Market Insight

Beyond the contract: why extra-contractual remedies matter in construction disputes

Construction lawyers are trained to begin with the contract. So are clients. When a dispute arises, the instinctive question is usually: what does the contract say? That is often the right starting point, but rarely the end.

Introduction

Large construction projects operate through intricate contractual frameworks designed to allocate risk, define responsibilities, and regulate remedies. Yet even the most sophisticated contract cannot anticipate every eventuality, every commercial relationship, or every form of wrongdoing that may arise during the life of a project. When the contract is silent, incomplete, ineffective, or simply inapplicable, parties must look beyond it.

That is where extra-contractual remedies come into play.

Extra-contractual claims derive not from the express bargain reached by the parties, but from broader sources of law: tort, equity, restitution, statute, and, in civil law jurisdictions, obligations imposed by legislative codes. They may supplement contractual rights, operate alongside them, provide remedies where contractual claims are unavailable altogether or, in some cases, completely override the contract. For construction practitioners and parties, this can make (or break) a claim. In major disputes, it is rarely the contract alone that decides the outcome.

Recent years have illustrated this reality with particular force. Global supply-chain disruption, unprecedented material price increases, pandemics, insolvencies, and geopolitical instability have all tested the limits of contractual risk allocation. As parties searched for solutions to problems that their contracts did not fully address, extra-contractual ‘solutions’ have moved from the periphery to the centre of many construction disputes.

Over the coming weeks, we will be publishing a series of articles exploring extra-contractual remedies in construction disputes across: England and Wales, the UAE, Saudi Arabia, Kuwait, Hong Kong, and Australia.

In this article, we expand on the types of extra-contractual remedies available and how they impact construction projects. Subsequent articles in the series will examine specific remedies and causes of action in detail, with jurisdiction-specific analysis from our specialist lawyers across the globe.

Looking beyond the four corners of the contract

The distinction between contractual and extra-contractual claims is conceptually simple.

A contractual claim arises because one party has failed to perform an obligation undertaken under the contract. A contractor misses a completion date. A supplier delivers non-compliant materials. A consultant breaches a design obligation. The remedy is based on the bargain the parties agreed.

Extra-contractual claims are different. They are claims that arise independently of, or in addition to, the express terms of the contract between the parties. Because an extra-contractual claim does not derive its existence from the contract, it is not, at least in principle, constrained by the contract’s terms.

A contractor may have been induced to enter into a contract by a misrepresentation. A consultant may owe a duty of care in negligence. A party may have received a benefit which ought to be returned. An employer may be prevented from enforcing a completion date where its own conduct made compliance impossible. None of these rights depend entirely on the wording of the contract.

Importantly, extra-contractual claims are not necessarily alternatives to contractual claims. The same factual circumstances may generate claims in contract, tort, equity and restitution simultaneously. Experienced parties therefore look beyond the contractual framework and examine the full range of legal rights that may be available.

On a construction project, one must utilise the entire arsenal of available remedies, not just the ones that were agreed with the opposition.

Why construction disputes generate extra-contractual claims

Construction projects possess characteristics that make extra-contractual remedies particularly important.

Multiple parties and a web of relationships

Unlike many commercial transactions, construction projects rarely involve only two parties.

Employers, main contractors, subcontractors, consultants, suppliers/vendors, project managers, insurers and funders are often connected through a network of separate agreements. Loss suffered by one party is, in some cases, caused by someone with whom that party has no direct contractual relationship.

The law of contract is constrained by privity. The law of tort, restitution and statute is not.

As a result, many construction disputes rely on causes of action outside the contract to connect liability to the person responsible for the loss, or simply to the party with the deepest pockets.

This can create immediate problems due to the doctrine of privity. When a subcontractor installs defective work, the party most directly damaged may be the employer, yet the employer has no contract with the subcontractor. Similarly, where a building is sold on to a purchaser and significant defects emerge years later, the purchaser’s ability to recover is very limited unless there is a direct warranty, a statutory duty of care, or (as is common in the Middle East) a decennial liability regime.

Contractual gaps and unforeseen events

Construction contracts are among the most heavily negotiated commercial documents in existence. Yet no contract can predict every potential event.

Unforeseen ground conditions, extreme weather, global pandemics, supply chain crises, dramatic price escalation, wars, and geopolitical upheaval all create situations that the parties did not (or could not) contemplate when they signed the contract.

