Construction and infrastructure updater

May 2010

Introduction

Welcome to the construction and infrastructure updater.

Frustration, breach of contract and repudiation

In the following case, which was bought before the courts by way of a summary application for judgement, the court had to consider whether the contract between the parties was frustrated so that performance become impossible or whether in fact one or other of the parties had wrongfully repudiated the contract.

Gold Group Properties Ltd v BDW Trading Ltd (formerly known as Barratt Homes Limited) [2010] EWHC 323 (TCC)

The relevant facts

The owner of a site in Whyteleafe, Surrey entered into a development agreement with a developer (the Development Agreement) under which it was agreed that:

• the developer was responsible for building a large number of houses and flats (the Units) and selling the Units on behalf of the owner on long leases;
• the owner and the developer were to share the revenue generated by the sales of the Units;
• the developer was required to commence and proceed with the building works as soon as reasonably practicable and in any event within 12 weeks from the grant of vacant possession (1 March 2008) and complete the building works as soon as reasonably practicable but in any event within 30 months after the date of possession (1 January 2011); and
• the developer was to carry out the works with due diligence.

Despite being given possession of the site the developer took few or no steps to commence the works. The developer returned the keys to the owner on 13 March 2009.

The developer’s claim

The developer argued that:

• it was a condition precedent to the commencement and carrying out the works that the Units would fetch the minimum prices set out in Schedule 4 to the Development Agreement (the Minimum Prices);
• it was advised that a fall in the property market would mean that the Minimum Prices would not be achieved;
• therefore the developer was not obliged to commence work and/or the Development Agreement was frustrated; and
• further, the owner was in breach of contract for failing to renegotiate the Minimum Prices.

The owner’s claim

Conversely, the owner argued that the Minimum Prices had been incorporated into the Development Agreement to protect the owner by providing it with a guaranteed minimum revenue stream.  Accordingly, there was no justification for the developer’s wholesale refusal to commence the works.

The effect of the fall in the property market on the minimum price of the Units

At the time the developer’s works should have commenced in March 2008 the recession was beginning to bite which directly affected the developer’s business. However, at no time did the developer inform the owner that there were any problems with the proposed development or that there would be a problem with achieving the Minimum Prices for the Units. The developer first attended the site in the summer of 2008 and carried out very little or no work.

When the parties eventually met in November 2008, the developer reported that property prices had fallen by 20 per cent and that it was clear that sales of the Units would be below the Minimum Prices which would result in a loss making project. However, the developer did put forward an alternative set of payment terms for the sale of the Units. The owner rejected the proposed rearrangement and instead gave notice in December 2008 that the developer was in breach of its contractual obligations and required the breach to be remedied by 12 January 2009.

On 12 January 2009 the developer advised the owner that the contract was void and unenforceable on the basis that the Development Agreement had been discharged by frustration. The frustration had arisen because of the fall in property market values which had rendered performance of a fundamental part of the Development Agreement impossible as the parties would not be able to sell the Units at the Minimum Prices.

The owner rejected this claim in March 2009. Nothing else happened until 14 August 2009 when the owner wrote to the developer again identifying various breaches of contract.

The court’s approach to frustration of contracts

The starting point when considering whether a contract was frustrated was to consider the proper construction of the contract - Davis Contractors Limited v Fareham UDC [1956] AC 696 in which Lord Reid said:

“It appears to me that frustration depends, at least in most cases, not on adding any implied term, but on the true construction of the terms which are in the contract, read in light of the nature of the contract and of the relevant surrounding circumstances when the contract was made.”

Lord Reid followed the approach of Viscount Simon in British Movietone News Limited v London and District Cinemas Limited [1952] AC 166:

“If, on the other hand, a consideration of the terms of the contract, in the light of the circumstances existing when it was made, shows that they never agreed to be bound in a fundamentally different situation which has now unexpectedly emerged, the contract ceases to bind at that point - not because of the court in its discretion thinks it just and reasonable to qualify the terms of the contract, but because on its true construction it does not apply in that situation.”

For whose benefit were the minimum prices for?

