Construction and infrastructure updater

Publication | December 2011


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Contract Formation: incorporation of terms

In the following case the Court of Appeal had to consider whether the trial judge was right to decide that the oral contract concluded between the parties for a fixed term of two years included a right to terminate upon three months’ written notice. This case focuses on the risk of commencing performance on the basis of partially completed contract terms.

BVM Management Ltd v Yeomans (t/a the Great Hall At Mains) & Anor [2011] EWCA Civ 1254

The respondents, Mr and Mrs Yeomans (the Yeomans) entered into a written agreement with a company (GBRF) for the provision of catering services (Catering Contract). It was a term of the Catering Contract that either party be entitled to terminate the Catering Contract upon three months' written notice.

The Yeomans and GBRF subsequently commenced negotiating the terms of a second agreement for the provision of event management services (Events Contract). The proposed terms of the Events Contract contained the same right of termination and notice period that was included in the Catering Contract.

Although draft terms of the Events Contract were circulated, the Events Contract was never signed because GBRF fell into financial difficulties. A meeting was held in July 2007 between the parties to discuss a proposed solution whereby one of the directors of GBRF (Mr Middleton) would take over GBRF’s position. It was agreed that Mr Middleton would form a separate company (BVM) to provide the event services.

BVM and the Yeomans did not conclude a written contract. However, there was no dispute that whatever the terms of the contract might be between BVM and the Yeomans, the parties were agreed that their contract was based on the partially negotiated terms of the Events Contract.

BVM continued to provide the event services until February 2008 when the Yeomans terminated the contract on the basis that it was entitled to do so on three months’ written notice.

BVM argued that the contract between BVM and the Yeomans did not entitle either party to terminate the contract early, let alone upon three months written notice - the contract was for a fixed term of two years, with no option for early termination at all.

Findings of the Trial Judge

The trial judge made several findings of fact:

  • The Events Contract (which was based on the Catering Contract) contained the right to terminate upon notice and the Events Contract was before all those who attended the July meeting.
  • At the July meeting Mr Middleton had stated that he wanted some security of contract and required that the contract be for a fixed term of two years.
  • The right to terminate on three months’ notice provision (contained in the Events Contract) was not discussed or mentioned by either party at the July meeting.
  • Mr Middleton believed it was agreed that the Events Contract would run for two years without any right of termination regardless of any notice.
  • Equally, the Yeomans believed that the two year fixed period could be terminated by either party upon three months’ notice.

The trial judge held that:

  • Mr Middleton and the Yeomans had concluded an oral contract at the July meeting;
  • It was term of the oral contract that it would be for a two year period.
  • The right to terminate on three months’ notice in the Events Contract was incorporated into the oral contract.
  • The termination provision was not incompatible with the oral contract being for a fixed term.

Did the parties agree either expressly or tacitly to incorporate the right to terminate on notice in the oral contract?

On appeal BVM sought to argue that the trial judge was wrong to conclude that the parties had incorporated a right to terminate on notice particularly given that:

  • BVM sought the security of a fixed term two year contract;
  • neither party at the July meeting discussed any right of termination; and
  • that an “objective bystander” would have understood that the parties were agreeing a contract for a two year term with no possibility of an earlier termination on notice.

The findings of the Court of Appeal

The Court of Appeal noted that case law required an appeal court to be slow to reverse a trial judge’s evaluation of the facts, particularly where the finding depended on oral evidence, unless the findings:

  • were obviously wrong;
  • unreasonable; or
  • produced a result unsustainable in law.

The Court of Appeal considered the key material which was before the trial judge and the subjective understandings of what each party thought they were agreeing. However, these subjective understandings were of no help as they cancelled each other out and the Court of Appeal dismissed the appeal. The trial judge was entitled on the evidence he had before him to reach a finding of fact that the parties did agree that the three month termination provision was part of the contract concluded orally at the July meeting.

There was no legal difficulty in having a contract for a period of two years with a provision that permitted an earlier termination of the fixed term.

Editors’ comments

This case is another example of the danger of commencing performance in the absence of a signed contract. Although it does not introduce any new law, it does highlight the effect that oral negotiations have on the drafting process. Terms of agreements - particularly such terms as a right of termination - should be agreed in writing. Here, the fact that a termination clause was included in the draft agreement which was before the parties at their meeting (even though it was not discussed) was sufficient to incorporate it into the oral agreement between the parties.

View: BVM Management Ltd v Yeomans (t/a the Great Hall At Mains) & Anor [2011] EWCA Civ 1254

Adjudication: stay of execution

The following case concerned the enforcement of an adjudicator’s decision. The unusual feature of the case was that the adjudication took place concurrently with court proceedings.

The court confirmed that as a result of the decision in Herschel Engineering Ltd v Breen Property Ltd (2000), a party to a construction contract could refer a dispute to adjudication even though the same dispute is the subject of current litigation. The court also held that the adjudicator did not breach rules of natural justice, but ordered a partial stay of execution of the judgment sum due to the claimant's financial position.

NAP Anglia Ltd v Sun-Land Development Co Ltd [2011] EWHC 2846 (TCC)

The contractor was engaged to construct four houses and ancillary works. The work was subject to substantial delays. The works were subsequently varied to include an additional four houses.

The dispute concerned the employer’s failure to pay sums certified due to the contractor. The contractor initially started county court proceedings but, having lost patience with those proceedings, subsequently referred the dispute to adjudication.

The contractor was successful in the adjudication proceedings and sought to enforce the decision in August 2011 by seeking summary judgment. The employer resisted the application on the basis that the timetable laid down by the adjudicator unfairly and unjustifiably favoured the contractor and constituted a breach of the rules of natural justice. In addition, the employer argued the adjudicator ignored substantial arguments raised by the employer.

