Construction update - September 2007

Fixed price contract means just that

Case summary

If you, a contractor, instruct your subcontractor to omit items of work from his subcontract, you would expect to receive a corresponding reduction in the price-wouldn't you? Not in this case, said the Court of Appeal. The contract was a true fixed price contract, with no provisions for variations. What is more, the court refused to imply any. So the contractor could omit the work, but still had to pay the full fixed price.

Comment

The contract was of course rather unusual. Nevertheless, the case is a useful reminder of the reasons why you need clauses in contracts allowing the works to be variedparticularly where the contract is stated to be a fixed price one.

SWI Ltd v P&I Data Services Ltd (04/07/07)

Employers' rights on contractor insolvency-more law

Case summary

This is the first reported case since the House of Lords decision in Melville Dundas Limited (In Receivership) v George Wimpey UK Ltd (see our briefing note in May 2007). That case confirmed that, on a contractor insolvency under the JCT contract, the termination clause, which allows the employer to postpone making any further payments until he has quantified his losses, is perfectly enforceable, and in particular, is not defeated by the requirement in s.111 of the Housing Grants, Construction and Regeneration Act 1996 to serve a withholding notice. What was unclear was whether this applied only to terminations on insolvency, or to any termination. His Honour Judge Coulson QC confirmed the latter. Here the employer had terminated the contractor's employment because of its failure to proceed regularly and diligently (the employer was however defeated on a secondary point, relating to clause 27.6.5.1 of the JCT 1998 Contract, because it had withheld a number of payments due over a period of some months without serving any withholding notices).

Comment

The Melville Dundas decision is an example of the court straining the words of the Construction Act in order to preserve a clause in the employer's favour that has protected employers for many years. The judge was bound to follow its logic, but some will argue that the courts should not find ways around the Act merely to cater for what they see as deserving cases.

Pierce Design International Ltd v Mark Johnston & Anor (17/07/07)

Actions speak louder than words

Case summary

A property owner entered into a contract with a builder for the construction of an extension. Part of the works were not constructed in accordance with instructions. Before completion the property owner's solicitors wrote to the builder alleging breach of conduct, stating that the builder had no authority to re-enter the property and asserting that remedial works were to be undertaken on the property owner's terms. Proceedings were commenced by the property owner for return of the interim payments and damages for defective work. However, the proceedings were unsuccessful. The court held that the letter from the owner's solicitor amounted to a notification that the owner regarded the contract as being at an end. This was unjustified and a repudiatory breach of the contract by the owner herself. The builder was therefore entitled to damages.

Comment

Although the property owner never expressly stated that she was treating the contract at an end she was deemed to have done so by her conduct. Aggressive letters asserting new conditions and preventing existing rights may be sufficient in themselves to communicate an intention no longer to be bound by the contract, even if this is not your intention. They may also be a repudiatory breach of contract, particularly if the other party is not in serious breach of the contract itself.

Margaret Tomlinson v Iain Wilson (T/A Wilson & Chamberlain) (11/05/07)

Admissibility of pre-contract negotiations

Case summary

The claimant wanted to refer in evidence to certain pre-contract statements made in the course of negotiations of an option deed (in an attempt to establish the true construction of one of the clauses in that deed). The Court confirmed that only if it was alleged that the parties had negotiated using terms that had a particular agreed meaning (as in Rugby Group Ltd v Proforce Recruit Ltd (2006)) or that there was an estoppel by convention, or that the contract should be rectified, was evidence of pre-contract negotiations admissible. Admissibility of pre-contract negotiations as an aid to the construction of a written contract that was intended to contain all the agreed terms is not permissible.

Comment

In the Rugby Group case, the Court exceptionally allowed evidence of pre-contract negotiations, where the parties had used a term ("preferred supplier status") that, it was alleged, bore a privately understood meaning between the parties. However, parties should ensure that the wording of each clause in their contract reflects their agreed intentions. The circumstances in which a party can rely on pre-contract negotiations to interpret contractual provisions are limited.

Great Hill Equity Partners II LP v Novator One LP and others (22/05/07)

Joint names insurance overrides your own negligence

Case summary

The claimant had been negligent in the design and installation of a fire protection system at the defendant's new assembly plant causing loss and damage to the defendant. The claimant argued that even though it was at fault, and had given an indemnity in respect of latent defects, the defendant was not entitled to compensation. Under the terms of the contract, it argued, the defendant was responsible for taking out joint names insurance, which it had failed to do. The court agreed. The joint names insurance would have covered the claimant for the type of losses suffered. The indemnity did not help the defendant, as it had to be read as subject to the special joint names insurance provisions set out in the contract. On that basis the claimant was not liable to pay compensation to the defendant.

Comment

Parties must ensure that they comply with all their insurance obligations under the contract. Where a building owner requires an indemnity from a contractor, he should consider where this fits in with insurance and in particular, whether he is intending any contractor's negligence to be covered by the terms of the "Contractor's All Risks" (or similar) policy.

April 2008 - The Court of Appeal have subsequently overturned this decision.

Tyco Fire and Integrated Solutions (UK) Ltd v Rolls-Royce Motor Cars Ltd (29/06/07)