On a proper construction of the Development Agreement the court did not agree with the owner’s claim that the benefit of the guaranteed Minimum Prices was solely for the owner’s benefit. On the contrary:

• the Minimum Prices were designed to apportion benefit and risk equally between the owner and the developer;
• the Minimum Prices were not fixed or set in stone or incapable of variation;
• the owner could take advantage of rising house prices so as to obtain a greater recovery for the land by fixing its recovery to a share of the revenue as opposed to reference to a specific sum. Conversely house prices might reduce so recovery would be less;
• the Minimum Prices could be reduced (or increased) by agreement between the parties; and
• other terms of the Development Agreement provided for good faith and approval processes which reflected the reality that this was a complex and detailed arrangement which required co-operation between the parties in order for it to work.

Was the ability to realise the Minimum Prices a condition precedent to the developer commencing work?

The real question before the court was whether the developer was entitled not to carry out any building works because of a “concern” about the level of prices that might be realised at a future date, i.e. that the risk that the Minimum Price might not be achieved at some stage in the future could act as a condition precedent to the commencement of the works.

The Court held that such a term would be extremely unusual and would need to be very clearly articulated - the Development Agreement contained no such term.

Frustration: the legal principles

In Davis v Fareham (the leading case on frustration in the construction context) the House of Lords rejected the contention that the contract was frustrated. The relevant principle was identified as follows:

“… frustration occurs whenever the law recognises that without default of either party a contractual obligation has become incapable of being performed because the circumstances in which performance is called for would render it a thing radically different from which was undertaken by the contract … it was not this that I promised to do.”

The House of Lords restated the test for frustration in National Carriers Limited v Panalpina (Northern) Limited [1981] AC 675:

“Frustration of a contract takes place when there supervenes an event (without default of either party and for which the contract makes no sufficient provision) which so significantly changes the nature (not merely the expense or onerousness) of the outstanding contractual rights and/or obligations from what the parties could reasonably have contemplated at the time of its execution that it would be unjust to hold them to the literal sense of its stipulations in the new circumstances; in such case the law declares both parties to be discharged from further performance.”

The Courts have repeatedly said that the doctrine of frustration operates within narrow confines. In Pioneer Shipping Limited v BTP Tioxide Limited (The Nema) [1982] AC 724 it was stressed that frustration was - “not likely to be invoked to relieve contracting parties of the normal consequences of imprudent commercial bargains.”

Bingham J in J. Lauritzen AS v Wijsmuller BV (The Super Servant Two) [1990] 1 Lloyds’ Rep 1 identified various propositions necessary to establish frustration, the principle propositions being that:

• frustration brought the contract to an immediate end;
• because frustration operated to “kill the contract”, it was not to be lightly invoked; and
• the essence of frustration was that it must be due to some outside event or extraneous change of situation.

The court had to consider whether the event was forseen or forseeable. The fact that the parties have foreseen the event but not made any provision for it in the contract will usually, not necessarily, prevent the doctrine of frustration from applying when the event occurs.

More recent Court of Appeal cases of frustration demonstrated that it is rare to find true instances of frustration.

Was the Development Agreement frustrated?

The developer argued that by no later than 12 January 2009 it was clear that the Units were unlikely to achieve the Minimum Prices, and since the fall in the property market was not the fault of either side it would be unjust to hold them to their literal obligations under the Development Agreement.

The Court found that the developer did not satisfy the legal test of frustration for the following reasons:

• the parties expressly contemplated/foresaw the possibility that the property market would drop and that the Minimum Prices would not be achieved;
• the Development Agreement made express provision for what would happen if that event occurred - i.e. the Minimum Prices would need to be reduced - the agreement remained capable of being performed;
• there was no reason for the law to intervene and dissolve the contract - there was no injustice in this case which required the “drastic remedy of frustration” because the Minimum Prices could be renegotiated or fixed by the expert pursuant to the dispute resolution mechanism; and
• there was no supervening event in this case - receipt of a gloomy forecast two years before the Units came onto the market was not “an event” in the proper sense of the word - it was not the happening of an event which could give rise to the frustration of the agreement.

Was the developer or the owner in breach of contract?

In the absence of frustration the court had to decide whether one or both of the parties were in breach of the terms of the Development Agreement and if so whether or not those breaches amounted to a repudiation of the agreement.

