Triangular associates executive summary

This is report for Triangular Associates (henceforth, TA) offering contractual, project administrative advice and recommendations on how they should proceed regarding the problems outlined to be dealt with in the facts as they have been provided. Specifically this report includes a discussion of the contractual provisions relevant to the facts, the actions Firstbuild Ltd (henceforth, FL) and CU Architects (henceforth, CU) should have taken during the period of the works, and the liabilities as between FL and TA. More generally this report considers a variety of issues before concluding with a summary of the key points derived from this discussion and the recommendations on how TA should look to proceed.

Findings

After the award of the contract but before the commencement of the Works, FL forwarded to CU, and had accepted, a programme showing the order in which he proposed to carry out the Works starting on 6th April 2009 and would be fully complete by week 52 with no float shown as a reflection of the fact the formation of a building contract could form a significant aspect of the relationship between the parties involved in a contract where construction is to be undertaken because the contracting parties are reliant upon each other. Therefore, whilst, as a normal rule, each party will usually perform their part, where this is not the case the participants can enforce their agreement and implement sanctions (Beatson, 1998, pp.2-3). Moreover, a contractual agreement can facilitate forward planning to make plans for future contingencies and establish the value of the exchange - i.e. the amount payable to the main contractor (Beatson, 1998, pp.2-3). A contract will also establish the parties respective responsibilities and the standards expected of them - i.e. the building work's specifications, the materials used and the date for completion (Beatson, 1998, pp.2-3). This did not happen here because CU Architects stated that FL had failed to give any notices required by the Contract, had failed to carry out the Works 'regularly and diligently', had submitted a total cost claim and had not substantiated the sum claimed. In addition, in the 12 weeks after practical completion it is to be appreciated that FL had to complete the extensive small areas of works not previously completed and further instructed variations.

However, the position is somewhat complex because, during the course of the Works, CU instructed numerous variations it is arguable the original agreement no longer stood (Beatson, 1998, pp.2-3). As a result, FL experienced substantial delay and disruption to their planned operations detailed in the accepted programme. CU did not extend the time for completion of the Works but orally instructed FL to complete the Works in the original contract period despite there being 33 notified items of agreed changes to the Works. FL engaged consultants who included a programme showing FL would have completed the Works in 40 weeks except for the instructed variations and the effect of the variations would (except for FL’s acceleration measures) have extended their period on site by 10 weeks. This is a reflection of the fact that the contract will also establish the economic risks involved to be allocated between the parties - i.e. it may provide for an increase in the cost of labour and/or materials - and for what is to happen if something goes wrong regarding payments in advance and penalty clauses (Union Eagle Ltd v. Golden Achievements Ltd). To achieve practical completion by the set date, FL increased their resources, re-sequenced activities and worked in an ad hoc manner to complete areas when they became available even though no special terms were agreed. Therefore, there is some debate about whether the obligation would be considered 'entire' since only an entire performance of the contract would entitle the party carrying out the work to their payment (Cutter v. Powell).

In view of the delays experienced as part of the project, by sub-letting part of the work, the contract administrator impliedly contracts with the main contractor they will not by any act or default of their own prevent performance otherwise a claim for damages may arise (McBrian v. Shanley) for work done and services performed under quantum meruit (British Steel Corporation v. Cleveland Bridge & Engineering Co). But the contractor is also liable to the contract administrator for defective work, as the relationship between them is similar to that of employer and contractor (Aurum Investments Ltd v. Avonforce Ltd (in liquidation) & Knapp Hicks & Partners & Advanced Underpinning Ltd (Pt 20 defendants)). Moreover, in Prince of Wales Dry Dock Co (Swansea) Ltd v. Fownes Forge & Engineering Co Ltd it was held a contractor denying their work was faulty was liable to the contract administrator for the costs of a counter-claim successfully raised by the employer for defects in such work, whilst they may also have an implied contractual duty to warn the administrator when it knows, or ought to know, works are dangerous (Plant Construction plc v. Clive Adams Associates). Accordingly, the contractor’s liability may include damages and costs the contractor has had to pay to a third party (Caister Group Developments Ltd v. Paul Rackham Construction Ltd) including the employer (Hadley v. Baxendale and Koufos v. Czarnikow Ltd). As a result, where, in breach of a contract, the contractor delays completion of the overall work, having known at the date of contracting the main contractor is liable to liquidated damages or forfeiture for delay, liability increases (Hadley v. Baxendale and Koufos v. Czarnikow Ltd).