When contractual mechanisms prove inadequate, parties often look beyond the contract to broader legal principles for relief.

Insolvency risk

The construction industry has one of the highest rates of insolvency of any sector. When a contractor or subcontractor becomes insolvent, contractual rights may become commercially worthless even if they remain legally valid. Claimants therefore frequently seek alternative routes to recovery through negligence claims, equitable remedies, collateral warranties, statutory rights, and claims against professional advisers.

Information and reliance

Construction projects depend on information. Tenderers rely on representations concerning ground conditions, design development, programme requirements, existing infrastructure and project constraints. Employers rely on representations regarding expertise, resources and capability.

Where that information is inaccurate, the consequences can be substantial. Misrepresentation claims can provide remedies that differ markedly from those available for breach of contract and, in some circumstances, may offer claimants a significantly more favourable route to recovery.

The interplay between contractual and extra-contractual rights

One of the recurring themes of this series is that contractual rights and extra-contractual rights are not mutually exclusive; they constantly interact.

For example, where two parties are in a direct contractual relationship, the existence of that contract does not necessarily prevent a concurrent duty of care from arising in tort. In some instances, where a party has assumed responsibility for the provision of services in circumstances where it was reasonably foreseeable that the other party would rely on the quality of those services, a duty of care may co-exist alongside the contractual obligation, even between the same two parties on the same facts.

The choice of legal framing can have significant practical consequences in at least three key respects:

Limitation periods: A claim framed in tort may be subject to different limitation periods. In English law, the primary limitation period for a contractual claim is six years from the breach (12 years where the contract is executed as a deed). For a tortious claim, time generally runs from the date of damage. For latent defects, the provisions of the Limitation Act 1980 may extend that period significantly.
Measure of damages: The measure of damages may differ. Generally, contract damages are assessed by reference to the claimant’s expectation, i.e., what it would have received had the contract been performed. However, the assessment is not always straightforward. In cases involving repudiatory breach or wrongful termination, for example, the claimant’s recovery may depend on whether the repudiation was accepted or the contract affirmed, and remains subject to the ordinary principles of causation, remoteness and mitigation. By contrast, tort damages aim to restore the claimant to the position it would have been in had the tort not been committed. On particular facts, this difference can be stark.
Contractual exclusions: A well-drafted contractual exclusion or limitation clause may not automatically extend to protect a party against a concurrent tortious claim. Whether it does so depends on the precise language of the clause, construed against the background of the particular contract and the applicable law. This is particularly stark in relation to negligence.

Alongside contract and tort, the doctrines of equity and restitution provide a third body of law from which extra-contractual claims in construction may derive. Equitable doctrines such as estoppel, unconscionability and fiduciary duty may give rise to enforceable obligations independently of any contract. Moreover, a party may find recourse in restitutionary remedies such as unjust enrichment and quantum meruit.

For construction practitioners, understanding these interactions is often as important as understanding the contract itself.

Implied terms and obligations imposed by Law

A further aspect affecting construction projects is the extent to which obligations are imposed on parties by operation of law, regardless of (and in some cases despite) what the contract says.

In common law jurisdictions, terms may be implied into contracts by law: the implied duty to exercise reasonable skill and care, the implied term as to the fitness for purpose of a completed building, and the implied duty to co-operate with and not to hinder the other party in performing its obligations are all examples of terms that have been implied into construction contracts.

In civil law jurisdictions, like in the Middle East, civil codes impose obligations on parties regardless of the contract. One such example is decennial liability, which imposes a mandatory ten-year liability on contractors, engineers and architects for structural defects. This liability cannot generally be excluded or limited by contractual agreement; it operates as an obligation imposed by law on every builder, regardless of contractual terms. Similarly, liability for liquidated damages is also frequently contested based on the wording of different civil codes.

Common Law and Civil Law perspectives

Another theme running through this series is the comparison between different legal systems.

While the labels and doctrinal foundations may vary, many legal systems seek to address similar problems. What one jurisdiction describes as a tortious duty of care may be addressed elsewhere through statutory obligations or general principles of civil liability. What appears in one system as the prevention principle may emerge in another through doctrines of good faith or prohibitions against taking advantage of one’s own wrongdoing.

The comparison is particularly relevant in the construction sector, where projects are increasingly international and parties regularly come from, and work across, multiple jurisdictions.

What this series will cover

The articles that follow will examine six areas in which extra-contractual remedies most frequently arise in construction disputes.