It was clear to the court that the developer was in breach of contract by 12 January 2009 (this was not ultimately disputed by the developer).

However, as to whether the owner was in breach of contract for failing to renegotiate the minimum prices under the Development Agreement, the court held that it was at least arguable that the owner’s refusal to come back with any financial counter-proposal of any sort, given the duty to act in good faith in the agreement, might constitute a breach of contract. A decision on this question would require further evidence.

The final question for the court was whether either of the parties were in repudiatory breach of contract and if so, whether that repudiation was accepted by the other party?

Repudiation: the legal principles

The court briefly set out the principles for repudiation:

• If a breach of contract amounted to the manifestation of an intention on the part of the wrongdoer no longer to be bound by the terms of that contract, the breach will be treated as repudiatory and may be accepted as such by the innocent party.
• Whether or not the breach would be regarded as repudiatory depended largely on the nature of the contractual term in issue and the nature and extent of the breach.
• A failure of performance which constituted a breach of condition entitled the innocent party to treat himself as discharged from further liability (Chitty on Contracts, 30th ed, paras 12-025 and 24-040).
• For repudiation, the breach must “go to the root of the contract” (Federal Commerce and Navigation Co. Ltd v Molena Alphas Inc. [1979] AC 757, 779.
• The general rule was that the contract is not terminated until the innocent party accepts the repudiation, although an act of acceptance requires no particular form (Stocznia Gdanska SA v Latvian Shipping Co. [2002] 1 Lloyds’ Rep 436.

Did the developer repudiate the Agreement?

On the facts it appeared that the developer repudiated the Development Agreement no later than 12 January 2009 - they failed to comply with their critical obligations under the Development Agreement - to commence, carry out and complete the building works. These were conditions of the agreement (not just intermediate terms) and the developer’s failure to comply went to the “root of the contract”.

The court left open the possibility that the owner might also be in repudiatory breach of contract for failing to renegotiate the Minimum Prices with the developer.

Did the owner accept the developer’s repudiation?

The court held that although it was clear from 12 January 2009 that the developer was no longer prepared to work on site which would normally give rise to the clearest case of repudiation, the owner’s acceptance of that repudiation was less clear:

• the owner did not reply to the developer’s letter of 12 January 2009;
• when the owner did reply in March 2009 their response was equivocal - the letter required further examination against a factual background;
• there were no details of a critical meeting between the parties in March 2009 - what was said during that meeting may be of critical relevance as to whether the repudiation by the developer was accepted or not by the owner; and
• nothing happened for a further five months between the parties.

The court held that the events after 12 January 2009 were not clear enough for the court to give summary judgement on the owner’s repudiation claim.

Editors’ comments

This case is a useful reminder of how difficult it is to found a successful claim on frustration. As Bingham LJ made plain in Super Servant Two, frustration only arises at all “to give effect to the demands of justice, to achieve a just and reasonable result, to escape from injustice”. But there was no injustice in this case which required the drastic remedy of frustration.

Secondly, this case highlights the importance of the innocent party’s role in clearly accepting a repudiation of the contract by the wrongdoer. Although an act of acceptance of a repudiation requires no particular form, if the repudiation is not accepted and the innocent party elects to treat the contract as continuing, then it will remain in existence for the benefit of the wrongdoer as well as for the innocent party (Suisse Atlantique Societe d’Armement Martime SA v MV Rotterdamsche Kolen Centrale [1967] 1 AC 361). Acceptance of the repudiation by the owner was surprisingly unclear in this case.

View: Gold Group Properties Ltd v BDW Trading Ltd (formerly known as Barratt Homes Limited) [2010] EWHC 323 (TCC)

Adjudication: dispute resolution provisions in GC Works/1

In the following case, the court considered the meaning of the dispute resolution clause in the CG Works/1 Form of Contract; and the use of Part 8 proceedings during an adjudication to seek a declaration that the adjudicator had no jurisdiction to hear the dispute.

Banner Holdings Ltd v Colchester Borough Council [2010] EWHC 139 (TCC)

The employer (Colchester) engaged the contractor (Banner) to build a visual arts facility in Colchester under GC Works/1 Form of Contract.

