UK: Formation Of Subcontracts And Time Bar Clauses

Today, notices and time bar provisions are found in most construction contracts. As Edward Colclough highlights, the 2016 case of Commercial Management (Investments) Ltd v Mitchell Design and Construct Ltd & Anor1 provides a useful insight into the enforceability of time bar provisions and highlights the confusion that can often exist when trying to identifying the applicable terms and conditions to a subcontract.

Here, the main contractor ("Mitchell") was engaged to design and build a warehouse in Erith, Kent. Mitchell appointed a ground works subcontractor ("Regorco") to carry out certain ground treatment works, known as vibro compaction, at the site. Ten years following practical completion, the tenant of the warehouse complained of settlement of the slab beneath the warehouse production area.

When the claims came to court, as a preliminary issue, the court had to determine:

  1. which terms and conditions formed the subcontract between the parties; and
  2. if Regorco's time barring clause, contained within its standard terms and conditions, complied with the Unfair Contract Terms Act 1977 ("UCTA").

Terms and Conditions of the subcontract

Mitchell stated in its invitation to tender that the subcontract terms were to be the JCT Standard Form of Contract (DOM/2). In response, Regorco provided an estimate for carrying out the subcontract works stating that such works would be undertaken on its own standard terms – which included a time barring clause. Mitchell later issued Regorco with a letter of intent instructing them to proceed to keep the project on programme.

The letter made no reference to the terms governing the subcontract. Following completion of the works, Mitchell issued a purchase order to Regorco to finalise the contractual paperwork. This purchase order now sought to incorporate Mitchell's own standard terms and conditions to govern the subcontract. Regorco returned and counter-signed the purchase order, but only after having made various manuscript amendments to the document. The key amendment was that Regorco accepted that Mitchell's terms and conditions governed the subcontract "where applicable otherwise [Regorco's standard terms and conditions] apply".

In assessing the many conflicting provisions between the parties, Mr Justice Edwards-Stuart applied the established principle of the "battle of the forms" (i.e. the last party to put forward terms and conditions that are not explicitly rejected wins). In doing so, he found that the purchase order issued by Mitchell was not an acceptance of Regorco's estimate, not least because it sought to introduce Mitchell's standard terms and conditions into the subcontract.

The subcontract terms were only considered to be agreed between the parties once the purchase order was counter-signed and returned with the manuscript amendments and the manuscript amendments were reviewed by Mitchell who decided to take no further action.

Although Regorco's manuscript amendments formed part of the subcontract, the time bar clause could not be read alongside Mitchell's standard terms and conditions as it attempted to curtail the indemnities given by Regorco under Mitchell's terms and conditions.

Conclusion

Having spent time and money negotiating a main contract with an employer, it is surprising how contractors can treat agreeing the subcontract terms as an afterthought. This case is a prime example.

The subcontract was finalised after the works were completed, there were numerous conflicting standard terms, purchase orders, letters of intent, correspondence and contract documents exchanged between the parties that provided little clarity as to what formed the subcontract between the parties. This contractual uncertainty was no doubt assisted by the fact the contractor and subcontractor had previously worked together and were probably working under the expectation that "everything would work out like last time".

It would have been in the interests of both parties to have had the contractual terms agreed and clearly documented at the outset. The Judge noted that the contractor was put in a difficult position by having to negotiate the subcontract after practical completion. This forced it to make concessions it would not have done, had the subcontract been agreed early on.

The case serves as a reminder of the importance of ensuring parties are aware of the applicable contractual terms and conditions in play between them. It also provides a warning to carefully review any last minute amendments to contractual documents. As seen, the last amendments made and not expressly rejected were deemed to be incorporated.

Time barring clause

Time barring clauses can provide a party with a complete defence to what would otherwise be a perfectly valid claim. The clause Regorco sought to incorporate through its standard terms and conditions looked to provide such a defence to the claim against it:

"All claims under or in connection with this Contract must in order to be considered as valid be notified to us in writing within 28 days of the appearance of any alleged defect or of the occurrence (or non occurrence as the case may be) of the event complained of and shall in any event be deemed to be waived and absolutely barred unless so notified within one calendar year of the date of completion of the works."

