Business common sense in contract terms.

The Supreme Court has held that business common sense should prevail when interpreting contract terms. How does this affect your terms? In Rainy Sky S.A. & Ors v Kookmin Bank [2011], the UK Supreme Court held that where language used in a contract has more than one potential meaning, it is generally appropriate to adopt the construction that is most consistent with business common sense.

In that case, the key issue between the parties concerned the proper construction of two paragraphs in a Bond document. The second paragraph of each Bond provided that Rainy Sky was entitled to “repayment of the pre-delivery instalments” upon their “rejection of the vessel…termination, cancellation or rescission of the Contract…”. The third paragraph of each Bond stated that, in consideration of each Rainy Sky’s agreement to make the pre-delivery instalments, Kookmin Bank undertook to pay “all such sums due to you under the Contract”. Kookmin Bank argued that “such sums” referred only to the limited circumstances referred to in the second paragraph, which did not include where repayment was triggered by an insolvency event. Rainy Sky argued that “such sums” simply meant any sums however they may became repayable.

Contrary to the view taken by the Court of Appeal, the UK Supreme Court agreed with Rainy Sky, and concluded that the long line of case law in this area had established that the Court’s task was to determine what a reasonable person, who had all of the background knowledge reasonably available to the parties at the relevant time, would have understood the parties to have meant by the words that they used.

The question for the Court was the role to be played by considerations of business common sense in determining what the parties meant. The Court held that where the terms of the contract were clear and unambiguous, effect would be given to them without any consideration of business common sense, even if the result is improbable. However, where there were two possible constructions of the language used (as would often be the case), the construction that was most consistent with business common sense would generally be adopted. It will therefore often be the case that, where a contractual dispute has arisen, considerations of business common sense will come into play.

Therefore if you face, or potentially face a situation where the application of business common sense may need to apply in respect of the construction of the language used in a contract term or in conflicting contract terms, then you need to contact our office for advice

The Battle of the Forms

When you have a Battle of the Forms, which form wins? .......

For a contract to be formed there must be agreement. However, before agreement is reached there may often be an exchange of correspondence containing offers and counter-offers. Sometimes agreement is reached by conduct (for example by starting work on site), and it is then necessary to determine what was the counter-offer that had been accepted by that conduct. This process is often referred to as the Battle of the Forms.

The standard position is that the last counter-offer that was in existence before acceptance by conduct took place was the offer that was accepted by the conduct. This standard position was reinforced again in the recent 2011 Court of Appeal case of Tekdata Interconnections Ltd v Aphenol Ltd where it was concluded that the standard position as outlined above would apply unless the parties’ previous conduct clearly showed that their common intention was that some other terms should prevail.

So that all seems very simple then - but as we all know it is often extremely difficult to determine which is the last counter-offer that was actually in place.

In fact this is a matter that has taxed many of the great legal minds through the years – and those great legal minds (unfortunately) often reach totally different conclusions. So it is obviously preferable not to put yourself into a position where the matter needs to be referred to a third party to decide upon in the first place.

Therefore if you face, or potentially face a Battle of the Forms situation, you need to ensure that your position is protected, and if you need any advice regarding this matter or any related issue, you should immediately contact our office.

BIM - Building Information Modelling

Building Information Modelling (BIM) is the way forward, but what about your intellectual property rights?.........

BIM is the process of creating and managing information, usually in a three-dimensional (3D) computer model. The government may soon require the use of BIM on all of its major projects, and it is recognised as being the way forward for the construction industry. However, BIM may bring with it certain legal challenges and one of the most obvious of these is the question of intellectual property rights.

When BIM is used to its full extent, it is likely that there will not only be one 3D model produced but there may be several models. Each of these models may have sensitive information embedded by different consultants or specialists, and the models may be co-ordinated together by an ‘information model manager’.

The question then is who owns the co-ordinated model and the intellectual property rights contained within it.

This entire area is a minefield of conflicting rights, and, depending upon the wording of any agreements reached, it may be that the intellectual property rights in the combined model may be invested in more than one party.

Clearly this is an area that will become more important as the use of BIM increases, and if you have any queries about how the use of BIM may affect your intellectual property rights, you should immediately contact our office.

If you alter the terms of the contract, your Bond protection may be lost.

If you alter the terms of the contract, your Bond protection may be lost. Hackney Empire agreed with a Contractor that it had employed to enter into a “side agreement” in respect of making three stage payments to the Contractor to cover, in part, a claim for loss and expense that the Contractor had submitted while the Contractor, in accordance with the contract, provided further particulars of its loss and expense claim, whilst at the same time attempted to progress regularly and diligently to meet a newly agreed completion date, at which time the final stage payment would be released. However, and despite this “side agreement”, the Contractor fell into administration.

Hackney Empire had a Performance Bond in place with Aviva, and, because of the failure of the Contractor as outlined above, called upon that Bond. However, Aviva refused to honour the Bond because it said that the “side agreement” that Hackney Empire had reached with its Contractor, was a material variation of the contract between Hackney Empire and its Contractor, and that meant that the Bond was invalidated.