Disputes arose between the parties. The contract provided that the employer could determine the employment of the contractor for cause or at will. The employer determined the contractor’s employment under the contract on the basis of a number of contactor failures under clause 56. The contractor challenged the determination by commencing proceedings in the TCC in the autumn of 2009. A trial date was set for November 2010.

The employer separately issued a notice of adjudication seeking a declaration from the adjudicator that the contract had been validly determined for cause.

The contractor then issued Part 8 proceedings in the TCC seeking a declaration that the adjudicator had no jurisdiction to decide the dispute that had been referred to him on the basis that condition 59(8) of the contract expressly provided that an adjudicator did not have the power to overrule a decision of the employer in respect of a determination by the employer.

There were two issues before the court:

• Issue 1: Did the adjudicator have jurisdiction or did condition 59(8) of the contract expressly provide that the adjudicator could not overrule a decision of the employer concerning the determination of the contract.
• Issue 2: Whether the terms of the contract complied with section 108 of the Construction Act and if not should it be replaced with the provisions of the Scheme for Construction Contracts 1998 (Scheme).

Issue 1: construing the relevant provisions

The contractor argued that the employer was asking the adjudicator to vary a decision made by the employer under condition 56 (to determine the employment of the contractor) and that under condition 59 (8) (c) that was not something that the adjudicator had the power or jurisdiction to do.

Condition 59 (8) provided

“… the adjudicator shall have power to vary or overrule any decision previously made under the contract by the Employer …, other than …

(c) decisions of the Employer to give … notice of determination under Condition 56 (1) [determination for cause];

(d) decisions or deemed decisions of the Employer to determine the Contract under Condition 56 (8) [determination at will];

In relation to decisions in respect of those matters, the Contractor’s only remedy against the Employer shall be financial compensation.”

The employer submitted that all they were asking the adjudicator to do was find that the determination was valid under condition 56.

The court found that there was no question of the dispute falling outside the adjudicator’s jurisdiction. The court reasoned as follows:

• Condition 59 (8) (c) did not prevent the adjudicator considering whether the employer had validly determined the contract under condition 56 (1). Even if the adjudicator concluded that there had not been a valid determination for cause this would not at law amount to the varying or overruling of the original decision to terminate the contract. All the adjudicator would be doing would be to identify the status of the determination and its financial consequences. If the adjudicator came to the view that the determination was not for cause, then the determination would automatically be a deemed determination at will but that did not amount to a variation or an overruling of the original decision to determine.
• The draftsman of condition 59(8) intended to differentiate between the decision to terminate itself (which was not something that could be varied or overruled once it had been taken) and the consequences of that decision and the financial effect of the determination, which could be referred to adjudication.
• Condition 59(8) taken as a whole expressly preserved the contractor’s right to argue in an adjudication that the particular decision to terminate was wrong and that financial compensation should be made to them as a result of that wrong decision. The final part of condition 59 (8) “In relation to decisions in respect of those matters, the Contractor’s only remedy against the Employer shall be financial compensation” made it clear that the adjudicator could consider whether or not one of the listed decisions to terminate was correct because it would only be if the adjudicator concluded that the decision was wrong that the adjudicator would then be in a position to award the contractor financial compensation.

Issue 2: Did the provision comply with the Construction Act

Did condition 59 comply with the provisions of section 108 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act)?

The court’s (obiter) view was that if condition 59 (8) was read as preventing the contractor from referring the dispute to adjudication then, the provision failed to comply with section 108 of the Construction Act. Condition 59 (8) sought to limit the adjudicator’s power and jurisdiction whereas section 108 contained no qualification or limit on the nature, scope and extent of the disputes that could be referred to adjudication under a construction contract.

In addition, the court considered that another part of condition 59 was also non-compliant with the Construction Act. This was condition 59 (5) which provided that the adjudicator’s decision should remain valid even if it was issued outside the 28 day statutory period for reaching a decision. The judge considered this to be non-compliant following the authorities of Epping Electrical Company Limited v Briggs & Forrester Plumbing Service Limited [2007] EWHC 4 (TCC) and Aveat Heating Limited v Jerram Falkus Construction Limited [2007] EWHC 131 (TCC), both of which we reported on in our February 2007 Updater.

