Ex-gratia payments to a Contractor are generally payments which are one not legally due under the construction contract or otherwise and usually represent some form of compensation paid to the contractor on grounds of hardship, sympathy or fair-play. Ex-gratia payments are not payments which need to be certified by the Architect, Engineer or Contract Administrator and are normally negotiated or proposed by the Employer to the Contractor directly.
A hardship payment can be described as one which is made without any legal obligation to do so. It is entirely discretionary. Hence, a loss by a Contractor on a contract is not itself a justification for making an ex-gratia payment. The fact is that the risk of loss is inherent in commercial contracts and the Contractor will have contemplated this prior to entering into the contract with the Employer for the Works
Where a situation arises where because of exceptional circumstances, the Contractor can demonstrate that he has indeed suffered undue hardship through perhaps circumstances outside his reasonable control and which could not have been foreseen or avoided the Employer may consider it reasonable to make an ex-gratia payment to a Contractor.
Any discussion, communication, correspondence and indeed payment in respect of such ex-gratia payment should in all circumstances carry the ‘without prejudice’ caveat.
Ex-gratia payments would normally be deferred until after the contract has been completed and the final account resolved, because only then can the final loss and hardship to the Contractor be assessed and as the ex-gratia payment is not a legally due amount it would normally be considered by the Employer as a form of bonus payment for completing the works under the hardship incurred by the Contractor. The Employer may consider earlier payment on ex-gratia basis, considering the circumstances in question, such as in the attempt to ease out the severe crisis in the cash flow so as not to affect the progress on site, but this money would not be recoverable through the contract should the Contractor fail thus Employer need to exercise caution before considering such an action.