Singapore: Implying Terms Of Due Diligence And When Time Is Of The Essence In Construction Contracts

A case study of CAA Technologies Pte Ltd v Newcon Builders Pte Ltd [2016] SGHC 246



Overview

In CAA Technologies Pte Ltd v Newcon Builders Pte Ltd [2016] SGHC 246, the Singapore High Court held that it could be appropriate to imply a term requiring contractors to perform their obligations with due diligence and expedition, and with respect to that, a term making time of the essence could be implied. The court also held that if, after the signing of a letter of intent, a party does not unequivocally signify its acceptance to a subsequent contract, that subsequent contract could not form part of the parties' contract.

This update takes a closer look at the decision.

Background

CAA Technologies Pte Ltd (CAA) was engaged by Newcon Builders Pte Ltd (Newcon) to design, produce, and deliver pre-cast concrete hollow core slabs for a building project. The parties signed a brief three-page letter of intent containing only eight terms and conditions. The letter provided for the parties to replace its terms with a comprehensive contract (referred to as a "letter of acceptance" in the letter of intent) setting out their obligations in greater detail.

Newcon subsequently sent to CAA a 153-page letter of acceptance which expanded in great detail on the eight terms and conditions. Attached to the letter of acceptance was a one-page acknowledgement—which was not signed by CAA.

Newcon reminded CAA several times to deliver the slabs in accordance with the schedule in the letter of acceptance, but CAA failed to deliver those slabs. It did not help that installation of the slabs was part of the superstructure works—which were on the critical path. Newcon revised the delivery schedule to take into account CAA's failures, but even so, CAA again failed to meet the revised schedule. CAA eventually did deliver some of the slabs, but its delivery was out of sequence, incomplete, and badly behind schedule. Newcon sent a formal notice of delay to CAA and received no response. Newcon then terminated the contract pursuant to a termination clause in the letter of acceptance.

CAA claimed against Newcon for failing to pay CAA sums due under the contract and by purporting to terminate the contract without any basis in law to do so. Newcon counterclaimed against CAA for breach of contract, claiming among others, the additional cost of engaging a substitute contractor and liquidated damages.

Issues in dispute

The court was faced with four issues:

  1. Whether the letter of acceptance formed part of the parties' contract;
  2. What were CAA's contractual obligations, whether express or implied;
  3. Whether CAA breached those contractual obligations; and
  4. If so, whether that breach entitled Newcon to terminate the contract.

Status of the letter of acceptance

The court held that the letter of acceptance did not form part of the parties' contract.

CAA argued that it had positively rejected the letter of acceptance. The court found that this was not the case, as there was no documentary evidence showing any rejection. CAA did not sign the acknowledgement because of its own inertia, and such inertia did not constitute acceptance. CAA did nothing which manifested an unequivocal intent, objectively ascertained, to accept the offer set out in the letter of acceptance. Even if CAA did act on information in one clause in the letter of acceptance, that does not form an unequivocal indication of its intent to accept as contractually binding every clause of the letter of acceptance.

Thus, the claims and counterclaims stood or fell upon only the terms of the letter of intent.

CAA's obligations under the letter of intent

Express obligations

CAA had an express obligation under the letter of intent to produce and deliver slabs in order to follow Newcon's progress on site. CAA was to do so in accordance with a delivery schedule which the letter of intent envisaged would be provided, supplemented and revised from time to time. The letter of intent did not contain any schedule—instead, the schedule was found in the letter of acceptance. Although the court found that the letter of acceptance had no contractual effect, it does not mean that the letter is a total nullity. It had contractual effect not as a term of the letter of acceptance, but as a delivery schedule brought to CAA's attention post-contractually as the letter of intent envisaged. CAA is therefore obliged to follow the schedule.

Implied obligations

The court implied two terms in fact into the contract: (i) CAA had an implied obligation to proceed with its works with due diligence and expedition at all times until completion, and (ii) time was of the essence with respect to the first implied term (this was for this contract in question).