Application of the Scheme: all or part

Section 108 (5) of the Construction Act provided that if the adjudication provisions of the contract did not comply with the Construction Act “the adjudication provisions of the Scheme for Construction Contracts [would] apply”.

There is a debate in the authorities as to whether section 108 (5) means either:

• that the provisions of the Scheme as a whole should apply; or
• that application of the Scheme should be limited to incorporation of those parts of the Scheme which were necessary to replace those terms which did not comply with the Construction Act, (sometimes called a piecemeal approach)

(see John Mowlem Limited v Hydra-Tight Limited [2002] 17 Const LJ 358 and Aveat Heating).

The court considered, albeit tentatively, that all the provisions of the Scheme (at least in relation to adjudication) should replace the contract terms regardless of how many (or how few) of those terms failed to comply with the Construction Act. The judge did not consider that the court should have to piece together a compliant set of provisions from two different sources.

Editors’ comments

There have been several cases recently where parties have issued Part 8 proceedings after an adjudication but this decision confirms that Part 8 proceedings can be brought during an adjudication. However, it remains the case that Part 8 proceedings should only be brought where there is unlikely to be a substantial dispute of fact.

The case also provides (obiter) confirmation that where there are non-compliant adjudication provisions in a contract, all the adjudication provisions in the Scheme will replace the contractual adjudication provisions.

Users of the GC/Works/1 contract should be aware of the observations of the court that Condition 59 (5) is likely to be held non-compliant with the Construction Act if it deprives a contractor from its right to adjudicate certain disputes.

View: Banner Holdings Ltd v Colchester Borough Council [2010] EWHC 139 (TCC)

Adjudication and the Scheme of Construction Contracts

In the following case the court had to consider the effect of so-called “Tolent clauses” and also whether a contractual interest rate constituted a substantial remedy within the meaning of the Late Payment of Commercial Debts (Interest) Act 1998 (Late Payment Act).

Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC)

The employer (WW Gear) engaged the curtain walling trade contractor (Yuanda) to provide glazed curtain walling as part of the construction of a very substantial luxury hotel in the old GLC building in London. The contract between the parties was based on the JCT Trade Contract with a schedule of bespoke amendments to the standard form and was one of 30 similar trade contracts on the project.

Although there was some negotiation between the parties of the employer’s schedule of amendments, two of the clauses in the employer’s schedule of amendments were not discussed or altered. These clauses were:

• an amendment concerning the adjudication provisions of the contract; and
• an amendment to the standard wording that interest on late payments by the employer would be paid at the rate of 5 per cent over base rate to 0.5 per cent over base rate.

The trade contractor brought proceedings under Part 8 of the CPR seeking declarations that:

• the adjudication provisions in the contract should be replaced by the provisions of the Scheme for Construction Contracts 1998 (Scheme); and
• the contractual rate of interest of 0.5 per cent above base rate on late payment was void by reason to the Late Payment Act.

The adjudication provision

The amended adjudication clause 9A provided as follows:

“The adjudication procedure will be the TeCSA Adjudication Rules (amended to require nomination by the RICS and joining of the members of the professional team in a multi-party dispute situation … and regardless of the eventual decision in the adjudication or in subsequent litigation the Trade Contractor agrees that should he make a reference to Adjudication … then he will be fully responsible for meeting and paying both his own and the Employer’s legal and professional costs in relation to the Adjudication.”

The issues before the court in relation to clause 9A were:

• Whether the adjudication provisions of clause 9A complied with the adjudication requirements of section 108 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act); if not what should replace them; and
• Whether clause 9A was void for uncertainty?

Did the adjudication provisions in clause 9A conflict with section 108 of the Construction Act?

The trade contractor argued that the amended adjudication provision imposed on them the entirety of the employer’s financial costs of the adjudication and was a fetter to the trade contractor’s ability to refer a dispute to adjudication at any time as was required by section 108 of the Construction Act.

The employer relied on the case of Bridgeway Construction Ltd v Tolent Construction Ltd (2000) CILL 1662. In Tolent a contractual provision requiring the referring party to an adjudication to bear all of the costs and expenses of both parties (including legal costs and adjudicators fees and expenses) was not in conflict with the Construction Act.

The Court recognised that the Construction Act and the Scheme were silent on the question of costs and considered that a contractual provision that conferred on an adjudicator a power to award the parties’ costs would not be in conflict with the Construction Act or the Scheme.

