaw put its claim on a number of alternative bases, of which two are relevant here. The first was that the instruction to move the site cabins was a variation for the purposes of the contract. The alternative claim was that the instruction constituted a breach of contract for which damages could be claimed.

The court found that the instruction was not a variation under the contract, as it did not change the permanent works or otherwise satisfy that contract’s test for a variation, and therefore had to consider the alternative claim of breach. Stein and GEC contended that there was an exhaustive remedies clause which meant that the only claims available were those under the contract, and claims for breach of contract were not available to Strachan & Henshaw.

The clause is clear in stating that there should be no liability for breach of contract except as under the contract. The courts agreed and enforced this provision, such that Strachan & Henshaw’s claim for breach of contract failed. Therefore, it is vital that you are aware of the impact of any exhaustive remedies clauses in your contracts when considering how claims should be put.

Practical takeaways

Claims under the contract tend to be more defined in likely outcome and thus more certain. Claims under the contract often require the innocent party to notify and set out its claims. These can be onerous – in speed and/or detail needed – and can have draconian consequences for non-compliance.

It is thus vital that parties are aware of notification requirements, and other potential conditions precedent, to ensure that they are not barred from making any claims under the contract or are not paying sums that are not contractually due as a result. Parties that have not complied with those notice requirements should consider whether a claim can still be made for damages for breach of contract – or because ‘time is at large’.

Breach of contract claims avoid these sometimes strict processes but do generally lead to the parties having to incur higher costs and spending more time establishing breach, causation and loss. Breach claims are also subject to foreseeability, remoteness and mitigation. Exhaustive and/or exclusive remedies provisions are designed to prevent that alternative, breach claim route.

It will ultimately depend on the type of claim and the relevant wording of the contract. As a general rule, if a party has complied with the notice requirements in the contract, usually a claim under the contract will bring a quicker and more certain reward for most claimants.

Co-written by Matthew Watson of Pinsent Masons.