The court applied the three-step test set out in Sembcorp Marine Ltd v PPL Holdings Pte Ltd and another and another appeal [2013] 4 SLR 193 (Sembcorp):

  1. Ascertain how the gap in the contract arises. Implication will be considered only if the gap arose because parties did not contemplate the gap;
  2. Whether it is necessary in the business or commercial sense to imply a term in order to give the contract efficacy;
  3. Whether the specific term passes the 'officious bystander' test.

At the first Sembcorp step, the court found that the entire commercial purpose of the parties' contract was for CAA to supply structural elements to Newcon in full, in sequence, and in time. Despite this, the letter of intent contained no express provisions on this point. The gaps arose because parties failed to contemplate them and were a result of the "rudimentary" and "haste" form in which the parties reduced their agreement into writing in the letter of intent. Although express terms on the commercial purpose were found in the letter of acceptance—which indicated that Newcon did contemplate these gaps—it was only after the parties had themselves contractually bound by way of the letter of intent.

At the second Sembcorp step, the court commented that CAA knew of the direct connection between its timely delivery and Newcon's timely performance of its obligation to the Employer. The delivery also had to occur in a particular sequence as the main contract—and laws of physics—required the works to be performed in a particular sequence. Business efficacy therefore necessitates an implied term as to timeliness in the production and delivery of the slabs, and for a contractual consequence for breach of that implied term.

At the third Sembcorp step, the court accepted Newcon's submission that the commercial purpose of the parties' contract made it necessary to imply that CAA was to proceed with its works with due diligence and expedition at all times until completion. It was also necessary that time be of the essence (which was implied into this contract), but only with respect to the first implied term of due diligence and expedition. Without this implied term making time of the essence, Newcon would have to wait patiently for CAA to miss each delivery date and even then, it would have no right to terminate but a right only to sue for damages. The court stressed that this second implied term did not entitle Newcon to terminate for any breach of any time provision under the contract. Even then, it did not give Newcon the right to terminate for breach of the first implied term. Newcon could only terminate if the breach, taken together with other breaches, went to the root of the parties' bargain.

CAA's breach of obligations

The court found that CAA breached both the express and implied terms of the parties' contract. In relation to the express terms, it was clear that CAA had failed to meet the delivery schedule as set out in the letter of acceptance. In relation to the implied terms, CAA failed to proceed with its works with due diligence and expedition because it failed to plan its production to meet the schedule, and did fail to deliver on time.

Entitlement of Newcon to terminate the contract

Since the letter of acceptance did not form part of the contract, Newcon was not entitled to rely on the express right of termination.

Nevertheless, the court held that Newcon was entitled to terminate the contract. In light of the commercial purpose of the contract, both the express term in the letter of intent requiring CAA to follow progress on site and implied term of due diligence and expedition constituted conditions of contract. CAA's breach of these conditions were thus a repudiatory breach entitling Newcon to terminate either under (i) common law or (ii) implied term making time of the essence. Even if those two terms were not conditions, breaches of both terms deprived Newcon of substantially the whole benefit it intended to obtain from the contract, and were sufficient to trigger its right to terminate.

Concluding remarks by the court

Since Newcon did not wrongfully terminate the contract, the bulk of CAA's claim failed. However, CAA was entitled to be paid for the slabs it actually produced and delivered. Newcon, on the other hand, was allowed the additional cost in engaging a replacement sub-contractor as this cost was reasonably foreseeable from CAA's breach and Newcon acted reasonably in doing so. However, Newcon's claim for liquidated damages failed as it was only a right found in the letter of acceptance, which did not form part of the parties' contract. Nevertheless, Newcon's claim for liquidated damages paid to the Employer was allowed as this flowed directly from CAA's breach and was within the reasonable contemplation of the parties if CAA failed to perform its obligations.

Conclusion

This case is important as it signifies the willingness of the court to imply a term in a construction contract obliging a contractor to proceed with due diligence and expedition. More significantly, it is open to the courts to imply a term making time of the essence in relation to certain terms in the contract. Also, in order to safeguard the rights and obligations of both parties, parties have to be sure that any subsequent contract that arises after the signing of a letter of intent is properly signed and unequivocally accepted. Otherwise, the subsequent contract may not be taken to form part of the parties' contract at all.

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