Enforceability Of Contracts Between Up And Gcm

Question 1

The issue with reference to Unicorn Properties Ltd (UP) and Goldfinch Construction Management Ltd (GCM) is whether there is a contract between them that can now be enforced against UP by GCM. The law applicable in this scenario is related to the formation of contracts, which is related to general contracts and also applies in similar manner to construction contracts.

Formation of contract requires three elements, which are agreement between parties; intention to create legal relations; and quid pro quo (Chappell, 2014). The agreement is formed when one party makes an offer to the other party and the other party accepts the offer (Poole, 2016). Offer should be distinguished from an invitation to offer; for instance, the invite for tenders would be invitation to offer and the tender would be an offer. Therefore, for the purpose of making an offer, a tender would constitute an offer and an acceptance of the tender would constitute acceptance. This was held by the court in British Steel Corporation v Cleveland Bridge and Engineering Co Ltd [1984] 1 All ER 504.

An intention to create legal relations differentiates between a legal contract and moral promises (Andrews, 2015). Two parties would be said to have an intention to create legal relations when they intend to be legally bound by the terms of the contract. A quid pro quo is in the nature of ‘something in return for something’ or consideration. Thus, where the parties agree to do something in return for something, it would amount to consideration.

If the above elements are present in the situation, then a contract can be construed. In construction contracts, letters of intent can be useful in relaying acceptance and giving instructions. In CT Construction Ltd v E Clarke & Sons (Coaches) Ltd [2002] EWCA Civ 972, the court has held that if there an instruction to do work and the other party accepts the instruction and carries out the work, a contract is construed. The same principle was laid down in Harvey Shopfitters Ltd v ADI Ltd [2004] 2 All ER 982.

Applying the above principles to the current case, the letter dated 15th March 2020 by UP noted authorised GCM to “begin the design work as soon as possible.” This was in response to the tender submitted by GCM and can be construed as an acceptance of the offer. The scope of work was defined in the letter and instructions given to start work. As per the principles laid down in CT Construction Ltd and Harvey Shopfitters Ltd the instruction and acceptance of the same by GCM can be used to formulate a contract between the parties. GCM carried out the requested design work and submitted the design drawings to UP as per the instructions by latter. A ‘subject to contract’ label is not sufficient to denote lack of intention to become legally bound when clear instruction to start work are given. To conclude, UP is bound by the contract.

Question 2

The issue with regard to Greengage Education Services (Greengage) and Plumpton Construction Ltd (PCL) is whether PCL can terminate the contract because of the variations to the original contract by Greengage. A variation is an alteration to the scope of works in the construction contract (JCT SBC 2016, Clause 5.1).

Variations may include alternation or modification of the design, quality or quantity of the Works or the addition, omission or substitution of any work (JCT SBC 2016, Clause 5.1). Variations are permissible under the JCT SBC 2016 on the grounds of clients changing their mind, or errors in design, or outside events. However, variations may not alter the fundamental nature of the work without the consent of the contractor. There may be clauses in the contract that can expressly restrict the scale of variations. Even if no such clause in the contract exists, variations that make extreme changes to the nature of the work by the description of the work in the Recitals are restricted under the JCT.

Variations that go to the root of the contract are not allowed and the parties would have to make a new contract to make such variations as was held in Blue Circle Industries plc v Holland Dredging Company (UK) Ltd (1987) 37 BLR 40. Only those variations that can be accommodated in the existing contract are allowed as per McAlpine Humberoak Ltd v McDermot International Inc (1982) 58 BLR 1.

The valuation of variations includes the work that the variation describes as well as other expenses that may be incurred due to the variation. Under Clause 5.2, employer and contractor are required to agree to the value of the variations by Direct Agreement; or measurement and valuation under Valuation Rules; or by Contractor as a Variation Quotation. The contract cannot be terminated on the basis of the minor Variations to the Works. The variations have to be major in nature and go to the root of the contract for them to be held to be outside the scope of the original work.

In the present situation, the new Variations will change the use of the building from a nursery school to secondary school, which is a major variation to the work. This can only be done under a new contract. Moreover, these works have to be valued as per one of the three methods mentioned above. To conclude, Plumpton can ask for valuation for the new changes and a new contract to accommodate the same.

Question 3

The issue in this case scenario is whether employer can take relevant action due to the defective concrete used by the Contractor in the construction of some pillars and whether the use of defective concrete would amount to breach of contract. Defective work or materials come within the scope of breach of contract under the JCT SBC 2016.

If the contractor uses defective materials in the construction, then it is a failure to perform the agreed terms of the contract, thus, a breach of contract. As in any case of breach of contract, certain remedies are available to the non-breaching party. The employer can ask for damages from the contractor for the breach of contract for use of defective materials. Damages would be the monetary cost of the loss, that is, cost of reinstatement or the compensation for the decrease in value of the property (East Ham Corporation v Bernard Sunley & Sons [1966] AC 406).

Under JCT contracts, parties to the contract also have some common law rights, including the right to deduct set-offs under the defence of ‘abatement’ from the certificate sum. Abatement can be applied where the employer may argue that they are not liable to pay the amount of payment claimed because of the defects in the work for which the payment is sought. The defects may be proved to have caused a reduction in the value of the thing constructed.

To conclude, in this situation, the use of defective materials amounted to a breach of contract. The employer can ask for damages and may also take use of abatement to deny payment for work done.

Question 4

The question considered in this essay is whether Cavendish makes it easier for contractor to have a liquidated ascertained damages clause rendered unenforceable. It is argued that the decision does not really make it easier for the contractor.

In Alfred McAlpine v Tilebox Ltd [2005] EWHC 281, Jackson J had noted that an agreed pre-estimate of loss does not become unreasonable if it is not right, further saying that there should be a substantial discrepancy in the damages stipulated and likely to be suffered for these to be unreasonable. This made it difficult for contractors to have liquidated ascertained damages clause rendered unenforceable on the grounds of these being in the nature of penalty.

In Cavendish Square Holdings BV v Talal El Makdessi [2015] UKSC 67, the court held that the clause would be a penalty if it imposes a detriment on the person breaching the contract which is not commensurate with the legitimate interest of the innocent party. It was held that it is necessary to consider whether and how the legitimate business interest is served and protected by the clause and clause is not extravagant, exorbitant or unconscionable. It may be said that compared to the earlier position, contractors may now find it is not easier to have such clauses rendered unreasonable because the contractor has to show that the clause acts as a detriment that is out of proportion to the legitimate interest.

Moreover, consistent with the earlier approach, the position is that if the contractor and the employer have negotiated a contract on a level playing field, then the contractor cannot challenge clause on liquidated damages on the ground of these being a penalty. However, in relief to the contract, the decision also provides that the liquidated damages should attach to the legitimate business interests, and not be exorbitant or unconscionable, failing which it can be set aside as being unreasonable or in the nature of a penalty.