Breach of natural justice

The court rejected the employer’s submissions that the adjudicator had conducted the adjudication unfairly by failing to grant the extensions of time sought by the employer for service of its submissions and by allowing the contractor to put in one extra submission to the employer. There was nothing unusual about giving the referring party the last word or having an odd number of submissions.

There was also no merit in the employer’s arguments that the adjudicator had failed to appreciate or have regard to a number of submissions made on its behalf.

As a result, the contractor was entitled to summary judgment of the adjudicator’s decision. The next question for the court was whether the adjudicator’s decision should be stayed until the decision of the county court was issued.

Should execution of the judgment be stayed until the decision of the county court?

The employer submitted that there was real doubt as to whether the contractor would be able to repay the amount of the judgment if it lost in court.

The court held:

  • There was no doubt that the probable inability on the part of the claimant (here the contractor) to repay a judgment debt was a special circumstance which would render it expedient to order a stay of execution of the judgment (Wimbledon Construction Co 2000 Ltd v Derek Vago (2005)).
  • On the facts, the contractor was in a less healthy financial position than it was before the contract was entered into but was not in such a bad position as to be unable to repay at least a significant proportion of the sum awarded by the adjudicator.
  • There was insufficient evidence to suggest the contractor would not be able to repay at least part of the adjudicator's decision.
  • The employer had to pay £65,000 of the judgment sum to the contractor.

Editors’ comments

This case is a reminder of the principles involved in a stay of execution. This is the second recent case on the question of a stay of execution, the other being Partner Projects Limited v Corinthian Nominees Limited [2011] EWHC1989.

Interestingly, the judge commented on the conduct of the employer’s solicitors. Not only did two witness statements contain material inaccuracies but the hearing bundle included 500 pages of unpaginated documents which only increased costs for no useful purpose. The judge said that making fundamental errors such as this was unacceptable.

View: NAP Anglia Ltd v Sun-Land Development Co Ltd [2011] EWHC 2846 (TCC)

Adjudication: same or substantially the same dispute

In the following case, the court gave guidance on the factors to take into account when determining whether a dispute referred to adjudication was the same or substantially the same as a dispute which has already been referred to adjudication.

Carillion Construction Limited v Smith [2011] EWHC 2910 (TCC)

The contractor, Carillion Construction, subcontracted underground pipeworks to the sub-contractor, Smith, in relation to the refurbishment works at Broadgreen Hospital in Liverpool. Smith acted through a firm by the name of Underground Pipeline Services. There was also in existence a company with which Smith was associated, called Underground Pipeline Limited (company).

The sub-contract works were not completed on time and there was disagreement as to the causes of delay and the extent to which there was any entitlement to an extension of time. The company issued adjudication proceedings in relation to a dispute on the assessment of the final account. The contractor was directed to pay the company £110,000 (approx).

The company then requested a second adjudication concerning an extension of time and loss and expense. On 28 August 2003, the adjudicator awarded the company an extension of time up until 5 May 2001 (which was the full period claimed) but found that the company had not proved that it had suffered loss and expense and therefore did not award any sums of money.

The company went into liquidation. In 2011 Mr Smith issued further adjudication proceedings (the third adjudication). These adjudication proceedings were issued personally by Mr Smith, trading in the name of the firm. Mr Smith stated that information contained within the third adjudication had not been adjudicated upon before because a number of documents had been withheld by the contractor during the earlier adjudications.

The contractor issued Part 8 proceedings to resolve whether the third adjudication involved the referral of substantially the same dispute as that addressed in earlier adjudications.

Same or substantially the same dispute - the principles

The court referred to the cases of Quietfield Limited v Vascroft Construction Limited [2006] EWCA Civ 1737, reported in our January 2007 updater and Benfield Construction Limited v Trudson (Hatton) Limited [2008] EWHC 2333 (TCC), before setting out the factors to be taken into account in considering whether the same or substantially the same dispute had been referred to or resolved in an earlier adjudication:

  • The ambit and scope of the disputed claims needed to be considered and a reasonably broad brush approach taken to determine what had been referred.
  • Different or additional evidence, be it witness, expert or documentary, in the later adjudication over and above what was relied upon in an earlier adjudication would not usually alter the essential dispute between the parties.
  • Deploying different or additional arguments in the later adjudication to support or enhance a claiming party's position would not usually mean that it was a different dispute from that which was referred earlier.
  • Claiming a different amount or on a different quantification basis was not necessarily a pointer to the later dispute being in substance different.
  • The amount or bulk of the detail, evidence, analysis, submissions or annexures should not over-awe the parties when comparing two sets of documents purporting to set out different disputes.
  • It was legitimate to look at why the later adjudication had been brought and the given reasons why it was formulated.
  • There was no specified form for the notices of adjudication and referral and they did not need to be interpreted as if they were contracts, pleadings or statutes.
  • A strong pointer as to whether disputes were substantially the same was whether the same causes of action were relied upon in the earlier and later notices of adjudication and referral bearing in mind that one dispute might encompass more than one cause of action.

Same or substantially the same dispute - applying the principles

On the facts, and applying the principles, the court formed a “very clear view” that essentially the dispute referred to by Mr Smith in the third adjudication was the same or substantially the same as the dispute referred to in the second adjudication. As a result, the third adjudicator lacked jurisdiction to hear the dispute.

Editors’ comments

Although the case is heavily dependent on its facts, it does provide useful guidance on the factors to take into account when determining whether a dispute referred to adjudication was the same or substantially the same as a dispute which has already been referred to adjudication.

View: Carillion Construction Limited v Smith [2011] EWHC 2910 (TCC)