Tendering for construction work can be a time consuming and costly business, particularly if you are unsuccessful because the opportunity to recover such costs is lost. Pre contract negotiations usually take place before a contract is awarded. Further work may be necessary to explain the tender, the tender may have been qualified, a letter of intent is issued, or the ‘battle of forms’ may result.
This is all part and parcel of the tendering process and at this stage there is no contract imposing obligations on the parties and none may subsequently come into existence. Whilst a tendering contractor will invest time and money, the inviting client does not commit itself to accept the highest or lowest tender or need to give reasons for the acceptance or refusal of a tender. This distinct advantage enjoyed by employers can sometimes lead to ignorance or abuse of the tendering process. On occasions a contractor may be asked to do work, such as preparing designs or providing estimates. However, where does this leave the disappointed contractor who is unsuccessful in its tender? Normally, a contractor cannot recover its tender costs. Theses are the speculative costs incurred in tendering for work. But consider this. You are a medium sized contractor who has recently submitted a tender to a client to undertake some work at several schools. You attend a tender clarification meeting and are informed that you are the lowest tender, and it is the intention that you are to be awarded the contract. Before any contract is awarded you are requested to provide additional design information and estimates of different construction solutions to assist the client in reducing its tendering costs. You happily oblige. You are subsequently informed that you were unsuccessful with no reasons given. This would have been a lucrative contract for you. Is there anything you can do to obtain compensation from the client? The leading case on this subject is William Lacey (Hounslow) Limited V Davis (1957) where William, after submitting its tender, was led to believe it would be awarded the contract. On this basis William carried out estimates at Davis’srequest but later did not proceed with the project. The court held that the estimates were outside the normal tendering process and Davis was required to pay a reasonable sum for the work carried out. This constituted an ‘implied contract’ because the work requested was outside the contract being tendered for and an intention to pay was implied even though no price was agreed. Davis was ordered to pay a reasonable sum. The judge made an important distinction. He said: …this case is not that this work was done in the hope that this building might possibly be reconstructed, and that the plaintiff company might obtain the contract, but that it was done under a mutual belief and understanding that this building was being reconstructed and that the plaintiff company was obtaining the contract. Similarly, in the case of Marston Construction Limited v Kigrass Limited (1989), Marston carried out work following its tender submission. The court held that the additional work was above the normal tender costs and that Kigrass had derived a benefit from the work. The essence of the claim in this case differs from that of William because it relied on unjust enrichment (Kigrass was enriched by receiving a benefit at the expense of Marston). Therefore, it had to pay a reasonable sum for the work. Importantly, whether or not an implied contract or claim in restitution arises is to be found in the wording of the tenders and the process itself. For example, in the case of Regalian Properties Plc v London Docklands Development Corporation (1995) the tender was accepted ‘subject to contract’. Regalian carried out pre contract work in the expectation that it would be awarded the contract. The parties failed to reach agreement and Regalian brought an action to recover its costs of £2.3m. The court held that the parties had entered into negotiations expressly subject to contract and therefore each party was free to withdraw from negotiations at any time. Thus, Regalian incurred costs at its own risk. The difference between this case and the other two cases is that the work was carried out by Regalian as part of conditions that had to be satisfied to be awarded the contract, whereas in William and Marston work was carried out in anticipation of being awarded the contract. Final thoughts If as a contractor you can prove that there was an implied contract or an implied promise that you would be awarded the contract or prove that a client has made profitable use of preliminary work during the tender process, you may be able to claim damages for work carried out. But remember, the court has to be convinced that the damages you are seeking represent actual loss as a result. The courts will not entertain spurious claims from disgruntled contractors. Alternatively, and for certainty, you may consider a pre-construction service agreement before starting work.
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Beware letters of intent, for they are the work of the devil’s pen.
