I was recently reviewing a claim submitted by a contractor wherein the contractor had included the costs of claim preparation as being compensable. Discussing with my colleagues we agreed that it is now common to see contractors claiming such costs, but are they entitled to?
My initial opinion is that such costs are not recoverable, as the generally accepted position is that subject to an express term in the contract, which gives entitlement to payment, the costs of producing a claim, which are required by the conditions of contract, will not be recovered.
This is due to the contractor accepting at the time of tendering, that any claim and the compilation of such documentation has been allowed for within the accepted contract price and that the contractor is only complying with the requirements of the contract.
However, upon further investigation, there might be some credence where such costs might be recoverable.
The first document I looked at was the Society of Construction Law Delay and Disruption Protocol (2nd Edition 2017) (“Protocol”) under item 3.1, where is provides the following advice:
“Most construction contracts provide that the Contractor may only recover the cost, loss and/or expense it has actually incurred and that the be demonstrated or proved by documentary evidence. The Contractor should not be entitled to addition 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.”
The Protocol therefore suggests that should the architect, contract administrator or engineer, fail to ascertain a claim constituting a breach of contract, resulting in the contractor incurring additional costs, then the costs in pursuing the claim from this point onward would be deemed recoverable.
The case of Croudace v London Borough of Lambeth (1986) 33 BLR 20 confirmed the above, due to the architect’s failure to ascertain a claim for loss and expense; this constituted a breach of contract for which the employer was liable for damages. The contractor is however required to establish that he has suffered damage because of such breach.
A second situation where the costs of preparing a claim may be recoverable is highlighted in the case of James Longley & Co. Ltd v South West Regional Health Authority (1985) 25 BLR 56, where certain works to a claim are done in preparation of an arbitration.
In this case, the arbitrator found that the fees of the claims consultant for the works related in the preparation of the claimant’s final account and as a general advisor to the claimants were disallowed, but allowance was made in respect of work done in preparation of the claimant’s case for arbitration.
However, one could argue that if costs are incurred contemplating an arbitration prior to the service of such a notice, then the arbitrator may include them in his award of costs. As the preparation of such a claim document before an arbitration notice is served falls into the category of costs in contemplation of arbitration.
In conclusion:
The costs of preparing the initial claim, unless there are express provision within the contract, are not recoverable.
However, if the architect, contract administrator or engineer breaches the contract by failing to respond to the claim, or makes an unjust award under the terms of contract, costs incurred in pursuing the claim from this point onwards would be recoverable.
In addition, if it can be shown that prior to service of an arbitration notice, that the preparation of such claim is in contemplation of arbitration, then the arbitrator whilst exercising discretion may include such costs within his award of costs.
Please note, should the contractor submit a poorly substantiated claim and it is rejected on such grounds that the claimant failed to prove its case; the additional preparation would be regarded as the contractor fulfilling its obligation under the contract and would therefore not be liable to pursue such costs.
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