As a result, in the 64 weeks FL were on Site they applied for completed measured works and variations on an interim basis and included assessed lump sums in their interim (later) applications for their additional costs of acceleration/disruption but, whilst the direct costs of all the 33 variations were agreed, CU did not certify any monies for FL’s acceleration/disruption. Therefore, it is arguable an analogy can be drawn with Bolton v. Mahadeva where the plaintiff installed a central heating system in the defendant’s house for a lump sum but it failed to heat the house adequately so the defendant refused to pay. The Court of Appeal held because this contract was based on a lump sum payment, the plaintiff could recover nothing since there was a need for complete performance before any payment may be demanded. This means a client like TA requiring the work to be done has the advantage because any failure to complete performance of the contract prevents any payment recovery by the party carrying out the work.

The courts have recognised substantial performance regarding lump sum contracts because the courts have found, where contracts have been substantially performed, an injured party like TA cannot treat themselves as discharged from their obligation to pay the party carrying out work for them - although they may have a counter-claim or a set-off right. Therefore, whilst there is not a right to repudiate for breach of condition, compensation can be obtained for a breach (Beatson, 1998, pp.487-489). The problem involves considering what substantial performance actually is as it arises - although it is usually established actual performance is not considered that far short of the required performance and the apparent cost of remedying any identifiable defects is not too substantial regarding the overall contract. In Dakin (H.) & Co Ltd v. Lee the plaintiff builders contracted to repair the defendant’s property for £1,500. But when the plaintiff sought the contract price, the defendant refused because - (i) the underpinning of a wall was 2 feet rather than 4; (ii) 4-inch solid columns had been used instead of 5-inch hollow ones; (iii) and the joists over a bay window in the property were not sufficiently fitted. However, since all of the defects could have been rectified for £80, the Court of Appeal decided the plaintiff should only be deducted this.

Usually in any contractual agreement, a party who partially performs a contract is unable to recover anything by way of compensation - although a claim for remuneration for one party can still arise if the other chooses to accept a partial performance. For example, section 30(1) of the Sale of Goods Act 1979 states “where the seller delivers to the buyer a quantity of goods less than (they) contracted to sell, the buyer may reject them, but if (they) accept them (they) must pay for them" (Baltic Shipping Co v. Dillon). More usually claims are based upon a quantum meruit (i.e. a reasonable sum regarding the benefit from partial performance) because if A accepts B’s partial performance it is arguable both mutually release the other from the original contract to form a new agreement. Therefore, partial performance is generally applicable only if the party not in default has a genuine choice to accept or reject it (Sumpter v. Hedges). If one side is prevented from completing their contractual obligations because of some default from the other, the injured party may recover damages for breach of contract or reasonable remuneration for the work already done on the basis of quantum meruit (Planché v. Colburn). However, problems could be assuaged if the court finds a particular contract is made up by numerable ‘severable’ obligations in keeping with the idea of the measured term contract consisting of a large number of small value orders for completion in a short time span on behalf of one main contractor as in this case with TA.

If a particular client requires a rapid response, the measured term contract is considered the perfect response in such cases because it provides a good method for controlling budgets, whilst also allowing for sufficient flexibility to consider the availability of suitable contractors and any client’s particular requirements. The need for this approach was recognised after a period of exactly three months from receipt of FL’s final account and no communication between FL, CU or TA, CU issued a certificate stating the final amount due to FL was £1.95M. CU agreed the measured works and variation values but included no sum for 'Instructed Acceleration/Disruption'. Therefore, whilst it is important to order all work covered by the Schedule of Rates with the appointed contractor, not just the low value and awkward work, that is why any client should look to tender on the basis of all work, the Schedule of Rates can be adjusted by means of its own updating percentages issued monthly by the Department of Trade and Industry (PSA Schedule of Rates for Building Works, 2005). Accordingly, any contract will also establish the economic risks involved to be allocated between the parties – e.g. an increase in the cost of labour and/or materials – and, finally, it will usually provide for what is to happen if something goes wrong regarding payments in advance and penalty clauses (Union Eagle Ltd v. Golden Achievements Ltd).