Often, you receive a document headed ‘Letter of Intent’, used in the course of your negotiations, pending the completion and formal execution of a contract. It signifies the sender’s intention to enter into a contract with you at some future date, but in the meantime, you are requested to start work towards fulfilling the obligations of that contract. This is often due to a tight schedule where the finality of the contract would delay the start of the project. The significance of such letters can be seen in the numerous court cases, where they have been held to give rise to no contractual relationships whatsoever and have created binding contracts. The consequent risk to both parties is that they are seldom clear and give rise to the interpretation of the single question: “What did the parties actually intend?” The case of Emcor Drake and Scull Limited v Sir Robert McAlpine Limited is an example of the perils of proceeding with work under a letter of intent. The project concerned the design and construction of new buildings and the refurbishment of an existing hospital as part of a private finance initiative scheme in the West Midlands, UK. McAlpine was the main contractor who appointedEmcor the subcontractor to undertake mechanical and electrical works, which at a value of £34.25m formed a significant part of the whole project. McAlpine and Emcor were in discussion for a year before the price for the works was agreed in principle. It had been the parties’ intention to enter into a formal subcontract in the near future, but about 18 months after Emcorcommenced work on site the parties’ working relations broke down due to disagreements concerning the terms and conditions of the proposed subcontract. In the end, no formal subcontract was executed. Emcor ultimately refused to undertake any further work until a formal subcontract was agreed. McAlpine held Emcor’s actions to be a repudiatory breach, contending that a letter of agreement and a series of work orders constituted an agreement to complete the entire installation. Emcor disagreed, and in its defence argued that its only obligation was to design and install the works instructed by McAlpine pursuant to the series of work orders, each valued at £1m. The Court concluded that there was no subcontract between the parties and accordingly Emcor was not obliged to complete the entire works and not in repudiatory breach. The parties placed little importance on the formalities of a written subcontract prior to Emcor commencing work on site, until disagreement about the terms and conditions resulted in a dispute. One witness remarked: ...the risks inherent in the M and E works...in terms of time and cost...there needed to be clear unequivocal agreement from the outset between the parties as to their respective obligations to avoid later difficulties Final thoughts The parties decided, for whatever good commercial reasons, to start work before the terms of its subcontract had been agreed, on a presumption that ultimately terms would be finalised. This case and countless others demonstrate that letters of intent are notoriously difficult to interpret, thus, potentially leading to conflict and a breakdown in an otherwise healthy working relationship. New instructions extending the scope of the original contract should be in writing.
Imagine, you are an M&E sub contractor and you have entered into contract with a contractor. During the works, you carry out additional work following instructions from the contractor. You attempt to extract a written order, but this is not forthcoming. Lo and behold, the contractor refuses to pay you without a written order, and you end up at loggerheads. The only thing you can point to as evidence that you were instructed is a conversation you had with the contractor’s site manager, in which he asked you, and you agreed, to carry out the works. Your contract is so worded that orders in writing are made a condition of any right to additional payment for the extra works. This is what happened to Management Solutions & Professional Consultants Limited who ended up in dispute with Bennett (Electrical) Services Limited. Management Solutions entered into contract with Bennett for electrical installation works in connection with electrical upgrading works for family houses at the RAF base in Colchester. After completion of the works, Management Solutions was left with sums of money which had been applied for, but which remained unpaid. A dispute arose concerning the unpaid sums and Management Solutions started adjudication proceedings claiming payment. The adjudicator decided in favour of Management Solutions and ordered Bennett to pay. Bennett refused. Disgruntled by this, Management Solutions issued court proceedings by way of summary judgment to have the adjudicator’s decision enforced. During the proceedings, it became clear that during the course of the project Bennett orally instructed Management Solutions to undertake certain additional works. Bennett disputed that the instructions had led to the agreed expansion of the scope of works or that the work was additional to the scope of the works. The reasoning behind this was that the contract contained a written variations clause allowing it to add or subtract from the scope of work. Thus, oral instructions fell outside the scope of this clause and the contract. Management Solutions argued that the variations clause allowed the scope of work to be varied within the limits provided for by the clause. Within those limits, the works could be varied. Oral variations were not varying the contract, they were merely instructions issued under the contract and redefined the scope of work. The judge preferred Management Solutions contentions. He said that the variations were carried out under the contract and were within its scope. Even if the variations were oral and not evidenced in writing, the work required by them was carried out and the instructions were given by Bennett. The resulting work was therefore carried out by agreement with the result that the requirement that the variations should be in writing was waived by both parties. Final thoughts The anxiety of the courts to avoid injustice to contractors caused by strict wording requiring an order in writing has led to rationalised reasons enabling contractors to recover without such an order in a number of different ways as this case shows. Nevertheless, a contractor should always ensure that orders are received in writing or evidenced in writing and preferably before committing itself to carry out the work. If an employer or contractor finds that it has entered into a bad contract, it is not allowed to escape from it by the use of the omissions clause so as to enable it to try and get a better deal by having the work done by another contractor at a lower cost