However, the court considered that a contractual provision which required a contractor to bear the legal and professional costs of the employer in any referral to adjudication would effectively deprive the contractor of its remedy (up to the amount of the employer’s costs). This was because if a party had to pay the other party’s costs of a referral to adjudication irrespective of the outcome then it would not be worth making a referral unless the sum it expected to recover would significantly exceed the likely costs of the other party.

In addition it was clear to the court that the requirement to permit the joinder of a member of the professional team where there was a multi-party dispute would make the costs burden on the contractor even more oppressive.

As a result the court considered that the adjudication provision was directly contrary to the purpose of the Construction Act and the Scheme since it would limit the trade contractor’s freedom to refer a dispute to adjudication at any time and in some circumstances - such as in a dispute involving a relatively small amount of money - deprive the trade contractor of a remedy altogether. The court therefore disagreed with the reasoning of the court in the Tolent case (although the court did observe that the Tolent case had been given when adjudication was a fairly new procedure and experience of the process was limited).

What should replace the non-compliant adjudication provisions in clause 9A?

The court noted that there was a difference in the language used in the legislation concerning what was to happen in the event on non-compliance with the adjudication provisions of section 108 of the Construction Act and the payment provisions of sections 109 - 113 of the Construction Act. In the event of non-compliance with the adjudication provisions “the adjudication provisions of the Scheme apply”; in the event of absence of agreement on payment matters then “the relevant provisions of the Scheme apply”.

The court considered the authorities including Aveat Heating v Jerram Falkus Construction [2007] EWHC 131 and Banner Holdings v Colchester Borough Council [2010] EWHC 139 and held:

• It was “reasonably clear” that as a matter of construction, if the adjudication provisions were non-compliant with section 108 of the Construction Act then those provisions were replaced in their entirety by the adjudication provisions in Part 1 of the Scheme “lock,stock and barrel.”
• If the payment and notice provisions were non-compliant with the Construction Act (sections 109,110 and 113) the court’s provisional view (obiter) was that the correct approach was that that the Scheme would fill the gaps in the express terms of the contract.

As a result Clause 9A was replaced in its entirety by the adjudication provisions in Part 1 of the Scheme.

Did the joinder provisions in clause 9A lack certainty or conflict with section 108 of the Construction Act?

In view of the court’s decision, it was not necessary to consider whether the joinder provisions in clause 9A lacked certainty but the court set out its view in case a similar point arose in another case.

The trade contractor argued that the requirement in clause 9A that the TeCSA Adjudication Rules be amended to “require joining of the members of the professional team in a multi-party dispute situation” lacked contractual certainty and was difficult to operate in practice.

However, the court considered that proper effect could be given to the clause by limiting its application to the joinder of members of the professional team when the dispute involved an issue which needed to be resolved against that professional as well as the trade contractor but would not extend to an adjudication about the professional’s liability.

In the case of a dispute between the trade contractor and the employer as to whether a defect resulted from poor workmanship or poor design it would be in the interests of the employer to have the issue of whether the defect was one of design or workmanship resolved as between himself and the contractor and also as between himself and the professional. However, the clause would not extend to a dispute involving the issue of the professional’s liability as between the professional and the employer as this would amount to a separate dispute to the issue of liability as between the contractor and the employer.

The interest provision

The rate of interest applicable on late payment was changed from 5 per cent above base rate stated in the JCT standard form to 0.5 per cent above base rate.

The trade contractor argued that the 0.5 per cent rate of interest was not a substantial remedy within the meaning of section 8 (1) of the Late Payment Act and the provision was therefore void. As a result the trade contractor claimed to be entitled to interest at the statutory rate.

The Late Payment Act is generally applicable to construction contracts and provides for a high rate of interest to run on commercial debts which are not paid on time. The statutory rate of interest is currently 8 per cent above the Bank of England base rate.

Many standard forms of contract (including the JCT form of contracts) and bespoke construction contracts substitute a lower rate of interest than the statutory rate. Where the parties agree a specific contractual provision allowing interest, on the assumption that those arrangements provide a “substantial remedy” for late payment, the Late Payment Act will not apply.

