Contractual issues in Construction Law

Louise Cheung, University of Southampton, Hertfordshire County Council

Following two weeks’ shadowing solicitors at a City Law firm specialising in work with the public sector, I share some interesting contractual issues in Construction Law concerning Liquidated and Ascertained Damages Clauses and the Rights of Third Parties in Contract Law.

Liquidated and Ascertained Damages Clauses (LAD)

LAD clauses allow a specified sum of money to made payable when a party has made a particular breach of contract. LAD clauses are most commonly used in construction contracts where a contractor fails to complete building works by a specified contractual completion date.

The drafting of such a clause requires:

  • A genuine pre-estimate of loss (and not deemed a ‘penalty’ clause)
  • Consideration of when a time limit can be extended (where for example where there has been a breach of contract or ‘act of prevention’ from the innocent party)
  • The means to which liquidated damages can be taken from the interim or final payment

E-Nik Ltd v Department for Communities and Local Government [2012] EWHC 3027

The issue of ‘take or pay’ clauses was discussed in this 2012 case. The claimant (IT company E-Nik Ltd) entered into an agreement with their client (DCLG), which included the clause: “2.1 The Authority hereby undertakes to purchase minimum of 500 days of Consultancy from the Supplier per year based on project requirement, additional days will be required once the purchased days have been exhausted.”

The dispute related to the Claimant’s unpaid invoices to the sum of £760,920 (inclusive of VAT) as DCLG had not purchased the minimum 500 days of Consultancy.

Judgment: This clause was deemed commercially justified and not a penalty clause. The claimant firm had to maintain the resources to provide the service whenever needed, and the parties had negotiated the working with comparative bargaining power.

Rights of Third Parties in Contract Law

The privity of contract and the rights of third parties have long distressed lawyers and judges alike. Issues of double liability, third parties’ protection under exclusion clauses, and ‘Himalaya’ clauses have all added to the complexity of contract law. Since the Contracts (Rights of Third Parties) Act 1999, the rules pertaining to conferring a benefit to non-parties and where a duty cannot be imposed have been clarified in statute. Similarly to LAD clauses, the rights of third parties often are disputed in complex construction contracts. Both contractual obligations and benefits can be conferred upon third parties through different mechanisms such as through trust, collateral contract and novation.

The 2000 case, Panatown v McAlpine demonstrates that there are still complexities in the ability to claim damages for third parties which are likely to need to be examined further by the courts.

Panatown Ltd v McAlpine Construction Ltd [2000] 4 All ER 97

The claimant Panatown Ltd entered into a building contract with Alfred McAlpine Construction Ltd for the construction of an office block and car park on land owned by Unex Investment Properties Ltd (UIPL). Panatown Ltd and UIPL were both parts of the Unex group of companies.

McAlpine also entered into a duty of care deed with UIPL, whereby McAlpine agreed with UIPL that they would carry out their obligations under the building contract with Panatown with reasonable skill and care. A dispute arose between Panatown Ltd and Alfred McAlpine Construction Ltd due to breach of contract for building defects.

Arbitration judgment: McAlpine’s defence during the arbitration included that Panatown Ltd had no interest in the site and therefore suffered no loss. The arbitrator heard this as a preliminary issue and found in Panatown’s favour. McAlpine appealed to the High Court which found in favour of McAlpine.

Court of Appeal: The Court of Appeal reversed the High Court, finding for Panatown.

The House of Lords: The House of Lords reversed the Court of Appeal finding for McAlpine. The House of Lords judgment hinged on the so-called ‘broad’ and ‘narrow’ ground justifying the claimant’s claim.

The Narrow Ground

The narrow ground concerns interpretation of the rule that a claimant can only ever recover damages for loss which he himself has suffered. This exception is established in commercial goods’ contract The Albazero, Albacruz (cargo owners) v Albazero (owners) [1976] 3 All ER 129 and Dunlop v Lambert (1839) 6 Cl & Fin 600, 7 ER 824. In the Albazero, where it is in contemplation of the parties that an interest in the goods may be transferred to another after the contract has been entered into (and before the breach which causes loss or damage to the goods), the original party to the contract, (if this is their intention) is to be treated as having entered into the contract for the benefit of all persons who acquire an interest in the goods. Accordingly, the original party is entitled to recover damages for breach of contract for those whose benefit the contract was entered into, and has now suffered loss. Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corp Ltd v Sir Robert McAlpine & Sons Ltd [1993] 3 All ER 417 also applied this rule in the building contract context. Darlington BC v Wiltshire Northern Ltd [1995] 1 WLR 68 further extended this rule where in the case no transfer of interest in the property was envisaged.

In Panatown, Lords Clyde, Jauncey of Tullichettle and Browne-Wilkinson approved the extension of The Albazero exception, and would have found for Panatown on that basis had it not been for the Duty of Care Deed, which displaced the narrow ground route.

The Broad Ground

Lords Goff and Millet dissented following the ‘broad’ ground argument, which follows the broad ground dissent by Lord Griffith in Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd; St Martins Property Corp Ltd v Sir Robert McAlpine & Sons Ltd [1993] 3 All ER 417

Lord Griffith in the 1993 Linden Gardens case argued that it was offensive to common sense that a person would be deprived of all damages because in a highly technical sense he had not suffered any loss. A person who contracts with another person to perform certain work is entitled to have this work done properly and if it is not, he is entitled to the cost of rectifying the defect.

Lord Goff and Lord Millett argued that the problem Panatown is not privity but in actual fact an overly narrow approach to compensatory loss in English law. Lord Goff and Lord Millett argued that protection of the contracting party’s performance or expectation interest was key to this case.

Lord Goff and Lord Millett did not think the Duty of Care deed deprived Panatown of recovery on the broader ground since the parties clearly did not intend the Duty of Care deed to replace Panatown’s rights under the construction contract.

It was very useful to follow up on some of the things I taught in contract law and examine how these subjects affect practice now.

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