A contract for the execution of work bestows on the contractor not only the duty to carry out the work but the corresponding right to be able to complete the work it was contracted to carry out. To take away or vary the work intrudes into and infringes that right and is a breach of contract. For this reason, contracts usually contain provisions to enable the work to be varied. Such clauses enable an employer or contractor to remove work or carry out additional work or make alterations in the work to meet the contract’s requirements. Other such clauses may provide that work can be taken away and carried out by another contractor and whether that is the situation will depend on the interpretation of the clause. This issue came before the court in the case of Abbey Development v PP Brickwork. PP Brickwork was engaged by Abbey as a labour-only subcontractor for brickwork and blockwork, forming part of the development of a residential property. A written agreement contained the following provision: Abbey... reserves the right to vary the number of units and the... programme... and to renegotiate rates or suspend the contract and retender the works without vitiating the contract. The contract also contained a standard variation clause that allowed for both additions and omissions. During the course of the project, Abbey wrote to PP Brickwork complaining of matters that it required to be put right. PP Brickwork disagreed with the matters raised. Abbey therefore wrote to explain that it was limiting PP Brickwork’s works to that currently under construction, but that the remainder of its works would be given to another contractor for completion. PP Brickwork referred the matter to adjudication, claiming Abbey’s letter amounted to a repudiatory breach of contract. The decision went in its favour. Abbey disagreed with the decision and issued legal proceedings. Abbey argued that the provision permitted it to reduce the quantity of works and to employ others to carry it out. PP Brickwork argued that it was no more than a standard variation provision and did not confer a right to deprive it of the opportunity to carry out the remaining works simply because Abbey was unhappy with its performance. It is established law that the basic bargain struck between contracting parties has to be honoured. Therefore, if an employer or contractor finds that it has entered into a bad contract, it is not allowed to escape from it by the use of the omissions clause so as to enable it to try and get a better deal by having the work done by another contractor at a lower cost. But can work be omitted simply because the employer or contractor was dissatisfied with the performance of the contractor? That was the issue in this case. The judge considered that the purpose of a variations clause is to enable the employer or contractor to alter the scope of the works to meet its requirements. As the project proceeds it may become clear that some change of mind is needed to attain the desired result. He said the test to be applied is whether the variations clause permits the change that was made, so that if the change does not fall under the definition of what constitutes a variation under the clause, it will be a breach of contract. The motive or reason for the variation is irrelevant. Final thoughts Although Abbey may well have had good reason to be dissatisfied with PP Brickwork’s performance, the contract did not provide the purposes which entitled Abbey to omit work with the intention to hire another contractor to carry it out. The variation provision was, according to the judge, a standard clause, as in most contracts, to omit work that Abbey considered was no longer required for the project. Employers or contractors may wish to omit work from a contract that it does not require to be done and there is no principle in law that states in no circumstances may work be omitted and given to others, but clear wording is needed. It’s surprising how many companies are unaware that there are payment periods in a construction contract prescribed by law. The Construction Act 1996 requires every construction contract to include a payment regime that ensures the parties know what and when they will be paid.
Although one of the requirements is for interim payments, the Act is not prescriptive and allows the parties to decide for themselves what intervals they agree for their interim payments. This is usually monthly, reflected in most of the standard form contracts (e.g., JCT). Those intervals may be on a specific date each month (i.e., 30th) or may be calculated monthly. Often, it can be difficult (sometimes impossible) to work out the other various payment dates in a contract (i.e., due date, payment notice date, final date for payment, etc.), so I encourage my clients to agree and include a payment schedule setting out the details. It also comes in handy as a quick reference sheet. Now, this is where it gets really complicated. If the parties’ contract does not comply with the Act, the payment provisions contained in separate legislation, the Scheme for Construction Contracts 1998, will apply to varying degrees. This means that if the payment provisions in the contract fail to comply with the Act at all, the entire payment provisions of the Scheme will replace the provisions in the contract. However, if some of the provisions in the contract comply but others don’t, the non-compliant provisions will be replaced by the Scheme to be read with the compliant provisions. Confused? Knowing whether your contract complies with the Act, and if not, how the Scheme applies, in regard to payment is of vital importance if you want to know what and when you are going to be paid. Final thoughts One final point, you’ve probably heard of the term ‘smash and grab’ adjudication and wondered what it means. Basically, if a paying party fails to serve proper payment notices in relation to, for example, an interim payment application, the payee might be able to take advantage of the situation and seek immediate payment via adjudication. The adjudicator won’t look at the value of the application (which, if overvalued, may lead to a windfall for the payee), only whether the payer has served compliant notices. Of course, the application itself must have been issued properly to satisfy the requirements of what is called a ‘default payment notice’. A common feature of most, if not all, construction projects is the dreaded “snagging list” at practical completion of the works. Of course, practical completion itself is perhaps easier to recognise than to define, which unsurprisingly leads to confusion about what constitutes snagging and what effect it has on completion of the works.
