Ascertainment of loss and expense

Duties of the architect or engineer

Under clause 4.23 of Joint Contracts Tribunal (JCT) Standard Building Contract With Quantities 2011 (JCT 2011), and having received a notice from the contractor, the architect/contract administrator should from time to time ascertain the amount of loss or expense. This provision allows the architect/contract administrator to ascertain the amount of loss or expense on more than one occasion - when the notice is first given, and thereafter, when more information becomes available.

Under the Institution of Civil Engineers (ICE) Conditions of Contract Measurement Version (7th edition), and having received a notice from the contractor, the engineer should determine the amount of any costs to be paid in the monthly statements. See clause 60(2) (a), which allows the engineer to determine the additional cost on the occasion of each monthly statement.

Under clauses 53(1) and 53(2) of the ICE 7th edition, the contractor must keep such contemporary records as may reasonably be necessary to support any claim it may subsequently wish to make. In addition, under clause 53(3), the engineer may instruct the contractor to keep such contemporary records as are reasonable, and to allow the engineer to inspect these.

The architect or engineer need not make an ascertainment or determination during the currency of the contract works unless a notice has been provided by the contractor. However, if the architect or engineer is aware that the contractor is incurring additional loss, expense or additional costs, it is good practice to ascertain or determine the level of those losses, expenses or costs. If such a notice is provided, and if the other requirements are met and the architect or engineer does not ascertain or determine the amount of loss, expense or additional costs, this will probably result in a referral to adjudication. It may also entitle the contractor to interest or finance charges (see London Borough of Merton v Stanley Hugh Leach [1985]). Such action could also amount to a breach of contract, entitling the contractor to other damages, such as statutory interest for late payment at a much higher rate.

Clause 4.3.3.4 of JCT 2011 and clauses 7(4), 12(6), 13(3), 14(8), 31(2), 40(1) and 42(3) of the ICE 7th edition provide that the architect or engineer shall include any such amounts so ascertained or determined within the interim certificates or monthly statements.

Retention is not deducted from loss and expense under JCT 2011, although it is deducted from additional cost under the ICE 7th edition.

Clause 4.5.2.1 of JCT 2011 and clause 60(4) of the ICE 7th edition provide that the architect or engineer shall ascertain or determine any loss, expense or additional cost as part of the final account.

In London Borough of Merton v Stanley Hugh Leach Ltd [1985], the court indicated that under the JCT 63 conditions, a notice by the contractor was necessary before the architect was obliged to ascertain loss and expense. However, if the contractor had made a claim for damages, rather than for loss and expense, then a notice would not have been necessary to assess the damages incurred (this reasoning may also be applied to other forms of contract). In this case, therefore, failure by the contractor to provide a notice did not prevent it from recovering damages for breach of contract, but it did prevent it from recovering loss or expense under the terms of the contract.

Duties of the contractor

Clauses 4.23 of JCT Standard Building Contract With Quantities 2011 (JCT 2011) and 53 of the ICE Conditions of Contract Measurement Version (7th edition) require the contractor to make written application to the architect/contract administrator or engineer stating that it has incurred, or is likely to incur, direct loss and expense.

In Walter Lilly & Company Ltd v Mackay & Anor [2012] EWHC 1773 (TCC) the court held that such written applications under the JCT contracts are a condition precedent to recovery by the contractor. In terms of the timing of such notices the court held that:

'for time related preliminary costs, the Contractor can wait until it is clear that the loss or expense has been incurred [before making the application]; thus, if the delay has not actually happened, the extended preliminary costs will (often) not have been incurred and the Contractor can therefore wait before serving its application until it has actually been incurred.'

In relation to the costs associated with such application the court held that:

'Clause 26.1 [of JCT ‘98] expressly says that the application under Clause 26.1 does not have to be given with a money quantification, because the bracketed wording suggests only that the Contractor "may give his quantification"'.

Arguably clause 4.23 of JCT 2011 is even clearer in this respect.

Clause 4.23.2 of JCT 2011 requires the contractor to submit upon request such information as will enable the architect/contract administrator to form an opinion as to whether such loss and expense has been, or is likely to be, incurred. Similar provisions are contained within the ICE 7th edition (for example, clause 53).

In the Walter Lilly case, the court held that:

'all that is required is that the architect must be reasonably put into a position in which it can form an opinion that "direct loss and/or expense has been incurred or is likely to be incurred ... because the regular progress of the Works ... has been materially affected" by the given events.'

Clause 53 of the ICE 7th edition requires the contractor, after submitting notice of a claim, to keep such contemporary records as may reasonably be necessary to support any claim it may subsequently wish to make. A similar provision could be implied within JCT 2011. On the balance of probabilities, failure to keep records will, in any event, have an adverse impact on the contractor's ability to prove a loss.

Clauses 4.23.3 of JCT 2011 and 53 of the ICE 7th edition require the contractor to submit upon request such details of loss, expense and additional costs as are reasonably necessary for the ascertainment or determination of these as aforesaid.

In the Walter Lilly case, the court held that:

'it is necessary to construe the words in a sensible and commercial way that would resonate with commercial parties in the real world. The architect or the quantity surveyor must be put in the position in which they can be satisfied that all or some of the loss and expense claimed is likely to be or has been incurred. They do not have to be "certain". One has to bear in mind that the ultimate dispute resolution tribunal will decide any litigation or arbitration on a balance of probabilities and at that stage that tribunal will (only) have to be satisfied that the contractor probably incurred loss or expense as a result of one or more of the events listed in Clause 26.2 [of JCT 98]. Bearing in mind that one of the exercises which the architect or quantity surveyor may do is allow loss and expense, which has not yet been incurred but which is merely "likely to be incurred"; in the absence of crystal ball gazing, they cannot be certain precisely what will happen in the future but they need only to be satisfied that the loss or expense will probably be incurred.'