The clause required the notification of any claim for defective works to be made in writing within 28 days of the appearance of the defect, and in any event, to be notified within one calendar year of completion of the works. The clause expressly noted that failure to do so would result in any claim being time barred.

Did UCTA apply?

Section 1 of UCTA provides that a person cannot restrict his liability for negligence "except in so far as the term or notice satisfies the requirement of reasonableness". Liability for death or personal insuring resulting from negligence can never be excluded.

Here, the court considered whether the above clause might have been subject to the provisions of UCTA on the basis it formed part of the written standard terms of business of one of the parties. The court concluded that it did and UCTA applied. In reaching its decision, it found the time bar clause was part of Regorco's standard terms of business even though the clause was only ever intended to be partially incorporated into the subcontract.

UCTA is intended to govern the practice of companies offering and relying on terms and conditions in the hope that the other party will not take any notice of them or regard them as non-negotiable. The time bar clause was found to be part of Regorco's standard terms of business and therefore subject to the provisions of UCTA.

 The Judge took particular note of the fact that the director of Regorco had required his own company's terms and conditions to be blown up in A3 for ease of reference at the hearing. The clause clearly formed part of the "small print".

UCTA – Reasonableness Test?

Having found that the clause would have been subject to UCTA, the Judge went on to provide some useful observations on the requirement of reasonableness as defined under section 3(2) of UCTA which states that:

"(2) As against that party, the other cannot by reference to any contract term—

(a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; or

(b) claim to be entitled—

(i) to render a contractual performance substantially different from that which was reasonably expected of him, or

(ii) in respect of the whole or any part of his contractual obligation, to render no performance at all, except in so far as (in any of the cases mentioned above in this subsection) the contract term satisfies the requirement of reasonableness."

The clause was distinguished from the time bar imposed by the FIDIC Red Book on the basis that FIDIC drafting requires a contractor, who wishes to claim an extension of time or additional payment, to give notice as soon as practicable, and not later than 28 days after he becomes aware, or should have become aware, of the event or circumstance giving rise to the entitlement. The FIDIC drafting was reasonable on the basis that:

(i)  contractors generally know when a contract is in delay or whether the work has been disrupted and so giving notice of the relevant event within 28 days should not be unduly onerous; and

(ii)  time starts running from when the contractor knew or ought to have known about the event.

In contrast, Regorco's time bar clause:

(i)  applied to events after the parties were off site and to concealed works; and

(ii) time started to run from the date the defect appeared and not from when the other party knew or ought to have known about it.

Mr Justice Edwards-Stuart concluded that the clause was not reasonable given the nature of groundworks undertaken by Regorco:

"It is, in my experience at least, rare for a failure of ground or piles to manifest itself in a period measured in months, rather than in years. Of course, there may be exceptional cases when the design or construction is so poor that failure occurs almost immediately upon loading, but I cannot recall such a case. In this case, the lapse of time was in excess of 10 years: whilst I would not suggest that such a long period is normal, it is more of the order that one would expect."

In these circumstances, it was concluded that it would not be reasonable to expect that the contractor should comply with the 28 day time limit, or one year long stop, imposed for bringing a claim for such defects. As a result, the clause would have been struck out under UCTA.

Conclusion

The case is a useful reminder that standard terms in a business to business contract will be subject to UCTA's reasonableness requirement, even if such terms are dissected or incorporated only in part by parties. Any limitations or exclusions contained within a business's standard terms must be reasonable in the circumstances to be enforceable under UCTA.

A time bar which ran from the date of an event (not knowledge of the other party) and provided a short timeframe to bring a claim in relation to concealed works (i.e. groundworks) was found, in the circumstances, not to be reasonable.


1. [2016] EWHC 76 (TCC)


This article is taken from Fenwick Elliott's 2016/2017 Annual Review. To read further articles go to http://www.fenwickelliott.com/research-insight/annual-review/2016

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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