A useful starting point is the meaning of practical completion. However, despite the importance resting on the determination of practical completion, due to the contractual and legal implications for both the contractor and the employer, there is no precise legal definition and most standard form building contracts do not define it. Instead, its meaning is left to the usual legal rules of interpretation, and from case law. Here’s how one judge defined it: "One would normally say that a task was practically completed when it was almost but not entirely finished, but 'practical completion' suggests that that is not the intended meaning and that what is meant is the completion of all the construction work that has to be done." Another judge said: "Practical completion means completion for all practical purposes, and what that completion entails must depend upon the nature, scope and contractual definitions of the Works, as they may have developed by way of variation or architect's instructions." One more, for good luck: "Practical completion is a legal term of art understood to mean a state of affairs where the works have been completed free from patent defects, other than ones to be ignored as trifling." However practical completion is defined, it should not be taken for granted that just because a building is capable of being, and indeed has been, inhabited it therefore follows that the works must be regarded as practically complete. Whilst occupation of a building may have some bearing on the matter, it is by no means definitive by itself. It is standard practice to issue with practical completion a list of incomplete defective items, “snagging list”, which need attention but are not sufficiently significant to prevent completion, the "de minimis”, principle. The majority of standard form contracts do not recognise this practice, including by far the most used forms, the JCT suite of contracts. A list is often produced by those certifying practical completion as a practical measure with no formal contractual effect; and lists sometimes, incorrectly, include incomplete works, making it difficult to identify the fairly minor items, which often leads to uncertainties and disagreements about whether practical completion has been reached. Final thoughts Case law makes clear that snagging should not be a bar to practical completion unless the number of snagging items, taken together, would prevent the building from being used for its intended purposes. This would suggest that the intended use of a building may be relevant when considering the type of defect that should be tolerated when certifying practical completion. However, it would seem that there is no case that sets out a hard and fast limit for the number of de minimis defects that would bar practical completion. Non-payment in the construction industry is nothing new and continues unabated. What can a party to a construction contract, on the receiving end of payment abuse, do about it? Falling into the trap of simply stopping work or worse, walking off site, is not the solution. It has to be carefully handled to avoid committing a breach of contract.
One solution is to lawfully suspend work until payment is received. An unpaid party may rely on a contract term allowing it to suspend or its statutory right to suspend under the Construction Act 1996. It’s worth noting that the right to suspend for non-payment under the Act does not have to be recorded in the contract. Consequently, a party may be unaware of its suspension rights. Solution: read the contract, read the Act, know your rights. Under the Act a party has the right to suspend “any or all” of its obligations under the contract – provided the “notified sum” remains unpaid by the “final date” for payment. A very useful provision because for instance, it means a party can pick and choose which of its obligations to suspend e.g., design, ordering critical materials, work on site, or all of them. A word of caution, a party should be careful not to unintentionally breach a statutory duty. Before a party can suspend its obligations, it must notify the other party in writing giving at least 7 days before actually taking action to suspend, with reasons why, e.g., non-payment relating to a particular interim payment. Get it wrong, and the unpaid party may put itself in breach of contract. The contract may include a term giving the express right to suspend performance. While many contracts repeat the provisions in the Act verbatim or simply refer to a party’s rights under the Act, some contracts provide for a contractual right to suspend that differs from the Act. In other words, parties can agree their own notice periods which can be longer than the Act’s 7-day notice period before suspension can take place. Additional time to complete the works and reasonable costs of suspension may also be claimed. This includes time for winding down the works and for remobilising after payment is received. Consequently, any time limits under the contract will be adjusted accordingly. Final thoughts Usually, the threat of suspension is enough to elicit payment. However, a party who decides to suspend its obligations needs to carefully consider:
If so, then, go for it. And remember to claim additional time and money. If you reduce the amount of work that the contractor must perform, can you make a saving? Not if you have an invariable fixed-price contract.