The matter was referred to the Technology and Construction Court in London, and the Court found that the Bond was still valid and Aviva was required to honour the Bond as the “side agreement” had not in fact varied the terms of the contract between Hackney Empire and its Contractor.

However, if the “side agreement” had varied the terms of the contract, the matter may well have been different. Therefore the risk is that a “side agreement” could invalidate a Performance Bond, or it could be that Bond providers may amend the wording of Bonds to “define” what type of “side agreement” in respect of the operative contract would have the effect of invalidating the Bond.

In the present economic climate, “side agreements” are becoming more and more common. Therefore, if you are tempted to enter into some form of “side agreement”, particularly where you have a Performance Bond in place, proceed with extreme caution, as you may repent at leisure over the action you took in haste.

Therefore, if you are considering entering into a “side agreement” and are unsure if this would have an impact on a live Performance Bond, then you need to contact us (i.e. Melbury Construction Consultants Ltd) to find out how this may affect your contractual and/or legal rights and/or obligations.

Do you want to risk losing money?

An Employer or a Contractor sends out a tender enquiry which consists of several lever arch files and CD’s. They ask you to provide a price within a particular, normally tight, timescale. You win the job, but you lose money because you did not price the ‘risk’ factor.

So, what is the ‘risk’ factor?

This can only be determined by inspecting the documentation issued, and will vary for every project that you price. A party will often attempt to pass on its own ‘risk’ factor onto another party. Typical examples of risk are full and partial design responsibilities, payment conditions, erroneous clauses, bond requirements etc. These types of risks occur frequently, and nearly always have a cost implication, but they are overlooked or are not given any priority at all in the rush of the tendering process. Because of this, it is often these very risk factors that turn what would have been a profitable contract into a loss making project.

But you may say, if we priced the risk factor in the first place we may not have won the work. Putting aside the obvious comment that why would you want to win a loss making project (particularly remembering the old mantra that ‘turnover is vanity, cash-flow is sanity’); there is another way.

That other way is to negotiate the risk factors during the tender process to ensure that the more onerous of those risk factors are modified such that they are included within your tendered sum. If the risk is highlighted in this way, it can be to the benefit of both parties, and the risk can then be managed correctly or even removed, resulting in good relationships and repeat agreements.

To this end, Melbury Construction Consultants Ltd offers a pre-contract vetting service that identifies risk; identifies the financial consequences of the risk; helps the contracting parties to achieve their appropriate risk balance; avoids parties accepting risks they don’t understand; and helps provide a successful execution and effective monitoring of the project.

Do you want to lose your rights to claim for damages?

Do you want to lose your rights to claim for damages when your contractor or sub-contractor breach the contract and then shortly after falls into administration?

Of course not! So how do you protect your rights?

In the recent Hackney Empire v Aviva Insurance case the courts had to decide if there was a right to recovery of damages under a performance bond due to Hackney Empire’s contractor entering into administration.

In that case, the court found that Hackney Empire’s contractor was in breach of the contract as it was no longer able to continue work on site in a meaningful way and had no possibility of being able to do so in the future; and also found that this breach occurred before an Administrator was appointed in respect of Hackney Empire’s contractor.

Under the contract between Hackney Empire and its contractor it was made clear that the termination clauses were ‘without prejudice to any other rights and remedies Hackney may possess’. This therefore meant that Hackney Empire would, in the normal course of events, be able to claim damages from its contractor for a breach of contract, irrespective of the fact that the breach in question may have been relied upon to terminate the contractor’s contract in the first place.

Obviously, because Hackney Empire’s contractor ceased trading it was not possible for Hackney Empire to recover the damages from the contractor, and, rather than simply be added to an unsecured creditors list with the administrator, sought to recover the damages through the performance bond in place.

Hackney Empire successfully argued to the court that as the bondsman (Aviva Insurance) was aware of the right of Hackney Empire to recover damages in the event of a breach of contract by Hackney Empire’s contractor, being a breach that also caused Hackney Empire to evoke the termination clauses, the said damages were recoverable through the performance bond.

The court agreed with Hackney Empire in respect of this matter, even though an earlier court case (Perar BV v General Surety) found that the recovery of damages relating to termination clauses was not allowed. The court in the Hackney Empire case decided that the Pera BV case was not relevant as in that earlier case the wording used in respect of this matter only related to one termination clause, and that particular termination clause had not been relied to terminate the contract.

Based upon the above background, it is clear that it is vital that you are properly protected in respect of the recovery of damages in a case where a contractor breaches the contract which results in you evoking the termination clauses, and where that contractor subsequently ceases trading, and where you have a performance bond in place.

Therefore, if you are considering using bespoke or amended contracts along with the use of a performance bond, and are unsure if your rights are protected in the event of termination of the contractor, then you need to contact us (i.e. Melbury Construction Consultants Ltd) to find out how this may affect your contractual and/or legal rights and/or obligations.