The question was whether the contractual rate of 0.5 per cent above base rate was a substantial remedy within the meaning of the Late Payment Act.

A substantial remedy

Under section 9(1) of the Late Payment Act a contractual remedy for late payment is regarded as a substantial remedy unless:

• “(a) The remedy is insufficient either for the purpose of compensating the supplier for late payment or for deterring late payment; and
• (b) It would not be fair or reasonable to allow the remedy to be relied on to oust or (as the case may be) to vary the right to statutory interest that would otherwise apply …”

In determining whether the remedy was substantial, section 9 (1) of the Late Payment Act provided that regard had to be had “to all the relevant circumstances at the time the terms in question are agreed.” This involved a consideration of the statutory criteria of:

• the benefits of commercial certainty;
• the strength of the bargaining positions of the parties;
• whether the term was imposed by one party to the detriment of the other; and
• whether the trade contractor received an inducement to agree to the term.

A substantial remedy: the court’s view

As a general point of construction, the court considered that it had not been the intention of Parliament to treat a contractual rate of interest as not being a substantial remedy simply because it was lower than the statutory rate. Rather, the statutory rate should be regarded as the penalty that a contracting party paid for failing to provide a fair remedy for late payment.

The court should bear also bear in mind the following when applying the statutory criteria:

• Where the contractual rate of interest for late payment was not obviously unreasonable and appeared to have been the product of genuine agreement then the contractual rate of interest should not be lightly set aside.
• Those responsible for drafting the JCT contract must have considered 5 per cent above base rate to be a fair rate of interest for late payment. A rate of interest of 5 per cent above base rate should therefore be considered to be a substantial remedy even though it was less than the statutory rate of interest.
• A rate of 3-4 per cent above base rate might also be regarded as a substantial remedy if it had been specifically discussed and agreed between the parties.

Taking all the factors into account it was clear to the court that:

• 0.5 per cent over base rate as a rate of interest for late payment could not be regarded as a substantial remedy within the meaning of the Late Payment Act in the absence of special circumstances (there were none here).
• There was no reason why it would be fair or reasonable to allow the contractual rate of 0.5 per cent to oust the statutory rate. The rate of interest had effectively been imposed on the trade contractor and it would not be fair or reasonable to allow the employer to take advantage of the fact that during pre-contract negotiations the trade contractor failed to spot the amendment to the interest rate.

Therefore the statutory rate of interest of 8 per cent above base rate was substituted for the contractual rate of 0.5 per cent.

Editors’ comments

This case confirms that Tolent clauses are likely to be contrary to the purpose of the Construction Act. Such clauses will in any event be outlawed by section 141 of the Local Democracy, Economic Development and Construction Act 2009 once it comes into force. Under the proposed changes, parties will no longer be able to agree in advance of an adjudication which party will pay the other side’s legal costs. Parties will still be able to give the adjudicator jurisdiction to allocate his own fee and expenses between them, if they do so in writing in their construction contract or after the adjudication notice.

It is interesting to note that interest as low as 3 - 4 per cent above base rate might constitute a substantial remedy in appropriate circumstances especially given the very low rates of interest at present.

View: Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC)

Suspension and repudiation

In the following case, the court had to consider whether:

• a contractor’s wrongful suspension constituted a repudiation of the contract; and
• whether a contractor could be excused from its liability for defects if the contract administrator failed to require the contractor to remedy defects which should have been apparent on attendance at site.

Mayhaven Healthcare v Bothma & Anor (t/a DAB Builders) [2009] EWHC 2634

The employer engaged the contractor under a JCT Intermediate Form of Building Contract (1998 edition) incorporating amendments 1 - 5 (Contract). The work consisted of the demolition of part of the nursing home in Plymouth and the construction of a three-store extension to increase the number of beds and provide new facilities at the home.

Disputes arose between the parties which were referred to adjudication. On 12 June 2006, the adjudicator directed the employer to pay the contractor certain sums.

The contractor claimed that these sums were not paid and suspended work, and completely withdrew from the site. The employer maintained that the contractor’s suspension amounted to a repudiatory breach (which it accepted) as the employer had paid the disputed sums in a subsequent valuation.