P&I Data Services Limited were acting as main contractor on the Glaxo Smith Klein site in Stevenage. It sent out tender specifications and drawings for pricing to sub-contractor SWI Electrical Contractors Limited. The tender information consisted of drawings describing the detail of the work that had to be performed and record sheets, which identified particular elements and parts of the building. SWI priced the tender documentation on a lump sum basis for each broad item of work and sent in its quotation. P&I accepted the quotation by purchase order and the contract was formed. During the course of the works P&I changed the drawings, so that SWI did not have to complete as much work as it had agreed. When SWI finished the work, it sent in its final account at the purchase order price. P&I worked out the value of the work that had not been completed by SWI and knocked it off the bill. SWI disapproved and made its feelings known to P&I. Any discussions that ensued thereafter by the parties in an attempt to resolve the matter failed. A dispute was born. SWI decided to sue P&I in the County Court for the full amount. The judge said that since SWI tendered a fixed price for the work that was shown on the drawings and in the specification, it took on the risk of the work being more extensive or expensive than anticipated and were only entitled to the fixed price. In other words, it made no difference if the work was less than shown on the drawings or included in the specifications. The judge decided there was a fixed price contract and found in SWI’s favour, awarding it the full amount. In a final attempt to get its way, P&I marched off to the Court of Appeal to settle the matter once and for all. The Court of Appeal decided that the judge was right in holding that the contract was a fixed price contract. P&I had to pay. SWI didn’t fail to do things it was required to do, P&I effectively asked it to do less work by altering the drawings and specifications. There was no agreement that by doing this P&I could pay less. Final thoughts No doubt most readers are familiar with the JCT standard building contract. Well, that is technically a fixed price contract but with a difference - it provides for variations to be issued during the construction phase, in which case the fixed price may change. Not to be confused with a “re-measurement” contract where the work content is only estimated at the start of the job. When the work is finished it is then subject to re-measurement and priced at unit rates included in the contract. The contract between SWI and P&I was different. There was no mechanism for making changes – it was fixed. When the term “best endeavours” features in a construction contract it’s not simply enough that the contractor has an obligation to complete the works on time, it may for instance impose a duty to re-programme the works either to prevent delay or to reduce delay when necessary.
Despite the courts having grappled with this term for many years, there is no single definitive authority on its meaning. And even though it is found in the most widely used family of off the shelf contracts, the JCT suite, among others, no definition is provided. Contractors and contract administrators are left in a quandary. It is of great significance of a contractors right to an extension of time, and to what extent a contractor must take steps to fulfil a best endeavours obligation is fact based, meaning it would be necessary to consider the particular circumstances of each situation as it unfolds. Projects don’t always go well, and through no fault of the contractor, the works may be far behind programme with no defined date in the future. But all the blame is being laid at its door. A contractor will have to contend with two possible situations. Not meeting the completion date, and at the same time defending a possible claim that it’s not proceeding with best endeavours. In addition to determining just how far it needs to go financially, while attempting to avoid committing commercial suicide. But it’s not all doom and gloom. A contractor is entitled to take into account all relevant commercial considerations, and to weigh up the likelihood of succeeding in the endeavour before taking any particular course. In particular, an entitlement to look first and foremost, if not only, to its own interests in determining whether any particular action should be taken at all weighed against the chances of achieving the desired result. Liability will of course play a big part. One very important exception to this is that where the contract expressly specifies that certain steps have to be taken as part of the exercise of best endeavours, those steps will have to be taken, even if that could be said to involve the sacrificing of the contractor’s commercial interests. Final thoughts An undefined best endeavour obligation creates uncertainty as to what exactly is required of a contractor. As with any obligation, the more precise the endeavours clause in a contract, the less likely it is to lead to interpretation disputes. To achieve greater certainty, it might be preferable to specify in the contract the steps a contractor is required to take (or not take) in order to comply with the obligation. |
Dr. Andrew MilnerDBEnv, LLM, MSc, BSc, MRICS, MCIArb Archives
February 2023
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