1. Misrepresentation

Misrepresentation is, in our experience, one of the most powerful extra-contractual causes of action in construction disputes. Representations made during the tender stage (e.g. ground conditions, programme, specification, and the capabilities and experience of the parties) can have an enormous impact on price and risk allocation. Where those representations turn out to be false, the consequences can be transformative: not only may the contract be rescinded, but the measure of damages available for misrepresentation may be significantly more generous than that available for breach of contract.

2. Implied terms and obligations imposed by Law

We will explore in detail the full range of implied terms relevant to construction: implied terms as to the quality of goods and materials, fitness for purpose, reasonable skill and care, good faith (including the Braganza duty in English law), non-hindrance and co-operation, and the obligation to give possession of the site within a reasonable time.

Looking at the Middle East, we will also address how mandatory obligations imposed by civil codes sit beyond the reach of any contractual exclusion. Finally, we will consider two contractual devices frequently used in an attempt to exclude these implied terms: entire agreement and exclusion clauses.

3. The prevention principle and time at large

The prevention principle is one of the most powerful and frequently invoked (albeit not always successfully) extra-contractual doctrines in construction disputes. It provides that an employer cannot hold a contractor to a contractual completion date that the employer’s own acts or omissions have prevented the contractor from meeting. Where the prevention principle applies and the contract’s extension of time mechanism fails to cater for employer-caused delay, time is said to be “at large”. That means the employer loses the right to claim liquidated damages and the contractor’s obligation is only to complete within a reasonable time.

We will consider the scope and application of the prevention principle and the full range of employer acts that can trigger it. We will also examine the critical interaction between the prevention principle and contractual extension of time mechanisms (including the effect of situations where those mechanisms are drafted too narrowly).

We will also consider how this principle operates in civil law jurisdictions that do not recognise it as such, but which achieve similar results through good faith and the prohibition on taking advantage of one’s own breach.

4. Unjust enrichment and quantum meruit

Unjust enrichment and quantum meruit are restitutionary concepts that are distinct but closely related. They frequently arise in construction disputes where work has been carried out without a binding contract, where a contract has been rescinded or frustrated, or where work has been performed outside the contractual scope without an agreed price. Unjust enrichment is an independent cause of action with its own principled structure. On the other hand, quantum meruit (i.e., a reasonable sum for work done) is a remedy, not a cause of action, and may be awarded on a contractual basis or as the measure of relief in a restitutionary claim.

We will consider the circumstances where unjust enrichment and quantum meruit claims arise in construction. The article will also consider the position in English law, the Middle East (where civil law concepts of unjust enrichment operate through the codes), and the position in Hong Kong and Australia (with particular attention to the impact of the security of payment legislation in those jurisdictions).

5. Force Majeure, frustration and price escalation

Recent geopolitical developments have brought force majeure and price escalation to the forefront of construction disputes. We will examine force majeure as a contractual mechanism found in standard form contracts and the doctrine of frustration.

We will also look at price escalation, consider the contractual mechanisms under standard forms, the options available to parties where no effective contractual mechanism exists, the role of hardship and unjust enrichment in civil law jurisdictions, and the scope for judicial revision of contracts in extreme cases.

6. Non-contractual rights of termination

The final article will address one of the most consequential decisions that any party to a construction contract can face: whether, and how, to terminate. When express contractual termination rights fail (which may happen for a myriad of reasons), parties must turn to the general law.

We will consider repudiation, wrongful repudiation, anticipatory breach, and the doctrines of election and waiver. We will also address the civil law equivalents and consider the potentially severe consequences of wrongful termination, which may itself constitute a repudiatory breach.

Conclusion

The contract remains the foundation of every construction project. But construction disputes are rarely resolved by the contract alone.

Projects are undertaken by networks of parties, affected by unforeseen events, influenced by pre-contractual representations and shaped by legal obligations that exist independently of any written agreement. The result is that some of the most important rights and remedies available to parties may lie outside of the contractual framework.

Practitioners who look only to the express contractual terms risk missing some of the most powerful remedies available. Extra-contractual remedies are not an afterthought; in our experience, many decide whether a case is won or lost.

By examining extra-contractual remedies across common law and civil law jurisdictions, we hope to provide a practical guide to an area of law that is often overlooked until the dispute has already begun.

We look forward to exploring these issues in greater detail in the forthcoming articles in this series, which we expect to be published from September onwards.