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Enforcement of contracts
To sign or not to sign
Over the years, I have regularly been contacted by clients looking for guidance on contract matters. I always ask two questions initially. The first question is whether they have a signed contract. More times than I wish the answer comes back that either (a) nothing in writing or (b) contract documents exist but they have not got around to signing the contract yet although works/services have commenced.
The second question relates to what documents have been included in the contract document pack. Has the sequence of contract documents (as defined in the contract terms) been followed? The answer to this can sometimes be no or, in the other extreme, that all procurement documents and tender responses have been attached.
These answers can provide clients with severe difficulties in enforcing contracts. Two recent court cases illustrate this perfectly and highlight why good contract management at the outset can save time and cost later on.
In Anchor 2020 vs Midas Construction, Anchor invited tenders to construct a retirement village. The contract was based on an amended JCT Design and Build contract with Anchor’s design consultants being novated to the selected contractor. Anchor accepted a tender from Midas, the tendered price being £18.2m. Anchor issued a letter of intent on 10 September 2013 as the parties were not able to agree on the contract although, eventually, five letters of intent were required covering the period up to 30 June 2014.
As part of the tender, Anchor asked bidders to submit a summary risk register so that potential risks were identified and contingency costs allocated to await further site surveys and design.
The risk register proved an issue. Anchor insisted that the nature of design and build is that the contractor assumes all risk whereas Midas countered that the register highlighted risks, which they confirmed were Anchor’s risks as client.
Despite this, the Contract Sum Analysis and Contract Sum were agreed together with the Schedule of Amendments to the JCT D&B. Midas then put together a set of contracts documents and issued a signed contract to Anchor’s Employer’s Agent on 21 July 2014.
During this period, the forms of novation were agreed between Anchor and Midas although not by the design consultants themselves.
Anchor’s EA checked the contract documents and noted that superseded documents had been used and that three discrepancies were present but more importantly, that Midas had included the risk register. The EA disputed the inclusion and did not press Anchor to sign the contract.
Matters did not resolve themselves although Midas at all times progressed the works. Anchor then decided in January 2015 that it could accept the register being included and issued a set of signed contract documents. However, Midas had now decided that it could not live with the risk register being included and notified Anchor that its offered risk register was withdrawn and that it wanted to hold further discussions on works costs.
The works proceeded to completion but disputes arose during agreement of the final account and Anchor went to court to determine preliminary issues. Anchor claimed that a binding contract was entered into on 21 July 2014. Midas countered that no binding contract had been entered into and that it should be reimbursed its costs on a quantum meruit basis. Midas claimed £28m on a quantum meruit basis but that, if a contract did exist that included the risk register, then its claim would be £33m.
The judge agreed with Anchor that a contract was entered into on 21 July 2014. He cited several points that supported his decision but in particular he confirmed that the existence of a contract is a matter for the courts to decide objectively by considering the communications between the parties, either words or conduct, and whether that leads to a conclusion that the parties intended to create a legal relationship and had agreed all the terms that they regarded as essential.
Whilst Anchor were successful in that the courts agreed with its claim that a contract had been entered into, the case does highlight the need for contract documents to be agreed before works commence, and the contract to be signed, otherwise clients can find that their leverage to agree the documents is lost once the works have commenced – which client is going to remove a contractor after works commencement on the basis that the contract documents cannot be agreed. Where contracts are being decided on communications between the parties then other points can be brought into play as part of the dispute such as a party claiming that variations were agreed at meetings or orally agreed. This in all likelihood will be to the disadvantage of the client.
“To be safe should I just include all documents?”
The second case is Clancy Docrwa vs E.ON. In this case, E.ON subcontracted with Clancy Docrwa for trench excavation works in relation to a district heat network that E.ON were installing. An amended JCT Sub-Contract was used as the contract basis.
As part of its tender submission, Clancy set out certain conditions that were not included in its tender including encountering adverse ground conditions. The contract defined the Sub-Contract Works as those works set out in the “Numbered Documents” attached to the Sub-Contract. These Numbered Documents included Clancy’s tender submission and Post Tender meeting minutes (which also referred to Clancy’s exclusions).
During the works, adverse ground conditions were encountered. Clancy claimed additional costs that E.ON disputed. E.ON were successful at an initial adjudication but Clancy went to court to seek a declaration based on its understanding that it had excluded items in its tender.
At court, E.ON argued that the JCT Sub-Contract contained a precedence of documents clause (in the event of any conflict, the conditions of contract apply) that trumped any other argument. In addition, it also contained a provision that Clancy were not entitled to any time extension or additional payment due to failure to discover or foresee any risk or contingency including the existence of any adverse physical condition or artificial obstructions ”influencing or affecting the Sub-Contract”.
However, the court agreed with Clancy. Why? The Numbered Documents contained Clancy’s tender submission and Post Tender meeting minutes that contained Clancy’s exclusions to its tender. The Court held that the definition of “Sub-Contract Works” did not include the items excluded by Clancy. Therefore, the terms of the JCT Sub-Contract did not apply.
So in this case the contract documents were agreed beforehand and the contract signed. However, the client included documentation that set out the contractors exclusions to its offer (the tender). Therefore, an inherent conflict was incorporated. Tender exclusions must be managed out before a contract is signed.
What are the take away points for clients from these cases?
- Ensure you are aware of what documents you are incorporating into the contract and their nature;
- Ensure contract is signed by both parties before works commence. I know this not always possible but the negative consequences of not doing so can be significant.
- Preferably engage lawyers to oversee this process but if using consultants challenge them on their advice over what documents to include
In my experience, housing providers often let themselves down in these areas and it is no surprise that one of these cases involved a housing association. Do not leave contracts in the in-tray or take the view that agreement on documents means the hard bit is over. Do not include all procurement documents simply in the belief that all bases must be covered. Procurement documents and tender responses should be analysed for inclusion and this process should start when the contract terms and conditions chosen as part of the procurement strategy.