Essentially, it is an arrangement whereby a contractor undertakes to carry out a series of work orders over several years within a defined geographical area and where the work is subsequently measured and valued in a Schedule of Rates - although this is a question of construction. This involves asking a series of questions regarding the contract on the facts in determining - (i) whether the contract is one single obligation that requires precise performance because, if it is, nothing else will suffice (Re Moore & Co Ltd v. Landauer & Co Ltd); (ii) if precise performance is not required, contractual obligations are divisible; and (iii) there has also been substantial, acceptance of partial, or prevention of performance. It must also be considered whether the contract recognises obligations to be performed within a reasonable time to determine whether time is of the essence. In United Scientific Holdings Ltd v. Burnley BC the House of Lords understood time is of the essence if it is the parties genuine intention that may be expressly provided or inferred (Charles Rickards v. Oppenheim). However, upon a party’s valid tender of performance in a given contract and the other party’s refusal to accept it, they are then freed from any liability for non-performance so long as the tender is made where the other party can examine the performance to determine conformity (Startup v. MacDonald). But an innocent party can terminate a contract and regard themselves as being fully discharged from their obligations because of another party’s breach of their obligations under the terms of a contract because it is always considered possible to sue for damages for breach of contract. Therefore, repudiation may be either expressed or by implication, whilst also establishing the defaulting party clearly no longer intends to perform their part of the contract and a breach can even be ‘anticipatory’ when the innocent party may accept the breach and immediately sue or refuse to accept it and wait until performance is due (Hochster v. De La Tour).

However, where a breach occurs during performance of the stated obligations, this raises several problems regarding the contract for a court because it is for the courts to decide whether an act cited as a repudiatory breach of contract actually amounts to that in practice (Mersey Steel & Iron Co v. Naylor Benzon & Co). Therefore, some guidance on construction - at least with regards to consumer contracts - was supplied in Maple Flock Co Ltd v. Universal Furniture Products so repudiation was not allowed on the facts contrary to Munro & Co Ltd v. Meyer. As a result of any repudiation or breach of a major term, a contract can be treated (a) as still operative; or (b) as terminated. This is because a client must be advised, generally in the context of a lump sum contract, a breach of contract does not solely discharge the innocent party because they must accept the breach. Therefore, if they refuse to choose to accept the breach, then the contract will continue to remain enforceable on both sides because, according to Lord Justice Asquith in Howard v. Pickford Tool Co, any “unaccepted repudiation is a thing writ in water and of no value to anybody; it affords no legal rights of any sort or kind". Accordingly, the plaintiff cannot repudiate or sue for damages until they accept the breach, and, regarding an unaccepted anticipatory breach, the plaintiff cannot sue until performance arrives so any contract will be terminated from the moment acceptance is communicated to the party in default - but will not act retrospectively (Johnson v. Agnew) - or ended by agreement (Elton Cop Dyeing Co Ltd v. Robert Broadbent & Son Ltd).

Conclusion

FL engaged consultants to re-assess and submit the final account and made a further submission 3 months later for a revised final account of £3 million including full factual and contractual supporting documents and submissions in support and allocated all monies previously claimed regarding the relevant variation. They then noted the liquidated damages TA would have suffered had they not been able to hand the site (and the buildings) to the various retailers was £75,000 per week and FL’s accelerative measures had saved them £750,000. On the other hand, TA wrote to FL stating they had already paid £1.6M to FL and due to FL’s late completion of the Works they would deduct liquidated damages of £75,000.00 per week for the 12 week period FL remained on Site completing the Works. TA stated no further payment would be made. The contract administrator can recover from the contractor the damages they have had to pay owing to the delay or profit they would have made on a contract rescinded from that cause together with the Works cost (Hydraulic Engineering Co Ltd v. McHaffie). Moreover, if the contract administrator compromises the employer’s claim arising from the contractor’s breach, the amount paid in settlement is admissible prima facie evidence of the amount of loss and damage caused by the contractor - although liability still needs establishing (Biggin & Co Ltd v. Permanite Ltd).

However, knowledge of the main contract is not sufficient to prove the contractor agreed with the contract administrator to be bound so, if the contractor properly completes their work, their right to payment will not depend upon the architect's (CU's) certificate, notwithstanding it is a condition precedent to payment to the administrator (Southern Water Authority v. Carey). Therefore, although the Works were practically completed by FL within the original contract period so TA could open the retail facility, FL wrote to CU Architects at the end of week 52 and informed them the Works were practically completed (although no Practical Completion Certificate was issued by CU) so they would be entitled to payment. However, the sub-contract often provides the payment of the administrator for any work only becomes due when the contractor receives the certificate which values that work (Dunlop & Ranken Ltd v. Hendall Steel Structures Ltd). Moreover, some sub-contracts also provide the contractor's right to payment does not arise until the main contractor has been paid the sum due by the employer. However, where it is a construction contract under the Housing Grants, Construction & Regeneration Act (HGCRA) 1996, any provision that makes payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third party, or any other whose payment under the contract is a condition of payment, is considered insolvent under section 113(1). Nevertheless, where the contractor expressly contracts to be bound by the terms of the main contract, provisions as to retention of money will be applied to them proportionally in the ratio to the whole (Geary, Walker & Co Ltd v. Lawrence & Son).