The contractor commenced arbitration proceedings in May 2007 which led to an arbitrator’s award on 30 April 2009. The arbitrator held that the contractor had in fact been paid the relevant sums and that the contractor’s suspension was improper. However, the arbitrator went on to decide that the improper suspension did not amount to a repudiatory breach of contract.
Under section 69 of the Arbitration Act the employer sought to appeal as a question of law the Arbitrator’s decision that the improper suspension did not amount to a repudiatory breach of contract.

Repudiatory breach of contract: the arguments

The employer submitted that the suspension by the contractor was a clear breach of the contractor’s obligation to “regularly and diligently proceed with the Works” and that breach of this obligation permitted immediate termination of the Contract. Alternatively, the employer submitted that the contractor’s breach went to the root of the Contract because a refusal to carry out the work or an abandonment of the work, without lawful excuse, before it was substantially completed was sufficiently serious to amount to a repudiation.

The contractor resisted the proceedings on the basis that the arbitrator had considered “the whole combination of circumstances that existed at the time that the employer sought to determine the builder’s contract” and that as a result the employer was seeking to challenge the Arbitrator’s findings of fact as opposed to a question of law.

Did a wrongful suspension of works amount to a repudiatory breach of contract?

The court found that the arbitrator had correctly set out the principle of law that a breach of a contract would be repudiatory if it went to the root of a contract. But the court went on to find that:

• A wrongful suspension which gave rise to a failure to proceed regularly and diligently would vary in seriousness, depending “on the breach and the facts and the circumstances of the case”. It would not automatically amount to a repudiatory breach.
• There was no absolute refusal to carry out the work or an abandonment of the work on the part of the contractor.
• The contactor’s genuine but mistaken belief that the monies awarded by the adjudicator had not been paid was one factor to be taken into account.
• The arbitrator was entitled to take into account the contents of the contractor’s suspension letters which set out the contractor’s expressed willingness to complete the works once it had been paid.

The arbitrator had not made an error of law. The arbitrator was entitled to come to the conclusion, taking account of the contractor’s breach and all factors and circumstances of the case, that the contractor’s suspension of the works was not a repudiation.

JCT contracts and defects

Another issue that arose in connection with this case concerned defects in the works.

The employer maintained that the contractor failed to construct the foundations in accordance with the details of the structural engineer’s drawing. The arbitrator found that the contractor was not liable for the defective work and in reaching this conclusion the arbitrator apparently relied on the fact that the contract administrator had impliedly approved the work.

The employer argued that the arbitrator had erred in law because implied approval of defective works by a contract administrator did not relieve a contractor of liability for that defective work.

The legal principles

The court accepted that the following passages from Hudson summarised the law on this issue:

• In the absence of express authority “It cannot be too strongly emphasised that the Architect/Engineer … will have no authority whatever to waive strict compliance with the contract.”
• In relation to allegations that the owner has waived or is estopped from claiming damages because the breaches of contract were visible during the course of routine visits to the site, Hudson states:

“no estoppel or waiver could arise unless some matter was expressly brought to an A/E’s attention by the contractor and he was expressly asked for and gave his approval.”

(Hudson 11th edition, at para 2-058)

The court held that these passages were consistent with what was said by Lord Upjohn in East Ham Corporation v Bernard Sunley [1066] AC 406 at 444:

“It seems to me most unlikely that the parties to the contract contemplated that the builder should be excused for faulty work at an early stage merely because the architect failed to carry out some examination which would have disclosed the defect …

For my part, to reach that result I should want to find quite clear words in [the contract] relieving the builder of liability …”

It was clear to the court that the arbitrator had made an error of law and the appeal was successful on this issue.

Editors’ comments

The case is interesting as it confirms that there is no simple answer as a matter of general principle as to whether a contractor’s wrongful suspension of the works amounts to a repudiatory breach. The answer will depend on the terms of the contract, the breach or breaches of contract and all the facts and circumstances of the case.

The case also confirms that a contractor who is in breach of contract in carrying out defective works is not to be relieved of liability for those defective works by any implied approval derived from the contract administrator’s failure to draw the contractor’s attention to defective works which should have been apparent when the contract administrator attended the site.

View: Mayhaven Healthcare v Bothma & Anor (t/a DAB Builders) [2009] EWHC 2634