A warning to contractors involved in using the services of sub-contractors arises out of a recent decision by the Technology and Construction Court in the case of Leander v Mulalley. The decision in this case is useful in illustrating when a court will imply a term into a contract.
Leander is a sub-contractor who was engaged to carry out groundworks, including drainage and other works for Mulalley on a site in South London. Mulalley served two withholding notices in relation to Leander’s applications for payment for work carried out. It withheld payment on the basis that Leander was obliged, but failed, to carry out the sub-contract works in accordance with Mulalley’s programme dates and periods set out in its activity schedule.
Mulalley claimed that Leander had an implied obligation to proceed regularly and diligently with the sub-contract works. It claimed that the activity schedule represented the best way of measuring whether or not Leander had complied with this term. In addition, the sub-contract allowed Mulalley to give 48 hours notice to Leander to rectify this breach before terminating for failure to proceed with the sub-contract works regularly and diligently. Mulalley argued that, as this was one of the grounds for termination under the contract, there must also be a corresponding implied term that Leander must proceed regularly and diligently with the sub-contract works.
The Court will only imply a term in the contract if it is necessary to make the contract work. The following five conditions must be satisfied:
1. It must be reasonable and equitable;
2. It must be necessary to give business efficacy to the contract so that no term will be implied if the contract is effective without it;
3. It must be so obvious that “it goes without saying”;
4. It must be capable of clear expression; and
5. It must not contradict any express term of the contract.
The Court found that there was no implied term in Leander’s contract to proceed regularly and diligently. Indeed, although failing to proceed regularly and diligently with the works enabled the contractor to serve notice under the termination provisions, there were other similar provisions allowing the contractor to terminate, for example, if the sub-contractor became insolvent, and insolvency, in and of itself, is not a breach of contract. Furthermore, in the absence of any indication to the contrary, a contractor is entitled to plan and perform its works as it pleases provided that it finishes by the date fixed in the contract.
The court also contemplated what “regularly and diligently” meant. Logically, the court said that what it means is dependent on the time period within which the obligation needs to be carried out. In other words, if the contractor is obliged to achieve a certain outcome within 12 weeks, it may be necessary for the contractor to exercise more haste than if the obligation is to complete it within 24 weeks.
The judgment in this case is a useful reminder for parties to consider to what extent they want to control the process of works that their contractor or sub contractor should carry out. For example, the standard JCT contracts provide for the contractor to “begin the construction of the Works or Section and regularly and diligently proceed with and complete the same on or before the relevant Completion Date.” However, this provision does not exist within the JCT sub-contract form. In a contractor/sub-contractor relationship it will be a matter for the sub-contractor to plan and perform its works in any way it sees fit in order to reach the stated completion date in the contract.
If you’re a contractor and you want to make sure that a sub-contractor meets certain key dates within your programme, you must make provision for this in your sub-contract together with an associated workable extension of time mechanism relating to the key dates.
Contact: Joe Griffiths, Partner
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